How long did it take you?

[jawn619]

After reading Thinking Fast and Slow, i have come to the conclusion that I am way too overconfident about my prospects as an investor and would like to ask board members for estimates about how long it would take someone who is reasonably smart and reads/looks at companies to become and above average investor.(able to beat the S&P)

I know that the base case for personal investors is something like 70-80% will lose money and not be able to beat the market, and I assume that I am no different.

[Picasso]

Took me four years.  It was a sucky four years and it cost me a lot more tuition than I would have liked.

 

I think my key takeaways were the following:

 

1) There are a lot of ways to generate great returns in a consistent, low risk manner.  You need to find a good process that fits into your temperament and personality. 

2) The market timing aspect of it is more of an art than science.  It's knowing in your gut when something is a deal versus topically cheap.

3) Patience is huge.  Waiting for no-brainer opportunities and knowing how to hold onto great investments.  This was a huge part of my mistakes early on.  If you only have a few good ideas every year you can absolutely kill it.

 

Of course there are other things I learned but those really stuck with me.  Having gone through the pain I truly believe it isn't worth it for 95% of investors.  But that makes sense since we're all just competing for a fixed amount of market inefficiencies.

 

Everyone is different but usually within a few minutes of talking to someone I can feel if the person has what it takes to beat the market.  I don't run into too many of those people.

 

It's probably a good thing you don't feel confident about your investing prospects.  You'll probably invest more cautiously while you pay the market tuition.  But you can't let it get in the way of betting big when you have one of those good investments stare you in the face.

[boilermaker75]

I developed an interest in the stock market in the late 1960s. However, I never seriously pursued learning about the stock market till around 1998. I have done really well the last 6 years. Am I there? I don't know. Ask me in another 5 years.

[rkbabang]

I developed an interest in the stock market in the late 1960s. However, I never seriously pursued learning about the stock market till around 1998. I have done really well the last 6 years. Am I there? I don't know. Ask me in another 5 years.

 

Exactly, when I'm 90 and I look back on my returns, I'll know whether or not I beat the market.

 

[Uccmal]

A very enlightened question Jawn.  I dont really know the answer.  I started buying my own stocks in 1997/98.  It took 6-7 years before I may have started to become competent at this.  Lets say, 20 hours per week over 7 years - about 5000 hpurs of time spent in some form on investing. 

 

To add to Picassos' #2) You only know in your gut when you have actual experience.  I mean real life experience with real money at stake, not reading and studying others methodologies. 

 

Picasso also states that it isn't worth it for 95% of the population of investors.  I agree with that.  If my results had been poor after those 7 years I would have packed it in and found someone else who does it better such as a good dividend ETF. 

 

I think about how long it took Buffett to become a good investor.  He tried alot of things before he latched on to Ben Graham.  He didn't have the instant success that we see in the rear view mirror. 

 

Your dealing with survivorship bias on this board.  In its ten years of existence I have seen many, many high fliers crash and burn.  Who knows I may become one, one day.  I have alot of faith that PDH will be my saviour from myself. 

[merkhet]

After reading Thinking Fast and Slow, i have come to the conclusion that I am way too overconfident about my prospects as an investor and would like to ask board members for estimates about how long it would take someone who is reasonably smart and reads/looks at companies to become and above average investor.(able to beat the S&P)

I know that the base case for personal investors is something like 70-80% will lose money and not be able to beat the market, and I assume that I am no different.

 

I would humbly submit that you are asking the wrong question. Or, at the very least, focusing on the wrong attributes.

 

There are plenty of reasonably smart people who look at companies all day that don't end up becoming above average investors. Instead, perhaps the question should be "how do I develop the temperament to become an above average investor, assuming some basic level of intelligence?"

[AzCactus]

After reading Thinking Fast and Slow, i have come to the conclusion that I am way too overconfident about my prospects as an investor and would like to ask board members for estimates about how long it would take someone who is reasonably smart and reads/looks at companies to become and above average investor.(able to beat the S&P)

I know that the base case for personal investors is something like 70-80% will lose money and not be able to beat the market, and I assume that I am no different.

 

I would humbly submit that you are asking the wrong question. Or, at the very least, focusing on the wrong attributes.

 

There are plenty of reasonably smart people who look at companies all day that don't end up becoming above average investors. Instead, perhaps the question should be "how do I develop the temperament to become an above average investor, assuming some basic level of intelligence?"

