My Worst Investment Ever Podcast

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they conclude the lessons from the book.LEARNING: Investing isn’t about chasing the next hot stock—it’s about building a resilient, well-diversified portfolio you can live with in good times and bad.&nbsp;“Once you have enough, stop playing the game as if you don’t. Reduce risk, enjoy life, and make your money serve you—not the other way around.”Larry Swedroe&nbsp;In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.Larry deeply understands the world of academic research and investing, especially risk. In this series, they conclude on the lessons from the book.Enrich Your Future: Larry’s Timeless Guide to Smarter InvestingIf you’ve ever wondered how to cut through the noise of investment hype and build a portfolio that actually works for you, Larry’s Enrich Your Future is the blueprint you’ve been looking for. Here’s a distilled look at the wisdom from his book.Start with core principlesLarry insists there are only a handful of fundamental truths in investing—and if you master them, you’ll avoid most costly mistakes:Markets are highly efficient – While not perfect, markets price assets so effectively that consistently beating them on a risk-adjusted basis is near impossible. So don’t engage in individual security selection or market timing.All risk assets offer similar risk-adjusted returns – Whether it’s US stocks, Thai stocks, or corporate bonds, the relationship between risk and return holds steady over time. Invest in assets based upon your ability, willingness, and need to take risks. If you’re willing to take more risk and have the ability and maybe the need to, then you can load up on more risky, higher expected-returning assets. It doesn’t mean they’re better assets; rather, they have higher expected returns at the cost of higher risk.Diversification is non-negotiable – Since all risk assets have similar risk-adjusted returns, it makes no sense to concentrate all of your risk in one basket. Concentrating your risk in a single asset class or geography is a recipe for trouble.Build a portfolio that fits YOUForget cookie-cutter solutions—Larry believes the “right” portfolio depends on three factors:Ability to take risk – Your financial capacity to weather market downturns is influenced by factors like investment horizon and job stability.Willingness to take risk – Your psychological comfort level with market volatility.Need to take risk – Whether you require high returns to meet your financial goals.Larry’s rule? Let the lowest of these three determine your equity exposure. If you don’t need to take big risks, don’t.Think global, but stay rationalA total global market portfolio is an ideal starting point—currently about 65% US, 27% developed international, and 8% emerging markets. Adjust only slightly if you have a reasoned view, but avoid drastic tilts that imply you “know better” than the market.Beyond stocks and bondsLarry is a big believer in alternative investments—if you can access them at reasonable costs. These include:Private credit – Lending directly to companies, often with double-digit returns and lower volatility than equities.Reinsurance – Returns tied to natural disaster risks, uncorrelated with stock markets.Infrastructure funds – Assets like toll roads, dams, and utilities with stable cash flows.His own portfolio now includes a significant allocation to alternatives, reducing reliance on traditional stocks and bonds.Focus on risk sources, not just labelsInstead of obsessing over “asset classes,” Larry advises analysing the risks each investment brings—economic cycle risk, credit risk, inflation risk—and blending assets with low correlations to one another.Integrate factors, don’t isolate themWhile factor investing (such as value, small-cap, quality, and momentum) is powerful, buying single-factor funds separately can create costly and contradictory trades. Larry favours integrated factor funds that combine multiple factors into one systematic strategy, reducing costs and improving efficiency.Master your behaviourEven the best portfolio fails if you can’t stick with it. Larry warns that there is no one right portfolio. The right portfolio for you is the one you are most likely to stick with.That means:Avoid assets you can’t hold for at least 10–15 years.Expect long stretches of underperformance from every risk asset.Continue to buy during downturns to maintain your target allocation.Don’t DIY unless you’re truly qualifiedLess than 1% of investors have the skill, time, and emotional discipline to manage their investments entirely on their own. Larry recommends working with a true fiduciary adviser—one who:Is paid only by you (no commissions).Invests in the same funds they recommend.Backs every decision with empirical evidence.Education beats ignorance every timeYou don’t need to read all 18 of Larry’s books, but three or four will give you the foundational knowledge to make better decisions. Investing ignorance, he warns, is far costlier than the price of a good book.The takeawayEnrich Your Future: The Keys to Successful Investing isn’t about chasing the next hot stock—it’s about building a resilient, well-diversified portfolio you can live with in good times and bad. Follow Larry’s principles, and you’ll not only protect your wealth but also position yourself for long-term financial peace of mind.As Larry himself says:“Once you have enough, stop playing the game as if you don’t. Reduce risk, enjoy life, and make your money serve you—not the other way around.”Did you miss out on the previous chapters? Check them out:Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to OutperformEnrich Your Future 01: The Determinants of the Risk and Return of Stocks and BondsEnrich Your Future 02: How Markets Set PricesEnrich Your Future 03: Persistence of Performance: Athletes Versus Investment ManagersEnrich Your Future 04: Why Is Persistent Outperformance So Hard to Find?Enrich Your Future 05: Great Companies Do Not Make High-Return InvestmentsEnrich Your Future 06: Market Efficiency and the Case of Pete RoseEnrich Your Future 07: The Value of Security AnalysisEnrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market ReturnEnrich Your Future 09: The Fed Model and the Money IllusionPart II: Strategic Portfolio Decisions<a href="https://myworstinvestmentever.com/enrich-your-future-10-you-wont-beat-the-market-even-the-best-funds-dont/" rel="noopener noreferrer"...

