Ben Carlson on Why It’s Better to Avoid a Strikeout Than to Swing for a Home run
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What insights does Ben Carlson share about investor behavior?
They've been beat over the head for so many years and decades of people telling them, and people like you at The Motley Fool, and there's people like me in a blog, hey, when stocks go down, you don't run out of the store because they're on sale, you rush in to buy. And it seems like people have actually learned. And so I make the case all the time that I think investor behavior has actually gotten better over time.
That was Ben Carlson, author of the Wealth of Common Sense blog, co-host of the Animal Spirits podcast, and the author of the upcoming book, Risk and Reward, How to Handle Market Volatility and Build Long-Term Wealth. I'm Robert Brokamp, and today is part two of my conversation with Ben, during which we discuss the risks of investing in individual stocks, market valuations, balancing saving for the future versus enjoying life today, and the career advice we give our kids. We've been talking about the performance of broad asset classes here, right? Which you can get exposure to through a low cost index fund.
How should individual investors approach stock selection?
But what about individual stocks, which a lot of our listeners own? Because even though the US stock market has always recovered from every downturn, not every stock does. How do you approach investing in individual stocks?
Yeah. And I highlight the work of Hendrik Bessenbinder in here. And he's a professor at the University of Arizona State. And he talks about the fact that over the long haul, the concentration of the U.S.
What role does diversification play in investment success?
stock market is probably more than you think. His definition of long term is even longer than mine probably. He's looking at like 100 years of data. And he says basically 60% or so of the companies fail to keep up with T-bills or cash, right, over the very long term. The other, you know, 30% and change kind of more or less keep up with that, maybe a little better. And then something like 4% of all stocks are account for all the gains. So it's the big ones, you know, Apple and Exxon and Amazon and Google and Nvidia. And these huge stocks from a market cap perspective have given investors all their gains over the past hundred years or whatever. And his point is, you know, there's a lot of different ways to look at it.
How can market valuations impact investment decisions?
The one way to look at it is if you own just one of these winners, you're probably set. Like all of your other losers are, you can offset all of them. So if you're an individual stock picker, as long as you have Again, that intestinal fortitude to stick with a long-term winner like that, that can pay off a lot of bets. And it's almost like a VC portfolio, a power law. If you've owned Apple for about 20 years, it didn't matter how bad you did in your other portfolio picks. That one offset all of the losers. I think that back to the diversification piece, casting a wide enough net, helps too that you wanna make sure that you are able to get some of these winners, right? And have them in your portfolio in some way.
And so that's the diversification piece is if you happen to miss out on a lot of these big winners, it's gonna be tough.
What is the balance between saving for the future and enjoying life today?
And the other thing is, obviously, he's looking at 100 years of data. So a lot of these companies that ended up going under and not making it, you could have gotten fantastic returns for one, two, three, five, seven years before these companies petered out, right? We're seeing now some huge brand name stocks, Nike and Disney and some of these really well-known companies that are doing really poorly right now, but owning them historically could have given you fantastic returns, right? So the timing of the ownership too, and sort of when you get in and get out, obviously that can matter too. But my personal takeaway is just like casting a wide enough net to make sure that you own these winners and finding a strategy that sort of forces your hand to hold them and not give up on them.
Because it's easy to buy, I think it's easy to sell. for an investment, right? I think the holding is the hard part for a lot of people because no matter the company, no matter the index, no matter the asset class, you're going to have drawdowns eventually.
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Chapters
8 chapters
1
What insights does Ben Carlson share about investor behavior?
0:05–1:04
2
How should individual investors approach stock selection?
1:04–1:24
3
What role does diversification play in investment success?
1:24–2:01
4
How can market valuations impact investment decisions?
2:01–2:42
5
What is the balance between saving for the future and enjoying life today?
2:42–3:59
6
What career advice does Ben Carlson offer for young professionals?
3:59–4:48
7
How can individuals become indispensable in their careers?
4:48–5:31
8
What lessons can we learn from past market behaviors?
5:31–21:57