Introduction

“Risk is what is left over. . . after you have thought

of everything.”

– CARL RICHARDS

LET ME TELL you the secret to investing.

There is no secret. Sorry to break it to you, but there is no Holy Grail that guarantees overnight riches in the markets. There’s no confidential stock-picking scheme that will give you all of the upside with none of the downside. If there were an investment strategy that was guaranteed to work all the time it wouldn’t be a secret and everyone would do it.

It has to be this way because risk and reward are attached at the hip. If you want to earn a return on your capital, you must accept risk in some form. One of the few iron laws of investing is there is no free lunch.

The first decade of the 21st century caused many investors to question their previously held beliefs. The stock market had barely recovered from the bursting of the dot-com bubble, which saw the stock market get cut in half from 2000 to 2002, before plunging nearly 60% during the Great Financial Crisis from 2007 to 2009. After a glorious bull market in the 1980s and 1990s, the 2000s were a lost decade of no returns with extraordinary volatility to boot.

That rough patch in the markets spawned a generation of crash-callers and permabears. Everyone wanted to be the new main character in a Michael Lewis sequel to The Big Short. Investors went to a dark place after 2008 with a barrage of predictions about double-dip recessions, hyperinflation, a crash in the dollar and the end of the financial system as we know it.

Thankfully, none of those predictions came true, but being assaulted with

constant crash predictions and warnings about it being a bad time to invest got me thinking.

What would happen if you only purchased stocks at the absolute peak of the market? What if you had the worst luck and only invested at the top of the market before a Titanic-level disaster?

I wrote a piece on my blog, A Wealth of Common Sense, titled “What If You Only Invested at Market Peaks?” to answer this question using historical data. I wrote about a hypothetical retirement saver named Bob who held the unfortunate title of the world’s worst market timer.

This was the premise:

Bob would start saving for retirement at age 22 in the 1970s and retire at age 65. He would start by saving $2,000 a year and increase that amount by $2,000 each subsequent decade (for a total savings of $184,000 in 40+ years). Bob was a nervous investor so he would keep his money in a bank account until he could work up the nerve to invest in the stock market. Every time he bought stocks, he would keep his money invested in the market while his additional savings piled up in his checking account until he mustered up the courage to make another purchase.

Here’s the catch – over his 40+ years of saving and investing, Bob’s only stock market investments occurred just before four of the worst downturns in history:

He invested $6,000 right before the 1973 to 1974 bear market which saw stocks tumble nearly 50%. He invested $46,000 right before the 1987 Black Monday crash which saw stocks crash 20% in a single day and 33% in a week. He invested $68,000 right before the 2000 to 2002 bursting of the dot-com bubble which saw stocks decline 50%. And finally, he invested $64,000 right before the 2007 to 2009 Great Financial Crisis which saw stocks plummet 57%.*

Bob made four of the most ill-timed stock market purchases in history. So how did he do? Bob retired a millionaire – $1.1 million to be exact – at age 65. How is this possible?!

Those ill-timed purchases and subsequent losses were painful to be sure, but the stock market recovered and eventually moved higher. Bob never sold a single share and slowly but surely increased the amount of money he saved over time. He felt the risk up-front and the reward many years later. Bob’s results illustrate the power of compounding, consistency and long-term thinking in the markets. A long time horizon is the ultimate equalizer when investing, even when you’re the worst market timer the world has ever seen.

I published that piece in 2014. It’s far and away the most popular blog post I’ve ever written, with more than a million readers and counting. The benefits of long-term investing have really resonated with readers.

But there are plenty of detractors as well. The most significant counterargument looks something like this:

NOW SHOW JAPAN! Sure this works in the United States but what about places like Japan where the stock market has gone nowhere for multiple decades? Doesn’t your argument fall apart?

This is a fair criticism. Winners write history books, and the U.S. stock market has been the big winner for over a hundred-plus years. In 1900, U.S. stocks made up just 15% of world equity market capitalization. By 2025, the U.S. stock market comprised 65% of world market capitalization.

Indeed, Bob would not have fared as well if he had invested exclusively in Japanese stocks. After topping out in 1989, Japan’s stock market crashed and then went nowhere for three-plus decades. Investing money in Japanese stocks has been an awful investment experience since 1990.

However, “Now show Japan” doesn’t necessarily invalidate an investment philosophy of thinking and acting for the long term. If anything, Japan is a wonderful case study in risk and reward (we will get to this in more detail in Chapters 15 and 16).

First things first – I believe in the power of compounding. I believe simple beats complex, less is more, costs should be low, behavior matters more than spreadsheets, diversification helps manage risk, and markets work over the long run. I don’t try to predict the future, but I find it helpful to analyze the present and calculate probabilities from the past. I believe the long term is the only time frame that matters to investors, but you also have to survive the short term to experience the benefits.

I also believe it’s essential to stress-test your most strongly held views regarding investing, business or anything else in life. This book plays devil’s advocate on the entire premise of long-term investing. I take a wrecking ball to my own investment philosophy to look at the good, the bad and the ugly. Ultimately, I prove the reward is worth the risk, but the two are inextricably linked.

Winston Churchill once said, “Many forms of government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of government except for all those other forms that have been tried from time to time.”

And so it is with investing. Many forms of investing have been tried and will be tried. Long-term investing is not perfect or all-wise. Buy and hold is the worst form of investing, except for all those other investment strategies that have been tried from time to time.

In the climactic scene in the movie 8 Mile, we’re shown the final rap battle between Eminem’s B-Rabbit and his arch nemesis, Papa Doc. I’ve never personally been in a rap battle, but I gather the point is to create some rhymes that denigrate your opponent while doing your best to get the crowd to wave their hands in the air from side to side like they just don’t care.

Instead of taking shots directly at Papa Doc, B-Rabbit flips the script by belittling himself before his counterpart even has the opportunity. His self-deprecation wins over the crowd with lines like, “I know everything he’s ‘bout to say against me. I am a f***ing bum. I do live in a trailer with my mom.”

Then he drops the mic with this finish:

Here, tell these people something they don’t know about me.

The crowd goes wild. Papa Doc is left speechless with no rebuttals. The

rap battle is over.

This book takes a similar approach to long-term investing. I lay out all of the risks from “Now show Japan” to the Great Depression to the lost decades and everything else that can and will go wrong in the markets. Then I provide context around those risks and offer solutions to help you survive the short term so you can thrive in the long term.

Peter Lynch once said, “The real key to making money in stocks is not to get scared out of them.”

We live in a world in which you are bombarded with negativity everywhere you look – social media, the news, politicians, podcasts, alerts on your smartphone and the financial media. It’s the new normal of negativity where pessimism gets the most eyeballs.

I’ve always been a glass-half-full person. I’m optimistic by nature. I believe the future will be better than the past because people wake up every day looking to better their station in life. That’s why we get innovation, growth and prosperity. But I am not naive to the fact that there will always be setbacks along the way. The graph doesn’t always move up and to the right in a straight line.

You are guaranteed to experience recessions, bear markets, financial crises, market crashes, geopolitical conflicts, war, pandemics, natural disasters and Black Swan events you can’t even imagine. Despite all of these nightmarish scenarios I still believe investing over the long term is your best bet.

This book aims to help you better understand the risks involved in investing and give you the ammunition to stick around long enough to earn the rewards. By the end, you will have a better grasp of the biggest risks and how to protect yourself against them.

As Dolly Parton once said, “The way I see it, if you want the rainbow, you gotta put up with the rain.”

Let’s start by looking at some of the worst days, months and years in stock market history.