Saturday, May 2, 2015

"My Investment Is Better Than Your Investment"

I will defend my position

Personally, I find the degree of stock-worshipping sickly disturbing lately. It seems that the current modern financial wisdom being bought and swallowed by the everyday man is that "long-term stock investing" is the magical holy grail to achieving financial freedom, and all other ways are inferior for X, Y and Z reasons.

As Jason Zweig has said before, "Good advise rarely changes":
In summary: Good advise doesn't change, and reduced to its simplest form, it is essentially: Buy low, sell high. Tune out the market noise, reference past history and look at the long term. If everyone is zigging, think about zagging. Everyone can't all be right together because the market is not a win-win system, it's a negative-sum system.

What you invest in honestly does not matter. Stocks. Value stocks. Dividend stocks. Growth stocks. REITs. Bonds. Real Estate. Commodities. Precious metals. Cows. Sheep. Orange Juice. Stamps. Collectible Hello Kitty. Taylor Swift memorabilia. Vintage porn. Whatever. It really doesn't matter.

All you have to do is to buy low and sell high. That's it. (Yes, you actually need to sell it)

Now, here's the hard part. When do you know when it is low, and when do you know when it is high? Essentially, every single question that people ask themselves about investing points to finding out that answer.

Every type of analysis all boils down to a variation of, "So will it be more expensive next time?". Fundamental analysis. Technical analysis. Fortune teller. Magic 8 ball. 

Example: What are the company's cash flows? Okay, what is the appropriate discount rate? Okay, what's the "intrinsic" value of the stock? Okay, compared to the current market price, is it cheap or expensive?

You really cannot reduce that basic question any further.

If I know something is going to be higher sometime in the future, then I buy it. WHY WILL IT BE HIGHER? Doesn't really matter, as long as it is.

I guess the reason why people just love stocks so much is because everyone thinks that they have found the "secret formula" to know when to buy.

"Yeah, I look at X, then I see Y, then I discount by Z for N years because of A, then duh, the intrinsic value is $123.456"
"Yeah, PE less than N, but cash flow positive, SURE WIN"
"Magic 8 ball, should I buy this stock?" "Signs point to yes" "Are you sure?" "You may rely on it"

Which, if you think about it, it is maybe one notch above asking a lucky octopus to help you to choose if you should buy or sell. Actually, the octopus might be better. He's right 85% of the time.

As investors, we don't know anything. We can't promise anything. The best we can do is make smart bets and hope that we win more often than we lose.

Now, the reason why I'm getting all riled up is because I've seen more and more people preaching about stocks and demonizing other asset classes, especially gold. Please, I also can screw around with timeframes to make my arugment look good. Year 2000 until today, gold is up 10% annualized. The US stock market? 3% annualized. The local STI? 2.5% annualized. Doesn't look like such a "barbaric relic" for something that raped the US stock market 700bps annualized over 14 years, now does it?

But since gold has no earnings or cash flow, we don't know it's "true" value?

And if we don't know what is the "true" value of something, we shouldn't own it? Since we would perpetually be waiting for the next so-called "greater fool" to come along and buy it?

Well, fuck that reasoning. When you sell a stock, isn't a "greater fool" also coming along to buy it?

I'm not saying stocks are shit investments. I'm also not saying that gold is a great investment. I'm just saying that if you use the same ways to evaluate stocks and apply it to gold, you're going to get a stupid answer. Likewise if you use the ways to evaluate gold and apply it to stocks, you also get a stupid answer. "Can you touch it? Can you feel it? So what do you have to show for it? WHY WOULD YOU INVEST IN SOMETHING INVISIBLE, ARE YOU STUPID OR WHAT?"

Now let me end this seemingly angsty post.

There are many ways to invest, just like there are many ways to get to Rome. The path that everyone takes to get there may be different. Some may have taken longer. Some may have spent more money. But if the final goal is getting to Rome and they got there, does it really matter? Many may have taken the path that you preach and extoll, but will all your followers reach Rome?

The path might be the same, but each traveller is different, so the journey may be different as well.

If you have don't understand something, question everything. Or else, know nothing.

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