The Road Less Traveled in Investing
Is Venturing Beyond the ETF Mainstream Comfort Zones Worth the Extra Returns?
Hello StockStar!
What if the true cost of ETF-Convenience comes with a blind spot and hidden fees?
If you’re new here, a warm welcome from my side! If not, you know what to do.
I’m Michael and on a mission to make beating the stock market as easy for you as choosing your favorite ice cream.
Last year, I started on a wild journey to write an algorithm that does exactly that.
Read the full story here.
Conversation with a Financial Titan
I had a great chat with my mentor.
Picture him this way:
A dude who’s basically living the dream we all secretly sketch in our mind’s diary before we go to sleep. He’s got the financial freedom, that gleaming Porsche, a home that’s straight out of a magazine, and an enviable zest for life.
Not to forget, the guy’s brain still runs fast like a Ferrari.
As we chatted, he said: In today’s market climate, “Greed-Flation” isn’t just a buzzword – it’s reality. People are hesitant to invest. Whether they’ve recently lost a chunk or hit the jackpot, the search is on for a safe haven to stash that cash.
Right now, fear has the spotlight, and it’s casting long shadows of doubt.
The Debate
Our conversation took a turn when he posed a simple question: “What’s your project about?” My heart answered before my brain could process it, “Invest once, roll that investment annually and let it grow.
I added.
I want to invest without spending endless hours analyzing stocks, because our thoughts are always biased and there is a lot of guesswork in all the "analysis" anyway. I bet I'm not the only one who thinks this way.”
He shot back with, “Why not just go for an ETF?”
The essence of my answer.
My Numbers Talk, and They’re Yelling
Imagine you’ve got 100k burning a hole in your pocket and you’re looking that S&P500 ETF.
If you let it sit and grow at a 10% annual rate, adjusting for a 0.2% TER (that’s the “Total Expense Ratio” you have to pay each year), and just let it do its thing for 25 years, you’d get gains amounting to $931,032.63. Add that to your initial amount, and you’re looking at a cool $1,031,032.63 (without the taxman’s cut).
The catch? You’ll be shelling out at least $19,874.82 in fees. In addition? No further transaction fees since it’s a one-time buy-and-sell gig.
Now, let’s shift to my brainchild.
We take that same 100k and feed it with fresh stocks every year for the same 25 years, averaging a 20% return every year. The service? A reasonable $40/month. Let’s even adjust it with a 4% annual uptick because inflation is real. And let’s factor in $30 for each buy/sell. If we spread our bets across 20 stocks each year, the transaction fees would be a total of roughly $26,587.05. Add the stock-picking service fee, and we’re talking $47,856.65 in total outgoings. That’s more, right? Hold on.
The payoff?
An eye-popping total of $9,491,765.01. That’s a whopping $8,460,732.38 more than the ETF route.
Now, think about the annual task of buying and selling those 20 stocks. If it’s an hour out of your 365 days, over 25 years, that’s a total of 25 hours. And if you do the math, you’re basically pocketing an additional hourly rate of $338,429.30 each year. I mean, isn’t that a decent hourly pay check worth a couple clicks?
To quote
:One thing, however, is sure and that is that a focused approach is the foundation of all great fortunes and that nobody ever became a billionaire by indexing.
(BTW read the full article, a wonderful story.)
Perspective Shapes Our Reality
My mentors response to my monologue?
Yes, that’s realistic, Michael. I guess most would still choose convenience.
Not the answer someone might expect.
First the obvious.
Yes, like every other investor with his strategy, I’m biased with my approach.
I’m convinced that data is the key and the less you guess, the better it is for your investment performance.
It still got me thinking.
Why is he saying that?
Let’s zoom out for perspective.
He’s playing in the major leagues. Imagine financial titan to titan.
For him, 8 million is not “a lot” of money.
Half a billion is where his brain wakes up.
His project pipeline is jam-packed with proposals. He’s the gatekeeper for private equity deals, filtering out golden nuggets from the crap.
And there’s me, thinking of the individual, the everyday investor.
Takeaway 1
If convenience is the major factor for you, then ETFs are the right vehicle for you.
If you think your guesses are the way to win, do it.
And if you don’t shy away from a manageable effort to get more in return, then what we are doing here might be your thing.
None of these three approaches is wrong.
Takeaway 2
To sum it up, my mentor's input guided my conclusion.
We are both right. The difference?
Different scales, lead to different perspectives.
Tech Talk
Alright, let’s jump to the tech side of things for a moment.
Parameter optimization has started.
But, (and isn’t there always a ‘but’ in tech and coding?), I noticed the optimization was dragging its feet.
I looked under the hood and found that by default, this AI algorithm is behaving like a sloth, using just 1 core out of the 10 in my CPU!
It’s like driving a 10-cylinder sports car and only using 1 cylinder. So I’m currently restructuring the code to turn on the other 9 cylinders.
Other Refinements
I initially believed that Q1, Q2, Q3, and Q4 were universal. You know, from January to March for Q1, and so on.
However, companies in the corporate world perform their own fiscal dance, making it a world filled with special snowflakes. Some begin their year smack in the middle or whenever they please.
This quirk occasionally led my algorithm to use older data, because it jumped back too far by a quarter. Addressing this will most probably increase the algorithm’s performance.
After all, in the world of investing, fresh data is the name of the game! So we will change that.
On the other hand, it reveils a good thing, because it show’s that the stock pics and performance have been decent, even with “stale” data.
How did I find the bug? Unit tests are the way to go.
Progress:
We are getting there.
Today I got new baseball caps. Nice! I like them.
What do you think? Got a favorite?
Plans:
Finish the parallel Parameter Optimization coding and restart it
Do some last refinements on the current code
Where’s my head:
To quote Rihanna: “Work, work, work, ….”
Tap that heart button just because you can!
See you soon, StockStar!
Michael
P.s.
Other nice nuggets I’ve enjoyed reading.
If you think somebody should read this, be a good human, share it, and make them happy
Disclaimer:
The information in this article is my personal opinion. I’m not a certified investment professional. It is not consulting, nor does it constitute investment recommendations.
I do my research carefully and follow my personal investment strategy.
The stock market is a complex building with its own rules. There are no rules set in stone, like the rules of physics.
Therefore, use the contents of this newsletter at your own risk and do your own research as well. Investing in the stock market can lead to a total loss of the capital invested.
Great perspectives!! thanks for sharing