The Power of Long-Term Investing
The episode delves into the world of long-term investing as we discuss the evolution of holding periods, from 7-8 years in the past to as short as 6-8 months in 2020. Long-term investing is emphasised as a smart move for mitigating taxes, with anecdotes like enduring 16 years of no returns leading to a 25% compound annual growth rate (CAGR) for Microsoft since its 1986 IPO.
Short-Term Investment Challenges
We shine a light on the challenges posed by the shift towards short-term investing, including the impact of the 2020 stock market frenzy and the emergence of new brokerage platforms like Revolut. They discuss how these factors have influenced market dynamics and the potential risks associated with short-term trading strategies.
Recommended Investment Books
We also provide valuable recommendations for investment literature, emphasising the importance of foundational texts like Benjamin Graham's "The Intelligent Investor" and Peter Lynch's "One Up On Wall Street." These books are highlighted as must-reads for anyone seeking to navigate the stock market successfully, offering timeless wisdom for finance professionals and enthusiasts alike.
Emmet Savage: 0:00
The easiest and most effective way to have earned 25% CAGR from Microsoft since its 1986 IPO required you to hold through 16 years of no returns, 16 years of nothing.
Anne Marie: 0:18
So, for every 10% increase in options, retail volume caused a 1% increase in idiosyncratic volatility, and idiosyncratic volatility is stock movements that cannot be explained by any financial models. It's noise, you know. It's a radical market movement that is just caused by the mere nature of humans. So, unfortunately, if you are in NVIDIA or Amazon or Apple or Tesla you know one of these companies that a naive option trader is going to be buying you are contributing to the overall volatility of that stock, even though all you're doing is buying options.
Emmet Savage: 0:50
The S&P 500 or the Standard, and Per 500 is a big ball of 500 companies that are broadly considered representative of America Incorporated. This ball of businesses is the index that virtually every investor pegs their success annually and lifetime against them.
Michael O’Mahony: 1:13
I just want to give a quick word to my friends and sponsors at Vodafone Business. I used to think of Vodafone Business as only a reliable provider of mobile and broadband needs, but they're really stepping up to help Irish businesses grow and flourish in an increasingly digital world. So they now offer a whole array of digital apps, from productivity tools and security solutions to IT support and even website builders. More recently, vodafone have launched their V-Hub Digital Advisory Service. With its new service, Irish businesses of all sizes can get free one-to-one digital support and advice tailored to their business by simply booking a call with one of the V-Hub digital experts. On the Vodafone Business website, search Vodafone V-Hub for more information. I'm Ray Emish. Welcome to another episode of Stock Club. Good to have you both on. We're going to go in a different direction a bit to what we usually talk about on Stock Club, so we're kind of ignoring the news. The small bit is probably something that happened in the last two days about NVIDIA that's taken Twitter by storm. But we're going in a different direction. So we're actually going to talk a bit more about long term investing. So this stat I shared with you over Slack or Huawei back there it's basically it was kind of jarring to see, especially because of what we do at my Wall Street and everything. So, basically, the average holding time for US stocks has fallen from seven to eight years in the 50s and 60s to between six and eight months between 2020 and now. So this decade, we'll say so. Emish, you've always been well, we've always been big backers of long term investing in my Wall Street, but perhaps we don't remind people enough about the benefits of it. So you've been doing this for what? 20, 25 years?
Emmet Savage: 2:52
Actually a bit more, I'd say more like 26, but the first few years were a lesson in malfunction, really Like the malfunction.
Michael O’Mahony: 3:03
That's how you got it. The pedigree is basically yeah, I like doing yeah.
Emmet Savage: 3:07
Well, do you know what? I was talking to somebody once who works in venture capital. He said I spoke to a lot of people who work in venture capital and they said to me he had founded a very successful venture capital firm and was a very nice person. And he said to me do you know how much it costs to train a junior VC? And I said no, how much? He said between 10 and 20 million dollars, because that's what they're going to lose in the first couple of years. And I thought, right, that's actually a very interesting way to look at it, to use a venture capital word interesting when you're interested, from a VC it's a kiss of death. But yeah, so the first few years malfunctioned, I might say, because technology wasn't there. I mean, I lifted a phone to a broker in New York and I spoke to her and we had a relationship which was lovely but ringing New York was expensive and the commission was expensive and the flow of information to me as an investor was expensive. But anyway, yeah, of course, and I also got started in the 90s, which was the buildup to a bubble. But that's not proper here to discuss Mike. We're here to discuss long term investing.
Michael O’Mahony: 4:11
Absolutely, and for someone that hasn't been investing for that long, you've reaped the benefits of it for sure. So, like you said yourself, you've had 200 baggers to separate 100 baggers, and that's something a lot of investors might never have in their career, and all of that has come from long term investing. So I want to let you kind of pitch the benefits of long term investing to our audience right now.
