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Category Archives: Stock Investing

Investing Success, Stock Investing

You have a 72% chance of making money in stocks in 2025

There’s a 73% probability the U.S. stock market will rise in 2025. These odds seem too good to be true, of course, since the market this year has already produced a well-above-average return — 28.2% as of Dec. 16, as measured by the Vanguard Total Stock Market ETF VTI+0.14%.

That’s triple the U.S. market’s average calendar-year return of 9.2% going back to 1794 (according to the database constructed by Edward McQuarrie, an emeritus professor at Santa Clara [Calif.] University).

Yet the market’s odds of rising in a given year are remarkably indifferent to what came before. Based on all calendar years in McQuarrie’s database, the market’s odds of rising in any given year are 73%. Following calendar years in which stocks rose, those odds are a statistically indistinguishable 72%.

What about five-calendar-year periods over which the market rose? Those odds would apply to 2025, since over the past five years the Vanguard Total Stock Market ETF has produced a 14.9% annualized return. The odds of the market rising in a calendar year following five-year gains are once again statistically similar — 72%.

What are the odds when coming off decade-long advances, such as the last one — over which the Vanguard ETF has produced a 13.4% annualized return. Following 10-year periods in which the market rose, the odds of the market rising in the subsequent calendar year are 73%. (These odds are plotted in the chart above.)

A gambling analogy helps illustrate what these statistics mean. Ask yourself: What odds would you place on a coin flip coming up heads if it had come up heads in each of the five previous flips? Or if the previous five flips had each come up tails? Many of us give different answers to these two hypotheticals, as if the odds that apply to the sixth flip have anything to do with what came before. They do not, of course, since the coin has no memory: The odds of that sixth flip coming up heads are always 50%. To think otherwise is to be guilty of what is known as the gambler’s fallacy.

It makes theoretical sense that the same is true of the stock market. If the odds of the market rising in a given calendar year were actually correlated with what had come before, then shrewd traders wouldn’t wait until January of that next year to exploit that correlation. They would instead place their bets in the preceding November or December, with the consequence that the gain or loss that otherwise would occur in that year would be transferred to those prior months. The net effect would be the correlation’s disappearance.

You may have other reasons to expect equities to do particularly well or poorly in 2025, of course. The stock market is extremely overvalued, for example, according to almost any valuation measure with a decent long-term record. But valuation only exerts its gravitational pull on the market over long periods of time, such as a decade. Over shorter periods, including calendar years, valuation indicators have relatively little predictive ability.

The bottom line? Based only on how the stock market performed this year, the odds of the stock market rising in 2025 are no higher or lower than they would be if equities were currently sitting on a big year-to-date loss.

Investing Success, Stock Investing

Stock Picking Success: Batting Average Or Slugging Percentage?

The passing of Pete Rose this year brought to mind the discussion of batting average versus slugging percentage for stock selection and portfolio management. Pete Rose had a lifetime batting average of .303 with 4,256 hits in his 24-year baseball career. This means he got a hit almost once in every three at-bats, which is an outstanding result but doesn’t get him into the top ten all-time for Major League Baseball. According to MLB, Josh Gibson holds the record for the highest career batting average at .372.

On the other hand, Babe Ruth has the all-time highest slugging percentage at .6897, with a batting average of .342. The slugging percentage measures the total number of bases a player gets per at-bat, so it considers the player’s power rather than counting all hits the same as with the batting average. Interestingly, Babe Ruth also failed a lot, striking out 14.4% of the time he was at the plate. Pete Rose, by contrast, had a very low strikeout percentage of 8.1%.

So, what does all this have to do with picking stocks and managing stock portfolios?

Despite having a Babe Ruth-like slugging percentage, the U.S. stock market has a high strikeout average. According to a fascinating paper by Hendrik Bessembinder recently examining the returns on 29,078 U.S. stocks from 1926 through 2023, over half of all stocks, 51.6% to be precise, had negative cumulative returns. How does the stock market have long-term nominal and after-inflation returns higher than any other asset class while more than half of the stocks fall in value while publicly traded?

