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The Power Of Passivity


"In the short run, the market is a voting machine, but in the long run it is a weighing machine." -Benjamin Graham.

Stay long American equities.

Do not lose your head while all others are losing theirs.

It is during times like these that we need to be reminded that fear should never override rationality. I aim to layout some numbers, with a sprinkle of commentary, to prove the importance of keeping your head while all others are losing theirs.

All three major indices are currently hovering around correction territory. However, for the sake of keeping this article as relevant as possible for as long as possible, I will not include the current numbers on the averages. The point of this is simple: it does not matter where the market is currently trading, as it does not change my long-term bullishness on America.

Examples are often times the best way to learn. Thus, I will illustrate with some of my favorites below.

Let’s pretend that you (wisely) decided to invest $10,000 in an S&P 500 tracking index fund. However, luck wasn’t exactly on your side and you put your money to work on October 16, 1987, the day before Black Monday and just a single trading day before the S&P 500 shed a whopping 20.5%.

The index that tracks America’s 500 largest companies closed at 282.70 on Friday October 16, 1987. On the very next trading day, the index closed at 224.75. In just a single day, your $10,000 investment was worth $7,950. Anyone who didn’t understand long-term investing would have called you a fool, telling you that you should have never taken it out of the “safe haven” that is the bank. An even bigger fool might have suggested selling it all, possibly suggesting that the $2,050 current loss on paper is bad, but it will look like nothing when the markets all inevitably go to 0. But you decided against the “wisdom” of your friends, and you chose instead to keep your head.

After roughly three decades, you decide to sell your position, at a gain of roughly $207,758. The market has increased by over 900% since that horrific October Monday. There have been ups and there have been downs but by simply sitting still, you have managed to reap all the rewards, stress-free as you are an American bull and nothing can change that.

To really drive the point home, I will finish with one more example.

I want you to pretend that you are 20 years old. You are enjoying your youth, but you also have one keen eye on the future, and so you decide to invest $10,000 into an S&P 500 tracking index. You decide that you will treat that $10,000 as if it no longer exists, and you make a deal with yourself to check back on it 60 years. You are not sure what it will turn into, but you hope there will be something to leave for your family at the end of the 60 years.

We will use the historical 10.37% annual appreciation on the S&P 500 along with a 1.99% dividend yield. We will not reinvest the dividends, significantly hampering the returns, as you do not want to have to do anything.

The returns above speak for themselves.

Stay long.

Disclosure: I am/we are long SPY.