The real secret to investing

“Time is the best teacher, but unfortunately, it kills all of its students.” —Robin Williams (1951-2014)

The real secret to investing is that there is no secret to investing. Time is the only advantage one investor truly has over another. Yes, one could opine that highly-paid investment analysts with direct access to corporate managements have an advantage over Mrs. Smith on Main Street – but I would say Mrs. Smith could earn better returns than those analysts over time. Additionally, time, as it relates to investing, allows the following:

  • OPPORTUNISTIC INVESTING: If one is not forced to buy or sell immediately then they have time to opportunistically select better investments. Said another way, it is always best to buy from urgent, distressed or emotional sellers than to sell to them.
  • LESS TRADING/ MORE SIMPLE TRADING: Frequent trading routinely leads to lower returns due to greater costs, forced and incorrect purchase and sale decisions and the belief that complex trading is the answer. Time gives one the ability to trade less and more simply in order to yield a more compelling investment idea.
  • COMPOUNDING: I do not need to expound on this much. Warren Buffett has described compounding as his “favorite word” and other investors call it the “eighth wonder of the world.” Compounding only occurs over time.

Finally, time gives an investor an edge to be more optimistic. The pessimists are very prevalent in the investment industry but the truth is that even when things are terrible, they aren’t that bad. For example, 2008 was the worst sell-off and economic conundrum in 70 years and it only took 18 months for the market to come all the way back. If you fell asleep in 2007 and woke up now five years later, your portfolio including dividend income and unrealized gains/losses looked like nothing ever happened at all.

Keep all of this in mind when the next big market downdraft occurs.