 

+1---There are definitely qualities that one needs to possess that goes beyond intellect.  We've heard Buffett say that if you have a 160 IQ you could give 30 points away.  Additionally, Ben Graham spoke of the investor controlling his/her emotions that should really be the focus.  Some of that is based on behavior: How often do you check stock quotes? Whats your turnover? That takes patience and discipline.  It probably took me around a year when I finally realized that checking stock quotes only really matters if I KNOW I plan to buy or sell.

[randomep]

After reading Thinking Fast and Slow, i have come to the conclusion that I am way too overconfident about my prospects as an investor and would like to ask board members for estimates about how long it would take someone who is reasonably smart and reads/looks at companies to become and above average investor.(able to beat the S&P)

I know that the base case for personal investors is something like 70-80% will lose money and not be able to beat the market, and I assume that I am no different.

 

I don't know what is thinking fast and slow. But I commend you for knowing what you don't know. I work in tech and I see lots and lots of super high IQ brains. I am sure they can pick up security analysis and understand it inside and out. But I think the key to being a good investor is stepping outside of yourself and evaluating your skill and limitations.

 

You are capable of matching the market, by buying an index fund. If you just know of a great thing that'll likely beat the market you can move some money from the index fund to it. And there you are slowing starting to beat the market.  Again the key is judging whether you are right in your analysis and discounting for the unknowables and risks.

 

I know this may sound obvious, but a lot of people miss that. I see some people on this board say with a serious face, they are targeting 60% annual returns.

 

Like the other posters said, only when you are 90 will you be able to measure if you beat the market. Don't measure yourself year by year.

[thefatbaboon]

jawn,

 

interesting question and not easy to answer.

 

like others have written it is critically important to have self-knowledge & temperament.  If you know what you are good at and where within the investing world you belong (and don't belong)  then I think you have an excellent chance of beating the market.

 

Take the following example:  A fairy godmother gave you $1m.  You try some investing and realize you are rubbish or maybe you decide you can't be bothered.  I would say that it is very possible to get a return that exceeds the S&P.  How?  Go to Interactive Brokers, put all your money into a low cost S&P ETF and lever it 10%. Reinvest dividends automatically; let the interest accrue.  You'll beat the market and furthermore you don't have to read a single annual report, ever.

 

Many on this board would reject the above approach in favor of the "stock picking & cash as fire power" approach.  Research, pull trigger, hold, go back to cash, rinse and repeat.  Given the tax implications together with the frequent zero return cash drag - most will find out that over time they are not as good as the market and, moreover, they will waste their lives reading annual reports.  If you go down this road be sure you are good and that you love it.  For most people they would be better off accepting their limitations and getting a decent understanding of taxes, frictional costs and minor leverage.

 

So, your question, how long till you know if you can beat the market?  I would say it depends whether you aim is to trash the market or scrape ahead of the market.  Go ahead try and trash it - you'll know within a couple years if you are driven and skilled enough to do so.  If you discover that you are not then you'll be better off aiming to scrape ahead through low cunning.

 

 

 

[netnet]

I agree with Merkhet, temperament is absolutely key, knowing that you have to pick a system that suits you.  And remember there are no points awarded for degree of difficulty, only shoot fish in a drained barrel, (Buffett)! 

 

 

Now part of it is training.  I have counseled others to put half their money in index funds, and monitor their emotions on down days; could they buy more or do they want to sell or SELL!.  Then

• read everything you can and look for compounders
  
• Use Buffetts 20 punches in a lifetime model. Munger says you only need 3 or 4 excellent companies.
  
• Stay in your circle of competence
  

 

 

Buffett is still learning, so you should get better.  However,  thefatbaboon could have the right model, slightly lever an index.  (Note, levering can kill you, see Munger and Buffett associate Peter Guerin, who blew up, but he is now comfortably rich. Kirkpactrick, the author, did the same levered BRK, but he did not blow up.) Slightly levering a compounder, when it is cheap AND has upside momentum will make you rich over the long term, if you are young enough to surviving nasty downturn then...

 

All of which to say is do not worry about the time it took.  It takes patience!

 

 

Important point, the average investor does worse than the averages as defined by the indexes, so just making the S&P is already above average.  Remember all the transaction costs.

[jawn619]

thanks for all the wise words everyone!

[intothebreach]

As always, I find discussion related to temperament and process to be very enlightening. This one prompted me to look in the rearview mirror, and even after doing so, I'm not sure what my answer really is.

