Mark, Run this thought experiment

[Arindam]

“I’ve long said that SALES of good stocks have cost me way more return than BUYS of bad stocks have. That’s because if I buy a bad stock, the most I can lose is 100% of it. But if I sell a good stock (too early), I can lose 200% or 500% or 1000% in some cases. The example I like to use is UNH…”

Mark,

Buy UNH 30 years ago at its closing price on Jan 30, 1996 of 7.73. Sell UNH last Friday, Jan 30, 2026 at its closing price of 286.93 for a pre-tax gain of 3,612%. But on that same, 30 years ago, starting date of Jan 30, 1996 buy 19 other stocks at that same starting price of 7.73 for a total of 146.87, all of which fail and go to zero by year’s end.

Thus, a more realistic gain on UNH has to include the losses from the bets that didn’t work out. So the gain from that basket of 20 stocks bought 30 years ago was 286.93 minus 154.60 divided by 154.60, or just 85.6%. That’s quite a difference.

Now things get even worse. Given that percentages can’t be spent at the grocery store or gas pump, and given that our dear government wants its cut on that profit, and given that inflation will impose its own tax on that gain, let’s see what the true scorecard might be.

Let’s assume a cap-gains rate of 15%. A sales price of 286.93 minus a basis of 7.73 times the 15% tax rate yields a dollars gain of 237.32. So run the percentages again. An after-tax net of 237.32 minus the basket basis of 154.50, divided by the basket cost, gives an underwhelming, after-tax gain of 53.5%

But what is the present day purchasing power of that investment gain? It might seem as if it is 237.32. But what is the present-day purchasing-power of the basis? Here’s where things get controversial. I think our dear government’s report that inflation is running at their targeted 2% is fabricated nonsense. 6% is more like it, and people like John Williams of Shadow Stats put the number even higher.

30 years ago, $154.60 had a purchasing-power of $154.60. But what do those same dollars buy today if the prevailing inflation-rate over the past 30 years was 6%? Their purchasing-power is the reciprocal of the inflation-rate, raised to the power of the holding-period, or in plain English, what used to buy $1 dollar of goods and services 30 years ago now buys just $0.17 cents worth.

So let’s run the percentages one final time. 30 years ago, 154.60 was spent to buy a basket of 20 stocks whose present-day, after-taxes and after-inflation gain is 196.98, or a modest gain of 27.4% and not even 3% percent per year.

For sure, every one of my assumptions and calculations could and should be challenged. But so too must be challenged the original premise that fabulous wealth can be obtained from stumbling onto a few wining stocks and then holding them for years and years, all the while totally ignoring the impact of one’s losing positions and the impact of taxes and inflation.

[Arindam]

Lest anyone think my setting up the thought-experiment with a basket of 20 stocks, only one of which paid off, was unrealistic, consider the results obtained by a similar, but factual experiment run by Bessenbinder (as reported by Kiplingers).

“A study of the performance of more than 64,000 global stocks from January 1990 to December 2020 revealed that the compound returns of 55.2% of U.S. stocks, as well as 57.4% of non-U.S. stocks, underperformed essentially risk-free one-month U.S. Treasury bills. Moreover, the entirety of the $75.7 trillion in net global stock market wealth created over the past 30 years was generated solely by the top-performing 2.4% of stocks.”

My numbers were conservative. So, do this. Instead of having most of a basket of stocks go bust, let them simply underperform what the 4-week T-bill pays, all the while putting the odds of picking an outstanding winner at one in forty, and then run the same tax and inflation numbers on that single winner.

Yes, mattress cash gives one optionality, but it loses purchasing-power over time. Exchanging some of that cash for assets that benefit from inflation helps to preserve purchasing-power or can even increase it. But given that percentages can’t be spent at the grocery store or gas pump, whatever opportunity “losses” one might have suffered aren’t worth fretting about, because yesterday’s market can’t be bought. There is only the hard, right-hand edge of today’s charts and the uncertainties of what the future might bring. Or as we used to say way back in the '60’s, “One nuclear bomb could ruin your whole day.”

Can’t happen? Won’t happened? Given the crazies in charge of the proverbial red button, I wouldn’t be so sure.

So, yeah. I continue to engage with markets and continue to gamble in the equity casinos. But I also know that the percentages game is total, hypothetical nonsense that some very unscrupulous people like to use to sell newsletter subscriptions rather than make an honest living by just trading for their own account.

What really matters, and the best that any would-be investor can do, is to make his or her decisions about what to buy or when to sell on the basis of their best guess at that time about what might be the most prudent thing to do, given their own specific means, needs, goals, skills, opportunities, and obligations. All the rest is up to luck and the markets gods to determine.

[Arindam]

The impact over time of inflation on purchasing-power can be calculated in several ways. The most explicit method and perhaps the most accurate is the brute force method of using a spreadsheet and dragging formulas down columns. But a good enough approximation can be achieved using the power and reciprocal method.