Who Determines The Value Of Your Investments?
When I was a kid, I remember the local grocery store having a table near the checkout stands filled with paper grocery bags with the words “Grab Bag” written on them.
These bags were filled with miscellaneous “mystery” non-perishable grocery items the store was closing out. Some were marked $1; some were marked $5. You never knew what you would get, and with most of the bags, you got what you paid for, but the grocery store would make sure to include a mystery bag among the group with items worth triple or quadruple the value marked on the bag. It was like gambling, and that was the appeal. The store never had any problems selling out of these Grab Bags.
My mom would often send me on my bike to this store with a specific list and enough money to buy the items she needed for dinner that night. I would often pass this table with the urge to spend the money my mom sent me with on one of these Grab Bags.
Just the prior week, my friend Jeff’s mom got a brand new $20 mixer from one of the $5 bags, and I thought how cool it would be to get my mom a new mixer. But I knew better. I knew that if I bought one of the Grab Bags, I wouldn’t have enough to get every item on my mom’s list. Like the 9 out of 10 people who didn’t get the mixer or some other sweet item, I would have shown up at home with not only something my mom didn’t want but without the things she did need.
To me, the stock market is a little like those Grab Bags. You never know what you’re going to get, and what you do get is determined by someone else – a grocery worker who – depending on the day – gets to decide what comes off the shelf and goes in the bag. With the Grab Bags, you don’t get to determine the outcome of your shopping trip. With a grocery list and with you doing the picking off the shelves, you control the outcome of your shopping trip and what ends up on the dinner table that night.
Smart investors don’t like the Grab Bag approach of the stock market. Too many variables out of their control determine the outcome of their investment. They prefer to be in control because they know exactly their investment objectives and the ingredients required for achieving those objectives.
The stock market is touted as an efficient market. Because of its public nature, theoretically, nobody should have an information advantage over other investors to profit from. However, this doesn’t stop investors from trying to beat the market. Like in the supermarket example, 9 out of 10 people will mostly be disappointed by the results of their portfolios. 1 out of 10 will get lucky, but it won’t be all the time. It will be only once in a while.
In the real world, 1 out of 10 professionals – fund managers and advisors – get lucky and beat the market. One study showed that 9 out of 10 professionals failed to beat the market over ten years. And those are trained professionals who studied at Ivy League schools. For average retail investors, the chances of success are even worse.
You can say it’s irrational for investors to believe they can beat the market. Still, irrational behavior rules the market – enabled by liquidity that allows investors to jump in and out of stock positions instantly and act on the slightest impulse.
Swayed by market drivers as wide-ranging as economic indicators, the news cycle, geopolitical conflict, social media, the internet, talking heads, pandemic, natural disasters, and more, the stock market is a breeding ground for irrational behavior.
The result is extreme volatility from investors acting on irrational impulses with no fundamental rhyme or reason for markets moving in one direction or another.
The past two years have been a master class in investor irrational behavior. Driven by stimulus money, the stock market reached new heights for no underlying economic reason. The S&P 500 was trading nearly double its lifetime Price to Earnings Ratio (P/I Ratio) average at one point. That bubble has since burst as the stock market reels from inflation and recession fears.
Savvy investors don’t put the value of their portfolios in the hands of an irrational investing public. They prefer assets that will help them achieve specific objectives – financial independence and multigenerational wealth through wealth building and capital preservation. That is what they want to be served at their dinner table.
What about the ingredients to serve up that wealth and capital preservation?
The essential ingredients for creating and maintaining wealth are cash flow, appreciation, tangibility, and tax benefits. These ingredients are not found in the Grab Bags of the stock market. Instead, they’re found in the private markets where the wealthy shop. It’s where they can pick and choose off the shelf the exact assets that will help them achieve their goals.
Ask yourself this: Where do you want to invest?
Investments where the value is determined by fear, noise, media, or investments where the demand and value determine the value they bring to the marketplace?
The wealthy don’t like to gamble and leave the outcome of their investments in the hands of others. To the smart investor, it doesn’t matter how market drivers currently manipulate the irrational investing public. By focusing on productive assets with a value determined by real-world demand, they can achieve their goals precisely and not on hopes and dreams.