Synopsis

In Episode 025, Jared examines why investors with access to the same stock market, the same liquidity, the same volatility, and the same opportunities can end up with dramatically different results.

The stock market is one of the greatest wealth-generating tools ever created. It allows ordinary people to become owners of many of the best businesses in the world with little more than some money, an internet connection, and a few button pushes. But the market is also a powerful wealth-destroying tool when it is used poorly.

The danger comes from the combination of volatility and liquidity. Volatility creates fear, greed, urgency, and the temptation to act. Liquidity gives investors the opportunity to act immediately, often at exactly the wrong time.

Jared illustrates this through three real investor stories. Harry learned to buy strong companies, hold them, and allow time and compounding to work. Rodney constantly searched for an edge, tried to time the market, and interfered with his advisor’s decisions, delaying the retirement he wanted. Mike and Kim repeatedly bought after markets had risen and sold after they had fallen, turning a $30 million fortune into roughly $4 million.

The difference between those who thrive and those who dive is often not intelligence, access, or opportunity. It is behavior.

Detailed Sequential Outline

I. Five Types of Stock Market Investors

(0:33) Listener Questions: Jared again asks listeners to submit questions for a future episode and admits that he forgot to explain how to do it the first time. The contact information is in the show notes, and listeners are expected to be resourceful enough to find it. He jokes that “figure it the heck out” may become his answer to every future how-to question.
(1:23) The Active Trader and Panic Investor: Jared introduces five common investor personalities. The active trader is always looking for an edge and is never far from the next trendy investment. The panic buyer and panic seller moves between fear and greed, wanting to buy when prices rise and sell when they fall.
(2:14) The Overanalyzer and Set-It-and-Forget-It Investor: The overanalyzer reads every report and follows every company but struggles to make a decision. The set-it-and-forget-it investor contributes money, checks occasionally, forgets the password, and accidentally discovers a highly effective long-term strategy.
(3:04) The Buy-and-Hold Fundamental Investor: This investor studies the business, makes a decision, pays attention, and mostly allows the investment to play out. Jared sarcastically presents the list as though traders are the best and patient business owners are the worst, before clarifying that the list runs from worst to best.
(4:13) Forgetting May Be an Advantage: Investors who forget about their accounts may sometimes outperform attentive investors because they are less tempted to interfere. All five investor types have access to the same market, liquidity, volatility, and opportunities, but their behavior produces very different outcomes.

II. Why the Stock Market Is Such a Powerful Tool

(5:11) Connecting the Previous Episodes: The discussion builds on the recent episodes about inertia, defaults, rebalancing, and liquidity. In life, the largest returns often require intentional commitment and some degree of illiquidity. People have to lock in, put down roots, and give up certain options.
(6:12) Financial Investing Is Different: With money, the best returns remain available in highly liquid public markets. Investors do not have to lock their money away for decades in an inaccessible asset to participate in the growth of excellent businesses.
(6:47) Easy Access to Business Ownership: With some cash, an internet connection, and a few button pushes, almost anyone can own shares in many of the greatest businesses in the world. Becoming an owner of these companies is often much easier than becoming one of their employees.
(7:44) Companies Work for Their Owners: Ideally, a company creates undeniable value for customers, which then creates value for shareholders. Everyone from the CEO to the newest employee is working to make the business stronger and more valuable for its owners.
(8:14) A Double-Edged Sword: Most people fail to appreciate this opportunity, and many view the market as something dangerous. That concern is not completely wrong. The market can be the greatest wealth-generating tool ever created, but it can also be one of the greatest wealth-destroying tools. Used correctly, it moves investors toward wealth. Used incorrectly, it becomes an amplified casino.

III. Volatility, Liquidity, and the Opportunity to Be Wrong

(9:12) Volatility Is Not Risk: Jared briefly returns to Episode 018 and its central argument that price movement alone is a poor measure of risk. The current discussion sits at the intersection of liquidity and volatility.
(10:41) The Visible Liquidity Premium: Liquid assets often sell for higher prices than similar illiquid assets. Two nearly identical businesses may receive dramatically different valuations if one is publicly traded and easy to sell while the other is privately held and difficult to transact.
(12:08) The Behavioral Cost of Liquidity: The less obvious part of the liquidity premium is that liquidity gives investors the opportunity to do the wrong thing almost instantly.
(12:35) Temptation Plus Opportunity: People often avoid bad decisions because they either lack the desire or lack the opportunity. When both temptation and opportunity are present, people are much more likely to act.
(14:06) The Market Provides Both: Volatility creates fear, greed, urgency, and excitement. Liquidity gives investors the ability to respond to those emotions immediately. This combination drives the three stories that follow.

