When it comes to goods and services, sales and deals are always promoted, “smart” consumers look to buy at opportune times or clearances to secure the best deals. Pricing psychology and marketing is a massive business to train us to buy a certain product over another.

However, when it comes to investing in stocks, all this conditioning and sale-seeking habits can be incredibly detrimental to your success. Price is counterintuitive, and untraining those habits can help propel your portfolio.

Sales/discounts/deals

Common advice given to investors is to “wait for a dip”, “buy the pullback”, but when the dip keeps dipping, what do you do? “Average down!” they say. “Dollar-cost averaging works over the long run!” they shout at you.

Yet if you actually did these things you would quickly realize that at best, it doesn’t work as well as it seems like it should on paper, and at worst, your stock continues to tank until you’re either too scared or in too deep and it never recovers. Worse yet, you tell yourself you’ll exit when it gets back to breakeven but the stock teases you repeatedly, coming just shy of breakeven, before eventually going bankrupt and never allowing you an exit.

This is a common hurdle in every investor’s journey to profitability, and yet many never manage to see the trap for what it is and never manage to dig themselves out to meet the next challenge keeping them from consistent gains. I’ve experienced it myself, and have seen many friends and family that I coach go through the same struggles.

During the dotcom bubble, you would have been buying steep discounts over and over until you deployed all your capital far above the bottom, giving you a poor average cost, then were forced to hold these unrealized losses for (in many and the best of cases) 10+ years before even dreaming of breaking even while forgoing infinitely many opportunities with that capital.

• Amazon ($AMZN) 11 years until making a new high, 95% drop peak to trough

• Microsoft ($MSFT) 16 years until making a new high, 75% drop peak to trough

• Cisco Systems ($CSCO) 90% drop peak to trough, has yet to fully recover after 21 years

Pricing power

Why does indiscriminately buying cheap stocks that have dumped off a lot tend to be a trap? Let’s pretend for a second that these stocks represent offerings and services (surprise, they do!). Sales and discounts are generally offered to get rid of an excess of stock (not the shares, the product). In cases where items are expiring and about to lose all their value[1]eerily similar to how option decay works as option expiration approaches in grocery stores, or an old item is no longer being produced, steep clearance type sales occur. A company that needs to offer steep discounts/clearances has one or more of the following problems: lack of demand, inconsistent/poor product quality, supply chain/inventory issues, etc. Needless to say, none of these are desirable traits for an investor to expect profitability on

Lack of pricing power is not an indicator of a strong company, never mind a company that is a leader in its respective space. Apple ($AAPL) rarely if ever puts its products on sale. It does not need to price its products in the same price range that the average Chinese retailer might need to. It’s able to command sky-high prices time and again, and count on its loyal customer base who know and love its products to clear out their supply. Apple is able to sell more than any other company whilst commanding high prices. When there is no lack of demand relative to supply, prices go up.

Low prices beget lower prices. A company whose stock price is being discounted by the market tends to continue to have its price discounted until sufficient buyers are found to counteract the supply in shares. This does not tend to happen whilst the company stays on its current trajectory that the market has deemed unfavourable. If meaningful and significant change comes, the stock price may turn around again, and fetch higher prices, hopefully sustainably. This is the basis on which bearish and bullish trends are created.

Low prices beget lower prices

Another thing I’ve noticed that is not immediately intuitive to new entrants in the stock market is that in addition to sale-seeking behaviour, it’s expected that something that drops 90% only has up to go. This is a simple misconception that can be easily debunked using math, or less ideally, experience. A stock purchased at $300 is down 90% upon hitting $30. When the stock gets to $3, you’re down another 90% even if you bought or doubled down at $30. The stock is now down 99% from its high and at serious risk of being delisted altogether, never mind all the underwater people looking to exit every time price tries to move up, creating excess supply.

