Episode #3 - PPE, personal protective

equity and the glory of being just average.

Intro:

Welcome back, if you’re reading this you’ve made it to another Monday and are among the first 100 subscribers to Winnings. Thanks for coming. If you’re just viewing this - click here to lock in for the rest of these weekly notes. The purpose of these notes is to make you able to do something with your winnings (read: money). If you have taken any action as a result of these notes or have any specific follow-up questions/comments please email takewinnings@gmail.com.

In the last issue I raised the idea of following a stock. In case you didn’t, here is a chart following Zoom Video Communications Inc (aka Zoom) over the last six months:

(Thank you Google for making this easily accessible - click the picture to see where it is when you read the article - it moves. Please share with me which stock you followed over the last week here.)

The information stored in this photo may not be exactly obvious to you, and we’ll save that for another note. What I want you to see though in this image is the volatility you have in a single stock - most significantly a single stock can go kaput! Not all stocks are high flying during this pandemic (check out Carnival Cruise Line). Even if you’re not investing during a pandemic, factors way beyond your control will influence your stocks. (As an aside, if you followed Netflix and Amazon based on my direction, you can see that they’re doing FINE through this pandemic.)

Ok, so based on the data shown in the image above presume you bought 10 shares of Zoom on February 19, 2020 (that’s a $10,393.00 purchase for those keeping track at home). If you sold it today and the market opened at $138.56/share you’d be up a fair amount of money. (Numeric answer can be shared here.) The reason you made a profit is that someone else wanted to by the stock from you, just like someone wanted to sell it to you at the price you bought it for on February 19, 2020.

Now that you’ve hopefully clicked a few links of the above stocks and run the same experiment of buying a stock on February 19, 2020 and then selling it on May 4, 2020, you can see that on some you would have been up and on others you would be down. Seems pretty straightforward.

What if I told you that you can own all of the stocks I mentioned (other than ZM) plus 502 additional stocks. Would you take that deal?

History:

Well, to understand how you can own 505 stocks at once, you first need to meet your first “index” - it’s called the Standard & Poor’s 500. 500 stands for the 505 companies listed in this index (why 500 is not for now). Founded in the middle of the 19th Century, Poor’s Publishing was originally an investors guide to the railroad industry. Standard Statistics Company started in this work by rating mortgage bonds (for another letter). Wikipedia could give you the rest, but, as they say, it’s history. By 1962, the index grew to 500 companies, and now you have 505. The index’s value is computed not only by the average stock price of each company, but it’s also weighted based on the size of the company. Larger stocks take up more weight on the index. You can trace the index over the past while here.

That’s definitely too little on the whole business of indices, there are a number more, but for our purposes this general understanding that there are specific criteria by which companies are evaluated to join the S&P 500 gives us enough context to understand how you can OWN an index. One thing you can’t forget, ON AVERAGE the S&P 500 goes up about 8-11% annually.

For the full framing, until now, the assumption is I can only own specific stocks. I can buy many of them, as much as the money I have can buy. However, I couldn’t buy an entire index until John C. “Jack” Bogle.

Who thought of this idea?

Granted the first Index Funds were created a few years’s before Jack Bogle came on the scene, but when you have a world in which Bogleheads (devotees, hasidim, or groupies depending on your frame of reference) developed a cult around Bogle. His fund, the little thing known as Vanguard (a cool 5.3 trillion under management), revolutionized the way individuals could invest in the stock market.

As with most great ideas, he discovered this theory of investing while writing his senior thesis at Princeton. Okay, that definitely is a remarkable concept, but he published it by graduation and it formed the fundamentals of his investment strategy for life. In 1975 he founded the First Index Investment Trust and from there it was off to the races. However, many naysayers didn’t think his version of investing would get people excited. Some even called it “un-American.” Why? Investing in a full market was viewed as a cop-out, just settling for “mediocrity.” Again, if you look at the S&P 500 since 1980, and you can find charts where it goes even further back, it is, on balance, the safest bet you can play while still exposing yourself to the stock market, or more specifically the S&P 500.

As advertisements in the late 1970s and 1980s would knock the index approach because it was just average, the other funds based on “expert knowledge” and stock pickers developing a strong plan would do better. But they did not. The experts invariably did worse than the S&P 500 and that was the race Bogle was looking to win: sometimes just being average is better than everyone else.

Takeaway:

Trading on an index protects you from the cost of investing in specific stocks, but you still do have the risk of own the whole market. For the experts in the crowd, there are two ways to invest in an index: Mutual Funds and Exchange Traded Funds - we’ll cover that a different time.

For those looking for long term investments, one key piece of the puzzle comes in the form of index based investing. You don’t have the thrill of following Zoom go up and down, but you do get the security that over the arc of history the S&P 500 bends up and to the right. There are down years, and that is part of the diversification discussion, but general wisdom maintains that for people who are early in their investment careers and more significantly their lives, can take the the risk of investing in the stock market. Your tolerance for risk should become lower as you get closer to retirement, and if you are typically risk averse, you likely need to overcompensate so you can enjoy the fruits of the market’s labor.

If you’d like to read Bogle’s own words, check out this site. Bogle passed away in 2019, but his wisdom will likely outlast most of the people reading this email.

Interact:

If you have finances in individual stocks already, check out the S&P 500 as a potential index you can benefit from. Perhaps it won’t be the Vanguard version, but you should find a way to gain from the consistent growth of the S&P 500. If you have invested there or would like to, shoot me a note here: takewinnings@gmail.com. I’d love to hear about your moves in the market. No need to share the amount you’ve put in, but just that you’ve put in will make me super happy.

Because I really do think its a great resource and you can follow S&P 500 daily with Morning Brew, I recommend signing up for their free daily notes here.

Gratitude:

Thank you to Yair L for reaching out regarding some investing questions. If you have any questions of your own, please send them my direction here.