This is a fictionalized story about a lady who enjoyed great success throughout her life, investing in the stock market using a simple “Buy and Hold” approach. This article not only tells us how and why she succeeded but how you too can easily master and exploit this truly amazing strategy .
Many of us have known or at least heard about someone like Aunt Betsey. She was a kind, good natured person of somewhat eccentric character who, for reasons best known to herself, had never married or entered into any kind of committed relationship. She lived her life alone, comfortably but modestly. When she retired at the mandatory age of 65, she owned a 2 bedroom apartment in what had become a fashionable inner suburb plus a significant portfolio of shares in a dozen or so “substantial” companies.
Betsey simply saved some of her wages each week and every few years, when her bank account had built up to a sizable amount, went out and bought another parcel of shares in a company of her choosing.
Betsey never sold any of her shares. She simply filled them away with any correspondence under “S” in the small filling cabinet that stood beside a well-crafted oak writing desk in her fussy living room. When dividend cheques arrived she deposited them into her savings account which in the course of time found their way back into further share purchases.
Betsey didn’t really know much about the share market, in fact she wasn’t even really interested in it. Her sole motivation for this lifelong habit was that her father had once told her that putting her surplus money into shares was a prudent thing to do. One of the qualities that Betsey valued highly was prudence.
When it came time to buy another share parcel, she simply browsed through a couple of stock market magazines during her lunch break at one of the news agencies that provided her long term employment. She jotted down the names of any shares that caught her attention in the small notebook she always carried in her handbag. Most of the stock market jargon in the magazine went way above her head, but that didn’t really faze Betsey. Her final solitary selection on each occasion was made after a judicious reading of the tea leaves at the completion of her evening meal.
Betsey passed away at the respectable age of 87, bequeathing a worthwhile inheritance to several nieces and nephews together with a substantial sum to a long favored charity.
The accountant who helped finalise her affairs was impressed by Betsey’s financial achievements. He commented to the executor of the estate that she had done far better than if she had just left her money sitting in her bank savings account.
Like the accountant, a casual observer may have concluded that Betsy had a knack for successful stock picking or if s/he had known the real truth, that reading tea leaves did in fact have some scientific basis to it after all. If nothing else, Betsey’s efforts surely proved the wisdom of having a well balanced portfolio.
Sadly, none of these things are true, although reading tea leaves are probably just as good an indicator for stock picking as input from the majority of expert or professional advisors. A handful of professionals do over time do better than random, while others do far worse. Numerous studies have shown, time and again, that the net results of professional advisers are about the same as tossing a coin.
Another thing that may have attributed to Betsey’s success was her market timing. Her entry signal that triggered a stock purchase occurred only when her bank account had reached a certain level.
By being totally oblivious to what the markets were doing she inadvertently insulated herself from the generally losing game of trying to pick the tops and bottoms that both amateurs and professionals tend to get caught up in.
Many people, who think they understand randomness, are often very surprised by the way it often pans out in practice.
A typical response to encountering a proven random result for the first time is “I didn’t think that luck could be responsible for such a wide range of outcomes”. For example it would have been perfectly reasonable for Aunt Betsey to have finished up with a portfolio of 9 losing stocks and 3 winners with just one of those winners responsible for nearly all her profits. If that is so, people will then often ask how one goes about picking these big winners. The answer is you can’t. It is just a matter of luck. Many however, struggle to accept that explanation and attempt to attribute other supposedly rational causes to essentially random events and outcomes.
There is a mathematical law in statistics known as the Law of Large Numbers. This law is frequently broken, not just in financial markets but in many other areas of life where statistics are used or quoted in an attempt to make sense of numerical data. The breaking of this law leads to the heinous Crime of Small Samples, committed frequently by traders and investors. In simple terms it means attempting to draw conclusions from inadequate sized data samples. This in turn leads to misleading or incorrect conclusions.
Aunt Betsey’s 12 stocks are a very small sample indeed and no explanation, other than a run of good luck, could be rationally drawn from her results.
For every person like Betsy who did well, there is another untold story about someone who would have been better off simply leaving their money in the bank.
Nobody tells these stories because nobody wants to hear about those who lose. This results is a steady source of “good news” informational bias which is passed on ad nauseam by market professionals and others.
This leads to people developing unrealistic beliefs, hopes and aspirations.