Emmet Savage: 4:36
Yeah, I'll do that. I mean, I'm such an advocate of long term investing. When I look at a stock today I'm thinking I'd love to own this for 50 years, but I'm very aware of this kind of downside thing called human mortality. But you know you can buy for generations. But I had a look just before the podcast and I did a quick Google to find that at this moment there are over 32,000 books listed on Amazon on the subject of stock investing and they cover a variety of subjects from fundamental analysis and technical analysis and you know behavioural finance, index investing, value investing, different investing, growth investing, options trading, forex trading, blah, blah, blah, blah, blah blah, like there is no end of literature out there. You know the broad, broad topic of stock investing and until I Google that I thought I'd read most of these books, but I haven't even nearly read one percent of them. I've at most on my shelf over at the other side of my computer here about 200 books in stock investing and I've really only read and properly absorbed about 60 or 70 of them. And 32,000 is absolutely nuts. And if you read a book a day for the rest of your life at 32,000, it would take about 88 years to read all those books a day without fail. Anyway, we'll come back to that, I'm sure. But long term investing is something that is good for the soul, because when you basically take a long term perspective, you can tap into a more karmic self. You don't have to get bothered by news. You don't have to participate as heavily in paying taxes. Of course you pay the tax, your taxes owed, but 100 baggers do not happen quickly, they just don't. The average time for 100 baggers to happen, according to the law, according to Chris Mayer, who's studied the subject extensively is 25 years, and what I would say is that there's two ways of looking at long term investing. You can have a pile of anecdotes and stories, and I'm going to hit you with a few of those, and then you can look at big data, and I'm going to hit you with that as well. So I'm going to start off, I guess, with a simple fact, which is that the, which is a statement, which is that the easiest and most effective way to have earned 25 percent CAGR from Microsoft since its 1986 IPO required you to hold through 16 years of no returns, 16 years of nothing, en route to some of the greatest wealth creation in history, and that anecdote is repeated over and over and over and over and over. But every stock, almost every stock that has done inordinately well, like, if I can elaborate, if you take, if you'd bought Amazon at or near its IPO, you would have waited well over 10 years for it to start to show the promise that we all know has been expressed in the last 15, 20 years. Had you bought shares in Netflix, as I did in the early days, you would have had to wait well, well, well over 10 years. And it's easy to look at a graph and see success and go oh well, look, had I bought back then at a book share, sure, and it's worth 200 books share now, 200 buyers, that's amazing.
Michael O’Mahony: 8:19
And the graph is very decent. Not only would you have to wait that long, Emmett, in that 10 years, but you'd also have to experience some severe drawdowns as well and not sell at those fearful moments Horrible.
Emmet Savage: 8:31
Horrible and I'm a member of the Horizon community recently on that very point that the real thing that got me hooked on stock investing was the observation and I said on this podcast before, so I apologise for saying it again, but what really captured the full fury of my attention was the fact that Dell grew 1,600 fold, not 1,600% 1,600 fold in the decade that was the 1990s. So had you bought two grand worth of Dell shares on the first day of 1990 and held them till December 31, 1999, that two grand would have turned into $3.2 million, which isa life-changing amount of money. Well, for anyone, no matter who you are, that's a lot of money, and it was. I got completely obsessed. But what was it Dell had back on the first day of 1990? What attributes did it have that I can look for in businesses today and it's that that I spend my whole life looking for, and with that mindset, I guess that brought me to Tesla, nearly as an angel investor, not too long after it, and to Netflix in its very, very earliest days. So, and it's in fact, the methodology and the mindset that I bring to the Horizon service, but not to go on about that, really, you're absolutely on the money. You really need to allow a vast amount of time to pass before great good businesses become great. And when you buy a business, you should at least carry a hunch that this thing is going to grow 10, 20, 50x. And if you're a growth investor I should say, if you're a dividend investor or a value investor there's a different approach. But if you're really looking for those kinds of rockets that are going to augment your future wealth, you really have to go along. So anyways, as I was saying, you would have had to wait 10 years for Netflix. You'd have to Nike, I mean Nike, arguably the most wonderful sports apparel company in the world for 20 years. You could have bought Nike at IPO and had two decades of home drum returns before it started to absolutely knock the ball out of the park. But this is a story not of cherry picking stocks that clearly have done very well, because for every great winner there's nine losers. I actually don't know the ratio, but you get my point. But this is really a 150-year-old story, and that's where we start to bring in big data. And the exact summary of the 150-year story is that Bob Schiller, a Robert Schiller economic Nobel Prize winner, has written a lot on the subject of stock market returns and investment returns and has analysed it extensively and taken some of the studies that he has conducted. The S&P 500 was only born in 1957. And I'm pretty certain most of our listeners know that the S&P 500, or the Standard Per 500, is a big ball of 500 companies that are broadly considered representative of America Incorporated. This ball of businesses is the index that virtually every investor pegs their success annually and lifetime against. And the S&P 500 is a wonderful way to instantly diversify without any effort and since its inception and since it was founded in 1957, it has returned about 10.5% compounded annual growth per year, which roughly means you double your money every seven years. So a dollar turns to two, two turns to four after another seven years and four turns to eight another seven years later. So you're doubling it every seven years. But you can actually synthesise the method that companies entered the S&P 500 with backwards for 150 years and Bob Schiller did this to see what is the probability of being down had you invested in the stock market at any point with 100. And actually I'm rounding up. I think there's about 140 years of data and listeners who are really into the academia of this can go to GitHub and Google GitHub and Zonation slash investing, or look just Google GitHub. I won't go there, but if you want big, big data behind what I'm about to say, just go to GitHub and look for long term returns. And it was found that the probability, after inflation, of being down after 25 years of investing in the S&P 500, 150 years of data was zero. No other asset class carries such certainty. So just to kind of break that down a little bit and start to go deeper on this data. So the probability of being down if you're unlucky and start your investing life in the S&P 500, which is the representative of American corporate, if you start at some really bad times, the probability of being down after 10 years is 11.8%. So you've about a one in nine chance of being down after 10 years if you invest in the S&P 500 for 10 years. If we bring that up to 15 years, the probability of being down drops to 4.7%. Chance of being down 1905, 1906, 1907, 1929. Most of these dates are really really old 1964, 65, 66, 67, 68 and 69. Had you invested in any of those years and held for 15 years, you'd be down. However, if you hold for 20 years, the probability of being down if you invested in the S&P 500 drops to 0.0664%. And if you bought the S&P 500 with a 25 year holding period, zero chance, 0% chance that you will be down. And when you take this big data and you start to extrapolate what it's telling us, which is, by going long, by buying a basket of quality businesses and exercising some Zen temperament, you are absolutely putting yourself on the front foot. So hot, so hot is just no other asset class with such historical certainty and even when we just bring in 104 years of gold prices adjusted for inflation. I know our listeners love what I describe in the shape of a graph. It's like it's just the way I do it. It's lovely, I have a lovely way of doing it. Sometimes I say to everyone now, imagine a V, that's its stock. Sometimes I say, imagine a W. And everyone goes oh yeah, I know W. Well, if you imagine the inside of a shark's mouth, that's what the price of gold looks like. It's just a horrible shape up the Dione sideways. It's with 104 years of data. You look at the S&P for since 1957, or synthesised, it's a beautiful upward slope. It looks like you know the Han and Cam in Austria in the other direction. It's just lovely.
