The turn of the year brings familiar things. Everyone goes to the gym and makes resolutions to try to create habits to benefit their life. Every year, Wall Street charlatans pepper the airwaves and business channels with advice on how to get rich quick.
One of the seven deadly sins is envy. The Wall Street charlatans prey on that sin all the time and especially at the beginning of the year. Last year, the Nasdaq QQQ Index was up by 54 percent.
- Apple, up by 258.1 percent
- Nvidia, up by 227.57 percent
- DraftKings, up by 254.74 percent
- Vertiv Holdings, up by 234.57 percent
- Palantir, up by 218.31 percent
I see emails and ads all the time from touts who say they’ve unlocked the keys to the kingdom, and if you just subscribe to their service, they will give you the winner of the year on Jan 1. I’ve never clicked the clickbait, but I assure you that they can’t do it. Save your money.
To give you some background of my experience, I traded my own money successfully for 30 years on the floor of the Chicago Mercantile Exchange. I started every single year at zero percent profit. I had a view on how things might proceed, but markets changed so quickly that I couldn’t get married to it.
There’s one way to beat the market: It’s to have some sort of edge. Today, the bulk of the money is made by companies that have a trading-speed edge over the rest of the market or they have an artificial edge by purchasing order flow from brokerages and trading internally against it. They make a few pennies on millions of contracts every millisecond of every day.
Cynically, you could run for Congress and gain an edge too.
People also try fancy strategies to try to use leverage to take advantage of what they perceive as a big future move on a stock. Imagine if you just bought Apple on margin and used leverage to magnify your return. Imagine if you bought out of the money calls on the same stock or, better yet, sold in the money puts and also collected premium for your effort.
Boy, you really missed the boat, didn’t you? You didn’t.
Get-rich-quick schemes in the stock market never work. Get-rich-quick schemes in your life don’t work either. Getting wealthy isn’t buying a lotto ticket.
The tried-and-true way to financial success is indexing. You can’t beat the market. Most pros don’t beat the market, which is why they charge fees.
University of Chicago finance professor and Nobel Prize-winner Eugene Fama wrote a paper in 1962 about the efficient market hypothesis, and its basic thesis is still true. Academics, Wall Street savants, and others who discount or try to discredit Mr. Fama’s paper think they’re smarter than the market. They aren’t. These same people usually believe in systems in which centralized authority dictates to a captive population.
Take the long view. If you buy an index such as the SPY or QQQ, you will have up years and down years. Invest the same amount every single month when the market goes up or down. Don’t get scared. Don’t listen to the talking heads on television. They’re entertainers, not stockpickers. They’re there to sell advertisements.
It doesn’t matter who’s in the White House because the occupant is there for such a short period of time. Presidents love to take credit for stock market performance, but the truth is that presidents can only hurt stocks, they can’t help them.
If you have a view on something or if you want to assume a little more risk, buy a dedicated exchange-traded fund (ETF) that can be a focused index. Maybe you think the oil market is going to explode, so buy an oil-focused ETF. But if it doesn’t work out, don’t be afraid to sell and roll it back into the SPY or QQQ.
Gimmicks tend to not work. Even if you believe in the goals of environmental, social, and governance (ESG) funds, they don’t do as well over time as plain-vanilla ETFs that replicate the broad market.
If you’re in your 20s, putting money away now will make it easier for you to retire when you’re still young so you aren’t chained to a job when you’re in your early 60s. The compounding and the reinvestment of dividends that indexed funds feature will grow faster the more money you sock away.
This isn’t difficult. It isn’t rocket science. It takes discipline. Getting wealthy takes discipline. It also takes time.
