The Lucky Bat!
When I was ten years old, I remember playing Little League baseball and getting on a hitting streak that seemed never to end. I found a “lucky bat” and used it for the rest of the season. Do you think someone could convince me to use another bat after all the success I was having with my lucky one? Never in a million years!
If you find something that works—why would you want to change it? Buying and selling stocks without an underlying reason makes little sense. Regularly buying and selling stocks is equivalent to telling you to change bats, often with no apparent reason. Investing should be the same process of finding a good bat and sticking to it. It should also be something you truly understand and not an investment that requires extensive education and experience.
Mutual funds are one example of changing bats often. Most investors do not understand what is in their mutual funds. Do you know what is in the small-cap mutual fund your company offers in their 401K program? How many times do the money managers who manage your mysterious mutual fund trade stocks that incur trading fees? Do they trade so often that you pay taxes at ordinary income rates instead of the favorable capital gains tax if you hold the investment over 12 months? A Dalbar study in 2015 found that the 30-year return for the average stock mutual fund was only 3.66 percent after they deducted all fees. This windfall is nothing to brag about at your company business luncheon.
Mutual funds are supposed to be professionally managed. However, most mutual fund managers cannot even match the Standard & Poor’s 500 (S&P 500) annual growth rate. Investing in a mutual fund reminds me of the old bubble gum baseball cards. As a kid, I would save my money to purchase these cards with gum inside, expecting to get a baseball legend card. Most of the time, I was disappointed. Understandably, working investors do not have the time to research stocks. Therefore, they opt to invest in mutual funds, not knowing Exchange-Traded Funds (ETF) act like mutual funds without professional money managers clogging up the drain with excessive fee structures. ETFs only charge a fraction of the fees that mutual funds cost and often mirror an index like the S&P 500.
Warren Buffett has a simple process: find businesses that are easy to understand, selling at a discount to their value, and offer a margin of safety. Simple-but it works! He does not go into some dissertation about how he is continuously changing his investments. He sticks to what he knows and continues to work his system ignoring all the pundits on Wall Street telling everyone else to use different bats. The last time I checked, Warren Buffett is worth over 96 billion dollars. I think he has a good bat.