PROMOTED

LT Annualized Returns
Long-Term Annualized Returns: 1928-2023Glenview Trust, Aswath Damodaran, Bloomberg

The complex mathematical answer is that stock returns have strong positive skewness. However, a simple example of long-term positive compound returns provides an easier-to-digest answer. Take a portfolio of just two stocks selling for $100 per share. The first stock grows at 9.8% annualized, while the second stock falls by 9.8% annualized over thirty years. One would think our total portfolio would stagnate during that period since the losses in one stock would offset the other, but compound returns make our intuition incorrect. The exponential return on our positively performing company outweighs the loser. This portfolio grew to be worth $1,657, a 7.3% annualized rate. In other words, the highest-performing stocks more than compensate for the losers over time.

magic of compound interest
The Magic Of Compound InterestGlenview Trust

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Pick your player: Pete Rose or Babe Ruth?

All other things being equal, you would pick Babe Ruth for your team since his power more than made up in production for the strikeout. Frankly, you would want both on your team if you could. But should investors seek a high batting average or swing for the fences? In his book More Than You Know, Michael Mauboussin provides a robust rationale that one should also strive to be the Babe Ruth of investors.The video player is currently playing an ad.

He notes that “the frequency of correctness does not matter; it is the magnitude of the correctness that matters.” The dollar change in a portfolio counts as success in investing, not the percentage of stocks with a positive outcome. Much like the stock market as a whole, a successful investment portfolio typically has exceptional stocks that more than overcome the subpar returns of the duds.

Crucial Implications For Investors

Mauboussin notes that investors must consider probabilities when investing in a stock since we know that significant losses and winners in a few stocks are the likely drivers of success versus failure in investment excellence. He quotes the late, great Charlie Munger speaking about the thought process of Berkshire Hathaway’s (BRK/A, BRK/B) Warren Buffett, “Take the probability of the loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we are trying to do. It’s imperfect, but that’s what it is all about.”

Trying to hit home runs does not mean buying the riskiest stocks. Contrary to academic teaching on the subject, riskier stocks, as defined by higher volatility, do not provide investors with higher returns. Furthermore, a few lethal losses can destroy the performance of a portfolio. While Buffett began his investing career buying “cigar butts,” low-quality but cheap companies with one more “puff” left in them, he evolved to focus on higher-quality companies with Munger’s influence. Buffett now says that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

According to Howard Marks, Warren Buffett, the greatest investor of all time, is credited with just twelve sensational winners in his career. Charlie Munger told Marks that the “vast majority of his own wealth came not from twelve winners, but only four.” The key was to find and hold onto those winners while avoiding significant losses. Alas, in the words of Warren Buffett, “investing is simple, but not easy.”

Art Investing, Bonds Investing, Cryptocurrency Investing, Forex Trading, Investing Success, Options Investing, Real Estate Investing, Stock Investing

Don’t Invest Alone. Get a Investment Mentor

After talking to hundred of investors I’ve learned that the majority go into the experience with the feeling that they’re doing this for themselves, and so they’re on their own. They seek the education and the hand-holding they need to do it themselves. Which is fine if that’s what they want to do. But I’ve found that investing is much easier and much more enjoyable when you do it with someone else. Peers and mentors have helped me to gain more from my investments, and I’ve also made lasting friendships with people I’ll know and love for the rest of my life. Now I don’t mean going into joint investments with these people, but talking about the routes you’re taking and the things you invest in, sharing tips and pointers, and going on that journey together. An investment mentor can do a lot for you.

Looking at having peers and mentors that are doing more than you, are putting more value than you are contributing, that is a powerful person to have in your life. If you don’t have that person and there is not this drive to meet that level or get to that next point of resistance then I would say that’s one place to start. Now, it doesn’t have to be someone you hang out with all the time, it doesn’t have to be someone you have a relationship with. We live in a world where you can get on a podcast and you can listen and find personas or find people that are doing amazing things and use them as your mentor and use some of the things they’re doing as your goal and that’s what’s going to kind of push you along and hit really that other need that we have.

Now, I think the idea of these needs, they’re different for people and sometimes are even different based on the circumstance you’re in in your life. Looking again at this growth side of things, it’s just one of those principles that’s going to continue to push you and you can either deny it or you can accept it. Accepting that principle is incredibly empowering because I think if you accept it, now there’s some accountability associated with it. You know that you have to be growing and whether it’s through books or courses or personal development seminars or whatever, you’re gonna try to get yourself driven, get yourself motivated and pushed to that next level.

