Investing to Keep Up

Electrifying our world of investing

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Rising inflation rates should push us to invest more, not less, in stocks.  Consumer prices rose 3.5% in March 2024.  If we keep all our money in savings, ten years from now it will lose some of its purchasing power.

Higher interest rates help fight inflation only to some extent, especially not with money we plan to leave for the next generation.  Currently, the interest rates on savings accounts hover around a little over 4%.  Banks pay less interest to depositors than they collect from the borrowers, to make money.  Income tax is paid yearly on the interest earned, reducing savers’ returns.

Most public companies have to do better than inflation.  They must pay higher wages, but also improve productivity and market share to compensate.  Else their stock price will not go up with time.  People instead will pick stocks in other companies, that are more likely to go up.  Public companies are required to disclose their forecasts.  So we have some clue of the future performance of public companies.  Further, taxes on stock gains are only paid when appreciated stock is sold — and not every year.  In the meantime reinvesting the unpaid tax money, can further increase returns.

But picking stocks and knowing when to buy or sell is super difficult.  That is why investors like Warren Buffet are revered.  His company Berkshire has delivered 19.8% compounded annual returns over nearly 55 years.

The alternative to picking stocks (not for unsophisticated investors like me) is to buy a basket of stocks such as S&P 500, where 500 large company stocks are picked by experts.  The S&P 500 is the gold standard in the investing world for comparing returns.

Very few money managers beat S&P 500 returns on a long-term basis.  But in any given year the fund’s returns can even be negative.  Annual compounded returns on S&P 500 has been 7.8%, and most professionals are unable to beat it.

In contrast, a savings account’s money will never reduce from its original amount, but its purchasing power will keep reducing over time.  The decision between investing in S&P 500 vs a bank account is that of higher risk with higher reward.

Yet I am finding investing in stocks can be fun, even though my money is at stake.  It is a great learning experience for anyone.  It tests our rationality.  According to Gallup, 61% of Americans own stocks.  Public companies get money when people invest in their stocks, and investors benefit when the stock price rises.  Higher productivity of companies grows a country’s GDP.  This is why capitalism works.

Almost 30000 people show up for Berkshire’s annual shareholders meeting to listen to the words of wisdom from Buffet and Munger — who passed away last November just before turning 100.  In this meeting and Annual Reports — a goldmine for any investor — they share how they pick stocks:

“Price entry for buying a stock is important, because of the inherent risk in stocks, which mitigates the risk to some extent.”

“(Invest in) wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices.” Charlie Munger advised Buffet.

“We don’t buy what we don’t understand.”

“Consistency over a long term is hard to achieve in investing, just like in the game of bridge,” Munger said.

This is how far I have gone in my playbook.

There are outliers to Warren’s investment philosophy.  The biggest success story is Jim Simons’ company Renaissance Technologies.  Simons, who holds a PhD in mathematics, hired the best mathematicians to design an algorithm to pick and trade stocks.  In 1979 his team studied if a severe weather pattern would affect the supply of wheat”.   Many more such obscure correlated patterns, are now incorporated in their algorithms. The machine flips a stock on an average in less than 2 days, as opposed to Warren Buffet holding stocks for decades!

Renaissance Technologies Medallion Fund’s annual returns are whooping 66% against Berkeshire’s of 19.8% and S&P 500’s of 7.8%.

Simons is listed on Forbes’ list of the 100 richest.  Renaissance Technologies’ secret sauce is the mathematicians who built the model and who keep improving it.

Renaissance Technologies has been so successful that it has been closed to outsiders since 1993.

In contrast, Warren’s investment philosophy is far more nuanced.

There are other success stories in both models.

For most investors, the easier choices are between letting inflation erode our purchasing power, or investing in S&P 500, like index funds.  Choosing individual stocks is riskier, and mistakes can be fatal.  Buying US Treasuries can be a better choice than savings accounts because the interest on them is tax-free.

Investing sensibly is not easy, but not so difficult either.

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9 comments

  1. Sunil Suri

    Dear Vinita –

    Thank you for sharing your view of a Buffet. Or of Renaissance,

    BUT

    To my judgment the Stock Market is anything but perfect. It really is a betting agency – based on imperfect information. You as investor have zero clue to why a Seller sells or a Buyer Buys. Plus you “bet” against those who “play” the market as a vocation. Thus as a part time investor you will perform poorly.

    Yes do not park your “tax paid” money into a Bank CD – that is worse.

    To my mind as a practitioner of making money consistently for 50+ years – my truth for you is – that both Naren and You made a higher IRR or TMOI though your entrepreneurial skills. As did I.

    Therefore – interesting writing as an act of Fiction, but it does not do justice to your outstanding Entrepreneurial Success. If anything Madam your advocacy should always suggest “innovation” and especially “technology”.

    I submit your TMOI way outshines any pundit you quote here. Give yourself more credit at Wisdom. And your Naren was no light weight either.

    1. vinitagupta

      We too thought, and I continue to think that investing is very tough.

  2. SREEDHAR MENON

    Very useful for a person like me, 87 years old, who has invested about 60 percent of his retirement assets in stocks!

  3. Vijay Gupta

    Why do some billionaires work hard when they don’t really need the money? Because they enjoy their work. Or perhaps because they enjoy the social status that comes with their job.

    Why do some young people work hard to make money? Or to maximize returns on their investments? Because they need the money. Perhaps to buy a bigger home, or to start a company.

    But why would retired people work hard to maximize their ROI? Why would they care whether their annual return is 5% or 8%? Especially when they have more than enough money for their (real or imagined) needs, and when they don’t really enjoy the investment process.

    1. vinitagupta

      Thanks for your thoughtful comments and question, Vijay.
      When one gets the taste of winning, one keeps doing it just for that reason alone, will be my answer.

  4. Ramesh C Gupta

    Thnak you Vinita. Hope you are well. My comments are based on almost 50 years as an investors and in the financial industry – with various senior jobs. Fisrt – Sunil, the US stock market does work reasonably well. Most of us can’t be entrepreneur and need passive investment instruments. Offer us alternatives if not the stock market. An entrepreneur is also an investor in his/her company. From a buy/hold moderate risk perspective, I concur that SP500 is the optimal choice. Over the years I have looked at literally hundreds of allocation strategies, models and instruments. One also needs a money market fund and a bond fund at a minimum for emergency needs. I recommend BND or VCRB – a new active ETF. Since retiring, I do write about every 2 months an email to my friends (free. I am fully retired), many from my IITDelhi 1969 batch. The focus is on active investments, planning, estate issues from a high net worth angle. I am updating an older version of a paper on SP500 – be ready in May. I discuss how and why I settled on Sp500 from thousnads of other possibilities.

    1. vinitagupta

      You, Ramesh fall in the sophisticated class od investor. Look forward to your blog.

  5. Stefan Skorchev

    While investing in index funds like S&P500 feels like a conservative choice compared to investing in particular mature companies where the risk is greater, none of this sounds like fun or driving much innovation or bringing value to the future of humanity. It sounds rather the mission is "protect my money".
    For me, investing is about making a positive change, and by that criteria, the startups are the clear winner. Innovation is what moves us forward and while big companies do innovations, the starups are the real game changers.
    In the UK for example, there are huge tax incentives for investing in early-stage startups, making them a good choice for professional investors who spend the time to do their due diligence and invest in many startups based on their insticts and knowledge. Furthermore, the UK tax office gives generous R&D cashback to innovative startups, further fueling their growth prospects. DeepMind, the first big AI company, later acquired by Google, is from the UK.

    1. vinitagupta

      You diagnosed it right, Stefan.

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