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Why “Investing” is a Bad Word
We’ve all heard it by now…buying and holding stocks is dead. Is it true? Are stocks bad investments?
Well, yes…and no. A bit of clarification is needed here.
In the good old days, stocks were a terrific investment. Were there risks? Sure; but they were small and minimized through the powerful Modern Portfolio Theory, developed in 1957, which combined stocks and bonds into risk-managed portfolios that could be linked to a specific time horizon.
When that technique was paired with the mainstreaming of mutual funds in the 1970s, investment in the stock market by millions of Americans via their retirement plans not only sent huge amounts of new money into the markets, but also democratized stock investing.
“Everyday” average investors could offset the high yield and volatility of stocks with the stability of low yield bonds. Not only did the blend work greatly, but since stocks and bonds moved inversely to one another, Modern Portfolio Theory offered mom and pop investors a great way to earn the money they would need in retirement. There was plenty of money, growth, and value created; the investment business was rockin’.
Everything worked…for a while.
The smell of decay
Everything changed. Banks, hedge funds, mutual fund companies, sovereign wealth funds, and government all got greedy. Smart people found ways to game the system and create massive leverage through creative instrument like derivatives. Huge sums of money hitting individual stocks became able to influence the market. And then of course, along came…Technology.
Technology changed everything…again. It has allowed traders to place millions of trades per second on very small price changes. Add to the ultra-rapid trading technology, new and exotic products like ultra-leveraging from synthetic ETF options and the fundamentals of the stock market no longer seem to apply.
That’s because they don’t.
And that’s why stock investing, that is, buying companies based upon fundamental analytics, can be very hazardous to your retirement fund. Today, there is much more money to be made trading the market than there is investing in the market. I know; Warren Buffet is one of the richest guys in the world and he’s an investor, right?
That’s true; but he’s an old school investor worth billions of dollars. Guess who else is rich? The guy who invented the ‘pet rock’, the guy who invented the 8-track tape cartridge, the guy who thought up the ‘beany babies’ and loads of other people who made money yesterday that wouldn’t work today. Plus, traders today risk way less on each trade than investors do on long term investments. To put it in drinking terms, traders are more akin to taking shots of low quality whisky, while investors drink fine wine slowly. If the wine goes sour, as it has, then it's better to down cheap whisky quickly than drink bad wine slowly.
Besides, unlike Buffet, most investors can’t absorb a 50% hit, or more, and go on with their lives as if nothing happened. But Warren Buffet can and has. But believe me when I tell you that I didn’t always take this point of view. In fact, I come from the school of buy and hold. I was a financial planner for many years. Buying and holding in packaged financial products like mutual funds and variable annuities were my stock-in-trade.
Sure, I moved money around; say out of bond funds after interest rates had cratered; or out of equities when the Dow hit too many new highs too quickly. But overall, the idea of investing is to let the asset gain value over time. I, and many others, viewed equities like real estate; certain to gain and hold value over the long term and provide some income in the meantime. It turns out the stock market was like real estate; more so than we had ever considered…
Too many frauds and failures on Wall Street
The problems for my own sense of professional wellbeing began when too many major companies were proven to be frauds or abusing the system. Companies like Enron, Global Crossing, and of course, Lehman Brothers. Or when Putnam admitted to backdating trades made after hours for its biggest clients. It became apparent to me that fraud, cronyism and hype had too often become the modus operandi of the financial world.
That is not to say that the entire financial system is rigged—that’s a thought for another time and better managed with a distilled confidence under the cover of darkness and pleasant companionship. But it is apparent that, as my friends and colleagues John F. Carter and Hubert Senters have so joyfully pointed out to me on more than one occasion, “fundamental investing today will leave you fundamentally broke tomorrow.” That is why their monthly newsletter, the Independent Wealth Alliance is so popular; they show their readers, many former investors, the way to making money in the market today, independent of any institutional bias. Believe me, in the traditional financial world, there’s a lot of bias…and B.S.
Inveterate and successful traders both, John and Hubert certainly don’t lack an appreciation for fundamental analytics of listed companies, it’s just that, in large measure, they know that those things don’t matter much when it comes to stock performance. As traders, they look at technical indicators that are much more short-term in their duration, but what drive prices up or down much more than the fundamentals. What pushes equity prices today, they say, are less related to fundamentals and much more dependent upon “external forces” such as central bank actions and financial media headlines.
Speed, insight, and risk-management are how money is made in the market today. “Value”, that outdated relic of an idea that you almost never hear spoken of anymore, is no longer a factor when it comes to the stock market. Somehow, that seems quite appropriate for these times.
And those are…The Gorrie Details.