Image Credit: Christophe Vorlet
By Jason Zweig | Nov. 25, 2016 9:44 am ET
After what for many has been a grim and stressful year, investors shouldn’t let Thanksgiving weekend pass without making sure to count their blessings.
Begin by closing your eyes, thinking of this year’s economic and political news, and then guessing how the U.S. stock market has responded. Remarkably, the S&P 500 is up 10% so far this year, including dividends. That might not last, but only an ingrate would scoff at it.
Next, be thankful for the low costs of investing.
When I first wrote about mutual funds back in 1992, many still charged 8% sales commissions — even on dividends that you reinvested in the fund! — and annual expenses typically exceeded 1% of assets.
If you put $10,000 in such a fund, only $9,200 would go to work for you, and you would pay at least $100 a year in expenses on that.
Today, you can buy exchange-traded funds, commission-free, with annual expenses as low as 0.03%. Invest $10,000, and $9,997 stays in your own pocket — where it has always belonged. For small investors, the costs of buying or selling individual stocks also have shrunk toward zero.
Speaking for myself, the blessing for which I’m most grateful is the unlimited ability to learn free of charge from those who are wiser and have come before us.
As Sir Isaac Newton wrote to the scientist Robert Hooke in 1675, “If I have seen further it is by standing on ye sholders of Giants”, an expression that he himself had adapted from earlier great thinkers.
Individual investors may have no greater advantage over professionals than the ability and freedom to think for themselves, rather than having to follow the herd.
Benjamin Graham, the great analyst and investor, wrote in the 1949 book after which this column is named: “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and your reasoning are right.”
I never knew Graham, who died when I was in high school, but editing the revised edition of his book in 2002 and 2003 taught me several other eternal truths.
Investing is often portrayed as a battle between you and the markets. Instead, Graham wrote, “the investor’s chief problem — and even his worst enemy — is likely to be himself.”
Evaluating yourself honestly is at least as important as evaluating your investments accurately. If you don’t force yourself to learn your limits as an investor, then it doesn’t matter how much you learn about the markets: Your emotions will be your undoing.
Graham also taught that stocks aren’t pieces of paper (or, in today’s terms, electronic blips); they are units of ownership in real businesses whose underlying value doesn’t change thousands of times a day.
Graham devised the metaphorical figure “Mr. Market,” whose mood swings — from euphoria to misery — determine stock prices. You don’t have to trade with Mr. Market when he wants to, but only when you want to.
I’m especially grateful that he taught me this: “The most important question is, ‘What is the base rate?’”
By that he means that you shouldn’t go on gut feelings when estimating how likely an outcome is. Instead, determine the base rate — how often similar cases have occurred in the past, based on the longest and most complete data available.
Michael Mauboussin, a strategist at Credit Suisse, has taken that hint and compiled base rates for all sorts of corporate measures, so investors can readily check a company’s projections against reality.
From the economist and investing writer Peter Bernstein, who died in 2009, I learned about Pascal’s wager: You must weigh not only the alluring probabilities of being right, but the dire consequences of being wrong.
I also give thanks to Mr. Bernstein for teaching me that wealth is a loan, not a gift, from the markets. A few months of a bear market can claw away all the gains you pile up over years of bull markets. Finally, Mr. Bernstein never tired of emphasizing that we can never know the future — least of all at the very moments when it seems most certain.
You don’t need to have known these people to be grateful for their wisdom. As the biologist Richard Dawkins pointed out in a lecture in 1996, many of us today know more about the world around us than Aristotle, the greatest mind of his age, did more than 2,300 years ago: “Science is cumulative, and we live later.”
Investing knowledge is also cumulative, and we all benefit from those who have already learned — and taught — how it works. For that, we should give thanks.
Source: The Wall Street Journal, http://on.wsj.com/2gckqmT