So let’s maybe go through a few other needs. And there have been studies on this Abraham Maslow is big into it, Tony Robbins is huge into this. We have a lot of these kind of gurus that are out there that have really kind of discovered some various similar principles and they’ve organized them in different ways. There’s really two ways to do it. You can just live life and experience things and try to figure it out on the fly or you can learn from people that have discovered them already.

Q: Why is it important to have an investment mentor in your financial journey?

A: Having an investment mentor is crucial because it provides guidance, knowledge, and expertise that can help individuals make informed investment decisions, avoid common pitfalls, and achieve their financial goals more effectively.

Q: How can individuals find a suitable investment mentor?

A: Finding a suitable mentor involves networking, seeking recommendations from trusted sources, and researching potential mentors. It’s essential to identify someone with relevant experience and a willingness to share their insights.

Q: What are some of the valuable benefits that individuals can gain from having an investment mentor?

A: Benefits of having a mentor include gaining access to industry knowledge, learning from real-world experiences, receiving personalized advice, and building confidence in one’s investment decisions.

Options Investing, Stock Investing

How to Be the Perfect Copycat Investor

by Elvis Picardo

Copycat investing, as the name implies, refers to the strategy of replicating the investment ideas of famous investors or investment managers. The strategy is also known as coattail investing since the investor rides on the coattails of those who presumably have much more investment prowess.

But is copycat investing a viable trading or investment strategy? While the evidence about its success is somewhat mixed, there are certain techniques you can use to increase your chances of becoming the perfect copycat investor.

Buffett Bootleg vs. Miller Mime

The long-term success of legendary investor Warren Buffett has attracted a host of copycats over the years, and that could be because replicating Buffett’s strategy has made people money.

According to a 2008 study by Gerald Martin and John Puthenpurackal, a hypothetical portfolio that mimicked Berkshire Hathaway’s investments a month after they were publicly disclosed would have outperformed the S&P 500 by an annual average of 10.75% from 1976 to 2006.1

But before you rush off to check Buffett’s current holdings, consider the other side of the coin, when a long streak of outperformance ends with a resounding thud. Fund manager Bill Miller joined the pantheon of great investment managers after his Legg Mason Value Trust Fund beat the S&P 500 for 15 years in a row, from 1991 to 2006.2 Miller’s fund finally had a bad year in 2007—losing 6.6% and trailing the S&P 500.

However, 2008 was an outright disaster for the Value Trust, which plummeted 55%, compared with a 37% plunge for the S&P 500, as Miller loaded up on flameouts like Bear Stearns and AIG.

Investors who had mimicked Miller would have rued their decision if they had continued to do so after 2006. Miller eventually opted to step down from managing the Value Trust Fund in 2012.3

How to Be a Copycat

Copycat investing is more widespread than one would think, although it is often done discreetly and without much fanfare by institutional investors like mutual funds and hedge funds. But the idea of latching onto someone else’s investing ideas has also caught on among retail investors.

The earliest copycat investors would routinely scour regulatory filings from mutual fund companies to discover which stocks star managers had loaded up on in recent months. Nowadays, online value investing research companies such as GuruFocus offer an alternative to this arduous process by tracking and displaying the holdings of the best investors and investment managers.

Then there’s “mirror investing,” which copies the copycat strategy and takes it one step further. Services such as TD Ameritrade’s Autotrade enable an investor to link investment accounts to portfolios actively managed by other investors or investment professionals and automatically mirror every investment move that the latter make, within specific allocations set by the investor.

The obvious difference between copycat investing and mirror investing is that the former attempts to duplicate trading ideas only of well-known and recognized investment gurus.

Who Should You Copy?

Investors considering a copycat strategy should consider replicating investment ideas from the following sources.

Successful Money Managers

All institutional money managers with over $100 million in qualifying assets are required to file SEC Form 13F quarterly detailing their investment holdings.4 This is a great source document for copycat trades.