BIO: Pieter Slegers is the founder of Compounding Quality Newsletter. Pieter worked for three years as a Belgian asset manager before focusing full-time on his investment newsletter, Compounding Quality, in July 2022. Compounding Quality has over 1 million followers across social media and nearly 500,000 email subscribers. The goal of the newsletter is to help other investors by focusing on Quality Investing.STORY: At the age of 13, Peter convinced his parents to open a brokerage account. He picked the broker’s newest “hottest pick” stock—an oil/gas transport company. He invested everything, thinking the people running the company knew what they were doing. Weeks later, the 2008 financial crisis hit. Peter sold his stock after a year, taking a 60% loss.LEARNING: Small losses are better than catastrophic ones. Knowledge is your only edge.&nbsp;“People who invest in individual stocks will make mistakes. There’s no doubt about that, but it’s way better to make a mistake with a few hundred dollars compared to $100,000.”Pieter Slegers&nbsp;Guest profilePieter Slegers is the founder of Compounding Quality Newsletter. Pieter studied Financial Management at the KULeuven and graduated summa cum laude. He worked for three years as a Belgian asset manager before focusing full-time on his investment newsletter, Compounding Quality, in July 2022. Compounding Quality has over 1 million followers across social media and nearly 500,000 email subscribers. The goal of the newsletter is to help other investors by focusing on Quality Investing.Worst investment everAt the age of 13, Peter earned his first paycheck by stocking shelves at a supermarket. Eager to grow his savings, he persuaded his parents to open a brokerage account (a feat for minors in Belgium).Despite his lack of investing knowledge, he diligently explored his broker’s platform for ideas. A new stock caught his eye on the broker’s “hot picks” list—an oil/gas transport company. He invested all his earnings, believing in the company’s potential.Peter didn’t conduct any research, despite his limited knowledge of oil and gas and his complete lack of investing experience. He simply trusted the “hot pick”.The crashWeeks later, the 2008 financial crisis hit. Peter sold his stock after a year, taking a 60% loss. His family was not impressed by his poor investment skills and told him that investing was akin to gambling, and he should consider working for the government instead.Pieter felt like such a failure. However, that $300 loss was his best investment. It hurt, but it taught him never to follow others blindly.Lessons learnedSmall losses are better than catastrophic ones. Losing $300 at the age of 13 beats losing $300,000 when you’re 40. Early pain builds immunity to big mistakes.Knowledge is your only edge: If you don’t understand how a company makes money, you’re gambling, not investing.Failure fuels obsession. That loss made Pieter devour investing books, 10-Ks, and financial news. Pain became his mentor.Andrew’s takeawaysAllow young investors to make mistakes with small sums (e.g., companies they understand, such as Netflix or Coca-Cola).Humility beats hubris. 90% of professional investors at Goldman Sachs underperform. What makes you different? It’s your checklists, not confidence.Read biographies, study market history, and connect patterns. Wisdom compounds like interest.Actionable adviceFor parents guiding young investors, start with brands that they are familiar with and use in their daily lives, such as Coca-Cola, Netflix, and McDonald’s. When they drink a Coke, say: “You own a piece of this.”Cap play money at 5% and limit high-risk bets to cash they can afford to lose. Encourage young investors to do their homework. If they can’t explain the business model in two sentences, they shouldn’t own it.Pieter’s recommendationsPieter recommends reading What I Learned About Investing From Darwin by Pulak Prasad if you want to perfect your investment skills. He also offers numerous free resources on CompoundingQuality.net.Learning from others’ experiences, whether through books, online resources, or personal advice, is a valuable way to improve your own investing skills.No.1 goal for the next 12 monthsPieter’s goal for the next 12 months is to continue his learning journey by reading books, listening to podcasts, and engaging in other educational activities. He understands that continuous learning is the key to successful investing.Parting words&nbsp;“It’s amazing what Andrew is doing. I had a lovely time. Please give him a hand, send him an email, or support him in any way you can. If people have questions for me, I’m always happy to help via combining quality.”Pieter Slegers&nbsp;[spp-transcript]&nbsp;Connect with Pieter SlegersLinkedIn&nbsp;WebsiteAndrew’s booksHow to Start Building Your Wealth Investing in the Stock MarketMy Worst Investment Ever9 Valuation Mistakes and How to Avoid ThemTransform Your Business with Dr.Deming’s 14 PointsAndrew’s online programsValuation Master ClassThe Become a Better Investor CommunityHow to Start Building Your Wealth Investing in the Stock MarketFinance Made Ridiculously SimpleFVMR Investing: Quantamental Investing Across the WorldBecome a Great Presenter and Increase Your InfluenceTransform Your Business with Dr. Deming’s 14 PointsAchieve Your GoalsConnect with Andrew Stotz:astotz.comLinkedInFacebookInstagramThreadsXYouTubeMy Worst Investment Ever Podcast

