NWP Monthly Digest | June 2024
There was a lot of inspiration this month for the newsletter, my friends, but none more so than a conversation that I had with a prospective client a few weeks ago. More on that in a second…
There seems to be a lot of anxiety and angst being posted lately about the markets. The reemergence of Roaring Kitty and meme stocks, along with Brian Portnoy of Barstool Sports railing against the perceived unfairness of the stock market will do that. As will an upcoming contentious Presidential election season.
When I first started in this industry back in 1999, I remember thinking I was pretty smart. The stock market was in it’s high-flying days of gargantuan tech IPOs and internet start-ups with no revenue trading on the NASDAQ. From my own naive (if not stupid) viewpoint, I thought the market was pretty easy to figure out. Look for new companies with low share prices and buy them and wait for them to go up. For those that realize the absurdity of that strategy, I appreciate you. The point I’m trying to make is that it takes a LONG TIME to understand investing. Not necessarily to be good at it, but just to understand it. And if anybody tells you they have the secret to the market, run for the hills.
The truth is, the real secret to the market is not that exciting. And that secret says nothing about trading stocks all day long or comparing the valuations of this company to this other company or looking for the right time to enter into a position or thinking that things are getting a little scary over there in Europe so maybe I need to start hedging that position?!? That sounds cool, but it’s not investing. Trying to speculate on the direction of the stock market in the short-term is a pretty unwinnable battle, yet so many novices and experts alike seem to think they can do it.
As corny as it sounds, real investing is like collecting stamps (or baseball cards, or whiskey, or fine art). Just keep buying a lot of the things that are cool, unique, and valuable and hang on to them. Buying a stock is simply buying into a profitable (hopefully) business. You are becoming a part owner of that business, no matter how small the unit of measurement. Think like an owner, not a trader.
Buy a share of Tesla? Well, now you own a part of Tesla, just like Elon Musk. And the ownership of that share of the business will rise and fall over time in accordance with their ability to build and sell cars and generate a profit. Of course, just like Elon Musk or any business owner, your money is now at risk. The company could have a lot of negative things happen to them that would have a detrimental effect on their profits, and it could even go bankrupt. That’s the price you pay for being a business owner.
But another little not-so-cool sounding secret about the market is that you can start to reduce the risk of being a business owner by buying a bunch of different stocks in different industries and sectors, and maybe even different countries. If I do that I don’t have to worry about one thing like interest rates having a negative impact on my business (like banks) or styles changing (like department stores and clothing manufacturers) or new technologies coming along (software and tech hardware). I can own different businesses that can thrive in different environments. This is called diversification, and what is sometimes called “the only free lunch on Wall Street”.
Cool, right? Now we’re starting to define what it means to invest vs. what it is to speculate. Speculation, my friends, is hazardous to your wallet. It is akin to gambling, and it can make people claim things like “the stock market is rigged!” and “the stock market is nothing more than a casino!”
Ben Carlson of Ritholtz Wealth Management just wrote an amazing piece about this last week, and you can jump in and read more here.
“Look, if you’re looking to get rich overnight, the stock market probably does feel like a casino where the house always wins. The stock market is rigged against you if you’re looking for easy money. The big money has more brainpower, more computing power and better information than you. And it’s still difficult for many of them to beat the market.” ~Ben Carlson, A Wealth of Common Sense
But you know what? The longer you choose to invest your savings into a portfolio of cool, unique, and valuable businesses, the market starts to be rigged in your favor. Read that again.
I posted these two charts below in this newsletter two months ago. The longer I hold stocks (read: maintain ownership of these businesses), the more money I make and the less chance I have of losing money. What a deal. Being a partial owner of a bunch of different businesses (which sounds cooler than “I own a bunch of stocks”) is not risky at all, when you look at it through this lens. The real risk is not doing it or not doing it long enough, because we fall victim to our own fear and irrational thoughts. The businesses I own will lose value from time to time, but if I have the patience to endure those rough patches, I will be rewarded down the road.
Which brings me to that prospective client I mentioned earlier. A few weeks ago, I received a request to chat with a gentleman looking for help with his retirement, or so I was told.
During this conversation I was treated to every crazy sounding conspiracy theory known to man. In no particular order, here is a list of several things that I was told were incontrovertibly true (according to this man):
The United States was going bankrupt
The government and the corporations are working together to steal our identities to give them to our foreign enemies
Civil war was coming
The only thing that is worth investing in is gold bars
How could I, in good conscience, keep a positive attitude in the face of so much overwhelming bad news
All the important and smart people are seeing the same thing - a stock market crash like we’ve never seen before
So, let’s get into unpacking this a bit. The emphasis on #1 and #6 are my own, as they are the two I want to spend some time on.
First, at some point in my life, I became the “old guy”. It’s weird how it sneaks up on you, but for the first ~20 years of my career, I was the “young guy”. The passing of time and the addition of plenty of gray hair is the most likely culprit but, somehow and seemingly overnight, I became the person that had seen a lot of stuff. Which I am learning to accept.
