In December of 2017, Dividend Growth Investor (DGI) asked me if I’d like to duplicate the famous Warren Buffett bet. For those unfamiliar, in 2008 Buffett famously challenged the hedge fund industry:
Can you beat the S&P 500 over a 10 year period?
Only one hedge fund accepted the bet and didn’t do well. Buffett, and more importantly index investors, won.
But, I’m a slow learner and still like to play with individual stocks, so I accepted DGI’s challenge. I decided to pick four stocks that I’d hold for the duration of the challenge. No swapping, no rebalancing. Keep it simple.
The stocks I chose were Amazon, Google, Berkshire Hathaway, and Alibaba (for the rationale behind these choices, see this post). Here is how I’ve done so far:
Year 1 was a success. The S&P 500 was down, but I was up:
Year 2: My lead narrowed, but I remained ahead:
Year 3: Now, we’re back to the present day. The broker where I had my account (Motif) ceased operations, so I had to move my performance tracking to a Google sheet. With 3 years or 30% of the bet in the bag, I’ve extended my lead. The S&P 500 is up 39% while my portfolio is up 73%:
Only half of my picks are beating the S&P and Amazon is doing most of the heavy lifting. This is how the stock market works though. You don’t buy an index fund to have a large basket of winners. You buy it so you own the very few stocks that really soar. The always excellent Morgan Housel explains it here:
The S&P 500 rose 22% in 2017. But a quarter of that return came from 5 companies – Amazon, Apple, Facebook, Boeing, and Microsoft. Ten companies made up 35% of the return. Twenty-three accounted for half the return. Apple alone was responsible for more of the index’s total returns than the bottom 321 companies combined.
The S&P 500 gained 108% over the last five years. Twenty-two companies are responsible for half that gain. Ninety-two companies made up three-quarters of the returns.
If you’re going to be a successful stock picker, you must somehow figure out which of the very few companies are going to win over time. Good luck with that.
Storm Clouds Ahead?
I’ve crushed it so far, but the future is cloudy:
- Alibaba: Jack Ma (CEO) ran afoul of Chinese authorities and hasn’t been seen in months.
- Amazon: Will it be regulated?
- Berkshire Hathaway: Buffett’s famous holding company has been underperforming the S&P 500 for years. Perhaps it’s just undervalued, but I also have to consider that both Buffett and Munger will probably die before this bet is over.
- Google: Lawsuit!
I have no idea if I’ll win this thing, but in the meantime, it’s some cheap entertainment.
Index Funds
Despite my occasional stock-picking ways, I invest almost all new money into index funds. Mindy and I just netted a large sum of money from the sale of the trailer park (more on this soon) and it all went into VTSAX:
Index funds are effective, don’t call you in the middle of the night (looking at you rental properties), are self-cleansing, and require almost no attention. No brainer. (See JL Collins’s excellent book for more on the matter.)
DGI Versus Me
DGI is a different kind of investor than I am. He cares about numbers. I care about change and disruption. The quarterly payouts help the dividend lovers sleep better at night while I enjoy watching (and making money off of) the changes that are impacting our world.
*** cough *** Tesla!! *** cough cough ***
I’ have a lot more to say about my Subjective Strategy, but I’ll save that for another day.
Join the 10s who have signed up already!
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If you told someone there would be one of the worst global health pandemics of all time but SPY would be up 40% in 3 years, no one would believe you!!
Mr. RTTS recently posted…The First Six Months of my FIRE Journey
I know, right? Insane!
So do you have any plans for that four stock portfolio any time soon? Are you going to dump them at some point and roll them into VTSAX? I know index funds are the way to go, and most new money goes into them now, but I can’t help loving my stock portfolio that I started back in 2010 when I had very little money. I keep thinking I SHOULD sell them off and put it all in VTSAX but I don’t really want to. ☺️
revanche @ a gai shan life recently posted…2021 AGSL Fourth Annual Giving Project: Lakota Families
I’ll leave the money there for the duration of the bet (7 more years). After that, if the portfolio is still worth something, I’ll probably roll it over.
