Bad Investments? Or Investing Badly?

Bad Investments? Or Investing Badly?

There are a lot of ways to invest in the world today, and truthfully, I’m convinced that the majority of them, over time, will prove positive.  It is our natural tendency to place blame on the investment itself when we are unhappy with the performance.  The reality is, in many cases, the blame should fall solely on the investor themselves rather than the investment. 

You see, as human emotional creatures, we often are ruled not by logic and discipline, but rather we are ruled by fear, greed, and those pesky emotions.  We are left making poor decisions or being extremely myopic with our investment strategy.  Let me provide the best example I’ve EVER read or seen as to exactly what I am talking about.

Magellan Fund

From 1977-1990, Peter Lynch ran the Fidelity Magellan fund.  For those that don’t know, the Magellan fund was probably the best returning mutual fund of all time.  Peter was an absolute genius when it came to investing.  Let me throw a few mindboggling stats at you, before I hit you with the most insane stat you may ever hear.  During that 13-year reign of dominance, Peter’s Magellan fund averaged 29.2% annual return for those 13 years.  The S&P 500 during that same period returned 15.8%, which is relevant, of course.  This means over those 13 years, the Magellan fund did almost 14% better year over year than the indices. 

In real dollar figures, this means if you invested $100,000 when he began and sold it all when he left, you would have amassed a fortune to the tune of $2,794,400.  If you invested in the S&P 500, you would have still done great, but to the tune of $688,000.  That is a net difference of $2,106,000.  Staggering numbers when you think about it, and doing that consistently over 13 years is truly elite-level investing.

I know what you are thinking, “OK, dude, I get it, but what’s your point?”  Remember when I told you that the most mind-boggling stat you may ever have heard, I am about to share?  Well, hold on to your britches because here it comes.  What do you think the average investor’s performance was in the Magellan fund during Peter’s management of 13 years?  Higher or lower than the 29.2% quoted above?  Go ahead, take a moment to reflect and take a guess (the title may be leading).  Ok, got it.

What if I told you that the average investor during those 13 years didn’t get 29.2%, they didn’t get 20%, as a matter of fact, they DIDN’T MAKE A DOLLAR!  That is right, the average investor in the Fidelity Magellan fund during Lynch’s dominance actually LOST MONEY!  Are you freaking kidding me?!  How in the world could that have been? 

Investing Badly

The answer lies in the title, not a bad investment, rather it is investors investing badly.  What happened is emotions ran wild.  People would get in after they read how well the fund was doing.  Then, as markets do, they fluctuate, which has had people run for the exit and sell.  They would assume his dominance is over, and what do you know, the fund would do well again.  This was the rinse and repeat cycle of the fund and the investors in the fund for 13 straight years!

Tell me that isn’t the most insane stat you have ever heard?  Even crazier than the Birthday Paradox stat I love.  Can you imagine if you simply were the dumbest investor ever and put your money in his fund, took a nap, and did nothing for 13 years, you’d be a multimillionaire.  However, if you tried to outsmart the markets, you simply had less money than you started!

I’ve seen scenarios like this play out consistently over my career and each time it gives me great pride and joy to know our role extends further than simply picking sound investments.  Our job as your financial guide is to provide you with the hard truths you need to hear to protect you from yourself.  I saw this play out constantly during every recession and can’t tell you how much money and people’s futures we saved during times like Covid, when the natural tendency was fight or flight.  It is a badge of honor that my colleagues get to wear every single day in this business.  We are proud to be the constant and steady hand during good times and bad. 

So, what do you think?  Bad investments or bad investors?

As always, stay wealthy, healthy, and happy.