Buy-and-Hold Managers

Copycat investors would be much better served by getting ideas from long-term managers who believe in buy-and-hold, rather than investment pros who are short-term traders. This is because the time lag between an actual trade and its reporting may be a detriment to effective trade replication.

It’s better to go with someone like Buffett, who has often been quoted as saying, “Our favorite holding period is forever.”5

Activist Investors

Activist investors like Carl Icahn can usually cause a stock to appreciate as soon as the news of their involvement in the company becomes public.6 Icahn often shares his investment plans on X (formerly Twitter), which makes it easier for copycat investors to act on them rather than waiting for regulatory filings.

What Are the Risks?

Like any other strategy, copycat investing has its share of risks.

Success Is Not Guaranteed

No investment strategy is a sure-shot winner. For example, a copycat investor may have to stick with the strategy for many years if following a value-based manager since value stocks sometimes take an eternity to turn around.

Losing patience and abandoning the strategy prematurely may result in substantial losses.

Stock May Have Already Moved

A stock may have already moved significantly between the time it was acquired (or disposed of) by a money manager and the time this news is made public. This has an adverse effect on the stock’s risk-reward profile for the copycat investor.

Too Many Copycats

Too many investors—retail and institutional—are watching the top hedge funds and money managers. Given the speed of information dissemination and trading nowadays, an investor who is a little late to a copycat trade is at a huge disadvantage, because the stock may have already moved quite a bit in a short time span.

Differing Investment Objectives

Your investment horizon and objectives may differ from that of the money manager. For example, you may have a very short-term horizon, while the manager you are copying may be in for the long haul. Or the money manager may have a risk tolerance level that is much higher than your own.

How Should You Do It?

Here are some suggestions to consider while implementing a copycat investment strategy.

Follow Credible, Successful Professionals

Stick with the tried-and-tested money managers, since you may occasionally come across a stock that could be a spectacular success. As an example, Carl Icahn sold close to 3 million shares of Netflix (NFLX) in October 2013, after the stock had more than tripled that year.

Icahn’s average cost of the Netflix stake was $58 when he originally acquired the shares on Oct. 31, 2012. A year later, the shares were sold around $323 for a gain of 457%. Copying a timely investment like that could juice up returns for any investor’s portfolio.

Exercise Patience

Chasing a stock is never a good idea. If a stock has already moved up on news that an investing heavyweight has taken a position in it, the best course of action may be to wait for it to come back within your buying range. If it does not, move on to something else.

Look for Accumulation

Large-capitalization stocks that are having hard times may be a great opportunity for patient investors. Look for such stocks where money managers have commenced accumulating significant positions since this signals their confidence in a turnaround in the near- to medium-term.

Follow Pros in Different Sectors

Don’t put all your eggs in one basket by focusing only on investment professionals in one or two sectors. Many top managers and investors in a specific sector have a considerable degree of overlap in their holdings. Diversify your copycat strategy by replicating investment ideas from gurus in different sectors.

Conduct Your Own Due Diligence 

Do not assume that copying trades from the best money managers around absolves you of the responsibility to conduct your own due diligence. Ensure that copycat stock you are considering is suitable for your investment objectives and risk tolerance before you acquire it.

Who Are the Best Investors to Copycat?

If you’re going to use a copycat investing strategy, the best investors to imitate are ones with a proven track record of success, such as top mutual fund managers and well-known investors. You can also use a company’s public filings to find out more about shares bought and sold by corporate insiders and significant shareholders.

Does Copycat Investing Work?

Copycat investing can work, and it’s a great way to learn from top investors. But keep in mind that these investors, such as Warren Buffet, are working at a much greater scale, which allows them to diversify their holdings in a way that’s difficult for retail traders to emulate.

Which Investing Apps Can Do Copycat Investing?

Investing apps can help you copy others’ investments. For example, you can use eToro’s Copy Trader platform to automatically copy trades in real time.7 There are also investing research platforms like Guru Focus, which can help you identify the trades that big investors are making. You can then use nearly any investing app to place your trades.

The Bottom Line

While copycat investing has its risks, common-sense measures—such as following successful investors, exercising patience, looking for accumulation, diversifying with different sectors and conducting your own due diligence—can help you become a (near) perfect copycat and improve your chances of investment success.