Michael O’Mahony: 15:53
We need to have a button to cut you off when you go describing graphs.
Emmet Savage: 15:57
Okay, Amri, what were you going to say?
Anne Marie: 16:00
My question was Amri, would you like to?
Michael O’Mahony: 16:01
describe a Vendhaya graph If I had a 10. It's two circles.
Anne Marie: 16:05
I mean overlap, and there's a bit in the middle. My question was this is like a single instance of investment as well. Right, it's like oh you put in money at the peak in 2007 once it's not even taking into consideration that most investors might do a monthly or quarterly top up, in which case their dollar cost averaging probably greatly reduces their wait time. If you want to put in money in 2007,. You might be waiting 15 years. You put money in 2007, but then again 2008, 2009,.
Michael O’Mahony: 16:30
It's likely yeah.
Anne Marie: 16:32
It halves the amount of time.
Michael O’Mahony: 16:33
Yeah, you look at how favourable that data looks towards long-term investing and then consider that it takes the absolute extremes into account, like if you're investing at the peak of the dot-com bubble or January in 1929 or wherever else. It's like that's the point where you lose money over 20 years. So on average it really does favour holding on for the long term. So there's a lot of different ways of approaching long term investing, but I think one very unique way of visualising it is the coffee can portfolio. I mean, this is something you talked about in the past.
Emmet Savage: 17:09
Yeah, actually I think, did Chris Mayer come up with this? I know I'm constantly referencing Chris at the moment.
Michael O’Mahony: 17:15
It's in the Hunderbagger's book. I don't think it's an original concept, but I don't want to be quoted on that either.
Emmet Savage: 17:21
Is it a Ben Graham book? But the basic premise of that is that you take your stock certificates and you stick them in an old coffee can. It's clearly a very dated concept. When's the last time I saw? I don't know if coffee comes in cans Mine doesn't.
Michael O’Mahony: 17:36
Does yours? I think the stock certificates are ageing my mechanics.
Emmet Savage: 17:39
No, no, no, never mind that I'm still. I'm actually obsessed with the coffee can. At least I've seen the stock cert, but anyway, yeah, and I think I think Chris says something about you by a basket or a pile of stocks, or it's sticking to the coffee can and you bury it in your garden or something like that. But I mean the. The premise is that you really go long and you leave it there and I think most people who Are lucky enough to have a family and have elders in that family will be aware of an asset in that family that somehow just turned out to be worth something. You know, it could be your great-grandmother's engagement ring, or it could be a piece of art that your grandfather bought for, you know, penny hay, penny farthing shilling or whatever the old fashioned currency was, and now it's worth a lot of money. But the coffee can portfolio is really. It's a concept designed to take the stress and pressure out of investing and there's a lot of pros to long term investing. I mean, apart from the fact that they really really are. It's good for the soul. If you ask me, compounding will only express itself. Compounding returns really only happens when we bring that big data that's out there in GitHub and start to superimpose it on those anecdotes like Nike and Netflix and Tesla and so on. Really, the only secret ingredient is sitting and waiting. Don't let those short term bumps knock you off your perch. And coming back to that Dell example, where Dell grew 1600 fold in that 10 year period, there were at least three incidents where Dell stock fell 50 percent. And I remember it very clearly, my uncle living in New York, the rest of Seoul. I remember he had bought Dell and it fell 45 percent in around mid to late 90s, maybe 96. And I remember being on the phone to him and he was going to sell. And I remember I mean I was quite young, was in my early 20s I guess, and I was like maybe you should just hold it and he was spooked and he sold and sure that was not the right thing to do. Apart from Time Express as compounding returns, you mitigate market volatility by just sitting and waiting. You defer tax events, I mean depending on where you are and what part of the world you're in. Some countries incentivize you with capital gains to hold on to your shares for more than a year. That's not the case. In Ireland it's 33 percent CGT capital gains tax. In America it drops a couple of percentage points near the low 20s. What's it at Amri CGT?
Anne Marie: 20:13
Twenty if you hold more than a year.
