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Why playing the average game pays.
Date: Sunday, 15th April, 2006. Source: The Age. Author: Marcus Padley.
After 25 years as a stockbroker, I have sussed it. I have tried everything — traded warrants, traded crap, traded options, traded momentum, traded off charts, traded futures, having played the portfolio game, listened to everyone, listened to tips, believed fools, ignored geniuses, sweated at night, hidden losses from the wife, read everything and even having made some money, finally, I have sussed it.
There are four ways to make “easy” money, just four. But they are cast iron. Guaranteed to work. Here they are.
- Be born rich.
- Marry rich.
- Win the Lotto.
- Lie and cheat.
Failing this list of “easy” money makers, most of us will have to resort to the second list. Ways to “make” money (as opposed to “easy” money).
- Build a business.
- Build a career.
- After this lot comes another list. How to “look after” your money. Finally…
- The stockmarket
As many of us can testify, if you try to beat the averages in the stockmarket you put your money and often your future in the hands of Lady Luck. Even the most hard working and sophisticated of investors will admit as much. Predicting the future is a difficult thing. It is not the place to make your “life’s money”.
Instead the stockmarket will, reasonably reliably, “look after” your money. The average return over the past 50 years is around 12 per cent a year. At that rate you'll double your money every six years and triple it every 10. Great stuff.
But try to “make” your life’s money in the stockmarket, try to beat the 12 per cent average, try to transform yourself the way Warren Buffett did, and you are likely to be disappointed. Most of you will not become mega rich by playing the stockmarket. Yes some will, and some do, but the odds are that you won't. The ones that do are in a tiny minority. They are not the norm. The stockmarket is good for looking after your money, but when it comes to “making money” there are better investments of your time and energy.
I am a big fan of the Rich Dad, Poor Dad philosophy. If you’ve never read the book, get it today and read it over Easter. By page 30 you'll get the idea. The most exploitable resource in the world is people and their willingness to work for a certain (rather than variable) sum.
I remember being a stockbroker in the 1980s. As an institutional salesman we used to argue with the huge broking firm we were employed by about whether we should get paid 10 per cent of what we brought in, or 20 per cent (institutional sales). We claimed 20 per cent, the standard brush salesman’s take. The broking house argued that because their franchise was so strong they could replace us with a monkey and 10 per cent was enough.
Let’s be generous and take 20 per cent. As employees earning 20 per cent we could take home a lot. In fact some dealers were earning the firm multiple millions of pounds a year. This was the ’80s remember. Stockbrokers had a very nice decade. But let’s think about this.
If the employee was taking home 20 per cent then the broking house was taking home 80 per cent. In investment terms, the broking house was making a 400 per cent return on their investment in the employee. When the average annual return on the stockmarket is 12 per cent, you have to ask, who cares about the stockmarket, what's the better investment?
The best investment is in you, your business, your employees or your career. Get on with that.
Trying to squeeze more than the average out of the stockmarket is no career. The stockmarket is a tool, not a life, unless of course you are fortunate enough to work in it.
Marcus Padley is a stockbroker and the author of the daily stockmarket newsletter Marcus Today.
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