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 39: Enough.LEARNING: More wealth does not give you more happiness.&nbsp;“Prudent investors don’t take more risk than they have the ability, willingness, or need to take. If you’ve already won the game, why are you still playing?”Larry Swedroe&nbsp;In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 39: Enough.Chapter 39: EnoughIn Chapter 39, Larry discusses the importance of knowing that you have “enough,” a concept that, once understood, can enlighten and guide your financial decisions.In 2009, Larry conducted an investment seminar for the Tiger 21 Group, America’s most exclusive wealth management group. One of the issues the group asked him to address was: How do the wealthy think about risk, and how should they approach it? Larry’s answer exposed a terrifying paradox.More wealth will not make you happierAccording to Larry, self-made wealth follows a predictable script. Fortunes are built through extreme risk-taking: betting everything on one business, ignoring diversification, and trusting instinct over analysis. This breeds a dangerous confidence—the kind that whispers, “If I did it once, I can do it again.”He explains that the utility of the wealth curve resembles an elephant from the side. It goes up quickly because when you have nothing, even a little extra money can significantly improve your life. If you’re homeless and someone gives you $25 to take a shower, get a meal, and stuff, that will make you much better off. But once you get to some level of net worth, like $2 million or $3 million, or whatever the number is for you, the extra wealth is better than less.However, as you gain more wealth, your incremental level of happiness—just like the elephant’s back— flattens out. There’s virtually little or no improvement in your state of well-being and happiness.The entrepreneur’s invisible trapLarry stresses that wealth building and wealth preservation demand opposite mindsets. Those with the greatest ability to take risks (resources to absorb losses) and willingness (confidence from past wins) often overlook the third critical factor: need. And therein lies the trap.The wealthiest individuals have a near-zero need for further risk. Yet, they continually strive for more and take on significant risks that may not ultimately lead to an enhanced level of happiness. In reality, they do not need to take such a substantial risk. They can dial down the risk in their portfolio and be much happier, sleep better, not worry about markets, and enjoy their life.When $13 million evaporatesLarry recounts meeting a couple in 2003. Three years earlier, their portfolio stood at $13 million, with a heavy concentration in tech stocks. By 2003? $3 million. An 80% collapse.“Would doubling to $26 million have changed your lives?” Larry asked.“No,” they admitted.“Then why risk everything for gains that wouldn’t matter?”Their fatal error? Never defining their “enough.” When desires—a larger yacht, a vineyard, or “legacy” projects—morph into perceived needs, they artificially inflate risk tolerance. This ignites a destructive cycle: greater “needs” demand riskier bets, which invite catastrophic losses.The science of “enough”Larry points to research that reshapes wealth psychology: Beyond $75,000 per year (adjusted for inflation), happiness plateaus. After $10 million, diminishing returns accelerate violently. The billionaire’s third home brings no more joy than a latte at the bookstore.This isn’t a theory. Psychologists confirm that true contentment comes from non-tradable assets. These are the experiences and relationships that money can’t buy. A walk in the park with your partner. Reading to grandchildren. The freedom to control your time. These cost little yet yield everything. A $100 bottle of wine? It can’t compete with a $10 one shared with friends.Breaking the cycleLarry prescribes four antidotes for Tiger 21’s members:First, ask: “If I lost 80% tomorrow, would my core lifestyle survive? Would my relationships?” If the answer chills you, you’re over-risked.Second, map your marginal utility of wealth. Draw a curve tracking wealth against life satisfaction. Where does the line flatten? That’s your “enough.” For most, it’s far lower than imagined.Third, build a “fortress portfolio.” Replace concentrated bets with global diversification. Swap illiquid moonshots for Treasury bonds and index funds. Protect capital like a museum guards its masterpieces.Fourth, demote desires. Luxury items must never masquerade as needs. That