This is not a fantasy scenario, if you do a review of the stocks in the stock market, you’ll find this happens time and time again, even to strong stocks facing serious headwinds or fear. Even more companies you’ll never find because the charts and tickers no longer exist as they are out of business. Even Amazon ($AMZN) dropped 83% from Dec 6 1999 to Oct 16 2000, from $113 to $19.39 split-adjusted. After dropping 83%, it lost another 71% by hitting $5.51 on Oct 1 2001. Worth noting this sustained drop took 2 whole years. Since then, Amazon has returned over 683x or 68,300% from the bottom as an incredibly rare and dominant player. 99% of beaten-down stocks do not share the same fate.

My learnings from Tupperware

As mentioned in my about me page, I’ve been fortunate enough to have stumbled across a couple opportunities (and mistakes) that had a significant, life-changing impact on my portfolio, and more importantly, my understanding of the stock market. One of these opportunities were Tupperware ($TUP). Perhaps I’ll write a deep dive on this play in the future, but for now, I’ll use it as a tale of a caution against bottom-fishing, buying discounts, and “averaging down”.

Tupperware was a name I’d heard many times over the course of my life, so imagine my shock when I saw this company that had a brand synonymous with food storage container as a household name like “Bandaid” or “Kleenex” was at $16~$18 years after making a high of $97.14. This piqued my curiousity and I looked into the company further. Without going into the reasons why I decided this was worth a punt, I decided to allocate a total of low 5 figures into a play on $TUP, expecting an eventual bounce to at least $32, where some buying occurred before it created new all-time low prices.

My trade plan was as follows: I’d wait for $TUP to hit $5 before deploying 16.66% of intended position, as the trend was down and more down was to be expected. This allocation was in case the stock blew up without me and I simply didn’t want to deal with the pain of feeling I missed it. Somewhere between $1.5 to $1, I’d 5x my existing position, completing my full risk allocation.

Buys and position sizes on Tupperware ($TUP)

Needless to say, Feb 2020 came along, my $5 buys filled, then it quickly dropped another 80% to nearly $1. With the backdrop of COVID-19 panic and broader market sell-offs, I suddenly became very frightened about buying around $1 as planned. My mind was convinced that the possibility of $TUP going bankrupt was much higher than whatever figures I expected going into the trade. Luckily I overcame my fear and followed my trade plan and process, which was also something that took me quite a while to learn previously.

Weeks later, Tupperware announced new directors to its board, new CEO, and eventually a turnaround plan. I quickly saw my account break my own personal all-time highs, and my $TUP shares were worth more than any amount of money I’d ever had before. I was fully satisfied and sold my shares at $28.

Despite the massive success that this trade was, seeing an 80% drawdown in my position was vastly different than thinking about it. Investors tend to overestimate their ability to follow their plan and underestimate the real, crippling power their emotions can have over them in the moment, causing massive, lasting damage to their net worth.

A few months later, I made another life-changing play in Gamestop ($GME) using more initial risk capital, which was a much harder play to time and execute but paid off tremendously. Except this time, I took my learnings from Tupperware and made necessary adjustments to minimize my downside while realizing extraordinary gains and avoiding doubling down and bottom fishing. It didn’t have to be so hard, and I felt like a fool after realizing it, but I really needed to experience it and make sense of it holistically myself for it to click.

Buy high, then sell higher

Simply put, assets are things that produce future expected value. As an investor, you should be seeking out assets to grow your portfolio over time, and avoiding stocks that are not on that trajectory lest you want your assets to be “bags” that pull you down. Ensuring that a stock is in a bullish trend is key to accomplishing this. Shake off the silly notion of “the price is too high” as touted by others — price is only too high if no one is willing to buy it from you higher.

When Bitcoin hit $100 for the first time, few could truly envision it going 100x higher to $10,000 even if they saw the potential and understood cryptography and blockchain. I believed tremendously in Bitcoin since I first came across it in 2011, but it’s hard to visualize something going up 100x higher when it’s putting in a steep, daunting peak. When Bitcoin hit $20,000, few could see it hitting $60,000 as fast as it did.

Bitcoin, of course, is special as it’s a once-in-a-lifetime type of breakthrough in “sound money”, but thousands of stocks have made runs of similar magnitude. It’s only when the next run has occurred that the current “peak” that’s so steep and daunting suddenly shrinks to a line on the chart, barely visible to the naked eye.

