There were a couple of really good articles last week about the quick collapse of wealth. The first one in the Financial Times was about the final hours of FTX. It was a fascinating insight into the collapse of a company once worth $40 billion. Its founder Sam Bankman-Fried had a personal wealth of $20 billion. He is now facing a life sentence for his role in the collapse of the company. At 30 years of age, that’s a long prison sentence!
The other article was in the Wall Street Journal titled “The retreat of the amateur investors“. It featured a 25 year old investor who was once worth $1.5 million before losing it all. He now works in a deli for $14 an hour plus tips and he has $51,000 of debt.
What happened over the last few years are an insight into how easy it was for people to make massive amounts of money in a very short time but then lose it all.
It is so easy for investors to get caught up in the euphoria of high return, get rich quick trading that we have seen. The cult like stock of Tesla stock was trading at $407 in November 2021. Lots of people got very rich off its constant rise while short sellers were left with massive losses. It was trading at $113 just a month ago and is currently trading at $201.
We all read the news about Game Stop, the computer game store that stock went from $3 to $81 when a group of traders on Reddit decided to mess up a short sell on the company stock. It is now trading at $21.
How many people bought at $3 and sold at $81? It is very hard to amass that much so quickly through trading and to have the discipline to sell and take your profit. It is like a drug. You make this money so easily and you can do no wrong. Instead of taking profit off the table, you push your targets out. $1 million isn’t enough, you’ll sell when it gets to $1.5m. But that day never comes. You’ll either push the target out further or the stock will start falling and you will be just hoping it is a blip that will recover until you have nothing left.
Meanwhile the conservative investor is not getting those highs with their investment in indexes like the S&P 500. The highest 12 month return of the index since 1970 was 61%. An impressive return but not the same as 2,700%!!
But then, the worst 12 month return has been -43%. It is never please to lose that much money but it is not the same as a total wipeout. And when you are invested in an index like the S&P 500, you know there are professionals deciding what companies meet the criteria to be included in the index and what weighting each stock should have. There is no deviation on which company is included.
The result of this disciplined approach to investing is an annualised return of 10.54% since 1970. If you invested $1 on 1 January 1970, it would be worth $203.96 today.
It takes time to make money. It is very easy to get FOMO seeing other people making massive amounts of money very quickly but you have to realise that they are taking big risks to do so. Unless you want to risk all of the money you have worked hard to earn, stay disciplined and invest in the tried and trusted indexes with a strict criteria on which companies qualify to be included in their selection process.
13 February 2023