vineyard? A want—funded only if cash flows cover it without gambling capital.The unbreakable wealth paradoxLarry concludes by emphasizing that building wealth requires courage. Preserving it requires the courage to say: “No more.” The difference between the rich and the ruined isn’t intelligence—it’s knowing when you have enough.Did you miss out on the previous chapters? Check them out:Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to OutperformEnrich Your Future 01: The Determinants of the Risk and Return of Stocks and BondsEnrich Your Future 02: How Markets Set PricesEnrich Your Future 03: Persistence of Performance: Athletes Versus Investment ManagersEnrich Your Future 04: Why Is Persistent Outperformance So Hard to Find?Enrich Your Future 05: Great Companies Do Not Make High-Return InvestmentsEnrich Your Future 06: Market Efficiency and the Case of Pete RoseEnrich Your Future 07: The Value of Security AnalysisEnrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market ReturnEnrich Your Future 09: The Fed Model and the Money IllusionPart II: Strategic Portfolio DecisionsEnrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’tEnrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of SkillEnrich Your Future 12: When Confronted With a Loser’s Game Do Not PlayEnrich Your Future 13: Past Performance Is Not a Predictor of Future PerformanceEnrich Your Future 14: Stocks Are Risky No Matter How Long the...

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 37: Sell in May and Go Away: Financial Astrology and Chapter 38: Chasing Spectacular Fund Performance.LEARNING: Calendars don’t drive returns. Winners ignore hot funds.&nbsp;“For you to believe in a strategy, there should be some economically logical reason for it to persist, so you can be confident it isn’t just some random outcome.”Larry Swedroe&nbsp;In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 37: Sell in May and Go Away: Financial Astrology and Chapter 38: Chasing Spectacular Fund Performance.Chapter 37: Sell in May and Go Away: Financial AstrologyIn chapter 37, Larry explains why the idea of selling stocks in May and switching to cash, then buying back in November, is not a sound strategy.What financial advisers insist on repeating, in Larry’s view, is: “Sell in May, go to cash, and reinvest in November.” It makes sense and is even logical. And, as the adage has it, numbers don’t lie. Figures, backed by reliable data, show that stocks gain more from November through April (a 5.7% average premium) than from May through October (a 2.6% average premium). So why not time the market?Busting the mythLarry dismantles this advice, revealing that the ‘Sell in May’ strategy, despite its apparent logic, is a myth. He points out that stocks still outperform cash even during the May to October period, with stocks beating T-bills by 2.6% annually.Selling stocks prematurely leads to missed gains, and the strategy of switching investments underperforms a simple buy-and-hold approach. In fact, a ‘Sell in May’ strategy yielded an average annual return of 8.3% from 1926 to 2023, while simply holding the S&amp;P 500 returned 10.2%—a significant 1.9% yearly gap.Larry adds that Taxes and fees make the strategy worse. Trading converts long-term gains (lower tax) into short-term gains (higher tax). Transaction costs always pile up.Additionally, this strategy is rarely effective. Before 2022, the last “win” was 2011. A single outlier (2022’s bear market) does not make a strategy worthwhile.The fatal flawAccording to Larry, one of the fundamental rules of finance is that expected return and risk are positively correlated. So if stocks actually do worse than cash between May and October, they’d need to be less risky for these six months, which is absurd because volatility doesn’t take summer vacations.Why do people believe in this flawed strategy?Larry notes four reasons why people still believe in this flawed investment strategy:Recency bias: Media hypes the strategy after rare wins (like 2022).Pattern-seeking: Humans confuse coincidence with cause.“Free lunch” fantasy: Active investors crave simple shortcuts.The proper investment to followLarry’s advice is to:Ignore the noise. Calendars don’t drive returns.Stay invested. Missing just 10 best days in 30 years slashes returns by 50%.Focus on what matters: Diversification, low costs, and tax efficiency.Bottom line: The “Sell in May” strategy is a form of financial astrology. It confuses seasonal patterns with strategy. The market’s not a magic 8-ball. Stop gambling on folklore—and start compounding.Chapter 38: Chasing Spectacular Fund PerformanceIn chapter 38, Larry explains why chasing spectacular performance is not a prudent investment strategy.He starts the article by highlighting that 2020 was a phenomenal year for hot funds. During that year, 18 US stock funds posted gains of over 100%, attracting $19 billion in investor dollars in pursuit of recent performance. Their prior records seemed