One of the statistics that I often think about, and have mentioned with some frequency on this site, is the fact that the average equity investor compounded his wealth at 3.49% annually from 1990 through 2010 while the S&P 500 Index posted annual returns of 7.81% during that time frame.
To check out the study yourself, click here: http://www.thewpi.org/pdf_files/dalbar.2012.roccy.pdf
When I pursue investing, my long-term assumption is that I will achieve returns somewhere between 8-12% annually (assuming 3.5% annual inflation). If everything goes right, and companies like Coca-Cola, Johnson & Johnson, and Procter & Gamble are able to replicate their former glories (in terms of earnings per share growth) due to a combination of population growth, share buybacks, and price increases/productivity increases, then I imagine that figure will lean closer to 12%. If I make some big mistakes along the way like buy a decaying tech stock or a bank that experiences a blowup (think Wachovia, Washington Mutual, Lehman Brothers, etc.), then that figure may be closer to 8% over the course of my lifetime. My job is to make sure that I can still get to where I need to be even if I “only” hit that 8% annual rate over the course of my lifetime.
But implicit in that is the fact that I don’t want to be one of those people that achieved 3.49% returns while the market at large returned 7.81% over a long stretch of time. The best thing I have to say for avoiding that trap is this: Focus your energy on your future investments rather than modifying your current investments (this notion is much less applicable to investors currently in retirement).
When I bought Royal Dutch Shell right after the weak earnings report, I was pretty much done thinking about it. It might consume—maybe—fifteen hours worth of examination over the next year or two. If I am doing my job right, I am picking companies with nearly unassailable moats that will be generating more profits five years from now than today, and will be generating more profits in 2023 than in 2018. In other words, once I make a selection, I let the company’s business performance do its thing. I don’t want to spend my time rearranging and reshuffling assets—I don’t want to go through life trying to eke out a small gain here and there. Rather, I want to generate surplus capital from labor, acquire an ownership stake in a business, and receive a growing share of the profits (dividends) as the business increases its earnings per share over time.
This means that once an investment is made, my focus shifts to finding a new investment opportunity and finding a way to make some money to acquire an ownership stake in that company. Meanwhile, the stocks I bought recently and in yesteryears compound silently in the background (some of the dividends are pooled together as cash, others are directly reinvested back into the paying company because my attitude towards something like Johnson & Johnson is that I want to own more, more, more of it over the course of my lifetime). The point is this—once I buy a business, I let the company do its thing and shower me with dividends over the course of my life. Yeah, I’ll check it here and there to make sure that it’s not about to fall apart, but that’s not where the bulk of my energy goes from. From there, I’m focusing I’m buying something new to add to the collection.
If you look at buy-and-hold baseball collectors, they pick up a Ty Cobb autographed baseball here, a Stan Musial signed bat there. Over the course of a lifetime, they’ll have a portfolio ofblue-chippers—a Mickey Mantle signed photo, a Joe DiMaggio signed bat, a Willie Mays signed jersey, and so on. It’s all about the constant addition of high-quality goods. That is how I view investing. It’s not about selling and reshuffling what I already have. It’s about building a collection. Some Coca-Cola here. Some Procter & Gamble there. Some Exxon over there. Some Colgate-Palmolive right here. I don’t want to get in and out of stocks. I want to build a financial fortress. That means I’m always focused on what to add next, not what to rearrange among what I already own.