Combat Chicken Little Investor Syndrome

“Wow.” You say, “If only 20% of people beat the market, why do humans keep putting their money into these one company type stocks? Why does this continue to happen???”

There are numerous reasons, but I’ll just give you a few.

One is that the stock analysts, brokers, market specialists, etc. all need a paycheck. And their paycheck is paid from the fees charged when someone buys or sells a stock. These “specialists” need you to play the Chicken Little game to continue making money. Often these entities have ongoing marketing campaigns to convince you they can help you beat the market.

Another is the casino effect. People believe they can be lucky at a game of chance. They succumb to instinctual, irrational beliefs that are best understood in psychology as the illusion of control or cognitive bias.

Chicken Littles are overly confident that they have an ability to win at a game of chance. And all the flashy marketing, paid for by the market specialists I mentioned above, helps boost that confidence. The marketing ads present seemingly convincing arguments that are suppose to tell Chicken Littles when to “buy in” or “sell out” at the perfect time.

Off the Chicken Littles go following the advertisements instead of following the empirical evidence above.

Then how come advertisements claiming they can “beat the market” continually fly? It is sad, but any report that guarantees a firm can beat the market is using the art of logical fallacies.

Are there any exceptions? C’mon don’t some beat the market?

You will often see advertisements, interviews, etc. with Chicken Littles who beat the market over the last quarter, the last year, or even the last couple of years. But look, that is not the real question. The real question is: Will you or anyone else be able to pick the portfolio that will beat the market in advance?

Since 1970 you can count the Chicken Littles on one hand who have beat the market by any meaningful amount. Nobody ever has been able to figure out in advance which funds will do better. This even includes the rating companies like Morningstar, etc.

So when you see those Chicken Littles with a “hot streak” come on television/internet, what should you do? Turn the other way. Their probability of continuing a win streak is no greater than flipping heads, even after you’ve flipped heads several times previously.

One of those very few people who we might say is in this outlier group is Warren Buffet. His company Berkshire Hathaway has earned a return twice that of the stock market for over 40 years!

But his incredible return was not made by buying and selling stocks (Chicken Little style). His return was made by buying his stocks and then simply holding them. He has said publicly that his favorite holding term for a stock is forever. And for the stocks that Buffett does purchase he then takes an active role in managing the company.

Even with all this, Warren Buffett still suggests that the best place for an investor to invest their savings ratio each month is in low-cost index funds. Hell, even Buffett himself plans to have his money placed in index funds when he dies. Here's his exact words:

“My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will... My advice… could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”

Ok, so index funds it is.

But what about when the entire market goes down, like in 2008 with the Financial Crisis or in 2000 with the bursting of the Dot Com Bubble? When that happens you maybe put a little more than your regular savings ratio into your index funds. But really what you do is not pay attention, continue adding your savings ratio amount, and keep having fun.

Look, when you hold a broad balance of index funds you are betting on human ingenuity -- the entire market. You are betting that, in the long term, humans will continue to improve products and services. And judging by all the ancient coal powered electricity plants and inefficient gas guzzling SUVs, I think our beautifully creative species has a long, long way to go!

Since the 1900s the entire market has grown at dependable average close to 10%. This combats our 3% inflation! Which means that the true growth of the market is 7%. (10 - 3 = 7, duh!)

Here, check it out. This is the Dow Jones market since 1900 on a logarithmic scale. See those blips in 2000 and 2008? Those were the “end of the world” type moments in the news.

To keep with our theme of the S&P 500, here’s a graph of the S&P 500 since 1871.

Here’s US Gross Domestic Product since 1790. H-u-m-a-n ingenuity.

And here’s the DOW Jones again on a linear scale as far back as Yahoo! Finance will allow me to see (1985). Look at the foolish advertisement that came up in the top right…

Ok, great. I’m going to leave off there. Index funds = human ingenuity.

Now if you believe that humans, as a species, will continue to make better products and services sign up in the newsletter section below. I’ll send you the next article on how to harness the power of just that!


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