Guinness World Records
Personally, I find the Guinness World Records absolutely fascinating. The type of book that adds little intellectual value, but you could just get lost for hours in the pages of oddball records and feats.
Here are some notable and memorable records:
- Irvin “Irv” Gordon’s Guinness claim to fame is his 1966 Volvo with 3,039,122 miles. That’s a whole lot of oil changes, no? Irv says he’ll sell it if the buyer pays $1 per mile.
- Robert Pershing Wadlow flirted with being 9 feet tall, standing 8 feet and 11.1 inches. Wadlow passed in July 1940, but continues to stand tall in the Guinness World Records.
- How about this one? Vitomir Maričić held his breath underwater for… 29 minutes and 3 seconds! That does not even seem humanly possible.
- Then you have a 25-foot 2-inch python snake from Kansas City, Missouri, or the longest fingernails at 42 feet 10.2 inches, uncut since 1997.
A Coin Flip
Today, I want to discuss a lesser-known record, which is held by Billy Morgan of the UK. Billy’s record is for the most consecutive heads flipped on a coin. How many times you ask? 8. A bit underwhelming, no?
This is simply how the law of averages works, or what we will sometimes refer to as a reversion to the mean. Things that have coin-flip odds can go on abnormal runs, but these runs are short-lived, just as this record reflects.
Abnormal Returns
DEFINITION:
“An abnormal return is the difference between the actual return of an investment and its expected return, indicating unusually large profits or losses over a specified period.” ~ Investopedia
In the world of investing, we are living in one of those rare coin-flip sequences right now. In 2023, the total return of the market (S&P 500) was 26.29%. Last year, 25.02%. Year-to-date, as of this writing, north of 15%.
Since 1928, there have been 11 occurrences when the market was up 3 years in a row. Only once was the market up over 20% 3-years in a row, which was actually 5 years (1995-1999) and the run-up to the dot-com bubble.
These facts and records make this a bit of an ominous moment. Yet, records are broken, so there is nothing holding this current streak back from its own historical run. This just leads us to a simple conversation and history lesson around the highs and lows of a speculator.
An Investor vs. A Speculator
Warren Buffett’s famed professor, Benjamin Graham, was well-known for his bifurcation of an investor versus a speculator. Graham stated,
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
He often described a speculator as one looking to ride the waves of market momentum without any interest or concern for the underlying fundamentals.
Speculators forever and always will have to deal with the exaggerated boom-bust cycle of speculative assets. Whether you want to imagine a child attempting to blow the largest bubblegum bubble or a coin-flipper nearing that Guinness record, you just know that this sequence can’t go on forever. Bubbles pop, and streaks revert back to their averages. Yet, a sticky face of bubblegum or a lost record pale in comparison to the destruction of a speculator’s life savings.
Wishful Promises
I recently heard second-hand of an investor being enticed by the opportunity to invest in a strategy that “on average” would return 20%. When I heard this, I just found myself shaking my head. If one is to compound at 20% then they could turn one dollar into one billion dollars in less than 50 years. For perspective, there are 340 million people in the United States and fewer than 1,200 billionaires. That 20% tout is even greater than what Warren Buffett has achieved over the last 60 years, one of the greatest investors of all time.
Yet, people are so captivated by the “boom” that they often forget about the “bust,” until they experience it firsthand. It’s important to realize how damaging losses can be. Imagine an investment that returns 20% 3-years in a row, followed by a 50% drop. You are then left with less money than what you started with. It’s like a home burning down; one spends a lifetime building up memories and acquiring things that can all be stripped away in a moment.
When the Nasdaq came off of its historic high in the last 90’s it lost nearly 80% of its value and took over 15 years to recover from this drop. When it comes to speculating, most often the “bust” does more damage than the “boom” can make up for.
Playing with Fire
That analogy of one’s home burning down really resonates with me because it reflects all the efforts behind making a house a home, and then how a simple spark could be the violent thief of it all. Based on this risk, one really shouldn’t “play with fire.” Yet, not a day goes by that I don’t see or hear of an investor doing exactly that – playing with fire.
Investing is already so incredibly difficult that we need to be sure not to make it harder than it already is. It’s almost like speculative investments draw us into a trance. Everything we’ve learned and known about prudent investing is thrown out the window for a potential lotto-ticket winner. In the end, the financial wreckage left behind looks eerily similar to that of a burnt-down home.
My advice: be careful. Let history be a guide and don’t fall into that speculative trance. For me, I’ve chosen to lean into cash flow generative investments where the price is susceptible to high volatility, but not the cash flow. I use that cash flow as a focal point, seeking to find fairly priced investments that can increase cash flow (dividends) in good and bad markets. This is what’s at the heart of Dividend Growth investing.
You can’t flip heads forever, and markets won’t go on like this forever. Your financial plan and mindset need to be equipped with the reality that markets go up and down. Years with above-average results will average themselves out with years of below-average results.
When will tides turn? I don’t know, and nobody else does either. The goal will never be to guess when the storm will begin or to even avoid it, but rather to equip yourself and your portfolio to weather that inevitable storm.
“Winds in the east, mist coming in. Like somethin’ is brewin’ and bout to begin. Can’t put my finger on what lies in store, But I fear what’s to happen all happened before.”
– P.L. Travers, Mary Poppins