I know how you feel! Stock picking is so damn tempting!
Hello! I’m curious what do you think about investing those 350k over time instead? It’s a trade-off between variance and expected return still I feel I’d think about something like investing a chunk per week over a 2.5-3.5 months. Thanks and thanks for writing.
Hi Igor!
I’m a big fan of front-loading. Most of the time, you’ll come out ahead: https://www.madfientist.com/front-loading/
Over the long-term, I don’t think it matters that much.
that housel quote is the best. i think the other half of the equation that kills stock buyers is they tend to sell after an initial investment doubles or some such and “take money off the table.” they are the dog that doesn’t know what to do when they catch the rabbit.
the smidlap portfolio is trouncing the sp500 since 2016. we don’t own any jc penney or general electric. those few huge winners more than make up for a handful of duds.
freddy smidlap recently posted…Malevolent Missy Stock Series #17: We Bought InMode ($INMD)
“they are the dog that doesn’t know what to do when they catch the rabbit.”
YES! I hear that all of the time! If I had a nickel for every time I told someone about how much a stock appreciated and then they say: “I’d sell it!” I wouldn’t have to buy stocks at all!
Have you lost your way? You doubled your goal and then tripled it. And the race to exceed the goal by a big number continues. Why? Was it really a goal or a first step to something else? When will there be enough?
Since you have exceeded your goal, have you considered expanding your lifestyle to increase your comfort and your life experiences? Have you put aside $$$ for future education needs in a form that isn’t volatile? How about a multi year cash reserve so you don’t think about the market in the short term (mine is 5 years cash)? Have you converted any of your savings to deferred annuity type savings to put a floor under your elder years.? Savings that are tax advantaged and don’t pay out until later years (like annuities that begin payments at age 75 and 85) can be safe enough to not be affected by market conditions?
What about using excess funds to prevent ‘black swans’ … better health insurance, disability insurance, nursing home/assisted living insurance, life insurance, a large personal liability policy, some small portion of savings in investments that don’t move with the market? Maybe only some, maybe none but how are you handling low risk high cost risks. $3mil in savings is good until you get hit with a $3mil lawsuit judgement,
What is important to you that some of the ‘excess funds’ could be used for? Travel? Lifestyle enhancements? ???
How about spending on others? Any relatives in trouble that could use a hand? Any greater family kids in college that could use a bit of spending money? Local situations where someone could use a helping hand?
And contributions to more general charities. Setting up a family fund with appreciated stock is a great way to do charitable contributions.
Or do nothing and leave an estate that is hugely greater than what you decided you needed to live on. But why?
You did a great job getting to your goal in 1500 days but that was 1500 days ago. What’s next? Just more accumulation? If the original $1.15 million wasn’t the right number, ok. Just tell us what the right number is and why and what you will do when you get there. I liked your fatFIRE post but it was ‘small potatoes’ relative to your ‘overachievement’.
And I might have missed something in your writings and be totally wrong. If so, I apologize. Otherwise when is enough that you get to the point where you will spend ‘capital’?
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I fatFIRED / retired at 51 and am now 72. You can see my retired life at reisner.info. Not a word about being rich. A lot about family and travel and other stuff.
Hi Bob-
If I know something will make me happy or improve my life in some way, I buy it. In the happiness category, I bought fancy speakers that set me back over $500 earlier this year. In the “improve my life” category, I bought a new jacket at Costco (my old one was ragged) that set me back $29.
But, if you want to see something I’m thinking about spending a big chunk of money on, tune in tomorrow!
Since we still have income, I don’t worry about converting to more stable investments. When Mindy leaves work, we’ll keep a little bit more money in cash.
The most important thing to me right now is raising children that are confident, hard-working, and thoughtful. Not having a job improves my chances of doing that since I get to spend more time with them.
