I'm Not Buying Stocks As Before - Why?

The natural sciences have laws that guide everything and make it easier to predict an outcome when certain actions are taken. For example, it's possible to calculate the time it would take a car traveling at a certain speed to cover a specific distance. Many such things have already been demonstrated to us by the giants of the past. Sometimes, however, you have to self-critique and "checkmate" yourself. Many are told to take it easy on themselves, but when you're really growing, being hard on yourself is not necessarily a bad thing. 

Image by Google Gemini

There's a vast literature of empirical evidence that now tells us how accurate this is. Please ignore or skip the equation below if you hated math back in school and still hate it to this day lol. 

This equation is simply saying that your expected investment returns are the sum of the risk-free rate plus the extra return you get for taking on market risk. The "Beta of the portfolio" is simply what you'll achieve from the market by doing nothing other than continuing to invest. Personally, a simple stock index is recommended for most people, but because I dare to be a contrarian, I tend to pick some individual stocks. My strategy has always followed interest rates, or should I say, it's a response to inflation growth in an economy. I'm relatively young and can afford to take the risks that come with picking individual stocks. That formula, as many would come to realize, works for all assets on the condition that one lets time do the trick. An index will, of course, be much safer, but the returns you can get from individual stocks can be much better, compensating you for bearing that extra risk. Of course, the reverse is true: when things don't go as planned, your portfolio can really be a mess.

There's just a little more to this, and I will illustrate that with this image. 

GRAB stock chart

This shows a company known as Grab Holdings Limited trading at less than $4 a share. These are the companies I like to buy for very simple reasons. This company is the "delivery goat" in Asia with no debt and good revenue; despite the geopolitical jitters in the Middle East, the company's stock has fallen significantly from its peak. I hate debt, and most companies without debt tend to do well. This just happens to be a key metric in how I value a company personally. I don't need to go into details here, but if you, as a person, have little or no debt and have the means to clear off any debt you have, you typically feel a lot better and can do a lot more with your life and time.

Let us consider a more familiar example in Netflix. In the last few years, rumors circulated about Netflix potentially incurring billions in debt to acquire other studios. What often happens in these scenarios is that investors sell off the stock because the company is going to incur significant debt. Of course, there is always more to it politically, but the main theme is the risk of substantial debt. When Netflix’s stock became "less valuable" to the market and dropped significantly, I bought in at $83 as it became clear the company remained a great entity with high demand for its services. I watch Netflix, you watch Netflix, and we both know others who know others who watch Netflix. It remains a great company regardless of all the noise. 

Somebody once said, "Life is all about risks," and though I used to throw that statement around very casually, I began to really think about it about three years ago. It became apparent that the degrees I had obtained were not necessarily going to help me get directly to where I wanted to be in life. It was a harsh reality to accept, but in a world that punishes hesitation and delusions, I had to quickly accept that reality and re-strategize. Think about it: you go to school for the purpose of utilizing skills learned to create the life you desire. That is a massive risk that many don't realize they are taking. Maybe the decision early on comes from your parents, but if you look at it critically, it is a risk swept under the carpet. Two years ago, I began reading about "lessons from the future," which is just my way of analyzing what people on their deathbeds say they wish they had done. The biggest point was the pain of regret, regretting not having done what would have made them happy or neglecting relationships with their families. When you look at society, the majority are in this bracket of constant anxiety, exhaustion, and frustration. So I thought, "Well, this will be a large group of people experiencing the pain of regret." Thus, we see that life is indeed all about risks, and though it may not appear as such to you, you have subconsciously taken on a big (risk)one. That first equation is basically a risk equation, which those so-called "economic experts" have coined into "returns" and other fancy terms to try to tell you that you're too dumb to understand, so you'll pay them to do the work for you.

If you buy government bonds, or should I say, if you lend your money to the government, you are sure to receive interest because the government has the power to tax its citizens to pay you back. This is a "risk-free" return, and many use this as their main investment to live a comfy life. If you decide to seek more than what the government is paying, you must take risks and go into stocks or other investments that are not guaranteed to pay you back. This is the whole idea behind it. Because governments have the sole power over legal tender, they can always print more currency than there are goods and services to justify it, thus creating the chronic inflation problem. However, the easiest way out for them is always to print more money. I could go on and on, but let me leave it here and conclude this section by saying it's all about what you're willing to risk. It helps to know what you're actually risking because that's when you make better decisions.

Now that we have the building framework, let's answer why I'm not buying stocks as much as before. The simple/honest answer is that I still buy a few, but not as many. The reason is that most companies just don't fit my criteria; many are heavily indebted, and this is not an environment I wish to be in. I do, however, buy those I think are thriving, like GRAB. Otherwise, I prefer to stay in cash, as that is a much clearer decision. The other reason is that I appreciate the concept of time and how it generates the "Beta" of the portfolio. I have been actively trying to generate "Alpha" using pattern day trading for about four years now, and I haven't seen consistent profitability. However, a simple example like time in the stock market, where I just bought and held, has yielded more gains than four years of day trading has. I'm not saying day trading is bad, but I’m simply pointing out how difficult it is to generate Alpha. Look at a snapshot of my day trading data:

After 1,234 trades, everything seems to converge around 50%. This is the "Law of Large Numbers" that one hears about in statistics. Even though my profitability is about 55%, I'm still not consistently profitable at generating ALPHA. It is that difficult and remains one of the biggest challenges I have ever taken on in my life. For those in statistics, 1,234 trades is a great sample size. Unsurprisingly, my "point data" reflects the general trends observed in the literature, where we see that even active fund managers often fail to consistently generate more than the "Beta" of a portfolio. We see that about 95% of day traders lose money and, unsurprisingly, the basic index, like the S&P 500, generates about 10% per year on average. This matches my own data: my stock portfolio has remained in positive territory, yet my day trading results have been hit-or-miss. In a nutshell, I have recognized the high debt levels in the world and have been dialing back from overcommitting in the markets, especially with individual stocks. 

What are you risking? Is it worth it? Have you found a way to deal with or avoid the pain of regret? I like these kinds of conversations, and if you feel like it, leave me a comment, and we can dial in. 

Know what you're risking, and you can better deal with it.