A little over a week ago, CNNMoney posted this video to its YouTube channel. It’s about two 4th grades who earned a 50% annual return in one year on the stock market.
The best hedge funds in America are happy with 15%; anything over 20% is considered brilliance, and anything over 40% is a miracle. To experience a 50% return even once is an amazing feat of financial savvy and/or timing. Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) only did that once (in 1976, when inflation was much higher than today and a strong return was much easier to obtain), and few hedge funds ever achieve that feat. So how did these two preteens do it?
The video is worth watching, and every investor should take it quite seriously. CNNMoney isn’t exactly the commonest resource for Wall Street, but the experience of these two children points to the power of common-sense, well-timed investing.
The boys invested primarily in Apple (AAPL) and Macy’s (M), with Apple being the boys’ best performer in their portfolio. They also had bonds and mutual funds from Vanguard and Goldman Sachs (GS). Why did they choose Apple? The company has great products, says one of the boys, such as the iPhone and iPad. When asked what investing advice they would give, both boys say investors should “look at the graphs” and ask, “What does the company make?” These two simple steps were enough for these boys to earn 50%.
So everyone should be able to make such returns, right? But they don’t.
There are three main faults that stop average investors from experiencing similar returns to these boys’ portfolio.
1. Burnout These boys bought and held their stocks and didn’t get bored of the project–as I expect many children would. Let’s face it, even adults quickly tire of the stock market and tend to avoid some of the harder parts of investing, such as maintaining and tweaking models, reading company disclosures, and so on. These boys did not burn out, and they saw their portfolio’s value grow as a result.
2. Impatience Similar to burnout, a lot of people get impatient with the market and jump out too early. Whether it’s because a decent return has already been realized or the needle isn’t moving as much as the investor would like, a lot of investors will sell quickly to make a quick buck–and avoid the bigger, slower dollars that they could have yielded instead. These boys didn’t give in to that temptation–an amazing accomplishment for any child.
3. Gimmicks Looking for a return, investors will often turn to gimmicks to earn profits. That gimmick can be anything–an asset class, a new trendy method of analyzing equities, or a fund that pays out unsustainably high dividends. Savvy investors identify gimmicks and ignore them. Instead, these boys knew their edge. They knew how to identify what spoke to and worked for them — and patiently stuck with their plan.
What is the bottom line? Even a child can make a lot of money on the stock market–even in such “mundane” categories as large cap U.S. stocks. For these boys, value investing yielded a 50% return without insider information, complex technical tools, or even any capital at all to get them off the ground. All it took was an understanding of what value is and what is not.