unstoppable—17 of 18 had reigned supreme over markets for three straight years.The brutal realityA landmark Morningstar study by Jeffrey Ptak looked into equity funds that gained more than 100% in a calendar year. He found that of the 123 stock funds that gained at least 100% between 1990 and 2016, just 24 made money in the three years following their phenomenal return.More adversely, the average fund subsequently lost around 17% each year. Ptak also found that funds that failed in the years before their big gain were far more likely to earn more money during the years after that big year, compared to money that had been profitable during the period preceding their big gain.Why do hot funds implode?There are a few reasons why hot funds could implode. One is overvalued bets. For instance, the 2020 superstars held stocks trading at 3x the valuation of the Nasdaq 100. Another reason is the reversion to the mean. Extreme returns are statistical outliers, not a result of skill. Lastly, the crowd effect. Inflows surge after gains, forcing managers to buy at high prices.The index fund quietly winsLarry observes that while speculators chased fireworks, Fidelity’s Total Market Index (FSKAX) returned 20.8% in 2020, beating 80% of active funds in its category. It did this with a 0.01% fee, 1/100th the cost of typical active funds.In conclusion, Larry reminds investors that the race to spectacular returns is a marathon, not a sprint. Winners ignore the fireworks.Further readingJeffrey Ptak, “What Happens After Fund Managers Crush It?” The Evidence Based Investor, January 18, 2001.Did you miss out on the previous chapters? Check them out:Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to OutperformEnrich Your Future 01: The Determinants of the Risk and Return of Stocks and BondsEnrich Your Future 02: How Markets Set PricesEnrich Your Future 03: Persistence of Performance: Athletes Versus Investment ManagersEnrich Your Future 04: Why Is Persistent Outperformance So Hard to Find?Enrich Your Future 05: Great Companies Do Not Make High-Return InvestmentsEnrich Your Future 06: Market Efficiency and the Case of Pete RoseEnrich Your Future 07: The Value of Security AnalysisEnrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market ReturnEnrich Your Future 09: The Fed Model and the Money IllusionPart II: Strategic Portfolio DecisionsEnrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’tEnrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of...

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 35: Mad Money.LEARNING:&nbsp;Investors are naive, and Cramer is an entertainer, not a financial advisor who adds value.&nbsp;“Do not confuse information with value-added information. If you know something because it was in the newspaper, everyone else knows it as well. So it has no value.”Larry Swedroe&nbsp;In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 35: Mad Money.Chapter 35: Mad MoneyIn this chapter, Larry explains why investment advice from so-called market experts is often worthless.The infamous Jim CramerJim Cramer, a former hedge fund manager, has become one of the most recognizable faces in the investment world. He dispenses rapid-fire investment advice on the show “Mad Money.” Since it premiered in March 2005, it has been one of CNBC’s most-watched shows. But has his advice been as successful for the investors who follow it? Larry shares a couple of research studies that answer this question.It pays more to invest in an S&amp;P than in Cramer’s fundCramer manages a portfolio that invests in many of the stock recommendations he makes on TV. Established in August 2001 with approximately $3 million, the Action Alerts PLUS (AAP) portfolio has been the centerpiece of Cramer’s media company, TheStreet, which sells his financial advice, giving subscribers in the millions access to each trade the portfolio makes ahead of time. Jonathan Hartley and Matthew Olson, authors of the 2018 study “Jim Cramer’s Mad Money Charitable Trust Performance and Factor Attribution,” examined the AAP portfolio’s historical performance. Their study covered the period from August 1, 2001, the AAP portfolio’s inception, through December 31, 2017. The study found that the fund returned a total of 97%. During that same period, an investment in the S&amp;P would have returned 204%.No real stock-picking skill, just entertainmentIn another study, “How Mad Is Mad Money?”, Paul Bolster, Emery Trahan, and Anand Venkateswaran examined Cramer’s buy and sell recommendations for the period from July 28, 2005, through December 31, 2008. They also constructed a portfolio of his recommendations and compared it to a market index. The researchers came to three key conclusions:Investors were paying attention, as the stocks he recommended had abnormal returns of almost 2% on the day following his recommendations.The returns for the recommended stocks were both positive and significant for the day of the show and the 30 days preceding the