The thing that makes me happiest is spending time with interesting people. If it weren’t for COVID, I’d be on the road more visiting friends.
The money part of my life is just a game to me now. Kinda like Warren Buffett. He could have left work years ago and I could have stopped accumulating a long time ago, but I enjoy making money. I’ll also enjoy giving it away to worthy causes. The giving part will happen at a bigger scale once I’ve seen my children off.
I’d had fancy stuff before like an Acura NSX: https://www.1500days.com/getting-naked-costco-parking-lot/ It didn’t make me happy. In fact, it did just the opposite. It came to be another thing I had to worry about.
So now, I’m very careful about the objects I introduce into my life.
You asked me if I’ve lost my way. I think the one that has lost their way is the one that goes buys cars. boat, vacation homes, etc. thinking that the new thing will bring happens and instead invites complication into their lives.
I certainly agree with your last paragraph. And hugely agree with the emphasis on raising children as a top priority.
But I do feel that much of your writings are about financial performance long after the self goal has been realized. Almost like a financial stock picking site.
In any event good luck and I hope you have a future that matches your desires.
Regards,
Bob
Yep, you have a point. I was going to quit the blog after I hit my number, but I enjoy it too much. Regarding the financial stuff, I’ve thought about stopping it a couple of times too, but readers have asked me not to.
But, the main reason I write and the main reason I continue writing about my money situation is that it helps me process my thoughts on a deeper level. It’s not readily apparent if you haven’t experienced it, but the process of writing helps me think about what I’m doing on a much deeper level than just walking around and thinking. I started the blog for an audience of 1 (me) and some of my writing is just for that audience.
Unrelated: You sound like an interesting person with a lot of wisdom. When you make it to Colorado, please look me up!
Been to Colorado many times. Great place. Will look you up if in the area. Ditto if you are ever near Amelia Island Fl.
Met MMM in Ecuador a few years ago. Say hi to him.
Good conversion, I do have a better understanding of your view point.
Please feel free to delete this thread, it is distracting to your readers.
Regards,
Bob
Your killing it Mr. 1500! Good job on those stock picks, but Berkshire is probably a big disappointment to be sure.
Why do you think it’s underperforming the S&P so badly? Do you think it’s a sign that the market views the outsized returns at Berkshire as ‘over and done with’?
Or, could this be a sign of just how inflated tech stocks have become? Even you admit Tesla’s stock increases seem a bit overdone.
I’m curious to hear your thoughts on the matter.
Mr. Tako recently posted…Growing Passive Income In 2021
Awesome returns. When will I get a sales letter to join your hedge fund?
Congrats on the trailer park sale, with cap rates being so compressed now the risk/return profile of an index fund looks a lot more attractive.
Robert – Stop Ironing Shirts recently posted…Landshark Revisited: When is Enough Enough?
All of the overweight growth from the biggest companies really shows how much shareholder wealth is being concentrated into fewer and fewer companies. If things collapse in those companies (no *particular* reason to think that’d happen), boy will it be felt across the market.
It’s a point to consider where index funds don’t necessarily offer all the diversity we envision.
Taking things to the extreme, if Apple one day carried the US index and represented say…50% of the market cap for a broad index, well, we’d be hurting for some diversification when owning that index!
A wild ride, hope the experiment works out—which seems to be less about the money but more about the experience gained!
Chris@TTL recently posted…Enjoying Retirement: Are You Still a Useful Member of Society?
Yeah, this is all something I’ve thought about too.
“If things collapse in those companies (no *particular* reason to think that’d happen), boy will it be felt across the market.”
I think the obvious action is government antitrust or some other form of regulatory action against these companies. It’s already underway with Google. If the Feds start really looking at big tech with a critical eye, watch out below for at least a little bit.
Any reason to have a home bias and pick VTSAX versus picking the world stock market (VT)?
Of course the past 10 years VTSAX was better, but can the US continue to perform better than all markets?