Friday's market action was one more indication of what Marv (John C. McGinley) tells Bud Fox (Charlie Sheen) in Wall Street: "We're all just one trade away from humility." When the Dow Jones drops 310 points, oil tumbles and professional investors run for the hills, we're all close to humility. And that's the single most important factor in investing: humility.
Being humble means an investor must look for returns from stocks and meet hurdles that are derived from decades of data that define ... returns from stocks.
Looking for 1,000% gains is just not a valid investing strategy. That type of gain is not repeatable and it's definitely not sustainable. Simple economic theory would tell us a portfolio manager -- or newsletter writer -- who gets that type of gain will eventually lose his or her comparative advantage. Others will mimic the strategy, and as investors crowd into a stock, the stock's market capitalization will grow and that makes generating attractive returns that much harder. There's only so much investing capital in the world and new sources of stock, like IPOs and secondary and follow-on offerings, will compete for those incremental investment dollars.
Financial pundits will call this "the law of large numbers," but it's really just common sense. Look at Apple (AAPL). It closed Friday just over $113 a share. Famously, Apple hit a low price of $6.56 on April 17, 2003, which, adjusted for the recent 7-for-1 split, means it was trading at under a dollar at today's share count. (Apple is part of TheStreet's Action Alerts PLUS portfolio.)
From under a dollar to over $113 in 12 years. That's an 11,200% return! And you know what? It's never going to happen again. Just as stocks get crowded, economic theory tells us industries get crowded. Apple can't grow that much anymore, even as its third-quarter earnings showed strong iPhone shipments. It's the dominant handset company in the world, but it can't sustain the growth rates seen in the earlier part of this decade. It's simply mathematically impossible.
So investors really should be looking for gains that meet historical stock returns with some periods of outperformance.
NYU's legendary finance professor Aswath Damodaran has measured the arithmetic average return for the S&P 500 for the period 1928-2014 at 11.53%. Add in 3.5 points or so in dividends (close to historical average, but well above today's puny yields) and that would give an investor a total return target of 15%. That's steep, and most professional investors need leverage to achieve those returns, and the vast majority of unlevered funds fall well short of the 15% average annual performance benchmark.
But if you want to shoot for 15%, by all means go for it. It's a nice target and you could send your results to Damodaran for validation.
You know what he will not send you in return? An email full of come-ons for "penny stock miracles," "the next Apple" "a guaranteed winner" or any such platitudes. He'd probably send a much shorter missive.
That's what investing is. A job. And if you do not have the time or the inclination to put the type of effort into it that you put into your actual avocation, you should be prepared to face lower returns.
You can pay someone else to manage your money -- the main business of my firm Portfolio Guru, LLC -- or you can buy broad-market ETFs like SPYders, which is letting the market manage your money by investing in itself.
But just be careful who you listen to. For every Aswath Damodaran, there are 100 sharks who just want you to give them your hard-earned money in exchange for worthless advice or "research" that doesn't perform the most basic analytical tasks required to properly value a company.
Damodaran could teach you how to model a company's results and derive a fair market value, and, actually, so could I. I learned on Wall Street instead of in a classroom, but in any setting, valuation of public companies is a science, not an art, and anyone who tells you otherwise is a liar.
And listening to liars is probably an expensive habit. So do your own research, keep realistic targets in mind and invest for the long term.
It doesn't take a guru to understand that wisdom.