The Case for Stocks
The title of this Substack is a little misleading. I still think there will some sort of corrective phase in equity markets this year. Possibly Octoberish to mid December. Fear not, that is a healthy sign of a growing robust economy and its long overdue.
My point today is that I still believe in doing the homework and buying stocks. Not just an index fund, mutual fund or an ETF. Buying a company’s stock because you believe that their business model will continue to succeed or finding a company that the market undervalues and it’s only a matter of time before their future success is reflected in their stock price.
While an index fund should be a part of everyone’s portfolio along with a mutual fund or two and if you want to drill down a little deeper, an ETF as well but I still think conscious investing has a place in any diverse portfolio.
What is conscious investing you ask? It is simply investing in something that you have made the effort to investigate, whatever that might be. Doesn’t necessarily have to be a stock. It could be any investment.
Well, isn’t investing in a mutual fund or an ETF conscious investing? Yes and no. You research the fund or the ETF and you invest but once you put your money in, they make the decisions about what stock and the balance of the portfolio. You are trusting the track record and the managers of either to be successful. That’s like betting on several horses to win in a single race. You may win but your winnings will be diminished by the cost of the overall bet. You also can lose it all. Maybe not the best analogy but hopefully you get my point.
You buy an individual stock based on whatever criteria you determine that are important. You research flows, you research product development, etc. You decide to invest and see what happens. You may set a price target for you to sell, at a profit or at a loss, and you watch the company and the stock. You are a conscious investor. You win or lose on your terms and you are in a bit more control of your future.
It is a dying art I agree. Less and less people are investing on ideas and more people are turning their money over to some portfolio manager in some fund or ETF and allowing his expertise and knowledge to help you be a successful investor. While these mangers do a very good job of researching and investing in some of the same ideas you may have, they also invest in other things and while you and that portfolio manager might be on the same page about ABC stock, he is obligated to invest in 20-100 other names and not all of them will be successful. So, your “great idea” will be mitigated by a lot of “not so great ideas” and you have reached mediocrity.
This is a key point to investing and it’s become standard operating procedure for traders for the last decade or so. Coming from a trading background I can tell you that is how business is run today. Every investment manager will just try to be average as far as investing in a certain stock. They wan’t to just be at what is called the VWAP. The VWAP is the Volume Weighted Average Price of a stock during a given time frame. That is mediocrity. They buy or sell something with no intention of doing better for their portfolio or client, just average. They can’t be wrong if they are average. The bulk of institutional trading is done on this basis and because the cost is so cheap, there really is no incentive to do it any other way. Why pay a trader or a broker a commission to try and do better when you can be average like every other fund and pay nothing, or next to nothing. While the individual investor has reaped some of the rewards of this low to no cost investing, institutional results I believe have suffered somewhat. I digress.
The point to all this is that I still believe in the power of human intelligence and conscious investing. In today’s market, it might be hard to discern because as we all know, everyone is a genius in a rising market, but when that correction comes, those singular voices will be the ones you want to listen to.
Human nature is that of crowd movement. As crowds go in one direction, they bring more crowds and that movement then becomes the norm. It’s the same way with stocks, people jump on to whatever the wave is and when it come crashing down, they all stumble. With the advent of the Robinhoods of the World, you see this in real time and the waves that took weeks or months now take seconds to minutes. There is an old adage that has been around Wall Street forever and it simply says, “Don’t fight the tape”. That is momentum in four simple words. That is the period we are in right now. The crowd is still putting money to work in the market. Stocks are continuing to go up. There is very little talk of a pull back or correction. Finally, the economy is giving the market all it needs to continue to go higher, expanding economy, increased earnings and easy money. Everyone on board, the market will continue to go higher for the foreseeable future.
Someone needs to pump the brakes on this and I may be a lone voice but this is my conscious investing mind talking, time to trim and take those profits and put them away for taxes and better opportunities in the first half of next year.
There, I said it. You feel differently? Email me.