🧠 A Quick Quiz

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Welcome to Long-Term Mindset, the Wednesday newsletter that helps you invest better.

Today’s Issue Read Time: <3 minutes

  • Lesson: Understand the base rates of stocks losing to the market.
  • Timeless Content: How to get rich.
  • Thread: Stoffel’s Antifragile Portfolio reviewed
  • Resource: Warren Buffett archives
  • And more!

Together with Finchat

I (Feroldi here) am a huge fan of visuals. A good chart can relay information 10x faster than numbers or text alone. That’s why I’ve recently become a power user of Finchat.

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Finchat also allows you to take advantage of cutting-edge AI, drastically speeding up my research process. Finchat is free to try, but the site is so useful that I happily pay for its premium features.

Want to try it? Use this link to sign up and knock 25% off the annual price.

Friends,

Let’s start this week with a little quiz:

Two customers visit a restaurant in the United States. They just came from a yoga class and will soon discuss the previous week’s reading for a book club. They start their meal off with a cup of tea.

Which do you think is more likely?

  • These two customers are vegans
  • These two customers are male

If you’re like most people, you’ll say that these two customers are most likely vegans. We’ve created a picture we don’t normally associate with the typical U.S. male.

But that answer is simply not correct. How do we know?

  • 49.5% of all U.S. citizens are male
  • 4% of U.S. adults are vegan

That means the two customers are 12x more likely to be male than vegan!

There’s a common mistake at play here: the more details we have about something, the more confident we are that we can see the full picture.

The problem: we are completely ignoring base rates – the general prevalence of a given phenomenon across a population.

This can have disastrous effects for investors. The more we learn about a particular company – its CEO, the market it’s attempting to conquer, the products it offers, etc – the more confident we are that our investment will crush the market.

And yet, what’s the base rate for stocks beating the market?

It’s worse than you think: between 2000 and 2020, only 21% of all stocks beat the S&P 500. That means no matter how confident you are in a given company, there’s an ~80% chance it will lose to the market.

This doesn’t mean you shouldn’t invest in the company. It just means you should diversify accordingly. Consider:

  • If you own 3 stocks, there’s a 50% chance one of them will outperform the market.
  • If you own 5 stocks, there’s a 70% chance one of them will outperform the market.
  • If you own 10 stocks, there’s a 90% chance one of them will outperform the market.

The good news is that you only need one or two market-beating investments to build wealth. That’s because the out-performers typically outperform by an order of magnitude. So long as you don’t sell those winners, you’ll be rewarded over the long run.

And as you know, the long run is the only time horizon that matters to us.

Wishing you investing success,

– Brian Feroldi, Brian Stoffel, & Brian Withers

P.S. — We’re hosting a free investing webinar today at 12:00 PM EST! The topic: 10 Metrics Every Investor Must Know. We’ll cover the metrics, show you how to find them, and how to analyze them – fast.

Click here to register instantly! All registered guests will be sent a replay.

One Simple Graphic:

One Piece of Timeless Content:

Mr Money Mustache explains the simple way to get rich.

One Thread:

One Resource:

Are you a Warren Buffet fan? If so, you might want to turn off Netflix this weekend and binge on CNBC’s Warren Buffett Archive. It has:

  • Video of 29 full Berkshire Hathaway annual meetings
  • 140 hours of searchable video with transcripts
  • 520 video clips covering scores of subjects.

One Quote:

More From Us:

📗 If you’ve read Brian Feroldi’s book, he’d love a review.

👨‍🎓 The next cohort of our Advanced Financial Statment Analysis course starts in March! Click here to get on the list to learn more.