Bitcoin ($BTCUSD) from 2011 to 2022, can you see the $260 and $1100 peaks?

The key is not going back in time and loading up on Bitcoin at $5 or lower, although you should definitely do that if you can! What was pivotal for me to throw away my notions of price being “too high” was realizing that in order for an asset or stock to land a 3x, 5x, 10x, 20x 50x, 100x, 1000x, it needs to first double. Let me repeat that again: for a stock to 1000x, it must first 2x. A $100 stock simply cannot hit $10,000 without first reaching $200 on the way. It may be an elementary concept but this realization helped reframe my beliefs about price.

For a stock to 1000x, it must first 2x

By reframing the way we evaluate price, it then becomes exceedingly obvious that a stock near its all-time lows is the least likely to provide astronomical returns, and a stock near its all-time high is a more likely candidate to accomplish that feat. There is no need to fear a stock that has tripled simply because it has tripled, or jump to buy a stock 90% down simply because it’s 90% down.

That said, it’s important to note that with steep ascents come steep declines, and as always, it’s imperative to keep risk in check and be diligent with practicing risk management. Landing a 100x or 1000x on your investment requires luck, but you will not be around for luck to change your life if you wipe out your portfolio before then.

References[+]

Been mulling over whether an update is even warranted given the general softness of the market. Ultimately I’ve decided that if there is anything important I have to share, it’s the importance of persistence.

It has been persistence in the face of adversity, persistence in the face of challenges, persistence in the face of boredom that has ultimately brought me here. And in sharing my ongoing journey from zero to billion, I’d be remiss in not getting that point across.

A new variant?!

About 3 weeks back, news of the Omicron variant in South Africa started sending the media here into cycles of hysteria. Just prior to this, my thesis for the market going into this was cautiously bullish going into that, and was as follows: A portion of the main stocks I was monitoring or had a position in (including $RBLX) had become very extended from their moving averages[1]this is not a concern in and of itself, but when many stocks have a very steep angle of ascent/descent and I notice other factors occurring, I take caution and look to trim. Additionally, fresh breakouts were few and far in between, showing a lack of follow-through. S&P500 looked like it was on track to close its 3rd week under its recent high, and so I marked it out as a level of interest, expecting it to act as a key pivot point.

Typically I like to see a swift up move on the broader indices coinciding with lackluster follow-through and stock participation (among a couple of other factors) for me to trim positions and start taking on some short exposure to cushion and profit a bit on the downside/pullback. With that in mind, I expected to see us temporarily make new all-time highs for a day or two then swiftly fail back below and close the 4th weekly candle back below resistance. Sure enough, it did that, but in a much much shorter span than I had anticipated — after making new highs, within 2 hours it had given it back. I make a point not to trade according to my thesis, and as it didn’t meet the expectation I had in my mind’s eye, I did not take on short hedges.

S&P500 daily chart, blue circle was anticipated but not executed on

S&P500 weekly chart – significant resistance

Luckily I had locked in profits on my bigger runners in early November. However, unluckily, by the next week, news of Omicron conveniently surfaced and caused panic in the markets. In the 3 weeks since, we’ve seen a lot of old darlings of the market get slaughtered, with some names down 50~70%, luckily none in my portfolio. Even $RBLX took quite a tumble, but well within my expectations.

Crash? Cash?

Along with Omicron news, the stock market was heavy in negativity going into Jerome Powell’s speech on Dec 15th. Leading up to it, we had tremendous weakness, with media outlets and the Twittersphere going crazy with bearish outlooks and remarks. Truth be told, I’ve never seen a crash happen when “everyone” as a collective is expecting one and positioned accordingly. In such instances, I’ve done fairly well for myself going against the wisdom of the crowd, but timing is key. Going against the herd can be a recipe to end up trampled. In this instance, given the choppiness and uncertainty of the market along with the lack of setups, I didn’t take any additional positions. Federal Reserve Chair Jerome Powell indicated to expect 3 rate hikes of 0.25% into 2022 and the conclusion of Fed bond buying. This was well in line with my expectations and definitely not anywhere near the worst that could happen. Seemingly caught off guard by this, S&P500 rallied quite hard, but this quickly disappeared in the following days.

