By: Joey Casolaro, CFP®
During my first year in college, I read my first investment book, "The Intelligent Investor" by Benjamin Graham, widely regarded as one of the greatest stock traders ever. Filled with excitement, I took copious notes, convinced I had stumbled upon the secret to success in the stock market. With this new knowledge, I eagerly deposited $600 into a trading account and made my first trade, purchasing ten shares of Columbia Sportswear Company stock ($COLM) at $56.80 per share.
Why Columbia? One of the fundamental principles I learned from "The Intelligent Investor" was to invest in companies and industries you understand well. As a 19-year-old fond of the Columbia brand and owning a couple of shirts, I naively believed this familiarity equated to a deep understanding of the company.
I obsessively checked my investment account daily for the first six months, anxiously watching the stock price fluctuate. Then, the stock went on a run in October, closing the year with a gain of over 20%. This early success, while thrilling, may have been the worst thing that could have happened. I proceeded to believe I was an intelligent investor and began to buy more individual stocks in companies I thought I understood and would do well.
As you can imagine, reality soon set in. Three years later, my portfolio performance was breaking even while the overall market reached new all-time highs. My hopes of finding success in the stock market came crashing down, leaving me confused and questioning what I did wrong.
It wasn't until the following year, when I came across Burton Malkiel's book, "A Random Walk down Wall Street," that I learned financial markets are broad and profiting from stock mispricing is extremely difficult. This concept, known as the "efficient market hypothesis" (EMH), reshaped my understanding of investing and challenged my previous attempts at stock picking.
Understanding Market Efficiency
The EMH suggests that stock prices reflect all available information at any given moment. This means that:
News about company earnings, economic data, and other factors are almost instantly incorporated into stock prices.
With advanced trading algorithms constantly monitoring and acting on new information, prices adjust faster than most individual investors can react.
The implication? Profiting from stock mispricing is exceptionally challenging, if not nearly impossible, for the average investor.
The Exception to the Rule
While markets are generally efficient, I've observed one potential pocket of inefficiency: periods of panic due to external events. These rare moments of market turmoil can create opportunities for the disciplined investor to buy at discounted prices.
Lessons Learned and Strategy Shift
Reflecting on my journey, I've internalized two crucial lessons:
Randomness in Individual Stocks: Price movements of individual stocks are largely unpredictable, responding to new information in ways that are difficult to anticipate consistently.
The Power of Market Ownership: By investing in broad market funds, I've eliminated the need to worry about the performance of individual companies. As Morgan Housel aptly puts it in "The Psychology of Money," "I understand I am a passive investor and am optimistic that the world's ability to generate real economic growth will accrue to my investments."
My Current Approach
Today, my investment strategy is the same that we recommend to our clients:
Most of my portfolio is invested in funds to capture the market's return (I invest in the same funds our clients own). This approach has allowed me to keep pace with market performance over the long term.
While I still hold a few individual stocks for personal enjoyment, I view these as separate from my core investment strategy. I fully acknowledge the randomness in returns these individual positions can have and do not factor them into my long-term financial planning.
This strategy has simplified my approach to investing and provided peace of mind, as I know that I'm capturing the broad growth of the global economy rather than trying to outsmart an efficient market.
Looking back, I am blessed to have learned my biggest investment lesson while I was young and had very little money at risk. This early stumble has become a valuable insight that now shapes my financial strategy and professional approach. I am grateful to be in a position where I can help others avoid the mistakes I made and guide them toward achieving their financial goals through prudent equity investing. By sharing my experience and the principles of efficient markets, I hope to empower investors to make informed decisions, embrace a long-term perspective, and harness the power of broad market participation to build wealth over time.
Joey Casolaro is a CERTIFIED FINANCIAL PLANNER™ at HIGHLAND Financial Advisors, a Fee-Only fiduciary wealth advisory firm that offers comprehensive financial planning, retirement planning, and investment management. Joey graduated from the University of South Florida with a bachelor’s degree in personal finance and successfully passed the CFP national exam in 2021. Joey enjoys working out, spending time outdoors, and hanging out with family and friends in his free time.