Emmet Savage: 20:14
Yeah, exactly so. It's tax efficient. And then you also have well, it's a little bit of an old world thing to say but transaction costs. If in the world of Robin Hood and Dry Vault, my Wall Street and Revolut, you don't really have to pay much commission, there are costs, but let's not go there. It's another podcast. But there are many reasons why just set it and forget it, buy it and forget about it. And a great mindset for long-term investors is as soon as you buy your share, act as if you never owned it in the first place. That's the real kind of just. For me it's always been a little hack. As soon as I bought shares which I've done with frequency my whole life as soon as I've done it, I've almost said right, I don't have that anymore, and that's quite a strong mindset.
Michael O’Mahony: 20:59
Buried in the coffee can in the back of the garden.
Emmet Savage: 21:01
Yeah, yeah, yeah, for sure.
Michael O’Mahony: 21:04
So there is one kind of not glaring issue with this mindset. But Warren Buffett said that his favourite holding period is forever, and ideally you would always hold a stock forever because you never have a reason to sell it. But that doesn't take into account the realities of investing. So the big question I think I have to finish this section on is when is the right time to sell? Because holding forever can't be this unbreakable, unbendable route.
Emmet Savage: 21:32
Yeah, exactly, I mean, we invest. We humans invest because we what is the? What is an investment? Investment is deferring a pleasure today in anticipation of a bigger, better pleasure in the future. So, whether you invest in your body with a gym or your brain by going to university, what you're actually doing is you're taking a pain now in anticipation of being better, more enlightened, fitter, wealthier whatever the correct word is more spiritually enlightened. Whatever you're investing in, you are basically getting behind the concept of the future you. So what is an investment? It's deferring something today in anticipation of something bigger in the future. And what good is that? If you decide, hey, I'm 24, I'm going to buy shares in CRISPR therapeutics, I'm going to leave them to my kids. It's nice, but it's not as exciting as I'm going to buy shares in CRISPR therapeutics. And on my 48th birthday, I'm going to buy an island and I'm going to build a casino on it. So, like we do have to really crystallise, depending on your taste, you want to crystallise the benefits. So, of course, buying it and never selling is a very simple rule, and I think we as creatures are best left to a handful of simple rules. But the devil is in the detail and we do need to realise that there comes a point where you will need to sell. There's other things to take into consideration that a stock or a business that you've bought, if it's gone bad, it doesn't necessarily mean it's going to recover. And we used to say, or I used to say in the old days before religious idioms were frowned upon but there's no angels on Mall Street, which is the only person who remembers what you paid for. A stock is you Well, and hopefully you're a broker, but like so if you bought a share in Acme bricks at $100 and it's now $2, in your mind, as a cognitive bias, this thing owes me 100 books a share. It has to grow 50 fold back to where I bought it in order for me to get out. And I'm not selling until I get out, and that's a very deceptive cognitive bias because maybe you're better off taking that $2 and moving it to the left. So there's a lot and I mentioned all these books that are out there on the subject of stock investing and of the ones I've read, there's a mosaic in all of them about when you should buy. I mean all of them basically express in different ways you should buy it when there's clear, when you believe there's upside, and there's different methodologies of identifying what upside means whether it's paying tons of dividends or it's at the forefront of a cutting technology or fundamentally to use Benjamin Graham's coffee or what I call it, a cigar but an example that there's still a bit of value in it, which is a disgusting example, if you ask me. But there's all these things and they're all basically saying you buy something when you believe there's upside in it. However, when it comes to the subject of when you should sell, it's very dissonant. You don't get a huge alignment between some of the greatest master investors on when you should sell and they all have different viewpoints on that. But to bring it back to the investor, the most famous investor of our times today, warren Buffett he says and this is the one I live by as you sell a stock when you wouldn't buy it today, and one of the things that I do specifically in the Horizon portfolio is I keep a tracker on a weekly basis of what I put $10,000 into this stock today, because if the answer is no, I wouldn't buy it today. You are actually moving to the side of the room where it's probably inverting your thinking to say, well, maybe I should sell it. If I wouldn't buy it, then why do I own it? And there's a lot of hacks. You need to get into your own mind to actually make sure you're not pegging yourself to some cognitive bias. So the truth is you sell a stock when you wouldn't buy it today, and I have been tested along the way with Netflix and also Tesla, so they're my two biggest winners. I sold a lot of my Tesla shares over the years to do this and that, to buy something else that I preferred, and thankfully I didn't sell them all, because the few I left behind have augmented my situation. But the point, I suppose, is that you sell something when you wouldn't buy it and even though you might listen to that voice doesn't necessarily mean it's right.
Michael O’Mahony: 26:16
Yeah, I get that, but I think being fully certain that's something that you believed about that stock or that business has materially changed, I think, is distilling that. There it's like, well, this isn't why I bought it and I don't think it's going to get back to those reasons. You know Exactly. Yeah, Anne Marrie, I'm going to move to you now and just talk about why there's been this shift from long-term investing to much more short-term oriented investing. So what do you think has been the main driver behind that for people?
Anne Marie: 26:49
Well, I think initially it was maybe caused by the bit of the stock market frenzy we saw in 2020, you know a? bit of a combination of hype and panic, and usually anytime the stock market is in the news, people feel the need to get involved because they feel left out and everybody's talking about it, and that actually mimics a lot of consumer behaviour that we've seen before. In, you know, 1977, the average holding period for a US stock was about five years. In June of 2020 that dropped to five and a half months. It's quite a dramatic change and, you know, some of that is down to macroeconomic conditions, because in the middle of 2020 we had almost a 0% interest rate and there was a lot of stimulus money floating around, you know there was money to be put into the market.