Through the past few Fed meetings, it’s been abundantly clear (and communicated many times) that the approach is to communicate any Fed actions as early as possible and then take action so as not to shock the market. Seems many have simply ignored this messaging, but I digress. I don’t expect the market to cope well any other way given how quickly it goes into chop mode.

I am no epidemiologist but so far research on early data from Omicron and the various South African studies have shown that it has a higher spread than the other variants, particularly Delta. When this news first broke my initial impression was that this could be better news than anticipated, given that more transmissible viruses tend to have a lower mortality rate as time in host is a necessary requirement to assist in transmission, and killing or putting the host in critical care too soon greatly diminishes that.

That said, broader transmission could still mean more bodies in our healthcare facilities and cause increased strain on our healthcare systems, though I fully expect countries to be better equipped to deal with this than early on in the pandemic. Only time will tell how significant Omicron is and its impact on the global economy, but so far research results have been more promising than you’d think from the online and media chatter.

Going forward

I tend to be of the opinion this fear is overblown and if we can get the broader market firming up from here, with a lot of stocks failing to fail lower in the immediate term, many will find themselves underexposed and buy to increase exposure. I see no reason on the chart to get overly bearish. Hopes and dreams don’t pay, but the market does, and whatever the market communicates in the following weeks, it’s important to keep a keen eye open and position accordingly.

Signs to watch out for: lack of new lows being created in most weak stocks, higher highs and breakouts happening on stronger players, with breakouts holding better, broader participation in general. Any stocks emerging first out of this carnage will likely be the main leaders if the market gives a next up leg, and worth focusing on.

Cautiously bullish, but not adding any new exposure yet.

References[+]

Recently, Roblox ($RBLX) has been making the news cycles with an outstanding earnings report. This company was started in 2004 but only really caught my interest 3 or 4 years back when I started hearing about young children spending thousands of dollars on the platform. Is that surprising to you? It certainly was for me. A simple Google search will yield thousands of results that make you wonder how children with zero earning power are getting their hands on this type of money.

More importantly, parental concerns about fiscal responsibility aside, it signals that this company is really onto something. Enough to entice tremendous populations of children aged 9~12 to rack up incredible bills in a short span. However, money is not the end all be all, plenty of games have failed to convert short-term gains into long-standing, enduring success. Let’s explore why I believe Roblox is on a different trajectory.

The gravity of irrelevance

Think back to a time you or someone you know spent a lot of money on an internet game. Whether it be Runescape, Maplestory, World of Warcraft, League of Legends, Minecraft, PUBG, Puzzle and Dragons, Clash of Clans, Pokemon Go, Fortnite, the list goes on. For most of these games, they’ve had outstanding success, and have made tremendous profits off a portion of their player base, which largely subsidizes the playing costs for low or non-paying players in exchange for a marked advantage in their gameplay or cosmetics.

However, much like professional sports, even the very best struggle to maintain their performance and run for very long, save for outliers like Tom Brady and Faker who have had extraordinary careers well beyond the mean. Games like Maplestory and Puzzle and Dragons have turned their parent companies into significant, dominant players in the space, but attempts to replicate these successes often fall flat. Even the most widely-subscribed free-to-play games fail to convert said success into true long-term staying power.

How is Roblox different? Simple, Roblox is not a game. So what is Roblox exactly and how is it going to overcome this age-old gravity of irrelevance? Let’s take a look at the numbers.

What exactly is Roblox?

“Roblox” is a platform that consists of 3 main offerings:

• Roblox Studio – The tool used to created experiences inside Roblox

• Roblox Client – Where experiences take place whether inside of a phone, tablet, or game console

• Roblox Cloud – Open Cloud for developers to store resources and assets and make their experiences available to all platforms

For the purposes of this post, we’ll mainly be focusing on the Roblox ecosystem, which includes all 3 but mainly address the visible aspects regarding player/partner experiences on Roblox Client and not so much the developer experience for Roblox Studio and Roblox Cloud.

