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Hard Truths For Investors to Wrap Their Heads Around

By Morgan Housel - Feb 25, 2016 at 1:08PM

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It's so hard to believe.

Investing is difficult because so much of what's important is just hard to wrap your head around. 

It's hard to believe that $65.7 billion of Warren Buffett's $66 billion net worth came after his 50th birthday. But it did. Compound interest blows people's minds. As Albert Bartlett put it, "The greatest shortcoming of the human race is our inability to understand the exponential function."

It's hard to believe that corporations bought $1.5 trillion of their own stock over the last three years while net inflows into mutual funds and ETF stock funds were less than $500 billion. When we talk about "investors" we think of people investing their own money, but the overwhelming driver of stock purchases are companies themselves.

It's hard to believe that you can be wrong more than half the time and still make a fortune. It's easy to criticize high-profile hedge fund managers when some of their picks crash. But being wrong is part of the process, and doesn't preclude strong returns. Peter Lynch said, "If you're terrific in this business, you're right six times out of 10." In any portfolio, whether indexed or active, the majority of gains will likely come from a small minority of stocks. George Soros, who has a terrible batting average but can hit it out of the park, said: "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."

It's hard to believe that the whole concept of retirement regardless of socioeconomic class is only about a generation oldA lot of the reason most people aren't good at investing is because the idea that you save and invest for yourself in order to fund a third of your life without a paycheck is so new and untested that most people – from savers to regulators to investing companies -- are just trying to figure out what works.

It's hard to believe that during a period when the market went up 277-fold, it was below its all-time high on 93% of days, 10%-20% below its high on 22% of days, and 20% or more below its high on a fifth of days. On your way to making lots of money you spend most of the time losing lots of money.

It's hard to believe that stocks can rise or fall 30% or more with hardly any change to their business fundamentals. Robert Shiller once showed the difference between how the S&P 500 performed and how it should have rationally performed with hindsight knowledge of actual dividends. It's staggering (solid line is actual performance, dashed is rational performance):

It's hard to believe that over the last 100 years the S&P 500 rose 273-fold, but adjusted for dividends it rose 18,520-fold. Never has so little attention been paid to a portion of investment returns that matters so much.

It's hard to believe that we have a half century of good economic data, which seems like a lot, but during that time we've only had nine recessions, which is such a small sample size that we really don't know much about recessions.

It's hard to believe that you can have 30 years of investing experience and never have lived through a sustained period of rising interest rates. It's equally hard to believe that in a world where markets are always changing, having experience with certain events doesn't necessarily make you a better investor.

It's hard to believe that with historic average market returns, a 1% management fee will reduce your account balance by almost 40% over 50 years. Some advisors earn this fee; most don't. In a perfect world CNBC would have a perpetual box on the screen that just said "FEES. WATCH OUT FOR FEES."

It's hard to believe that as teachers around the country were preaching the efficient market hypothesis, a hedge fund manager was busy spending $700 million on a condo and two paintings.

It's hard to believe that you need a license to go fishing but can buy triple inverse ETFs on your own free will. 

For more:

Things I'm pretty sure about

Why we're terrified of typical

Is today's market more volatile than the past?

The evolution of good investing ideas 

Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.

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