 

I started dabbling in stocks when my revenue first exceeded my living expenses, right after doing my MBA in 1999. Process was inexistant, temperament was a blind spot, so that naturally lead to net negative returns despite a few lucky picks. Buying real estate for my living needs (rather than as an investment) was the only thing that prevented my from popping with the bubble (although damages would have been limited as I did not have much to invest in the first place.)

 

After many very good years operating a consulting business, I moved what still is for me a sizeable amount to the stock market between July and November 2007. Perfect timing to say the least. In retrospect, regardless of the market level, it would have been advisable to average in gradually over time (duh!). However what was different this time around, is that I was determined to operate in a disciplined and process-based fashion, and to learn from my mistakes. So right off the bat I started tracking all my transactions and also benchmarks to keep me honest and trying to understand what caused by mistakes (other than me. And I do not limit mistakes to losses, but also positions where I eventually get less comfortable with.)

 

During that time, I also learned that sizeable losses (was down between 40% and 50% during the worst of it) did not cause me to lose sleep, probably because I understood that either these losses were the result of unforced errors that I most likely could learn to avoid, or in many cases were temporary in nature. I made some of my very best moves to this day selling cheap to buy cheaper in the thick of the market debacle. In many cases, I clearly got lucky but I was starting to understand what quality means for businesses. During this period I read pretty much everything I could find on value investing (that's also how I initially stumbled on CoBF.) That's also the first few times that I really encountered my first identifiable proverbial "fat pitches" (although I was not comfortable "backing up the truck" and underinvested, other unforced errors : )

 

Experience is what you acquire just after really needing it, right?

 

While I'm sure that I have not yet "arrived" (if such as thing is even possible) and that I still have tons to learn, I would say that it took me between 4-5 years to get to a point where I feel comfortable with the overall process of investing in the stock market. During that time, I also built an ETF-based passive portfolio for my girlfriend who has not the least bit of interest for investing (I found extremely good references at canadiancouchpotato.com, which would need to be adjusted for US-based investors). So this presented an alternative I could be using if I did not want to spend the time and effort researching companies and managing my investments and another relevant benchmark. This 4-5 years would be from the point I decided to get serious, add another 5 years from the point I started dabbling.

 

One thing I clearly had no idea is how beneficial this would be to my consulting business. As a former big firm consultant and plant manager, I knew a lot about business planning and managing operations and people, but I never suspected that capital allocation could play such a prominent role in successful businesses (it really was not the case with most of my very large international clients.)

 

Another thing I grew to appreciated is how the masters of the craft have really laid out pretty much everything that is needed to do it properly. However, I believe it takes hands-on experience and time to really understand what seems very straightforward (and even simplistic) at first glance.

 

My biggest lessons learned are:

1) start with "no/I'll pass/too hard" by default; I no longer feel I need to understand/follow everything. Pretty much everything stops here. However, understanding is required before investing in something;

2) to always look to the downside before the potential (unforced errors cost dearly, and only a very few ideas per year are needed to make a sizeable difference);

3) quality drives everything: both the type of investment (trade/investment), and the margin of safety required to feel comfortable;

4) concentrate on fewer, better things, in terms of business quality not potential returns (it moves my threshold higher, diminishes overall activity and forces me to do better homework beforehand, and it also diminishes my end of year accounting). This magnifies returns, good or bad. So coupled with a weaker process such as what I had earlier, it would have been damaging and would actually be best not to concentrate. Much respect to posters here who run very large portfolios of smaller positions; I just find it too hard to do it properly.

 

Having said this, I'm pretty sure I would have read this list in 2007 and taken for granted that I understood what it meant without it being the case. So I'm really curious to see how I'll look at it in 1, 5 and 10 years.

 

Best returns to all, in investing and in life!

 

EDIT (1/15): corrected the web site mentioned (.com instead of .ca)

[Kraven]

I would say that no one ever arrives.  There is always more to learn.  When you think you know it all that's when you get your head handed to you.  It's like life.  When you're 18 you know everything.  When you're older, you realize that your 18 year old self was full of crap and you know nothing.  Try to learn something every day and get better.  That journey never ends. 

 

I don't think one can have a goal of beating the market.  That's a number you can't control.  All you can control is your process and your own thinking.  If you put up returns you feel are satisfactory, then you've accomplished something.  Of course the meaning of satisfactory may include a look to the market returns, but that's after the fact.