Think of Roblox as an ecosystem where people can go to meet, play, earn, learn, and more. It’s a constant evolution where its participants can choose to expand on it as experiences are driven by the community. Individual creators create games and hook into this ecosystem with over a billion existing users. Experiences range from world-exploring, building, learning, taking care of pets, and having the ability to evolve and change along with the world and lifestyles we experience.

To date, there are 10.5 million developers on the Roblox platform who create new and exciting experiences in addition to the 27 million existing experiences, gaining instant access to 47.3 million daily active users.

The Roblox platform and economy as of Q3 2021. Source: Roblox investor relations

Roblox provides the tooling and access to a massive economy that most game developers can only dream of. In exchange, it pays out 22% to developers that build on its platform, keeping a whopping 78% to grow the business. Nevertheless, developers are happy to continue with this arrangement, to the benefit of all parties involved.

What is it, really?

Now that we have a high-level overview of Roblox’s offerings and the scale at which it operates, let’s explore more about what Roblox really is and why it warrants a much larger market cap ($65B market cap at the time of writing).

We’ve previously looked at the staying power for very successful games, but given that Roblox is not a game and more a platform on which millions of games and experiences are developed upon, what are more appropriate comparables? Enter content ecosystems.

Youtube, Twitch, Spotify, App Store, Google Play Store. These are platforms that enable users to produce content and gain access to a vast number of viewers/users/customers. In return, the platform takes a significant chunk of the content creator’s revenues on the platform with the implied promise that the platform will grow larger and in turn, provide even more revenue for creators.

Once these platforms gain momentum and dominance, they have a significant flywheel effect that generates massive growth and becomes impossibly difficult for new entrants to compete and displace. By choosing to develop on Roblox, you gain unparalleled access to market opportunities that you otherwise would not have access to, no different than publishing apps on the App Store or videos on Youtube. Likewise, as more and more creators choose to build on Roblox, its value proposition and staying power increase, creating more incentive to build on it.

All of the above platforms are experiencing 20~30% year-over-year growth, with App Store showing revenues of $72.3B in 2020, of which gaming makes up 65.8%, while Google Play Store made $38.6B, Youtube made $22B and Spotify made $8.98B.

Roblox growth and numbers

There’s no doubt that COVID has been a major tailwind for the gaming sector, with Roblox being a significant beneficiary of that boon. That said, despite the reopening of many cities around the world, Roblox has not seen much of a drop in their player numbers despite what many expected, and is continuing to sustain the massive growth it’s shown in the past few years.

Roblox has shown 50~80% growth in each of the past 3 years and projects well over 100% growth this year vs 2020. Roblox continues to progress its Developer Platform Roadmap with significant features such as automatic translations and Talent Hub. With a very active developer community responding and giving feedback to each of these changes, I have no doubt these features will boost playership many-fold globally and create more career opportunities within the Roblox ecosystem, creating additional flywheels for success.

Average booking (spend) per user is a strong $13.49, with 47.3M daily active users, up 31% from Q3 2020. Users spent 11.2B hours engaged on the Roblox platform, up 28% from Q3 2020.

Partnerships

With such an immersive and boundless universe, many of the top brands are seeking out opportunities to build on Roblox to further engage with and connect with its young and budding user base. With endless possibilities to create events and displays not possible through COVID lockdowns, and even beyond the realm of possibility in the real world, Roblox is becoming the key to developing a loyal fanbase and gaining brand recognition for brands that would otherwise struggle to reach this demographic.

Nikeland. Source: Nike

Progress happens gradually, then suddenly. After 16 years, it’s no longer a possibility for all sorts of partnerships to happen on Roblox, it’s a necessity. Brands and companies not getting a piece of the metaverse pie will soon find themselves left behind.

Progress happens gradually, then suddenly

To date, merchandise has been sold on Roblox, with a digital version of the Gucci Dionysus bag being purchased for $4,115, fetching a premium over the price of the physical bag by > 30%. There have been concerts and parties with Lil Nas X and Zara Larsson thanks to a deal with Sony Music. Twenty One Pilots has also hosted an exclusive concert within the virtual world.