IV. Harry: The Investor Who Learned to Hold

(15:18) Three Real Stories: Jared introduces three real investor stories, with names and some details changed to preserve privacy.
(16:04) Early Retirement and Growing Wealth: Harry retired in his late 40s after a successful business career. He had a few million dollars when he retired in the 1990s. More than 30 years later, after living well throughout retirement, his net worth had grown to more than $20 million.
(17:00) The Simple Strategy: Harry bought strong companies, measured by earnings, cash flow, and financial stability, and held them. More precisely, he hired an advisor to implement the strategy and remained fully committed to it.
(17:42) Steady Through Market Cycles: Harry did not become overly excited when markets rose or panic when they fell. Major declines were potential buying opportunities rather than reasons to leave the market.
(18:21) Behavior Over Stock Picking: Harry’s success did not primarily come from perfectly identifying every great future company. It came from consistently doing simple and effective things correctly. He was not naturally perfect at this. He had to learn and practice the behavior over time.

V. Rodney: Trying to Shortcut the Path to Retirement

(19:02) Searching for an Edge: Rodney worked in the construction industry and wanted to retire early. Although he had a good financial advisor, he believed that the right newsletters, blogs, experts, or special investments could help him enter and exit the market at the right time.
(19:48) A Backseat Driver: Rodney gave his advisor discretion to manage the portfolio but repeatedly interfered. He disliked selling companies whose prices were rising and disliked buying companies whose prices had fallen.
(20:13) Conflicting Behavior: He viewed rising companies as winners and falling companies as losers. At the same time, when the overall market reached new highs, he wanted to sell and wait for prices to become cheaper. His decisions were contradictory and heavily influenced by short-term price movements and financial media.
(21:30) Worse Results from More Activity: The advisor could either follow Rodney’s demands or end the relationship. His market timing, trend chasing, and frequent tactical moves produced measurably worse returns than comparable clients received.
(22:16) The Goal Moved Farther Away: Rodney wanted better returns because he hated his job and wanted to retire sooner. His efforts had the opposite result. Poorer investment returns delayed his retirement, and the time he spent trying to game the market may also have reduced his effectiveness at work.
(23:04) The Money Is Made on the Hold: Investors can buy, hold, or sell, but the money is not primarily made on the buy or the sell. Paraphrasing Charlie Munger, it is made on the hold—or the wait. The investor must make a sound decision and then allow the investment time to vest.
(24:18) Interrupting Compounding: Finding a reasonable investment is not always the hardest part. The harder part is leaving it alone long enough to work. Rodney’s attempt to shortcut his way out of a job he hated made him more dependent on it.

VI. Mike and Kim: Turning $30 Million into $4 Million

(24:58) Successful but Inexperienced Investors: Mike and Kim built and sold a business for about $30 million in the late 1990s. They were intelligent and successful but knew little about the stock market and initially viewed it as risky.
(26:23) Buying During the Dot-Com Bubble: After watching technology and internet stocks rise at extraordinary rates, they became afraid of missing out. They invested nearly all of their money near the height of the bubble, much of it in highly priced stocks with little revenue, profit, or real business value.
(28:35) Selling After an 80 Percent Decline: When the bubble burst, their portfolio fell by roughly 80 percent. They sold, turning $30 million into approximately $6 million or $7 million. They concluded that the market itself was dangerous and stayed in cash.
(30:17) Repeating the Pattern in 2007: After watching markets and real estate rise for years, they again felt left behind. They reinvested near the market peak in 2007.
(31:08) Selling During the Financial Crisis: When the 2008 crisis arrived, they again sold near the bottom, reducing approximately $7 million to about $3.5 million. They repeated the same lesson: stay away from the market.
(32:07) Missing the Recovery: Mike and Kim remained in cash from 2009 through approximately 2015, missing the market recovery and the gains that followed.
(32:51) The Real Mistake: When they eventually met Jared’s business partner, Jason, he explained that their largest mistake was not simply buying at bad times. It was repeatedly failing to remain invested. Even after buying at the dot-com peak, they would eventually have recovered if they had simply stayed put.