 

To comment on another point made in the thread about looking back at 90 to see if one beat the market, clearly that is tongue in cheek.  While determinations of success must encompass longer than a one year period, perhaps even a 3 year period, there has to be some kind of realistic time frame in which to reach the conclusion about whether returns are satisfactory.  I would posit that 3-5 years is long enough to make that determination.  There has to be a balance between the view of value investing as the hanging of beautiful art in a museum and real life.  What good does it do anyone to say on their death bed "well, I guess in the final accounting, I lived a good life, had wonderful children and a beautiful wife . . .  and the final numbers are in, and I guess my returns from investing were good after all!"

[innerscorecard]

I think the best definition of successful investing for individuals is whether it helps you reach your personal financial goals in the relevant time-frame. So, for example, if your goal is to build wealth for your descendants, then a lifetime really is the appropriate metric. If your goal is to reach financial independence, then perhaps something like 5-10 years (or whatever the relevant timeline to financial independence is) is the best measuring stick. And if your goal is to advance your career by "beating the market," then one year or even shorter really is quite appropriate.

[meiroy]

I would posit that 3-5 years is long enough to make that determination. 

 

Tactfully, I 100% disagree with that and will randomly show a couple of examples.

 

There are countless individuals and funds that started investing in 2009 and show great results both because of the timing and the miss-pricing of megacaps which easily allowed Value Investors to outdo the market without too much work. 

 

If you are an investor who within 5 years:

1. Invested in small or micro caps, which you have found by yourself and analyzed by yourself.

2. Invested in different industries and markets.

3. Resulting in returns which are significantly higher than relevant indexes.

 

Than you may consider yourself a good investor.  I know several people like that, running concentrated portfolios, and it is obvious they are the real thing.

 

Of course this is not the only way to be a good investor. David Tepper is obviously fantastic investor and he's not exactly into small caps.

 

I know some guy who got rich by investing in carton boxes.

 

Point is 3-5 years by itself is somewhat meaningless as you can easily ride some macro cycle that can make you look like a genius.

 

 

I don't think one can have a goal of beating the market.  That's a number you can't control.

 

In the long run, one can and SHOULD set a goal of beating the market, otherwise why bother? Just go passive and buy an index. And it shouldn't be hard if you're looking at the S&P 500. If you can't do that than don't invest. You cant beat some sort of an average of the most looked at stocks on the planet? You're not a good investor. Easy. I know quite a few people who are lousy investors in the stock markets but are fantastic business man who made their fortune selling stuff, so it's all good.

 

Oh, and unfortunately, I don't think I'm a good investor.

 

[netnet]

I know some guy who got rich by investing in carton boxes.

 

Carton boxes?  Do tell.  Investing or more probably he ran a box making business or bought it out of bk or something.

[innerscorecard]

In the long run, one can and SHOULD set a goal of beating the market, otherwise why bother? Just go passive and buy an index.

 

Your goal could also be matching (or even only slightly underperforming) the overall markets with less risk. (Of course, the counterargument would be that you could do that too, with different index funds rather than simple broad-market index funds.)

[LC]

I outperformed over the last 3 years because I leveraged into a bull market. Pretty sure that goes more into the "lucky" vs "skillful" side of the coin.

[meiroy]

In the long run, one can and SHOULD set a goal of beating the market, otherwise why bother? Just go passive and buy an index.

 

Your goal could also be matching (or even only slightly underperforming) the overall markets with less risk. (Of course, the counterargument would be that you could do that too, with different index funds rather than simple broad-market index funds.)

 

Yes, you're right, one can also have the goal of just keeping up with inflation or hedging against something else. This is not what I was talking about.

 

[Ham Hockers]

In the long run, one can and SHOULD set a goal of beating the market, otherwise why bother? Just go passive and buy an index. And it shouldn't be hard if you're looking at the S&P 500. If you can't do that than don't invest. You cant beat some sort of an average of the most looked at stocks on the planet? You're not a good investor. Easy. I know quite a few people who are lousy investors in the stock markets but are fantastic business man who made their fortune selling stuff, so it's all good.

 

Oh, and unfortunately, I don't think I'm a good investor.

 

The fact is, most people, even those of us on this site who are reasonably knowledgeable and smart, will not beat the index over any long period of time, and certainly not consistently. That some people think it's easy sort of horrifies me.

 

My sense is most non-professionals here realize this, but are happy to invest on their own because it's a) fun and b) isn't so costly (in terms of underperformance) that it will be disastrous to their lives. For the pros, I would say some are above average, and most are just trying to make a living, like everyone else.

