The Disappointing Reality of Smart, Successful Investing

I stumbled across Spike Lee’s 25th Hour the other night on HBO and was reminded that it’s one of the better and more underrated films of the early 2000s.  The movie stars Edward Norton as a 33-year old New Yorker contemplating his uncertain future and life’s decisions in the final hours before starting a 7-year prison sentence for dealing drugs.  The acting is terrific and the movie also serves as an intimate portrayal of post-9/11 New York City, with the film being released just 15 months after the September 11th terrorist attacks.  We also see in the movie various snapshots of Wall Street, as one of the main supporting characters (played by Barry Pepper) works as a hard-charging investment banker.  The character, Frank Slaughtery, is prototypical Wall Street, at least from the Hollywood perspective.  He’s a brash, arrogant, Red-Bull-drinking, stress-ball squeezing investment cowboy who makes big bets during the day and goes out drinking all night (when he’s not sitting courtside at Knicks games).  We are introduced to Frank during the tense moments before the Bureau of Labor and Statistics is set to release the monthly employment numbers.  While the rest of the market is expecting a big increase in overall employment numbers, Frank has a contrarian “theory” that the numbers are going to be lower than expected.  Not only that, Frank’s limit of bank capital was recently increased to $100M and he’s betting all of it in support of his theory.  The scene contains almost every Wall Street cliché.  Of course, Frank’s theory turns out to be correct and the office erupts into a state of chaos as Frank pumps his fists in celebration.  At least in Hollywood's perspective, he won the zero-sum game of Wall Street trading. 

Photo by  Chris Li  on  Unsplash

Photo by Chris Li on Unsplash


Most people develop their initial perspective of the stock market through the media, particularly these scenes where investing seems more like a casino activity than a long-term financial strategy.

Oliver Stone’s Wall Street introduced us to Gordon Gekko and the “greed is good” mantra of investing.  Boiler Room focuses on the fast money that can be earned by young stock brokers scamming unsuspecting buyers over the phone.  The Wolf of Wall Street glamorizes the lavish lifestyles that can be achieved with rogue market behavior while The Big Short makes us all dream of the next contrarian market angle that could make us millionaires overnight.  On Showtime’s Billions, hedge fund manager Bobby Axelrod shorts everything in sight while parading around Manhattan in his $2,000 hoodies. 

The most common themes throughout each of these Wall Street portrayals, as well as most of the financial media, are:

1. Investing money should be exciting

2. Investing money is an activity that requires daily, fast-paced decisions

3. Strong market acumen is necessary to be a successful investor

4. Bold moves lead to vast wealth which translates to fabulous lifestyles

It’s no wonder so many people maintain a common misperception about the stock market.  If I read enough of The Wall Street Journal, watch enough CNBC and spend enough time talking with everyone about their investment strategies, I will accumulate enough knowledge to be a smart investor and make money in the stock market. 

Looking at the investing process from this perspective usually leads to one of two outcomes: either complete complacency (i.e. doing nothing at all) or unproductive stock picking.  Neither option is a reliable strategy for accumulating wealth over time and securing the meaningful goals and outcomes that are important to you.    

Active investing is hard.

By “active investing,” I mean picking individual stocks, trading frequently, attempting to time the market and changing strategic investment focus based on annual market conditions.  Despite popular perception, very few people are able to do this successfully and outperform the stock market.  Why?  Simply put, markets are fairly efficient and the occasional windows to exploit certain opportunities are difficult to identify and close very quickly.  Over long enough time horizons, roughly 9 out of 10 active investors will fail to outperform their benchmark.  That’s not an opinion, it’s a fact!

Still, this doesn’t prevent people from trying.  The most common question financial advisors receive is “what do you think the market is going to do?”  It’s a fun question.  Everyone has an opinion and many enjoy speculating.  But no one knows the answer.  Good investing is not about outsmarting the stock market, it’s about constructing an investment portfolio that will deliver the returns necessary to meet your goals.  For most people, the sure-fire investment strategy involves patience, discipline and a long-term focus. 

The disappointing realty...

Is that smart, successful long-term investing is actually an incredibly boring activity.  It generally doesn’t look like Frank Slaughtery trading the employment numbers or Bobby Axelrod placing big bets on the fates of individual companies.  Typically, the loudest, most active investors have very poor investment returns and completely miss the point of investing altogether.  Most people are much more successful following the simple strategy of automating and indexing.

  • Automating is setting up recurring, automatic savings transfers to an investment account.  Automation completely removes emotion from the process, as well as the desire to time the market.  Additionally, automation allows you to set savings aside without the opportunity to do something else with the money.  Millions of investors automate savings every 2 weeks with their 401(k) or other retirement savings.  The approach to saving and investing outside of retirement plans should not be any different.
  • Indexing is the investment strategy that targets broad exposure to specific market indexes. Rather than trying to select which individual stocks will perform well over time, indexing allows you to essentially buy them all.  Indexing provides broad exposure to large companies, small companies, domestic companies and international companies.  There is overwhelming evidence proving the long-term success of indexing over time.  In fact, a recent research paper  found that of the 26,000 stocks that have been listed on the stock exchange since 1926, the entire market growth since that time can be attributed to fewer than 4% of these stocks.  Do you really think you can identify which companies those will be?  And is it really worth your time and effort? 

The good news:

Good investing is controllable and more about behavior, patience and commitment to a process.  Instead, get excited about the goals that smart investing can secure.  The actual process of investing doesn’t need to be the fun part.  While automating and indexing won’t dazzle the conversation at a cocktail party or impress friends on the golf course, it’s almost certain to deliver superior investment results over time and secure the most important objectives in your life – which is the whole purpose of investing in the first place!