Why Investing Is Hard.

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Let me tell you how investing works:

Over the last 100 years, the stock market, or more specifically the S&P 500, has averaged 9% returns annually. If this century-old trend continues, and you invest $10,000 each year over the next 40 years, you will have $3,692,919 upon retirement. Want to build more wealth faster? Invest more money earlier.

Sure, there will be bull markets, bear markets, ups, downs, and all sorts of fluctuations, but on a long enough time horizon, you will (probably) be alright.

And just like that, I have rendered the trillion-dollar industry of financial advising, hedge funds, and market research useless.

Investing is easy.

Or at least, it should be.

You understand how markets work. You know, intuitively, that stock picking is a fool's errand. Warren Buffett himself recommended that the average investor should simply buy index funds. Would you really want to challenge the Oracle of Omaha? So you kick back, divert $1,000 per month to your portfolio, and let compounding work its magic.

You don't lose a second of sleep thinking about the markets, because you adopted a long-term mindset. But one day, everything changes.

It's Monday morning. You woke up 20 minutes earlier than normal to hit Chickfila before work, and you settle in to your desk at 8:31. As you sip your still-steaming coffee and respond to weekend emails, you overhear a conversation between coworkers.

"Yeah man, AMD? I told you they were going to smash their earnings report. I bought $2,000 worth of call options last week, and just sold them for a $20,000 profit."

"$20,000? That's insane."

"Good for Joey," you think to yourself. "Hopefully he treats himself to a nice dinner."

Then you walk into the conference room for a 9:15 meeting, and that conversation recedes to the back of your mind. Until your commute home.

As you inch down the highway in rush hour traffic, you tune into CNBC's 5:30 radio show. 

"And our stock of the day was AMD! After posting revenue and earnings 15% above consensus, the stock jumped 11% on the day. I'm sure investors are happy with this one..."

You switch channels, alternating from country to rock for the rest of the ride home. As you lay in bed that night, you can't stop thinking about Joey's conversation. "How did he know AMD would do so well?" you wonder. "Joey casually turned $2,000 into $20,000. It can't be that hard, right?" So you grab your laptop, and you Google "call options."

Before you know it, you're obsessed.

"Call options" leads you to put options, then spreads, then other more complex derivative structures like "iron collars" and "butterfly spreads". You log on to Twitter, where you see traders posting their technical analysis of Tesla, Amazon, crude oil futures, and bitcoin. And it seems like many of these normal folks, people just like you, are regularly making hundreds of thousands of dollars.

Still, while you might be envious, you're not dumb. You know the math, you know how rare outperformance in financial markets is, and you tell yourself that many of these traders are just getting lucky.

And then a few weeks later, you overhear Joey in the office again.

"...yeah man, Amazon was poised for a breakout. I scalped it for a quick $3,000."

So on your lunch break, you walk to Joey's table and take a seat.

"I didn't mean to eavesdrop, but I heard you talking about making some money trading Amazon this morning. What's your strategy? I've gotten interested in markets lately myself, and I want to start trading a little bit."

So Joey tells you about his technical analysis and what he looks for before earnings reports. He walks you through his last few trades: Amazon, AMD, Roku, and Tesla, and you see that more often than not, he turns a profit.

"Damn," you think to yourself, "maybe Joey really knows what he's doing."

"So what's your next trade?" you ask him.

"FedEx calls," he says. "Black Friday was insane this year, fuel costs have been low, and they're going to crush Q4 earnings."

So that afternoon, you buy $1,000 in FedEx calls expiring in a month.

Next week, FedEx has its earnings, and just like Joey predicted, they did outperform expectations. Stock up 15%, call options up 400%, and you cash out for $5,000. "This trading thing isn't too hard," you think.

Six months have gone by, and the only thing that you can think about is the market. Your search history consists of earnings dates, TradingView, and your brokerage account. You're in a "markets" group text, and you have joined 7 trading Discord servers. Yeah, your performance at work has been underwhelming over the last few months, but your portfolio is up $50,000. That's five years of contributions in six months, a net positive, all things considered.

