Understanding Stock Market Returns: Expectations vs. Reality
Written on
Chapter 1: The Illusion of Quick Wealth
Every morning, I sift through my emails, and since the onset of the pandemic, I've noticed a surge of "innovative" traders offering their investment insights.
Do you wish to amass wealth rapidly? Naturally, that’s a common aspiration. Who wouldn’t want a sudden influx of cash to secure their future? Many readers likely share similar ambitions, as money is often perceived as a significant problem-solver. While it’s true that wealth doesn’t guarantee happiness, it can certainly make life feel more manageable.
However, let’s return to the main topic at hand. Recently, I’ve been bombarded with emails claiming, “How to achieve 300% returns in the crypto market in just two weeks.” Sounds appealing, right? Investing $10,000 and receiving $40,000 back within a fortnight? Count me in! The $499 fee pales in comparison to the anticipated returns, as it’s merely a small investment towards a much larger profit.
When you encounter such emails, it’s best to delete them without hesitation.
Here’s the rationale: Warren Buffett—an unparalleled investor with decades of experience. Alongside Charlie Munger, Buffett’s wisdom has guided countless novice investors like myself.
I first heard of Warren Buffett back in the 1980s, and it was remarkable to see his influence reach even a small town in rural Austria pre-internet. His investment strategy is straightforward:
- Invest in robust companies with a promising growth outlook spanning one to two decades.
- Reap rewards through dividends, value appreciation, and share buybacks.
Buffett’s principles have proven effective over many years. So, what kind of returns can one expect? Approximately 20% annually—no more, no less.
The S&P 500
What could these seasoned investors possibly know about today’s fast-paced world? This sentiment might be echoed by the younger Bitcoin enthusiasts.
But where can we find a modern benchmark? To me, the S&P 500 serves as an excellent indicator. This index represents the 500 most powerful companies in the United States. Its annual adjustments reflect the current state of the US economy, still the leader on the global stage. If that doesn’t encapsulate productivity and strength, then what does?
So, what’s the average return for the S&P 500? Roughly 8-10% per year.
Chamath Palihapitiya
Sure, Bitcoin has outperformed both Berkshire Hathaway and the S&P 500. And every novice investor can boast about achieving better returns in mere days than Buffett could in a lifetime—20%, 30%, 50%, even 10,000% in record time.
Let’s not forget the legendary Bitcoin investment when you could buy two pizzas for 10,000 BTC. But what about other human-managed investment vehicles?
Fortunately, there are astute private equity investors who candidly share their performance. Chamath Palihapitiya is among them. A venture capitalist since 2011, he annually publishes a letter to shareholders, showcasing the unfiltered performance of his funds, boasting a gross IRR of around 36% annually, translating to a likely 20-30% return for his limited partners. His track record is notably shorter than Buffett’s or the S&P 500’s.
Cathie Wood's Ark Fund
During the pandemic, Cathie Wood emerged as a prominent figure in the investment world. Her Ark Innovation Fund focuses on groundbreaking technologies she believes will shape the future. In 2020, her fund saw returns exceeding 150%. However, as the saying goes, everything eventually reverts to the mean.
Deepak Chopra aptly stated, “What goes up must come down.” When I review the performance of Ark Innovations, I find it averages around 19.05% since its inception in 2015.
My Personal Journey
Since childhood, I’ve had a passion for investing. Back in the 1980s, platforms like Robinhood didn’t exist, and obtaining a brokerage account was challenging. As a result, I engaged in games and later began investing in funds akin to today’s ETFs. One such fund, Select Europe, returned about 18.9% in total since 1999—less than 1% annually.
In 2010, I resolved to outperform the funds and transitioned to active trading. After experimenting with various strategies, I discovered my comfort lay in investing in companies I believe in, alongside implementing trend-following strategies. Depending on the market cycle, I’ve achieved annualized returns ranging from 5% to 16%. You can track my successes and failures on Wikifolio.
While my returns are better than the 1% I previously earned—and occasionally exceed the S&P 500—my performance still lags behind luminaries like Cathie Wood, Chamath Palihapitiya, and Warren Buffett.
Conclusion: What Can We Learn?
The top investors and ETFs consistently deliver average returns between 8% to 30%. They boast solid long-term track records, providing thorough insights into their strategies and sharing both successes and failures. Most have records spanning over 12 years, with some extending beyond 50 or even 100 years.
Yet, the anonymous sender of that enticing "webinar-email" promising rapid wealth claims to have all the answers. When faced with anyone asserting they know the secret to achieving over 100% returns annually, be sure to ask numerous questions before committing any funds.
About the Author:
I am passionate about developing global businesses that contribute positively to society based on scientific principles. Through my writing, I share insights drawn from my daily experiences and business interactions. I firmly believe that discussing both successes and failures enriches society. My articles often include links to external resources for deeper insights, some of which may be affiliate links, like those to Amazon.
Feel free to connect with me on LinkedIn and Twitter!
Are you a new reader on Medium? Consider becoming a member to support writers.
Chapter 2: Examining Stock Market Returns
Explore the question: Do stocks really return an average of 10%? This video dives into the historical performance of the stock market and what investors can realistically expect.
In this video, we break down why the average returns of the stock market may not be what you think, highlighting key factors that influence investment outcomes.