At the time of writing, Ralph Lauren has just announced its own experience on Roblox, “Ralph Lauren: The Winter Escape”, an exclusive collection featured within an immersive winter sports world with exclusive digital merchandise available for purchase. Users can ice skate with friends, customize their own hot chocolate, and decorate the Holiday Tree.

Ralph Lauren: The Winter Escape. Source: Roblox

As more brands, artists, and offerings make their way into the massively expansive and unrivaled universe within Roblox, it will be a major miss for others not taking part. I fully expect the partnerships and rich experiences in this space to rapidly expand and displace investments and offerings from their real-world equivalents.

Brands and artists that have taken part in expanding the Roblox universe so far have included: Lil Nas X, Zara Larsson, Twenty One Pilots, KSI, Poppy, Hyundai: Hyundai Mobility Adventure, Vans: Vans World skatepark, Gucci: Gucci Garden, Nike: Nikeland, and now Ralph Lauren: The Winter Escape.

Growing challenges

User interface polish

Subjectively speaking, the UI is very unpolished and leaves quite a bit to be desired. Upon speaking with older gamers, it’s clear Roblox is a far cry from the AAA titles most older audiences are accustomed to playing. However, it’s this intentional and *deliberate* lack of polish and “blocky” aesthetic that has huge acclaim with its younger audience. More importantly, Roblox has managed its success *in spite of* these areas and it’s further proof of its market fit.

As Roblox continues to expand to older and more mature audiences, I fully expect the company to continue to make inroads here, as they are already making significant progress in this area.

Downtime

Towards the end of October, Roblox experienced a lengthy 70 hours of downtime, that’s a significant outage for any internet service at this scale. Management has addressed this in its Q3 Shareholder letter and Investor Day, along with updates on Twitter and the company blog. Additionally, using historical data, they’ve come up with and communicated an estimate for the lost bookings of about ~$31M, and have proactively compensated developers for their cut of this lost revenue, $6.8M.

As of now there is no reason to expect similar outages to show up in the future and this seems to be a one-off situation, but only time will tell.

Education

Bit of a misnomer here as this is more of a massive opportunity that Roblox is well-equipped for, but it will be a challenge nonetheless. Roblox is a platform that is capable of offering unparalleled learning experiences to facilitate and improve our dated learning paradigms like never before. Roblox has already clearly stated they are making inroads here and with China’s recent tightening of gameplay restrictions in hopes to bolster a more productive and entrepreneurial youth, this will be a key differentiator to see how much market share Roblox can capture in China’s massive population.

How this is ultimately executed and marketed will no doubt be key in how successful Roblox is in this regard, but the opportunities are endless and the TAM (total addressable market) for global education is massive.

Personal position and outlook

Needless to say, I see Roblox as an underappreciated opportunity despite its current valuation of ~$70B. Roblox has the potential to be a $1T company and be a leader in the metaverse so long as it is able to continue to execute and create shared wins for those in its creator economy, its partnerships, and users. This is a company I will continue to look to accumulate a larger position in so long as management continues to deliver and the chart attests to its strength.

Not mentioned in this post (due to length) were some of the strategic acquisitions Roblox made recently [4]Guilded, Sway, Bash Video, etc, which send a very clear and holistic signal of where the roadmap is headed and how Roblox is going further to produce an even richer and fuller immersive experience in the metaverse.

Green circle denote personal buys on $RBLX

In the spirit of full disclosure, I hold positions in Roblox ($RBLX) worth 8 figures at the green circles indicated in the chart and will progressively increase my stake and take profit as I see fit. That said, I am not a financial advisor, any statements and opinions expressed in this post or on this site are not to be taken as investment advice but merely the sharing of my own personal journey. As always, see the disclaimer before taking any action.

References[+]

How often have you heard a phrase about passive index investing like “investing in the SPY over the last 20 would have outperformed the vast majority of actively managed mutual funds”? I can imagine this does not come as a surprise to anybody who has been exposed to media in the past decade. However, as with anything, it’s important to delve deeper into the arguments of both sides to decide for yourself whether this is advice worth following for you.

