When I managed money after the 2008 financial crisis, I exclusively used exchange-traded funds (ETFs). And I traded them actively, rebalancing my holdings every single month.This was unique at the time. Most managers from this period were stock pickers. Their goal was to buy a stock, let it go up, and report large gains to clients. Managers avoided trading, preferring a passive approach. I don’t understand why, but some investors don’t like doing stuff. They want to simply buy and hold forever. This can work if you have decades to wait for gains — and pick the right stock. But most money managers don’t pick the right stocks at all. And that means worse returns for their clients. In my two-year stint managing money, I returned 48% to my clients — beating the market by a sound 13%.
Most Stocks Go Up… Right?
There are two big problems with long-term investing.study found, “the median time that a stock is listed … between 1926 and 2015 is just over seven years.” So, half of all stocks trade for less than seven years. That means your chance of picking a long-term investment that simply survives is about 50/50. That doesn’t mean it’ll be a good long-term investment, either. Just that it will remain listed for a long time. The second and even bigger problem is most stocks don’t go up. Almost 26,000 stocks traded over that same time period. From the study (emphasis mine): “…the eighty-six top-performing stocks, less than one third of one percent of the total, collectively account for over half of the wealth creation. The 1,000 top-performing stocks, less than four percent of the total, account for all of the wealth creation.” In the study, wealth creation means returns that beat Treasury bills. So, 96% of listed stocks failed to beat T-bills in the long run. Over half lost money in real terms. That means the stock was worth less than its initial price when it stopped trading. This data might be confusing… We know that stocks go up in the long run. But that idea applies more to stock market indexes than individual stocks. The S&P 500 and other popular indexes are actively managed. Indexers kick stocks out as they fall. That’s how they avoid the biggest losers. The bottom line is that stock market indexes make good long-term investments. Most individual stocks do not. Knowing this, I used ETFs. They track indexes. That avoids the problems stock pickers face. I also traded actively. That helps avoid steep losses in bear markets. Prospective clients often expressed concerns about trading. They heard it was risky. So I prodded for more details on why exactly they thought this way. The answer was always “I heard it was risky.” My rebuttal was simple — “is your goal to lose 50% of your money in the next bear market?” The answer was always “no.” But losing half your money in a bear market could be the goal of a passive strategy. If you just buy and hold, you suffer through bear markets. So, like it or not, your goal as a passive investor is to lose 50% when the market loses 50%. Now, we know individual stocks don’t always come back. That’s something stock pickers ignore. And we know the timing of the bear market may not meet your life’s goals. Even if prices recover, you may have to delay retirement. Or you might struggle to send a child to college. You could be forced to downsize the wedding of your daughter’s dreams. When I explained risk that way, no one objected. They saw the wisdom of active management. They saw the wisdom of ETFs. And they saw why they should pay my admittedly outrageous fee to manage their money. I don’t charge nearly as much as I used to these days. But I am still actively trading, selectively using ETFs, and avoiding bear markets. I tell you this because I’m right about to release a trading strategy that replicates what I did in the late 2000s, at a fraction of a fraction of the price. It’s an actively managed portfolio strategy whose goal is to maximize returns while minimizing risk, regardless of if the bear market continues or we’ve already hit bottom. To put it plainly, I’m putting out this research at a considerable loss. But I couldn’t care less. I believe it’s the kind of safer, smarter method of investing that very few people would ever consider, but could desperately use right now. As soon as it becomes available, I’ll send you a link. But until then, stay tuned to True Options Masters for more about my trading style and how it’s perfect for the environment we’re in right now.First, most stocks don’t trade long enough to be long-term investments. One
Regards,Michael Carr, CMT, CFTeEditor, True Options Masters