show. So, it seems he was recommending stocks with short-term momentum.The returns were negative and significant, at -0.33% and -2.1%, for days 2 through 5 and days 2 through 30 following the recommendation. After 30 days, the results are insignificant.There is no evidence of any stock-picking skill—Cramer’s picks are neither good nor bad. In the end, it’s just entertainment.A third study, “Is the Market Mad? Evidence from Mad Money,” conducted in 2005, found the same result as the second study: prices rise overnight, and they are quickly corrected. This means that Cramer added negative value for the people who tried to implement his advice because they drove the price up in their buying frenzy. Then the smart money comes in, and the price reverts to basically where it was before he made the recommendation.Do stock market experts reliably provide stock market timing guidance?In a fourth study, CXO Advisory Group set out to determine if stock market experts, whether self-proclaimed or endorsed by others (such as in the financial media), reliably provide stock market timing guidance.To find the answer, from 2005 through 2012, they collected and investigated 6,584 forecasts for the US stock market offered publicly by 68 experts (including Cramer), employing technical, fundamental, and sentiment indicators. Their collection included forecasts, all of which were publicly available on the internet, dating back to the end of 1998. They selected experts, both bulls and bears, based on web searches for public archives that contained enough forecasts spanning various market conditions to gauge their accuracy. Basically, they found there are no real experts.The distribution of their accuracy looks virtually identical to a bell curve but slightly to the left, meaning, on average, they do worse. The average accuracy was 47%, which happened to be the same score as Cramer’s. So, of all the non-expert experts, Cramer was average at being non-expert.The market is highly efficient for any guruAccording to Larry, all these studies indicate that investors are naive, Cramer is an entertainer, not a financial advisor, who adds value, and that the market is highly efficient, making it very hard to beat it.They also show that being highly intelligent (and entertaining, in Cramer’s case) is not a sufficient condition to outperform the market. The reason is simple. There are many other highly intelligent money managers whose price discovery actions work to keep the market highly efficient (meaning market prices are the best estimate we have of the right price). That makes it unlikely any active money manager will outperform on a risk-adjusted basis.The research shows that gurus’ only value is to make weathermen look good, whether it involves predicting economic growth, interest rates, currencies, or the stock market, or even picking individual stocks.Ignore the prognosticatorsLarry concludes that while Cramer might provide entertainment, those following his recommendations are like lambs being led to slaughter by more sophisticated institutional investors. He urges investors to keep this in mind the next time they find themselves paying attention to some guru’s latest forecast. You’re best served by ignoring it, he says.The prudent strategy, Larry adds, is to develop a well-thought-out plan and to have the discipline to adhere to it, ignoring the market noise, whether it comes from Jim Cramer or any other prognosticator.Further readingMichael Learmonth, “Ratings Flood for Fox, CNN,” Variety, September 27, 2005.Jonathan Hartley and Matthew Olson, “Jim Cramer’s Mad Money Charitable Trust Performance and Factor Attribution,” The Journal of Retirement (Summer 2018).Paul Bolster, Emery Trahan and Anand Venkateswaran, “How Mad Is Mad Money?”The Journal of Investing (Summer 2012).Joseph Engelberg, Caroline Sasseville and Jared Williams, “Is the Market Mad? Evidence from Mad Money,” March 22, 2006.Bill Alpert, “Shorting Cramer,” Barron’s (August 20, 2007).Jim Cramer, “Cramer vs. Cramer,” New York, May 25, 2007.CXO Advisory Group, “Guru Grades,” www.cxoadvisory.com/gurus.Did you miss out on the previous chapters? Check them out:Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to OutperformEnrich Your Future 01: The Determinants of the Risk and Return of Stocks and BondsEnrich Your Future 02: How Markets Set PricesEnrich Your Future 03: Persistence of Performance: Athletes Versus Investment