[randomep]

In the long run, one can and SHOULD set a goal of beating the market, otherwise why bother? Just go passive and buy an index. And it shouldn't be hard if you're looking at the S&P 500. If you can't do that than don't invest. You cant beat some sort of an average of the most looked at stocks on the planet? You're not a good investor. Easy. I know quite a few people who are lousy investors in the stock markets but are fantastic business man who made their fortune selling stuff, so it's all good.

 

Oh, and unfortunately, I don't think I'm a good investor.

 

The fact is, most people, even those of us on this site who are reasonably knowledgeable and smart, will not beat the index over any long period of time, and certainly not consistently. That some people think it's easy sort of horrifies me.

 

My sense is most non-professionals here realize this, but are happy to invest on their own because it's a) fun and b) isn't so costly (in terms of underperformance) that it will be disastrous to their lives. For the pros, I would say some are above average, and most are just trying to make a living, like everyone else.

 

I strongly disagree.

 

My goal and the goal of most long term investors is to beat the market overall, not necessarily beat it consistently (the word you used)

 

Firstly, when I think of someone beating the S&P 500 I think of a graph showing performance starting say at age 28, when that person reaches 50 the graph will show results pulling away from S&P 500. That is NOT to say that the person beats the S&P 500 the majority of the years, he can lag the S&P500 say 25/40 years yet still pull away.

 

The goal is to retire or die with the most money!

 

If there are a huge set of people trying to beat the market then some are able to beat it using my definition above, who are those people, they are in the minority but they exist somewhere.  When you say it is almost impossible to beat it, you are probably thinking of the same arguements are the efficient market people. Warren Buffett debunked that.

 

I think that the majority of people in this forum know they can do it, but they can't be bothered bothering doing what is required long term so they instead cut some corners, and thus may wind up failing.

 

 

[rranjan]

 

In the long run, one can and SHOULD set a goal of beating the market, otherwise why bother? Just go passive and buy an index. And it shouldn't be hard if you're looking at the S&P 500. If you can't do that than don't invest.

 

When index does -2% for 10 years then an individual doing 0% for 10 years is not going to help in building wealth. But doing 12% even if market does 14% is going to help a lot as far as building wealth is concerned.  Yes, after 5-10 years you should always see if your performance is better than index but when all said and done absolute performance over a long period matters.

 

If you are a good investor then you should get more than index over a long period. It's a good idea to be honest with yourself and see if you should continue investing actively but I am not sure if setting a goal of getting more than index is the way to go.

[Hielko]

 

In the long run, one can and SHOULD set a goal of beating the market, otherwise why bother? Just go passive and buy an index. And it shouldn't be hard if you're looking at the S&P 500. If you can't do that than don't invest.

 

When index does -2% for 10 years then an individual doing 0% for 10 years is not going to help in building wealth. But doing 12% even if market does 14% is going to help a lot as far as building wealth is concerned.  Yes, after 5-10 years you should always see if your performance is better than index but when all said and done absolute performance over a long period matters.

 

If you are a good investor then you should get more than index over a long period. It's a good idea to be honest with yourself and see if you should continue investing actively but I am not sure if setting a goal of getting more than index is the way to go.

Whatever goal you set it's going to require heavy exposure to risk factors that you can benchmark, be it equity, (corporate) bonds or something else. Looking at how you are doing compared to those shared risk factors is a lot more informative than looking at returns without context. Sure, everybody wants to make an absolute return that is always positive, but unless you are running some kind of fully hedged long/short arbitrage strategy that is simply not going to happen.

 

Expecting to make a positive 10% return while the benchmark can go -50% is just as unrealistic as wanting to generate 60% returns/year. The best most can hope for is to outperform a relevant benchmark by a small margin on average per year.

[rranjan]

Expecting to make a positive 10% return while the benchmark can go -50% is just as unrealistic as wanting to generate 60% returns/year.

 

It's surely unrealistic and I wasn't really making that point.

[Hielko]

Expecting to make a positive 10% return while the benchmark can go -50% is just as unrealistic as wanting to generate 60% returns/year.

 

It's surely unrealistic and I wasn't really making that point.

Not literally, but that's the extreme implication if you say outperforming a relevant benchmark is not important, but absolute performance is. There is no such thing as absolute performance, and if the actual 10 year return of your relevant benchmark is -2 percent than you are screwed whatever your absolute performance goal. Someone who is capable of generating a 0% return in that environment is doing a great job with a shitty hand. Doing 12% when the market is doing 14% for 10 years on the other hand is not so great. You can't control what the market does, but you can control how much alpha you add/subtract.