This is an article by my friend and advisor Dan Ogden from Dock Street Asset Management.  

Do the Odds Favor Stock Investors?

Stocks go up 3 years out of every 4

The majority of people who could invest in stocks don’t do it. They perceive that the risks are too high and they settle for lower returns that promise a smoother ride.

The graphic below says they are making a mistake. Yes, the stock market offers very uneven returns year to year. Dock Street clients know that only too well—2022 was a very painful year while 2023 has been highly rewarding, so far. But over time stocks offer tremendous opportunity.

This graphic sorts the positive and negative years in stocks into nine return outcomes, ranging from losses of 40% to gains of 50%. Most of the time stocks offer positive returns—see the green years. In fact, 3 out of every 4 years since 1945 produced gains for shareholders. (60 out of 77)

This calls into question the many investment advisors who promise portfolio protection on the downside and argue that limiting losses produces above average returns. This appeals to the natural fear of loss that keeps most people out of the market, but the odds are stacked against investors who focus on short-term loss prevention.

Our approach is to find highly advantaged businesses and hang on through thick and thin. The ride can be a bumpy one as the 2021 through 2023 period attests. However, we think the emotional costs of short-term losses are a small price to pay for the significant long-term opportunities offered by common stock ownership.

We agree with Warren Buffett (again), “We prefer a lumpy 15% return to a smooth 6% return.”

Best regards,

—
Daniel A. Ogden
[email protected]

I would add that if you are the kind of person who is going to buy some (high flyer) stocks and check them every day or every week, your emotions will cause you to buy high and sell low.  Trust me on this.  You need to buy a small group of quality companies with earnings that are projected to go up by at least 20% per year for at least the next five years.  Unless you want to spend a lot of time with analysis (and you are probably not good at it) then have someone do it for you instead.  I use Dock Street and I don’t have to think or worry about it.  Alternatively, you could buy an S&P 500 Index fund and for the most part, forget about it.

Full disclosure: I don’t get commissions, trips, or dinners from Dock Street – though they do send me a box of chocolates at Christmas each year – 25 years and counting!