Wall Street Myth – "Invest Early"

Wall Street tells you to invest as early as possible in its mutual funds or whatever it is trying to sell. Just another myth you are led to believe. Investing early does not always guarantee greater wealth. I will try to show that starting at the age of 20 isn’t all that different compared to starting at 30, 10 years later!. Let’s see why.

Wall Street vs Old School Investing

Wall Street proudly boasts that investing in its mutual funds wil yield approximately 10% return. They “forget” to mention that after taxes, commission and fees, the 10% would probably be lowered to 8% or so. But we’ll stick with the 10% in the example I provide later.

However, investing in an Old School style of waiting patiently for great companies at depressed prices and then wait until it reaches its intrinsic value will bring opportunities that can definitely yield 15% and beyond.

The Super Best Investor Club

Four friends all start with $10,000. They have just graduated from high school. As graduating gifts, they each receive a sum of $10,000 from their relatives and friends.

A few assumptions before I move on.

  • Wall Street return: 10%
  • Old School return: 15%
  • The return could be less than or greater than 10% or 15% but we will consider the boundary case since I just want to show the average results
  • Each person does not deposit anything more than the initial amount
  • Each person invests for 20 years
  • (You can download the different scenario calculations here.)
Investor No. 1

No.1 has always been interested in investing. Now that he has the capital, he places it all into a typical Wall Street hyped mutual fund. He starts at the age of 20. He is considered the benchmark by his friends due to his eagerness and early start.
Return after 20 years: $67,250

Investor No. 2

No.2 is a patient Buffett type investor. He has his money in a money market, which grows at 5%. He sees that friend no.1 has started investing and so he decides to study and wait for opportunities. He waits patiently until a good opportunity pops up and then buys it at excellent prices. He averages 15% return from solid investments.

We assume that no.2 only find opportunities every 2 years. He then holds for 3 years and sells, which by then has reached its intrinsic value. He waits another 2 years, holds for 3 years and so on.

Return after 20 years: $79,047
Return difference vs Investor no.1: + $11,773

Investor No. 3

No.3 is even more Old School than investor 3.
His money grows at 5% in a money market.
He usually finds an opportunity every 3 years, and then holds for 5 years. This pattern continues up to year 16. From years 17-20, his return is an industry average 10%.

Return after 20 years: $79,395
Return difference vs Investor no.1: + $12,100

Investor No. 4

No.4 is a late starter. He ejnoyed his life partying hard during his 20’s.
Throughout his 20’s, he had his money in a money market fund growing at 5% for 10 years. Finally, turning 30 and seeing his friends accumulate wealth, he follows the Old School style and manages 15% return for the next 10 years.

Return after 20 years: $65,898
Return difference vs Friend 1: – $1,377

What Does This Tell You?

If you had started investing when you were 16, I’m sure you will benefit. BUT “investing as early as you can” shouldn’t be the default cliche to splurt out when teaching young people or those that want to start investing.

Friend 4 started 10 years later than friend 1, but he was less by only $1,377 after 10 years. The other two friends were not constantly in the market. They were not constantly ‘investing’.

Rather than chasing mediocre opportunities here and there and everywhere, wait patiently with cash on hand until a great opportunity in a great company appears. Invest in great businesses with logical and objective reasoning and analysis, with a large margin of safety and you will trounce the market.

“Investing is most intelligent, when it is most business-like” – Ben Graham

“Invest early” is a myth. Investing in great businesses at the right price is not.

Download Section

Calculation of different return scenarios.

  • Value Investor

    Instead of staying in Cash, why not be invested in the Market itself?
    Also, less than 1% of the population have the smarts, discipline and emotion to get oldschool returns.
    Also, you have to consider a lot of other things.
    i) If you are invested in the Market, you’ll get a sense of Mr. Market early on your career. This is the biggest advantage of investing early. You can’t just start at Age 30 and suddenly understand Mr. Market. You’ll probably have to wait another 10 years to be an master ‘oldschool’ investor.
    ii) If you start early you can make all your rookie mistakes early which are less expensive
    iii) Late investors are not out there improving their knowledge and waiting for opportunity. Late investors are totally oblivious of any investing.
    If somebody can start at age 30 and get oldschool returns, why can’t he start at age 20 and get oldschool returns?
    In Summary, if you are destined to be an oldschool investor, your losses are even larger if you start late

  • Very good point. There really are too many variables in this example which I should have mentioned, but thanks for bringing that up.
    By cash I meant something very liquid and virtually risk free like a savings account, market fund etc. If you have money in the market and the market tanks, I don’t think you would be able to take it out so easily.
    The concept was that you don’t have to be rushed or panicked into acting or starting an investment. Maybe the title isnt that great..
    Anyhow, Wall Street tells its clients to leave it up to the pros. I say, learn the basics, do a little research a day, or week or month and you can do just as well. No need to jump into anything just because everyone else is or because you are afraid of being left behind. There are literally hundreds of opportunities and you just have to be selective. Otherwise just invest in an index fund.

  • Value Investor

    You are right. The most Value to be found in stocks would exactly be the time when the overall market would be down.
    But, here’s the counter argument to that.
    You invest in individual stocks because you, after careful analysis, have come to the conclusion that the stock will beat the market. So, it always makes sense to move your money from the market to that individual stock.
    Let’s say S&P 500 is below 10% intrinsic value. It is exactly at this stage where you find stocks trading below 50% MOS and you would have no problem making the trade.
    Also, remember, When do you think there would be no value stocks? When the market is going up and up. This is the exact time where you want to be invested in the market.
    Sure the market may go down 20% from the peak at this stage, but you would have enjoyed a good run and certainly would have performed better than Money Market.
    I’m not suggesting timing the market here. Just the nature of parking your money in S&P500 instead of money market naturally aligns with Value Investing(Just like automatic re-balancing sells overvalued assets and buys undervalued assets). After all, on average S&P500 beats Cash holdings
    PS: Cash means Risk-Free-Rate (or a 10 Year T)
    PPS: S&P500 could be an 80-20 Stocks-Bonds mix or 60-20-20 Domestic-International-Bonds mix

  • Personally speaking, I’ve missed out on a lot of opportunities and will definitely miss out on many more. However, sitting on cash allows me to deploy it at any given moment when a lip smacking opportunity comes along.
    The rising market sure makes finding hidden gems tough though. But you also want to make sure you are not buying a company that looks like a gem when the market is rising, but are left with a muddy rock once the tide is out. Much like the irrational behaviour during the dot com bust.
    Everything you say is definitely true. I don’t really believe there is a right or wrong as long as you invest wisely and don’t become a sheep or a fool. The only thing I do believe is that Wall Street does not offer the best or honest advice. They just want your hard earned money.
    I believe investing to be highly customised. Just build a sound foundation and then customise it to suit your lifestyle, character and temperament.
    Had Buffett just continued on with a Graham style on investing, he sure wouldn’t be the man he is now.
    Thanks for the thought provoking comment. Enjoying all of it.

  • Question: How do you calculate the intrinsic value of the S&P 500 as “Value Investor” suggested in his post?

  • Interesting question. I’m not sure of the exact answer, but I would think that since the SP500 is an index of the 500 large cap US companies, if you could calculate the intrinsic value for each company, you could come to an answer… or if we look at it with the Dow side by side, we could probably deduce that both were above their intrinsic values when the Dow was at 14,000 and 11,000 would be a fair to cheap price.

Ready to try Old School Value?