The stock market brings out the worst in people. I believe it is fair to say that most citizens in the Socialist Democracy of Amerika believe that the stock market is essentially a casino, with profits only truly being earned by the house. In this case the house consists of Wall Street crony capitalists and investment bankers out to feather their nests at the expense of the mom and pop investor. Rare indeed is the investor willing to admit that his atrocious stock market returns are the result of his own choices and decisions about how to manage his portfolio. It is always easier to blame someone else, especially when the other person is richer than I am.
One of the greatest mistakes that I see being made by people who invest in the stock market has to do with their perception of how the stock market is performing. There is something in human nature that will not allow people to forget prior negative markets and something else in human nature that forces them to depreciate current positive markets. To be a successful stock market investor it is necessary to be neither an optimist nor a pessimist. The person who does well in the stock market is the realist. Let's see if I can't help you become a bit more of a realist here today.
How has the stock market done so far this year? Ask that question of 100 people on the street and I suspect that the overwhelming majority of them would inform you that the stock market has been terrible so far this year. They may even tell you they are glad they are out of it. Or maybe they will inform you that they have sold out and missed some of the bear market. Many will remind you that at the end of January we were treated to national headlines informing us that January was the worst January for stock performance in decades. The carnage continued in February as the market continued to plunge, establishing a new low on February 11th that was down over ten percent for the year and almost fifteen percent since the previous high point made in July of 2015. Pessimism reigned supreme and everyone was predicting a new financial meltdown similar to the last one we experienced during 2008's Great Recession. I personally know of one investor who became so convinced the market was going to crash at least 60% that he pulled all of his money out of stocks to avoid what he believed was coming.
Here is a graph showing the performance of the S & P 500 so far this year. Look familiar? Probably not. Most people believe the stock market is negative so far this year when, in fact, it is positive. So much for most people's perceptions on the matter.
According to the Investment Company Institute, domestic stock fund investors pulled almost $19 billion from their mutual funds in the first two months of the year. In addition, total domestic stock fund holdings are down over 12% in the last year alone. Apparently a lot of investors share the misperception of my friend about the future of the stock market in this country. People are bailing out of domestic stocks in droves. Clearly they must believe that the future is very bleak.
Here is a graph of the performance of the S & P 500 for the past ten years:
Although we are very close to being back to an all time high on the S & P 500 index, the dramatic drop in 2008-2009 had such a huge impact upon the emotions of stock investors that the average investor is emotionally incapable of appreciating what has happened in the enormous bull market since then. The stock market is up over 200% since the March 2009 low, with many stocks tripling in value. Who knows that fact? I believe that the negative emotional impact of the Great Recession still continues today, thus causing stock market investors to be unreasonably pessimistic in their analysis of the stock market. People felt burned when their stock investments dropped by 60% in about a year's time. Many stock market investors bailed out of the stock market during the Great Recession, thus locking in losses and guaranteeing that they would miss all of the bull market that began in March of 2009. When they did so they did the exact opposite of what they profess to believe. Every investor in the universe says that he believes in buying low and selling high. In reality there is not one in a hundred investors who has the emotional constitution to actually do that. There were very few buyers in March of 2009 even though it turned out to be the best buying opportunity for stocks in my lifetime. By the way, I was a buyer. So was Warren Buffet. I have learned a thing or two from him over the years.
I made my first investment in 1985. Since making my first investment into the stock market I have witnessed a 34% drop in 1987, a 20% drop in 1990, a 19% drop in 1998, a 49% drop in 2000-02 and a 57% drop during the Great Recession. My average annual total return on my entire portfolio since 1985 is 13%/year. I have never attempted to time the market. I have never attempted to predict what the market might do next. I have never moved my investments around to take attempt to take advantage of a hot sector. I have done nothing but buy, buy and buy, holding all of my investments down to this very day. I realize I am only a lowly janitor but I think I know a thing or two about human nature. The biggest impediment to obtaining successful stock market returns is found entirely within the average investor's own noggin. Overcoming misperceptions about the market that have been created by uncontrolled emotional reactions to the market in the past is the single biggest factor in stock market investing. Very few are successful because very few can control their emotions.