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 34: Bear Markets: A Necessary Evil.LEARNING:&nbsp;Investors&nbsp;must view bear markets as necessary evils.&nbsp;“If stocks didn’t experience the kind of bear markets that we have, investors would be very unhappy.”Larry Swedroe&nbsp;In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 34: Bear Markets: A Necessary Evil.Chapter 34: Bear Markets: A Necessary EvilIn this chapter, Larry explains why investors must view bear markets as necessary evils. He says that if stocks didn’t experience the kind of bear markets that we have, investors would be very unhappy.Larry further explains that the most basic finance principle is the relationship between risk and expected, but not guaranteed, return. So, the higher the risk, the higher the expected return, which means that if the risk is high, investors will apply a bigger risk premium, which will lead to the denominator in the formula of the Net Present Value. The numerator is the expected earnings. The denominator is the risk-free rate plus the risk premium.The higher the risk, the higher the premiumsLarry highlights historical bear markets, noting the U.S. has experienced losses exceeding 34% during the COVID crisis and 51% from 2007 to 2009. He argues that these losses are essential for investors to demand higher risk premiums. The very fact that investors have experienced such significant losses leads them to price stocks with a large risk premium.From 1926 through 2022, the S&amp;P provided an annual risk premium over one-month Treasury bills of 8.2% and an annualized premium of 6.9%. If the losses that investors experienced had been smaller, the risk premium would also have been smaller. And the smaller the losses experienced, the smaller the premium would have been.In other words, the less risk investors perceive, the higher the price they are willing to pay for stocks. And the higher the market’s price-to-earnings ratio, the lower the future returns.Staying the course during underperformanceThe bottom line, Larry says, is that bear markets are necessary for the creation of the large equity risk premium we have experienced. Thus, if investors want stocks to provide high expected returns, bear markets (while painful to endure) should be considered a necessary evil.However, Larry notes that it is during the periods of underperformance that investor discipline is tested. Unfortunately, the evidence suggests that most investors significantly underperform the stock market and the mutual funds they invest in. The underperformance is because investors act like generals fighting the last war.Subject to recency bias (the tendency to overweight recent events/trends and ignore long-term evidence), they observe yesterday’s winners and jump on the bandwagon—buying high—and they observe yesterday’s losers and abandon ship—selling low. It is almost as if investors believe they can buy yesterday’s returns when they can only buy tomorrow’s.Keys to successful investingLarry shares three keys to successful investing to ensure you get the most from your investments even during bear markets.The first key is to have a well-thought-out plan that includes understanding the nature of the risks of investing. That means accepting that bear markets are inevitable and must be built into the plan.This understanding will help you feel prepared and less anxious when bear markets occur. It also means having the discipline to stay the course when it is most difficult (partly because the media will be filled with stories of economic doom and gloom).What is particularly difficult is that staying the course does not just mean buying and holding. Adhering to a plan requires that investors rebalance their portfolio, maintaining their desired asset allocation. That means that investors must buy stocks during bear markets and sell them in bull markets.The second key to successful investing, Larry suggests, is to avoid taking more risk than you have the ability, willingness, and need to take. By steering clear of excessive risk, investors are more likely to stay the course and avoid the common buy high/sell low pattern that most investors fall into.The last key is to understand that trying to time the market is a loser’s game—one that is possible to win but not prudent to try because the odds of doing so are so poor.Further reading1996 Annual Report of Berkshire Hathaway.1992 Annual Report of Berkshire Hathaway.1991 Annual Report of Berkshire Hathaway.2006 Annual Report of Berkshire Hathaway.2004 Annual Report of Berkshire Hathaway.Did you miss out on the previous chapters? Check them out:Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to OutperformEnrich Your Future 01: The Determinants of the Risk and Return of Stocks and BondsEnrich Your Future 02: How Markets Set PricesEnrich Your Future 03: Persistence of Performance: Athletes Versus Investment ManagersEnrich Your Future 04: Why Is Persistent Outperformance So Hard to Find?Enrich Your Future 05: Great Companies Do Not Make High-Return InvestmentsEnrich Your Future 06: Market Efficiency and the Case of Pete RoseEnrich Your Future 07: The Value of Security AnalysisEnrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market ReturnEnrich Your Future 09: The Fed Model and the Money IllusionPart II: Strategic Portfolio DecisionsEnrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’tEnrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of SkillEnrich Your Future 12: When Confronted With a Loser’s Game Do Not Play<a...

