I would tell you, however, that this is not only an impossibility – no one can be right every time – but that it is probably not desirable for such a scenario to come true.
I discuss the concept of “magnitude of rectitude” in my book Avantage Bourse. The example I use is that of the COTE 100 Financial Bulletin, which is based on a real portfolio that has existed since 1988. In 2013, we published a report for subscribers entitled, “25 years already”. In it, we carried out a complete review of the first 25 years of this real portfolio, its good moves, and its not so-good moves. In particular, we listed all the buy recommendations that we made to subscribers in the approximately 300 monthly issues of the Bulletin.
Although this example is somewhat dated, its conclusions are, in my opinion, still valid. Over 25 years, on average, out of all the stocks recommended and purchased, about 30% have given us excellent returns, including a few big winners, 20% have been big losers that caused us to lose a lot of money, 25% were stocks that gave us modest gains and 25% were simply a waste of time.
“If you find this assessment to be disappointing, please note that it still enabled the COTE 100 Financial Bulletin portfolio to achieve an annual compound real return (without management fees) of 10.8% between 1988 and 2012 (25 years).”
This means that we were right a little more than half the time: 30% of the stocks gave us excellent returns and 25% gave us modest returns. The rest (45%) lost.
I draw two conclusions from these statistics.
On the one hand, when you have a winning stock in your portfolio, hold on to it for as long as possible. Don’t sell it just because it gave you an arbitrary 50% or 100% return.
On the other hand, when you are convinced that a stock is an exceptional buying opportunity that meets all your selection criteria, buy a good amount. It takes as much work to analyze a security that will occupy 0.5% of your portfolio as a security that will weigh 5% of the same portfolio. However, if you are right, the stock that represents 5% of your portfolio at the start could make you considerably richer than the one that was worth only 0.5%.
The concept of magnitude of rectitude also makes me think that, from an environmental perspective, each of us should put our efforts where the potential return is greatest, where our efforts will have the greatest positive impact (“bang for the buck”) on the environment. On this subject, I just finished reading the book “Not the End of the Word”, by Hannah Ritchie (which I rated ★★★★★). According to the author, the actions of a consumer that would have the most positive impact on our planet would be, among others, the purchase of an electric car (or, even better, travelling by bike or walking) and a significant reduction of his beef consumption. There are many other actions we can take that are good for the environment, but she believes these two actions will provide the greatest benefits.
It’s like in the stock market. Often one or two stocks will be big winners and will provide us with the majority of our returns.
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