Michael O’Mahony: 27:27
There was money burning holes in people's pockets. And there was time as well. Oh yeah, lots of people were sitting doing nothing, finding a new way to kind of just spend their day.
Anne Marie: 27:38
Oh yeah, yeah, perusing like Reddit or TikTok or whatever way that investing kind of came to them, you know, but it's what we kind of see. A similar thing has happened over the years. You know the previous record low for holding was six months and that was hit right before the 2008 financial crisis in 1999. The holding period dropped sharply to 14 months and that's in the run up to the dot com bubble. So again, like if the stock market's on the mind, people are going to be trading and they're going to be trading irrationally because you know, if you think about it like the way Wall Street bets run on Reddit, it's every day they're discussing 10 new stocks. So I think people just get a bit of foam on. They kind of jump in and out of stocks really frequently. But I think the more long-term question here all has to do with technology and all has to do with access, because the most lasting change is going to be created here by the Fifi brokerages that we really saw begin to rise in about 2018, 2019. And that really just gives anyone the opportunity to buy whatever they want whenever they want from their phone, which is just an insane amount of movement to happen. You know, like Emmett is sitting right in front of us and he's like, yeah, you should have to call a broker and ask her to buy something on my behalf.
Michael O’Mahony: 28:44
Post me out stock certificates and stuff.
Anne Marie: 28:47
Yeah, like that's crazy. Now I can. You know we can go on Revolute and you can buy a stock in 15 seconds. You don't have to think about it again and that has led to a huge jump in trading volume. And, interestingly, we saw a really similar jump back in 1966, which is when the stock market became fully automated the New York Stock Exchange and that was a huge technological leap forward. All of a sudden, it meant that trades could be executed significantly faster and also for way less money. So then, once the technology was there, firms were going. How can we utilise this technology to the best of our ability? How do we make money? And that meant that we saw high frequency trading appear in HFT and today high frequency trading represents like 50% of the trading volume in the United States. But oftentimes this type of trading is computer run. You know, these are huge firms with billions or trillions of dollars, so when they shift money around, that's not a ripple, it's a title. It makes a huge impact. And now we're basically seeing the exact same thing, but it's consumer facing. You know, back in 1987, daily average trading volume was 500 million and by 2020 it will hit a billion, and a lot of this is being credited to individual investors having access. Individual investors today represent 25% of trading volume and that is up from 13% in 2019. This is a significant acceleration over a really short period of time and that it just shows how many people are involved in the stock market today. And we go back to the 1920s, right before the Great Depression, only 1% of the American population owned a share of anything and today that's at 50%. So 50% of regular people have some sort of foot in Wall Street. And of course you know we have to, I guess, acknowledge in the 1920s a lot of people did not have the money to participate and of course you know if Emmett's life was complicated trying to buy shares I'm sure in the 1920s that was even worse. It probably involved shouting on a street somewhere and fighting.
Michael O’Mahony: 30:33
I think you had to drive to Wall Street yourself and go in and fight someone, you get like a horse?
Anne Marie: 30:37
I don't know, I'm clear. But I also think it is worth mentioning something else that Emmett said is that, on top of just having the technological ability to buy the shares, we have way greater access to information because of the internet. You know, I think I can get really detailed write ups of companies or I can get all of their financial data they've released by just going to their investor relations page on the website. That takes 10 seconds. I can get a massive 50 page file. Sit down and read it. You know that's a huge innovation. That's only really happened in the last 10 to 15 years. So, consumer facing stock analysis services, you know the success of the Motley Fool shows that people are interested and willing to pay for stuff like this. Even services that we have ourselves, like Horizon, show that. You know people are interested in buying individual stocks and they want their hands held, they want advice, they want a place to discuss these types of things. And then, kind of as I mentioned at the top, I think a huge accelerator of this is just social media. You know, if we say, in 2008 or in 1999, a huge reason people got involved in the stock market was FOMO from the news cycle. Now we have social media, which means a news cycle is 24 sevens going all of the time, which means you probably have 20 times as many stocks that you're going to hear about and feel sad that you're missing out on, and so we just have this unstoppable kind of news cycle going around and round and round. So I think it's really a combination of just technology, and then it's that cycle of the technology gives you the ability to do so. So then you go and talk to people about what you should be buying and then you go, oh, it's really cheap to buy stocks. So you just go round and round and round and round.
Michael O’Mahony: 31:58
Yeah, it's a flywheel, and you mentioned FOMO there. I think FOMO is a big influence on these higher risk strategies that have become so much more commonplace recently, especially options trading. But, like crypto as well, falls completely into this too, where everyone's looking for that quick book.