Since a very early age, going back to the early to mid-1980s and the popularity of the “national debt clock” starting in 1989, almost all I can remember is people (some in my family) shouting from the mountain tops that the country is going to go bankrupt. This is nothing new, and while the national debt is concerning at the levels it’s risen to, I am not worried that the country will go bankrupt. In fact, a sovereign nation that prints it’s own currency should NEVER go bankrupt, unless they do it on purpose. The national debt can do a lot of other things, each with it’s own level of harm, but it will not cause the country to default on it’s debt. The United States can always print more money.
Inflation and higher interest rates will make people crazy, but I would hope that most could clear the smoke just a little to look at the actual data. The economy is doing well, the rate of inflation is coming down quickly, the stock market is up quite a bit, and unemployment is still at generational lows. And, yet, people seem to think the opposite. Lies travel faster than the truth, for sure. Michael Batnick, also from Ritholtz, does a great job in this piece talking about that.
Which leads me to #6. “All the important and smart people” are most certainly not saying that we’re expecting a stock market crash like we’ve never seen before. But plenty of charlatans are. And they always will. My entire career, whether the market is up a lot or down a lot, there is always someone (Nouriel Roubini, Marc Faber, Jim Rogers) that will claim we’re headed for disaster. And, just as universally, their predictions are WRONG. Until they’re not. But they are never called to account when they’re wrong.
If I go outside everyday shouting that there is going to be a tornado, I will be wrong 364 days a year. But, on average, there will be one day in Colorado where I’m right. That doesn’t make me smart or prescient.
“Man that successfully predicted a tornado the last time we had one has a new, dire prediction…he expects another tornado!”
Can you imagine? I’d sell a ton of books.
The most we can hope for in our day to day lives is to be roughly right, not precisely right. Trying to get everything precisely right and predict every pothole in the road is not only impossible, but makes life much less enjoyable. There is always going to be a reason according to someone with a loud voice and megaphone, for you to sell your investments. And, according to the historical evidence, those loud voices will be wrong in the long-term.
“The right time to buy equities for the long-term is whenever you have money". ~Nick Murray
Noble Wealth Pro Tip of the Month
It’s time for a cybersecurity check-up, dear readers. Most of the major financial firms and banks (including Charles Schwab) have been sounding the alarms about online scams. They are becoming both more prevalent and sophisticated. Here is a checklist of items you should be considering and changes you should be making to better protect yourself.
Do you receive strange phone calls or emails from people you don’t know trying to get you information “about your accounts”? Oftentimes, these messages are suspicious because they’re so strangely vague. Make sure you verify the domain of the email sender or call the bank/firm directly to talk with someone.
Do not click on links or attachments from people you don’t know. One especially popular trick to to try and engage you by sending a fake invoice for something you didn’t buy.
Don’t respond to random quizzes on Facebook asking for weird, personal information.
Do you use the same password for everything? Change your passwords more often and utilize a password manager like 1Password to help you create more cryptic credentials.
Enable two-factor authentication for all of your online financial accounts…no matter how inconvenient it might be.
You will never be able to stop people from trying to scam you out of your money. But you can educate yourself and remain vigilant to avoid them as much as possible.
Things We’re Reading and Enjoying
In This Economy? How Money and Markets Really Work, by Kyla Scanlon
I’m just getting started with this one and man, is it good. Kyla does an incredible job of making complex and difficult subject matter easier to understand. I can’t recommend her enough…I plan on making my kids read this book. You should, too. And subscribe to her newsletter.
“Few people can communicate how the economy actually works better than Kyla Scanlon.”—Morgan Housel, author of The Psychology of Money
An illustrated guide to the mad math and terrible terminology of economics, from one of the internet’s favorite financial educators.
Is our national debt really a threat? What is a “mild” recession, exactly? If you’re worried about your bank account balance, job security, or mortgage rate, what data should you be keeping tabs on?
The Acquired Podcast, Season 14, Episode 3 - Renaissance Technologies
The best investor the world has ever known passed away this past month. His name was Jim Simons and the returns he produced managing the Renaissance Technologies Medallion Fund would embarrass Warren Buffet. And most people don’t even know who he was. This is must listen to get into the details of how an upstart group of mathematicians cracked the code and learned how to beat the market. And you will also learn very quickly that they had no intention of sharing that secret with others.
Renaissance Technologies is the best performing investment firm of all time. And yet no one at RenTec would consider themselves an “investor”, at least in any traditional sense of the word. It’d rather be more accurate to call them scientists — scientists who’ve discovered a system of math, computers and artificial intelligence that has evolved into the greatest money making machine the world has ever seen.
“There is nothing noble about being superior to your fellow man. True nobility is being superior to your former self.” - Ernest Hemingway