First, let’s quickly evaluate the sources of said investing advice. Friends and family aside, this advice often hails from investing channels like CNBC, Bloomberg, etc while investment advisors at banks will quickly refute those claims by touting the many additional “benefits” you can get from investing with them, and emphasize risk mitigation strategies to justify the exorbitant MERs levied as taxes on your hard-earned life savings.

Incentives

Generally, the advice doled out happens to align with the incentives of said advice-giver. Directly attributable to malice or not, seldom does this advice align with our personal needs and best interests. It is to the bank’s benefit that you let them manage your portfolio and keep it there, so they can rake in commissions, MERs, have your money on their books for them to further invest and benefit without returning gains to you, etc.

It is to the benefit of hedge funds, robo-advisors, and other key players in the market to encourage you to take part in passive index investing for similar reasons and to propagate the idea that you are not experienced nor knowledgeable enough to take part in this glorious science of investing.

Being trained to deposit money and buy up passive indices paycheque by paycheque regardless of the price is how we are trained to be “the greater fool”. Does it really make sense that we spend some 20 odd years pursuing an education so that we may begin a career which we work for some 40~50 years only to hand it all to the market to decide our fate as some sort of great arbiter?

A more well informed approach

This generally leads most “enlightened investors” to pursue a lazy portfolio construction such as the popular Bogleheads Three-fund portfolio which is well studied and has brought many investors plenty of success with very minimal fees. And as a hands-off investor, I’d look no further. However, as with anything in life, there are nuances to everything, and if you’re someone like me who is irked by the thought of putting your life savings solely in the hands of fate, or worse yet, a glorified salesperson, what options are there for us?

Passive investing is a very quick and simple excuse to be irresponsibly responsible with your wealth. It’s a luxury that those more fortunate can afford, but to those of us starting from zero, it can be an incredibly crucial mistake that sets us back many years, or worse, prevents us from reaching our goals.

Simply being invested in the S&P 500 for the past 89 years would have put you in a 5%+ drawdown of about 43.6 of those 89 years. As often repeated to justify the “buy and hold” of passive index investing, if you grew weary or needed cash during any of those drawdowns, you’d underperform someone else simply buying and holding for those 89 years.

This, however, is a false dichotomy and incredibly harmful — misleading at best. The assumption is that we as “dumb money” are too stupid to educate ourselves a bit to better maneuver around some of these crushing blows.

The true cost of passive index investing

If you entered the market around Apr 1999, buying and holding S&P 500 would have taken you through 2 drawdowns of 50%+, once in the dot-com crash, and a faster, more traumatizing 2008 crash. The act of “averaging in” or “averaging down” across this period would smooth out these swings a bit, but for the most part, you’d be at a loss (and at best, breakeven) for a total of 14 years.

Chart of S&P 500 highlighting performance from Apr 1999 to Apr 2013

Think about 14 years of human life. How much goes on during this time? In the last 14 years, how many jobs did you change? How many friends did you gain and lose? How about a career change? Children? Did you endure the horrible loss of a loved one or a pet? While 14 years may have felt like a flash, it’s a considerably long time and a good chunk of the average human lifespan, 19.2% to be exact (using 72.9 years).

Is it reasonable to expect someone to be able to hold through these 50% drawdowns that feel like they’ll never recover while they go through all these life events and possibly need money for medical emergencies, weddings, a house, a car? I think not.

In hindsight, “holding through a 50% drawdown” is infinitely easier than it is in practice. Any person who has given a genuine try at investing will attest that in the moment, even a 30% drawdown can feel insurmountable and take a major toll on your confidence, perhaps even your job and loved ones.

Simply put, much like getting a degree and preparing for education, investing is a skill that can be learned and worked on, so long as we are willing. Given the effort most put just to start their careers, and the return most will reap from those same careers, learning to better invest and manage our hard-earned dollars accumulated throughout our careers is arguably more important and warrants more attention than simply buy and hold passive index investing.