Anne Marie: 32:15
Yeah, definitely, and it's actually kind of interesting because I think, like the first episode of stock club I was ever on was because we'd seen a massive surge in options trading and a number of people had had credited it to TikTok, because anytime you would like put investing in to TikTok, at the time, most of the largest videos were coming from people who regularly traded options, and I actually think that TikTok has since put in place financial regulations where you're really limited in what you're allowed to say now on the platform, which is quite interesting, and so I ended up having to dive in and do a bunch of analysis to find out what's going on with the options. But as of right now, today, we see about 40 million options contracts being traded daily. That's up from 15 million in 2010. And we saw less than 2 million be traded today in 1999. So, again, a significant acceleration. Retail investors account for more than 25% of total options trading activity, which is huge, and that has fully been spurred on by places like Robinhood, where options trading is now effectively free and it's kind of messing with some of the stuff that is exposed to options or exposed to options volatility, I guess you could say because these are like regular, everyday people who, yes, they have access to information, but they're probably not like hooked up to the Bloomberg terminal and doing like high analysis. It means that the biggest names associated with options trading right now are Tesla, Apple, Amazon and NVIDIA. They make up 20% of all single stock options ratings today. So this is really just regular people going yeah, apple's a good company. It could go up or go down whatever. We'll shorten it. Interestingly, unfortunately, it's pretty clear that most individual investors who are trading options are doing so in a risky way and in a kind of an unrealistic way. They're using the most basic strategy, which is they're buying a single option contract at a time. They're doing a put or they're doing a call. That's all they're doing, but that's actually not really how institutional investors use options. If you go into any kind of 13F, which is what a hedge fund uses to report their positioning, you will see that at any one time, they will have both calls and puts on a single entity, because they're hedging, they're using them to hedge and they're putting like tens of millions, hundreds of billions of dollars on these types of things. They're not buying single options contracts. That's not what they're intended for and that means that you know.
Michael O’Mahony: 34:36
I think that's a really good point, though, that these are incredibly complex and complicated financial products that are not being used to purpose. So, as you said, they're hedges. People are selling covered calls. It's kind of part of an overall portfolio strategy. It's not for someone to go. I think Tesla is going to kill the next earnings. I'm gambling on it, basically.
Anne Marie: 34:58
Yeah, and that means that, like 11% of Robinhood users monthly active users right now are buying options, but they're only buying single options at a time. Less than 1% is buying multiple at a time, which is what you would kind of need if you wanted to do an option spread, which is a bit more assurance, way less risky, likely losing everything is way less Like. Oh, it's just, it's very risky, and that has actually meant that. John Foley, who's the CEO of Options AI, has this great quote where he says everybody in the business knows that if you're only buying out of the money calls, then you're likely going to lose money over time. The question of democratisation shouldn't be. Can I trade options, but can I have straightforward access to the option strategies that Wall Street uses? The playing field is not level right now and no one is really focusing on that.
Michael O’Mahony: 35:39
Absolutely, and I imagine a lot of Wall Street would want to be on the other side of those trades because options are in some form zero for some game. Definitely yeah. So let's just finish up this section with kind of going to the downstream effects of people having this much greater access to financial markets and financial products and other rest.
Anne Marie: 35:59
Yeah, it's kind of interesting because we're living it right now. You know, as I said, this is a really new change. Like Robinhood only introduced fee-fee trading I think back at the end of 2018. It's only 2023. So that's like five years. And then it was going around doing a statistical analysis of 120 years of the stock market and we are here trying to be like this is what we know. We can make long-term conclusions from five years of data.
Michael O’Mahony: 36:19
This is the future. Old man, listen up. Yeah, yeah.
Anne Marie: 36:24
But there's actually a recent study that was done that is interesting. It's called a real cost of free trades Retail option trading increases the volatility of underlying securities. It was only published in March of 2023. It's a big, full analysis. The team essentially focused on the period of when Robinhood introduced fee-free options trading. They took six months. They said, okay, well, I know it's three months before and three months after and see what that has done to these stocks and, not surprisingly, volatility increased, more so for stocks that saw greater increases in retail options trading. Native traders are more likely to move in a herd, leading directly to volatility in the markets that they trade in. So, for every 10% increase in options, retail volume caused a 1% increase in idiosyncratic volatility. And idiosyncratic volatility is stock movements that cannot be explained by any financial model. It's noise, you know. It's a radical market movement that is just caused by the mere nature of humans. So, unfortunately, if you are in NVIDIA or Amazon or Apple or Tesla, you know one of these companies that a naive options trader is going to be buying, you are contributing to the overall volatility of that stock, even though all you're doing is buying options. And interestingly, the team found that because individual investors are so focused on options, because they're participating so much particularly Robinhood users they're making the short-term stock market more volatile, whereas even if they were doing erratic day trading of just regular shares, they wouldn't be contributing so much to erratic movement. So, as of right now, the conclusion is things are going to become more volatile in the short term, and that is because there is an obsession with options trading which, again, we have to keep in mind. Like not all the blame here should be placed on the individual investors, because Robinhood only really makes money when people buy options, because the whole basis of the fee-free model is the only way to turn a profit is through payment for order flow. Payment for order flow and you only make anything off. Payment for order flows with massive volume and you make way more if you're doing something risky like an options trade.
Michael O’Mahony: 38:27
Because in options each contract is covering 100 shares as well, so I think that feeds into everything.
Anne Marie: 38:35
Yeah, so they make I think it's like 10 times the amount of money. So this makes no difference to Robinhood. They want people to trade options and they want them to buy them every single day. So it's this combined thing of Robinhood desperately trying to make money. People want to make money and they're surrounded by all of these gurus on TikTok who are like well, the only way to participate in the market is to buy 24-hour put options. And then there's a really wonderful quote on this from Larry Swindor, who's an investment analyst and he's a financial author. He's put out like 10 books all about long-term investing and he says, while the new generation retail investors are tech savvy, they are nonetheless uninformed amateurs who act more like gamblers and casinos than investors in capital markets. The result is that the options trading is highly unprofitable for them, but highly profitable for the wholesalers making markets and the options and paying for the order flow. Four warrants is four armed, so it really is kind of interesting. You know, we have all this like new technology is giving people incredible access, but it is in some ways just kind of doubling down on Warren Buffett's strategy of there's a lot of noise in the market. Probably, if you're an individual. The best thing to do is just buy and hold through the noise.
