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That's Not Investing...That's Speculating

That's Not Investing...That's Speculating

July 06, 2017

One thing the human animal is notoriously bad at is learning from our own history.  I think this is because we are emotional creatures, not logical ones.  If we were truly logical beings, then we could analyze a data set and then only repeat good outcomes.  This wouldn’t guarantee success in every instance, but it would give us the best chance at re-creating successes.

In the world of investing, human beings are just not equipped to make good decisions.  There are exceptions to this rule but those exceptions simply prove the rule to be true.  Look, no one wants to be told they don’t make good decisions…I get that.  But when we collectively make the same mistakes again and again then we need to call it what it is…bad decision making ability.

And before I get too far into this discussion I want you all to know that I am not immune from this when it comes to investing.  I am a human and I have the same fear and greed drive bred into me.  The big difference in me and most of you is that I have a coach who helps me make my investing decisions.  Even after 20 years as a financial advisor I don’t make my own investing decisions…not because I don’t know HOW.  It’s because I am emotional about my money.  But my coach isn’t emotional about my money so I follow his advice.  This is the role I play in lives of my clients.  I’m their behavioral coach.  I am not emotional about their money.  I can detach from it and help them make a good decision, unlike my ability to detach from my own money.

We are all in this together and no robot advisor or “guru” on the internet can save you from poor behavior.

Let’s look specifically at two examples of trying to predict the future as it relates to individual stocks.  These two examples will provide you with the context to understand (I hope) that no matter how much you think you know or how much you think your co-worker, brother in law, or stock broker knows…. the truth is no one can predict the future of individual stocks. 

Example 1: The Failure of Kodak

Kodak was founded in 1880 and at one point accounted for 90% all film sales.  In 1996 Kodak had more than 145,000 employees and over $16 Billion in revenue.  In 1977 Kodak’s stock price was a lofty $96 per share.  Who in the world could have predicted that a company with a 100-year-old history and 90% market share and it’s very own Americana tag line (“a Kodak moment”) would collapse in relatively short order? 

Just 8 years after its height in revenue, Kodak was DELISTED from the Dow Jones average.  Kodak had spent 74 consecutive years on the Dow and then…it was gone.  That was in 2004.  In 2012, it was delisted from the S&P 500.  By 2015 Kodak had only about 6,000 employees and revenue was a relatively paltry $1.7 Billion.

What happened?  In a word: technology.  While Kodak tried to figure out how to deal with industry disruption, companies like Apple and Facebook ate its lunch. 

Think for a moment of all those corporate executives who sat on their company options.  They just couldn’t bring themselves to sell that stock and I imagine there were many who rode that stock from $90 per share all the way down to .35 cents per share. Why would they do this?  Here are some reasons:

  1. They didn’t want to pay the tax on the gains they had accumulated over the years
  2. They wouldn’t sell the stock when it hit $80, $70, $50, etc. because they kept waiting for the stock to go back to $96 (what it was “worth”).
  3. They believed they had internal knowledge that the market didn’t about the company and were certain it would continue to climb…just like it had for over 100 years.

But all those reasons ignore the greatest contribution to company value of all: the market decides the winners and losers and the market is made up of billions of people around the planet.

Who could have predicted Kodak’s collapse?  No one.  How do I know this?  Because people aren’t just bad at predicting collapse…they are equally as bad at predicting success.  Want an Example?  Ok.

Example 2: The Success of Apple

In 1985 Steve Jobs was fired from Apple.  At the time, it was a signal to most investors that the company had no future.  They were a once-great innovator that had simply run its course.  A little more than 30 years later and Apple is the most valuable company on the planet and has a market cap of about a half a TRILLION dollars. 

How the heck did that happen?  Why didn’t Kodak have that same comeback story?  Well since I can’t predict the future, I probably don’t know the answer to my own question, but here is my best guess: Apple paid attention to its competition and to its industry’s disruption.  Kodak didn’t.  Simple, right?  Wrong.  Remember, there are billions of people in the market and they all get a vote on the success or failure of companies.

The Big Takeaway

Here is the lesson in Kodak and Apple: you don’t know the future.  Neither does a CEO of a company or a co-worker, friend, stock broker, or even ME!  No one knows what companies will win and which will lose.  But we do know this:  The stock market as a whole rises over long periods of time.  The only predictable way to participate in those long-term gains is to:

  1. Own stocks.  Stocks are the easiest way for you to participate in free market Capitalism.
  2. Diversify.  You must own stocks from around the globe.  You should be in more than 45 countries and more than 18 different markets.  You also need to own fixed income bonds if you need to offset the volatility that stocks bring you in the short run.
  3. Re-Balance.  You must systematically re-balance your portfolio which actually requires you to SELL THE WINNERS AND BUY THE LOSERS which brings me to point 4:
  4. Behave.  It’s not hard to mark money in the stock market over long periods of time…if you aren’t human.  If you are a robot and have no emotion then you can make money very easily.  You just follow the logical rules of long term investing.  But you aren’t logical…because you aren’t a robot.  So, you better hire a coach.  Not a broker…a COACH.

I wish it was sexier than that.  I really wish you could trade options/pick stocks/day trade/speculate and gamble your way to riches.  I wish phrases the brokers threw at you like “tactical asset allocation” really meant something.  But you can’t and they don’t.

I don’t want you to be the Kodak story.  But here’s the crazy thing: I also don’t want you to be that Apple story.  The first is obvious, but why not Apple?  Because if you get lucky in a stock, you begin to think it was a skill…and you can always tell luck from skill by its duration; the longer you play the guessing game, the probability is high your luck will run out.  In the long run, you aren’t going to pick all the Apples.  In fact, you are going to pick more Kodaks then Apples.  So why take that risk?  Be boring.  Follow the rules. 

That’s how you become an amazing investor.  You do it the boring way.  No one will hear about you if you do it right…until decades later when we look back and say, “how did they DO that”???