Sure, you still *know* that most investors don't outperform the market, but a minority do. And your last six months make a strong case that you belong in the minority.

Another six months pass, and your portfolio has been flat. Yeah, some of your stock picks have been winners. But every winner has been followed by a heavy loss. Your portfolio looks like a heartbeat monitor over the last three months, reverberating back and forth, anchoring to the $100,000 mark.

Objectively, making $100,000 in a year trading is a massive W. But compared to the gains that you were making a few months ago, this three-month-long period of underperformance has you frustrated. Comparisons drive everything, and you are no longer comparing to those 9% market returns. Your new frame of reference is that FedEx trade that 4x'd your investment.

So you start taking on riskier trades. Options with shorter expiration dates. Larger bet sizes. Of course, you tell yourself that you are following a sound strategy, the risk-reward makes sense. Everything is calculated.

We humans have a real knack for rationalizing our actions, don't we?

And one of your trades hits. A $25,000 gain. Finally, that rush from a few months ago is back, and the dopamine is euphoric. So you place another big trade, and another. Before you know it, your portfolio has reached $250,000. A quarter-million dollars.

Your recent performance has bolstered your confidence. Instead of taking a more conservative approach, you double down on the large bets. Tesla's earnings are coming up, and the stock has been consolidating for months. You know they are going to blow through delivery expectations, and Elon Musk is nothing is not a showman. So you buy $50,000 in call options.

A few days later, Musk hops on the call to discuss the company's results. Revenue increased by 60%, Tesla posted its highest profit ever, and the company is firing on all cylinders. Your smile grows wider and wider.

"Let's see how the stock is doing," you tell yourself. You switch tabs to check the stock prices, and you think the screen is glitched. After initially jumping 10%, the stock is now down 2% on the day. And it continues to drop. 3%. 4%. 5%. By the time the market opens, the stock is down 7%, your $50,000 of call options are all-but-worthless, and you are shocked.

"Just a bad beat," you tell yourself.

A few weeks later, you make another $25,000 bet, determined to get back on track. And once again, your prediction proved false. Down $75,000 from your peak in just three weeks. You start to panic a bit. Yeah, you still have $150,000, but your aggressive bets also cost you a year's salary. Of course, you could cash out right now. "But I just need to get back to $200,000," you tell yourself. "It will take a few trades to get right back to where I was."

We all know how this story ends. You try to trade your way back, but it's death by a thousand cuts. By the end of the year, you blow through the remaining $150,000 in an attempt to get back to the top.

Hundreds of hours spent studying the market. Dozens of trades placed. You spent months coasting at work, and you dealt with waves of anxiety as your portfolio bled to zero.

And the end result of your efforts? You underperformed the S&P 500, which was up 12% on the year.

Investing isn't hard because you need a Ph.D. in financial engineering to understand the stock market. Investing isn't hard because you need to study the capital structure of hundreds of corporations to make decisions. Investing isn't hard because you need to actively shift from value to growth to emerging markets to some other sector every few weeks.

Investing isn't hard for any of these reasons.

Investing is hard because the risk-adjusted way to "win" is to index and chill while someone, somewhere, hits the lottery every single day. And you are going to hear about it from your coworkers. You'll read about it on Twitter and Reddit. Those winners will be interviewed by CNBC and MarketWatch and Bloomberg. Every single month you'll read about the GameStop Millionaire, the guy who retired on an all-in Tesla portfolio. The professor who ditched their academia job after their bitcoin holdings appreciated to seven-figures.

And you have to digest that information, accept that someone else "won" the game, and continue to index and chill.

Last year, Charlie Munger said, "The world is not driven by greed. It's driven by envy."

Sure, you *know* that outperformance isn't likely. But when you read a different story about a different market winner every single day, it's damn-near impossible not to grow envious as you think, "Why can't that be me?"

And that's why investing is so hard.

- Jack

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Jack's Picks

• Jack Butcher's post on the value and importance of a strong name is worth a read.

• Nick Maggiulli wrote a good piece covering the SEC crackdown on a group of Twitter stock pumpers.