Michael O’Mahony: 39:39
Yeah, I think that's going to be the kind of motto to take away from all of this. Hopefully and you'd hope to see I know Robin Hood isn't the only one in this game but, like most, you have to qualify, to prove you have financial expertise to buy options, because it is a more complex financial product. That's clearly not being done right now, so hopefully we'd see more come in.
Anne Marie: 40:03
Michael O’Mahony: 40:04
Okay, right, we're just going to give a quick promo to our newsletter, charging and fearless. So each week we're delivering one of the most unique products on the market and it's completely free. So no one else has covered the markets we cover with charging and fearlessness. Where we deliver to you, a new weekly stock pitch could be from Amsterdam, tokyo, paris, somewhere in between. So that's a completely free stock pitch every week. You're reading about a 30 seconds flash and we can almost guarantee most of these companies are going to be brand new to you, which is where you get an edge. Sign up in the show notes for today's episode. Right, we're staying with the kind of long term investing team of the episode here, so it's not going to go big, I know. We're going to do a bit of an advice corner instead. So, emmys, I have you up first and I just want to know what's the most beneficial book or any kind of literature that you've found that has helped your investing career.
Emmet Savage: 40:54
Okay, I have an answer, because I know you've slacked me the question about a half an hour before myself. So I've got it off my shelf and I'm going to go let me think about it and then I'm going to hold it up and people go. How did he have it to hand? So you know there's a lot of books that are regarded. So the book that had the greatest impact on my investing life was a book about investing. You'd never think of it, think of it, but it actually was. Like, I mean, what book had the biggest impact on my guitar playing? Well, it was a book about guitar playing. So I'd love to kind of draw from something very intellectual, human, all too human, by a salad collection of dally paintings or something really major. Seeing through the collective short stories of Guido Mapozo Absolutely wonderful. So anyway, there's a load of books out there and, as I said, what? 35,000? That would take you 88 years to read absolutely preposterously. But there's a generally regarded short list of five that you'll often see are constantly being referenced as the greatest investment books ever written. The first is the Intelligent Investor by Benjamin Graham, and I would say you have to be a very intelligent investor because it's a tedious read, although there's a version with footnotes by Jason Swig which makes it far more readable. Common Stocks and Uncommon Profits by Philip Fisher one full book, very readable. A Random Walk Down Wall Street by Burton Malkiel is a great book, very readable. Stocks for the Long Run by Jeremy Segal, or Segal Professor, jeremy Segal, one of my favourites. It's almost always on my table because it has basically a short explanation with a little bit of data on every term. You're ever going to get cancer in stock investing and I think it's the book everyone should have. And then the Go To Bible, which is one up on Wall Street, by Peter Lynch, which espouses that we all have an edge on Wall Street. I'd imagine one up on Wall Street was the one that had the greatest impact on my investing life from a. I can relate to this perspective, but I would say the book I most dip into is this one here. Can you see that?
Michael O’Mahony: 43:15
That is, the essays of Warren Buffett, is it?
Emmet Savage: 43:18
That's right, exactly. It's the essays of Warren Buffett Lessons for Corporate America. And it's the essays of Warren Buffett, funnily enough, and it's compiled by a professor of business and all called Lawrence Cunningham. And I dip into it and despite its really bland cover, it's actually colourful and enriching and it is a wonderful collation of Warren Buffett's essays and therefore it's a document, or documentation rather, of his and Charlie's, and therefore Berkshire's, investing philosophy. And it's so readable. And now I have the 2001 edition, which means that there ain't nothing in it that's more than 22 years old, but it's still written with a turn of phrase and, I suppose, a verbal dexterity that just keeps it so fresh. I think it's a wonderful book and hats off to the guy who wrote it. And do you want to hear something? Do you know the blurb that you get inside a cover? He managed to get Charlie Munger, who is probably the most how would you say old, like what is the host? Yeah, I know he's very frank, like you heard my story about him meeting the Reese's, the peanut brittle, the butter brittle, like. So anyway, Charlie Munger is to the point, but he wrote a blurb. And do you know what? Can I read it to you? Do you have time?
Michael O’Mahony: 44:43
Because we can edit it out.
Anne Marie: 44:44
It's a bit short, it's a bit long.
Emmet Savage: 44:47
Very practical, Charlie Munger. That's the entire blurb, the most practical guy of all time.
Michael O’Mahony: 44:55
But he's known him for 60 years as a lurker.
