This month marks 20 years as a financial advisor for me. A lot has changed in that time. When I started, we had to hand-write trade tickets, on blue paper for Buy and salmon for Sell, and fax them to the back office. We would photocopy account applications for our file, fax it in to our custodian, and then mail the original signature.
But a lot has not changed. Markets are still volatile. Timing doesn’t work. Investors still have biases. And good habits build wealth over time.
I am happy to celebrate this milestone, and incredibly grateful for the clients who have trusted me with their finances. I’m excited to start a third decade of service. Markets still fascinate me, and I love getting to help families build and preserve their wealth. One of my early clients passed on years ago, but now I work with their children who are approaching retirement age. And we have accounts for the grandchildren, and we have started 529 college savings accounts for the great-grandchildren. Working with four generations of one family gives you a new perspective about the significance of planning.
Learning the Hard Way
I started buying individual stocks in 1998, right at the end of the tech bubble. I had some profitable investments and some that did poorly. By the time I became an advisor in 2004, I think I had already made every mistake possible with my own investments. You can learn from a book, but the pain of losing your own hard-earned money is a more effective lesson.
After 2000, there were three years of losses in the S&P 500 Index, with the back to back shocks of the tech bubble and then 9/11 in 2001. During this time, I was looking for market inefficiencies and they were still existent back then. There were 50% more stocks than today and stock trading was still done by people on the floor of the NYSE, not on computers.
I would find tiny, small cap regional banks which traded only a couple of thousand shares a day. These stocks had a very wide bid/ask spread. For example, the market might show a bid of $20.00 and an ask of $21.00. If you entered a buy order at the market, you would buy at $21. And if you entered a sell order, you would sell at $20. Sometimes the stock would trade in the middle at $20.50, but large trades could easily move the market, and they would either pay too much to buy or get too little when they sold. Wall Street couldn’t touch these stocks and they were too small to bother.
The spread was often 5%: a $1 spread on a $20 stock. And since the expected return of the whole market was only 10% a year, making 5% on a trade over a day or two seemed pretty attractive. So, I would set a buy limit order at the Bid price of $20 and be the ready buyer for anyone who wanted to sell. And once I had shares, I would set a limit order to sell at the Ask price of $21. When this worked, I could make 3-5% in a day or two. And then once I had sold, I would try to buy back again at $20 and repeat the whole process.
Man Plans, Market Laughs
It worked as planned about half of the time. Sometimes however, the stocks kept on going up. I bought at $20, sold at $21, and then the stock went up to $25. I realized a small gain and then missed out on a big gain. Then I had to decide if I wanted to buy the stock at a much higher price or hope it came back down.
Other times, the stock would drop – I bought at $20 and soon the stock is $18. If I had 100 shares at $20, I would buy another 100 shares at $18 and lower my average cost to $19. Now, I only need the stock to get back to $19 for me to sell and break even. I would set a limit order to sell at $19 and hope I can get my money back.
If the stock would recover to $19, I’d sell. But the stock might then go to $22 and I would again have missed out on gains. Other times, the stock would continue to fall to $16, and I would buy more shares at $16 to try to average down further. But I was only increasing my losses.
At the end of the year, I’d have a lot of successful, but small trades where I had gains of 3-5%. And I would have a couple of large losses of 20%-30%, which I had magnified by buying more shares.
Lessons
Did my trading work? Sort of. I had a profit. In fact, in 2003, I was up 35% in spite of being in cash for a large number of days that year. But here are some of the things I learned:
- I made 35% in 2003, but the S&P 600 small cap index was up 37% that year. All the hours I spent researching stocks and following the market daily were not productive. I would have been better off using an index fund and spending my time elsewhere. Everyone thinks they’re a genius when the market is going up.
- Costs and Taxes matter. All my gains were short-term capital gains, taxed as ordinary income. With an index fund, I could hold for longer and eventually get long-term capital gains tax at 15%. Back in 2003, each trade cost $19.99 and I paid thousands in commissions that year.
- No one can predict individual stocks and speculation will humble you. Investing is better than trading: diversify and remain a buy and hold owner. Prices going up and down are noise.
- Let your winners run and harvest your losses. Humans are wired to do the opposite. I cut my gains short and doubled down on the losers. This comes from two behavioral biases: loss aversion and anchoring bias. I was fixated on shares getting back to even.
- Simple is usually more effective than complex. Focus on the long-term, not the short-term.
Today, markets are more liquid and most bid/ask spreads today are 1-5 cents. This is much better for investors. In spite of the prevalence of index funds, however, there is still a lot of speculation on individual stocks. Every morning, I read about stocks which were up 4% or down 7% in the previous day. It’s interesting, but not an opportunity. And of course, I have written many times about how managed funds under-perform index funds. I understand the allure of picking individual stocks, but today I have realized that stock picking is less beneficial than asset allocation. Investors don’t become wealthy because of stock picking, but through saving and time in the market.
The More Things Change
The past 20 years have seen some remarkable market events. The Global Financial Crisis of 2008-2009. The Lost Decade of stocks. Zero Interest Rate Policy. Coronavirus and then 9% inflation. Everything seems to have been a “never-seen-before” moment. And yet somehow, what has always worked, still works. I look back to every low point and think, wow, that was such a great buying opportunity!
I’m looking forward to the next 20 years of financial planning. I have no idea what we will see. How will we fix Social Security and Medicare? What is going to happen with the global debt levels? Will inflation remain elevated? Will AI save the economy and create a productivity boom, or destroy jobs?
What the last 20 years have reinforced for me is that we don’t have to know what is going to happen. We save, invest, diversify, rebalance, and keep costs and taxes low. That formula has built wealth for generations. We will continue to learn and improve, but the foundation of the financial planning process is timeless. We are awash in information today, but in spite of all the available knowledge, wisdom still requires experience.
My three month old daughter is asleep in the next room as I write this. Having a child is the ultimate form of optimism. We must have confidence, patience, and faith in a positive outcome. Along the way, there will be ups and downs, but ultimately growth is headed in the right direction. Our years are determined by our days. If we manage our days right (and weeks and months), the years take care of themselves. But we have to think about the years, when deciding how we use our days.
And so it is with money. I remain very optimistic about the work we do for clients and about the remarkable opportunity for Americans to achieve financial independence. There has never been a better time to be alive. Thank you to everyone I have met along the way for a great 20 years!