VII. Seven Years of Better Behavior

(33:42) Agreeing to Stay Invested: Before accepting Mike and Kim as clients, Jason made clear that they would need to listen, tolerate volatility, and remain invested. Their portfolio needed to grow because it had to support their spending and eventual retirement.
(34:31) The Plan Begins Working: After extensive education and reassurance, the firm began managing the portfolio. Mike and Kim remained nervous, but for years they stayed invested. Their portfolio grew from roughly $3 million to $4 million and then $5 million while also funding substantial withdrawals.
(36:02) Surviving the 2020 Decline: During the rapid pandemic selloff, they again wanted to sell. Jared and Jason strongly advised against it, and the couple listened. For the first time, they stayed invested through a major decline and participated in the recovery.
(37:15) Breaking During the 2022 Downturn: The longer decline in 2022 was harder for them to tolerate. After their portfolio fell from more than $5 million to around $4 million, they repeatedly demanded that everything be sold.
(37:55) Ending the Relationship: Jared and Jason told them that if they insisted on selling, the advisory relationship would have to end. They believed so strongly that selling was the wrong decision that they could not remain responsible for the portfolio afterward.
(38:16) Locking in the Loss Again: Mike and Kim acknowledged that the advice was probably correct but insisted that they could not tolerate further losses. They sold and missed the recovery that followed.

VIII. What Doing Nothing Would Have Produced

(38:44) The Path from $30 Million to $4 Million: Mike and Kim did not lose their fortune through extravagant spending, options, casino gambling, or one disastrous company. They repeatedly did the wrong thing at the wrong time because volatility tempted them and liquidity allowed them to act.
(39:29) A Reliable Bottom Indicator: Jared jokes that Mike and Kim used to be his best market-bottom signal. When they called demanding that everything be sold, the market was usually near its low point. The real disappointment is that he and Jason were ultimately unable to help them make the right decision.
(39:56) Three Alternate Outcomes: Had they invested at the dot-com peak and simply stayed invested, Jared estimates they could now be worth more than $100 million. Had they stayed invested from the 2007 peak, they could be worth more than $30 million. Had they simply remained invested in 2022, they might now have approximately $8 million instead of $4 million or less.

IX. Blind Spots and the Similarity Between the Three Stories

(41:01) People Rarely Recognize Themselves: Jared doubts that Rodney, Mike, or Kim would recognize themselves in these stories. Most people can easily identify bad behavior when it is described as someone else’s but believe that their own circumstances make them an exception.
(42:12) Blind Spots: Jared has seen people agree that certain behavior is unacceptable until they realize he is describing them. There is some version of Rodney, Mike, and Kim inside nearly everyone.
(42:49) Harry Was Not Always Harry: Harry began retirement with some of Rodney’s tendencies. He searched for special opportunities, chased fads, and struggled to be patient. He eventually became tired of that approach, delegated the day-to-day management, accepted a sound strategy, and learned to manage his temptations.
(44:01) Rodney Is Closer to Mike and Kim Than He Thinks: Rodney is motivated largely by avoidance. He does not want to keep working, miss special returns, or continue living his current life. That mindset places him one major downturn away from making the same panic-driven decisions as Mike and Kim.

X. Same Market, Different Lives

(44:39) Better Results Through Less Action: Rodney, Mike, and Kim would have been better off doing less. Once invested, doing nothing would have prevented them from acting on the temptations created by volatility and the opportunities provided by liquidity.
(44:56) Behavior Determines the Outcome: Same market. Same liquidity. Same volatility. Same opportunity. Different behavior produced very different financial outcomes and very different lives.
(45:14) Next Episode: The next discussion will examine the psychology, behavior, and temptations that cause investors to act at exactly the wrong time.

025: Those Who Thrive vs. Those Who Dive: Three Investor Stories