Emmet Savage: 44:59
Yeah, that's right, jacks. I know Juan Buffett, I guess, wrote the book but didn't compile it, and it's the compilation that makes it so kind of readable. And the nice thing about this particular book is that you don't need to read it in linear fashion. You can just let it fall at any page and just read a page from it and it will bring value to investing life. But do you mind if I just pause for a minute and read to you the writing? A short excerpt from the 2012 Berkshire Hathaway shareholder letter is written by Warren Buffett, because it's possibly my favourite thing ever written about the stock market, and it's only two paragraphs, so I'm really summarising here. I'm summarising a summary to a summary. I have it here on my screen. It says today, the world's gold stock is about so Warren Buffett wrote this. Okay. So I'm just gonna. This is a lovely way of crystallising the pursuit of stock investing. Okay, he says today, the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. Picture it fitting comfortably within a basketball field. At $1,750 per ounce gold's price as I write this, it would value it to be about $9.6 trillion. Call this cube pile A. Now let's create pile B. Costing an equal amount. For that, we could buy all of the US cropland, which is 400 million acres with output of about $200 billion annually, plus 16X in mobiles, the world's most profitable company at this time, earning more than $40 billion annually. After these purchases, we would have $1 trillion left over for walking around money. No sense in feeling strapped after this buying binge. Can you imagine an investor with $9.6 trillion selecting pile A over pile B? So when you think about alternative assets, that's it. And he elaborates on how gold does nothing. It has a couple of perceived value points, I suppose cosmetic jewellery and some limited applications in medicine, but gold is literally just an element and somehow we humans kind of decided its value because there was once upon a time where it was absolutely the way we extracted value from Mother Earth. But now we can invest in businesses that's only purpose is to create wealth for its owners, and Warren Buffett has a lovely way of just bringing all these stories to a point where you can go oh yeah, I get that. Why would you buy gold when you can buy apples? It just doesn't make any sense. So, anyway, that's the book, the essays of Warren Buffett, lessons for Corporate America the most boring cover you'll see on your bookshelf, but one you'll take down over and over again and put Jeremy Segal's book and Philip Lynch's Peter Lynch's book there as well. They're just wonderful.
Michael O’Mahony: 48:07
All right, good stuff. All of that Amarie for you, because Emma talked about every single investing book. There we're gonna go.
Emmet Savage: 48:17
You're welcome, Amarie. So what have you got? People's originality.
Michael O’Mahony: 48:21
All of that? No for you. We're gonna talk about habits instead. So what investing habits would you advise younger people especially to build in order to become great investors?
Anne Marie: 48:32
I suppose actually is one that we kind of already mentioned, which is the dollar cost averaging. You know that is a great way to lower risk when you're kind of building into a portfolio, particularly if, like all your if you're just starting off with an index fund. Getting in the habit of being like, okay, I'm gonna put 50 or 100 Euro in a month, like when my paycheck comes in, and kind of automating that process for yourself, I think you can kind of make buying stocks less daunting. I feel like I was quite frightened to do it initially, but I think getting in the habit of doing it and seeing it almost as the equivalent of putting money in a savings account can help, you know, make it easier for you to then go down the line. But I'm gonna research individual stocks, I'm gonna pick them out, I'm gonna assemble my portfolio in relation to one another. But I think the kind of second piece of advice which I think we talked about at the end of the year, is making sure you're keeping an investment journal which is recording the factors or the reasons why you have decided to buy a certain stock, and I tend to see like try and get it down to like five bullet points and some of them should be quantitative and some should be qualitative. You know, have it be okay. I really like the management team. Or it's a founding CEO and he owns a significant portion of the company, or, you know, this is in a very innovative industry that is growing rapidly. Or this company has an incredible moat. It's not going anywhere. Or it can even be something like oh, I interact with this company routinely. They have very high quality products. I can see continuing to be successful and just writing those down and having them somewhere and then maybe writing down one or two risks so you just in the back of your mind, go okay, if this continues to loom large on the horizon, it continues to get bigger. I have, you know, I can check in with myself and I think that would make the process easier to determine. You know, if you're 10 years down the line from holding an asset of, if you get into that process of going, is it time for me to sell this? You know, if you have to ask the question, okay, would I buy it today, having a concrete place for you to go back and say, okay, these are the five reasons I really liked this company and if you can sit there and say do you know what? These five reasons are gone, or this executive has left, or you know there's new competition on the horizon and I like this product better, I like this company better. Or you know there's new innovation and now no one wants to drink coffee anymore. Everybody wants to drink energy drinks, so I shouldn't hold Starbucks. You know those types of things. I think that that gives you just a bit of confidence, particularly if you're in the early days of investing, because it's quite emotional when you own a stock that all of a sudden plummets 50% off a cliff. And I think when you become a bit worried like that or a bit nervous, it can mean that you will make irrational decisions. And I think having your thoughts written down somewhere and having them be factual and measured and everything gives you a place to go and check in and say okay, I am panicked, but four out of these five factors continue to be strong, so I will continue to hold.
Michael O’Mahony: 51:07
That's great and it really distils what we mentioned in the sales conversation as well. I love that. Okay, I like that. That's everything for today, folks, and just gonna give a quick shout out for our sponsors and friends at Vodafone Business before we close out the show. So if you're an Irish business on a digital journey, you must check in with the experts at Vodafone VHUB. This is a new digital advisory service. All businesses of all sizes can get free one-to-one digital support and advice tailored to their business by simply booking a call with one of Vodafone's experts. So search Vodafone VHUB or check out the Vodafone Business website for more information on that. That's it for today's show. Thanks very much, eminem Marie, for joining me and thanks everyone for listening. Remember, if you have any questions you'd like answered or elevated pitches you'd like to tackle, make sure to get in touch. You can find us on Twitter at mywallstreethq, on tik tok at my wall street, or simply just email us a pod at mywallstreet.com. If you're enjoying the show, leave us a review, share us with your friends, and thanks for joining us. We will talk to you next week.
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