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. In this series, they discuss Chapter 33: An Investor’s Worst Enemy.LEARNING: You are your own worst enemy when it comes to investing.&nbsp;“The right strategy is to avoid the loser’s game. Don’t try to pick individual stocks or time the market, just invest in a disciplined way, and you will win by getting the market’s return.”Larry Swedroe&nbsp;In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 33: An Investor’s Worst Enemy.Chapter 33: An Investor’s Worst EnemyIn this chapter, Larry demonstrates why investors are their own worst enemies. He observes that many people think the key to investing is identifying the stocks that will outperform the market and avoiding the ones that will underperform.Yet the vast body of evidence says that’s playing the losers’ game. He adds that most professionals with advanced degrees in finance and mathematics, with access to the best databases and huge advantages over individuals, often think they’re smart enough to beat the market.They do so by attempting to uncover individual securities they believe the rest of the market has somehow mispriced (the price is too high or too low). They also try to time their investment decisions to buy when the market is “undervalued” and sell when it is “overvalued.”However, evidence shows that 98% of them fail to outperform in any statistically significant way on a risk-adjusted basis, even before taxes. As historian and author Peter Bernstein puts it: “The essence of investment theory is that being smart is not a sufficient condition for being rich.”Why do people keep playing the loser’s game?In the face of such overwhelming evidence, the puzzling question is why people keep trying to play a game they are likely to lose. From Larry’s perspective, there are four explanations:Because our education system has failed investors and Wall Street, and most financial media want to conceal the evidence, people are unaware of it.While the evidence suggests that playing the game of active management is the triumph of hope over wisdom and experience, hope does spring eternal—after all, a small minority succeed.Active management is exciting, while passive management is boring.Investors are overconfident—a normal human condition, not limited to investing. While each investor might admit that it’s hard to beat the market, each believes he will be one of the few who succeed.So, what is the right strategy?In light of the evidence presented, Larry’s advice is clear: avoid the losers’ game. Instead of trying to pick individual stocks or time the market, he advocates for a disciplined approach to investing. Investors can win by staying the course through bear markets by simply getting the market’s returns. This, he argues, is the right strategy for successful investing.Suppose you choose to play the game of active investing. In that case, Larry warns, the only ones likely to benefit are your financial advisor, broker-dealer, the manager of the actively managed fund, and the publisher of the newsletter or ratings service you subscribe to. The odds are overwhelmingly against individual investors in this game, making it a futile endeavor.Further readingJonathan Fuerbringer, “Investing It,” New York Times, March 30, 1997.Robert McGough, “The Secret (Active) Dreams of an Indexer,” Wall Street Journal, February 25, 1997.Peter Bernstein, The Portable MBA in Investment (Wiley, 1995).Jonathan Clements, 25 Myths You’ve Got to Avoid (Simon &amp; Schuster, 1998).James H. Smalhout, “Too Close to Your Money?” Bloomberg Personal (November 1997).Gary Belsky and Thomas Gilovich, Why Smart People Make Big Money Mistakes (Simon &amp; Schuster, 1999).Peter L. Bernstein and Aswath Damodaran (editors), Investment Management (Wiley, 1998).Ron Ross, The Unbeatable Market (Optimum Press, 2002).Did you miss out on the previous chapters? Check them out:Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to OutperformEnrich Your Future 01: The Determinants of the Risk and Return of Stocks and BondsEnrich Your Future 02: How Markets Set PricesEnrich Your Future 03: Persistence of Performance: Athletes Versus Investment ManagersEnrich Your Future 04: Why Is Persistent Outperformance So Hard to Find?Enrich Your Future 05: Great Companies Do Not Make High-Return InvestmentsEnrich Your Future 06: Market Efficiency and the Case of Pete RoseEnrich Your Future 07: The Value of Security AnalysisEnrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market ReturnEnrich Your Future 09: The Fed Model and the Money IllusionPart II: Strategic Portfolio DecisionsEnrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’tEnrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of SkillEnrich Your Future 12: When Confronted With a Loser’s Game Do Not PlayEnrich Your Future 13: Past Performance Is Not a Predictor of Future PerformanceEnrich Your Future 14: Stocks Are Risky No Matter How Long the HorizonEnrich Your Future 15: Individual Stocks Are Riskier Than You BelieveEnrich Your Future 16: The Estimated Return