The following is an adaptation of a Starvine Way podcast episode called “100 to 1 in the Stock Market (Part 1)“:
In the realm of investing, the quest for success often seems elusive. However, Thomas Phelps, the author of the lesser-known investment classic “100 to 1 in the Stock Market” published in 1972, sheds light on a timeless approach to long-term investing. In this blog post, we will explore the behavioral aspects discussed in Phelps’ book and their significance in achieving remarkable investment returns. Additionally, we will provide a glimpse into Phelps’ background and the enduring value of his insights, which remain as relevant today as they were when first written.
The Behavioral Aspects of Investing:
Phelps’s key mantra, “the way to wealth is to buy right and hold on,” emphasizes the importance of making informed investment choices and exhibiting unwavering patience. The author highlights that investors often set the bar too low, missing out on substantial gains by prematurely selling their investments for small profits or settling for meager returns on their savings. Phelps warns against being swayed by irrelevant information, comparing investors to boys searching for peanuts in a patch full of ripe melons.
Phelps counters skeptics who argue that the book provides hindsight-based information by pointing out that over the 35-year period he studied, thousands of investors held the 360 stocks highlighted in the book that went on to increase 100-fold in value. However, only a select few possessed the patience required to reap the rewards, as the majority would have exited their positions after modest gains.
Market Timing and Bottom-Up Thinking:
Phelps challenges the notion of market timing as the key to success by sharing a personal anecdote. Despite making a correct market call in 1946, which coincided with a market high, he emphasizes the importance of focusing on selecting the right stocks rather than predicting market movements. Phelps demonstrates that even if one has a strong conviction about market direction, it may be more profitable to identify and invest in fundamentally sound companies.
The Pitfalls of Memory-Based Decision Making:
Phelps cautions against confusing memory with reasoning when making investment decisions. He likens it to shooting where the rabbit was, as investors often act on outdated information and fail to adapt to changing conditions. Phelps candidly reveals his own mistakes, such as buying Southern Railway stock and selling it at $160 for a quick double shortly before the 1929 crash and then rebuying it at $8 after the crash on margin. Within a few months, the stock declined to $2.50 and he was wiped out. Phelps claimed that these experiences cost him millions throughout his investment lifetime, as he was conditioned to risk too little and sell too soon.
The Difficulty of Holding on:
Phelps acknowledges that adopting a buy-and-hold strategy is challenging. He acknowledges the scarcity of formal track records to support the profitability of this approach and notes that the mutual fund industry often favors hyperactivity over patient investing. Brokerage firms, driven by trading commissions, often discourage clients from holding on to their investments for the long term. Phelps shares a personal story in which he lost a multi-million dollar brokerage client because he refused to sell stocks during a perceived market dip, a decision that ultimately benefited the client but cost Phelps the customer’s business.
Conclusion:
Part 1 of our exploration of “100 to 1 in the Stock Market” has delved into the behavioral aspects of successful long-term investing. Thomas Phelps’s insights provide a valuable perspective on the psychology of investing and the significance of buying right and holding on. In Part 2, we will dive into the attributes and strategies necessary for identifying potential big winners before they happen, further unraveling the secrets of long-term investment success.
