I didn’t wake up one day and say, “I’m going to put most of my money in the stock market,” and yet I’ve come across so many people that do. I work closely with people from Inergy, an energy company just off of Hwy 119. Most of the old-timers will tell me that they have lost most of their retirement savings because of the Enron debacle. Enron was their parent company. I thought most of the victims were in Houston, but I see victims here in Bakersfield often. One guy told me he lost 500k in Enron stock. Another person told me he lost 50% of his holdings and his boss lost everything. I couldn’t bring myself to ask how much. A boss who actually works at Elk Hills for Oxy lost 800k, not from Enron but from a tech start-up that went bust. Because of his investment acumen, he is still slated to retire very soon. Considering he is around fifty years old, quiet the accomplishment. A co-worker of mine inherited $250,000 from his grandfather through a trust fund heavily invested in tech only to see the amount reduce to 20k after the tech mania fever came and went. He was able to pull it all out last year. The silver lining from this last story, however, was the fact that his grandfather started out with an initial investment of 10k. With all of this being said, most people will correctly realize that the path to wealth is still through equities(stocks). However, investors must understand that they are owners of businesses, and how viable these businesses are will result in the outcome of their investment. Sounds like such a basic concept, but I fear many people have yet to realize it. Efficient market followers are convinced the markets correctly reflect what the underlining company is worth; so many of them cannot square that philosophy with what is going on in the markets today. Our lives are intertwined with Wall Street. However big, intimidating and casino-like it resembles: The stock market represents us. Thinking along these lines reminded of what a co-worker told me, recently. “Yeah, RJ, I’m putting in 15% of my income in a retirement account, but I don’t know if I’ll have any money at retirement.” First, I congratulated him on such an aggressive plan towards financial independence, but then I asked him why he was so pessimistic. He responded by saying, “because it is all in the stock market.” He is only 30 something years old. Making a statement like that is like saying I don’t know if anybody is going to ever eat, drink, marry, have children , or consume anything again, immediately, for the next 30 years. To assume that he will not have anything in retirement simply because his money is invested in the stock market is completely irrational. Worse, when he sees his account lose 50% during some market turmoil, and this inevitability will happen; he will stop contributing or redeem shares just when his method of dollar-cost-averaging (systematic investment based on time increments) would have worked out well for him. Risks are prophetic everywhere and no where more evident than in investing. But the risks doesn’t lie in the markets but within ourselves. It takes a slightly inhuman soul to continue one’s investment program in the face of such a horrific decline of capital. Moreover, during times of such economic turmoil many must discontinue their program in the face of potential job-losses. During such financial hurricanes, investors could make buys of a lifetime. However, a household’s balance sheet must be rock solid to go against such strong currents. For me, being debt free, having a six month emergency fund, and living well below our means gives me confidence in the face of everyone sounding like Cassandras. I delight in stock market volatility and see it as an opportunity. I am especially comforted when the market goes down because it gives a chance to buy businesses at bargain levels. I never short, and I’m always long. This is the only time in which we can win as investors. People have written off some legendary investors because they have underperformed the market and their fund category. As an investor, we must decide whether their mistakes are temporary or permanent. One thing I can say is that investment advisors do not have to win all the time. Like baseball, all they have to average, in terms of a winning percentage, is below .300 to be deemed a successful investor. I often marvel at how when someone is wrong about one thing, people assume they are wrong about everything. I wouldn’t bet against many of these master investment advisors. In fact, I would put more capital in some of these mutual funds especially now that the masses have in large part exited their funds. Much like our deciding on whether to stick with or depart from a money manager, we pay them to decide whether a company’s earnings are impaired temporarily or permanently. What seems obvious for a layman to understand isn’t really obvious at all. There is an element of ‘bets’ money managers make and it is okay to be wrong just as long as they are right sometimes. Nothing is easy in Wall Street; and it can be argued that nothing is easy in life, but we must accept these challenges and move forward. Charlie Munger, Warren Buffet’s partner and one of my heroes, stopped being a successful lawyer and went on to become a renowned investor because he thought it undignified to have to invoice clients. This is the caliber of talent the investment world has, and I agree that it is difficult to compete with that level of genius, and so an investor would be better served to delegate the task of investing in individual securities to those chosen few. Listen to Wall Street pundits and even some financial advisors, when they start talking about macro-economic events, the trend of the market, modern portfolio theory, the Euro, Greece, and even our own national debt—and make company specific investment decisions based on these factors, I would be skeptical. These things should have little to do with deciding whether or not to invest in a company. In fact, I think it is just a lot of noise. I whole heartedly disagree with the notion that investing is too complicated for people to understand or dangerous for people to delve into. It isn’t hard to learn how to invest or find an investment advisor with an impeccable track record, history and culture. For example, Harris and Associates started out catering to high net-worth individuals and institutions, but realized early on that the mutual funds were the ultimate leveling field for the rich and the working class to have their money managed by top notch advisors. Making things sound more complicated than it really is only discourages people from starting an investment program. At the end of the day, contributing to a fund you understand and are comfortable with is all a person needs to know to get started. Historically the stock market has returned close to 10% per year and that over decades a little bit of money will snowball to financial independence. This is why people have to have exposure to equities and the volatility associated with that asset class. I do agree that individual stock selection should be left to professional investors.
Posted on: Fri, 23 Aug 2013 04:20:34 +0000
Trending Topics
Recently Viewed Topics
© 2015