The Hidden Desire of Investors
What is the most important question for a stock market investor?
* Whether the market is undervalued or overvalued? No!
* Whether interest rates will go up or down? No!
* Whether a particular company is undervalued or overvalued? No!
* Whether you should buy ABC or XYZ? No!
* Whether Joe Bloggs, the great analyst, says it is a great buy? No!
All these questions are useless! There are whole office buildings full of people pumping out answers to these questions. They are not trying to mislead you. They are just trying to supply answers to these questions because people keep asking them and are willing to pay large amounts of money for the answers.
Even if they could be answered, the answers will not help you reach your financial goals... Why?... Because they are the wrong questions!
Focusing on these questions will give you the illusion that you are a serious investor. Long hours spent in reading all the articles and books, perhaps even poring over charts and financial reports, will only keep you locked in the system of struggle and mediocre success.
For others, the questions will give you an illusion of confidence and comfort because you are acting on the advice coming from the latest Wall Street hotshot.
But illusions hold you in bondage. As Morpheus, in the film The Matrix explains, "Like everyone else, you were born into bondage. Born into a prison that you cannot taste or smell or touch. A prison...for your mind!"
Chasing answers to these questions will keep you in this prison. At best, you may from time to time do better than the S&P 500 or some other index. At worst, you will see your money slipping away with poor returns and excessive fees.
Consider the case of trying to determine whether a company is undervalued or overvalued. It may turn out to be undervalued using some academic model. And there are hundreds of books describing such models. But if it stays undervalued for the next 10 years then it is not going to be much of an investment!
Even the whole notion of what is value is flawed. Suppose you go into a jewellery store and decide to buy an emerald ring for $2,000. The jeweller assures you that it is really worth a lot more and even arranges to get an insurance certificate for $4,000. Great! You are now congratulating yourself for buying something that is valued at 100% more than you paid for it.
Then what if you split up with the person you were going to give the ring to. No worries, you are thinking. "I'll just sell it back to the store." But when you go back in you are told that they will only pay $1,000 to buy it back. What you thought you were getting for 50% of its true value turns out to be overvalued by 100%.
All the other questions asked above can be dealt with in a similar manner. For example, Warren Buffett said that he has no idea what the market is going to do and whether it is undervalued or overvalued, whatever that may mean. What is more, he is not interested in knowing.
The same applies to interest rates. Buffett once said, "If the Federal Reserve Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn't change one thing that I do."
There is only one question. Underneath it all, there is only one desire. What is my profit rate or percentage return?
The core activity of an investor is to estimate with confidence the percentage return over a specified holding period when buying stock in a company. And you want to be able to do this based on numbers that you can see and adjust such as the growth rate of earnings.
When you can do this with a range of companies, you then have a rational basis for deciding when to buy stock in a particular company; as well as when to hold, and when to sell. You can decide between companies. You can even decide whether to invest in a particular company or in bonds instead.
You are in control. The market is now working for you instead of against you. And because you know the expected return on a range of quality companies, you can wait until Mr. Market offers to sell you stock in one of these companies that will give you the return that you want!
* * * * *
* Whether the market is undervalued or overvalued? No!
* Whether interest rates will go up or down? No!
* Whether a particular company is undervalued or overvalued? No!
* Whether you should buy ABC or XYZ? No!
* Whether Joe Bloggs, the great analyst, says it is a great buy? No!
All these questions are useless! There are whole office buildings full of people pumping out answers to these questions. They are not trying to mislead you. They are just trying to supply answers to these questions because people keep asking them and are willing to pay large amounts of money for the answers.
Even if they could be answered, the answers will not help you reach your financial goals... Why?... Because they are the wrong questions!
Focusing on these questions will give you the illusion that you are a serious investor. Long hours spent in reading all the articles and books, perhaps even poring over charts and financial reports, will only keep you locked in the system of struggle and mediocre success.
For others, the questions will give you an illusion of confidence and comfort because you are acting on the advice coming from the latest Wall Street hotshot.
But illusions hold you in bondage. As Morpheus, in the film The Matrix explains, "Like everyone else, you were born into bondage. Born into a prison that you cannot taste or smell or touch. A prison...for your mind!"
Chasing answers to these questions will keep you in this prison. At best, you may from time to time do better than the S&P 500 or some other index. At worst, you will see your money slipping away with poor returns and excessive fees.
Consider the case of trying to determine whether a company is undervalued or overvalued. It may turn out to be undervalued using some academic model. And there are hundreds of books describing such models. But if it stays undervalued for the next 10 years then it is not going to be much of an investment!
Even the whole notion of what is value is flawed. Suppose you go into a jewellery store and decide to buy an emerald ring for $2,000. The jeweller assures you that it is really worth a lot more and even arranges to get an insurance certificate for $4,000. Great! You are now congratulating yourself for buying something that is valued at 100% more than you paid for it.
Then what if you split up with the person you were going to give the ring to. No worries, you are thinking. "I'll just sell it back to the store." But when you go back in you are told that they will only pay $1,000 to buy it back. What you thought you were getting for 50% of its true value turns out to be overvalued by 100%.
All the other questions asked above can be dealt with in a similar manner. For example, Warren Buffett said that he has no idea what the market is going to do and whether it is undervalued or overvalued, whatever that may mean. What is more, he is not interested in knowing.
The same applies to interest rates. Buffett once said, "If the Federal Reserve Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn't change one thing that I do."
There is only one question. Underneath it all, there is only one desire. What is my profit rate or percentage return?
The core activity of an investor is to estimate with confidence the percentage return over a specified holding period when buying stock in a company. And you want to be able to do this based on numbers that you can see and adjust such as the growth rate of earnings.
When you can do this with a range of companies, you then have a rational basis for deciding when to buy stock in a particular company; as well as when to hold, and when to sell. You can decide between companies. You can even decide whether to invest in a particular company or in bonds instead.
You are in control. The market is now working for you instead of against you. And because you know the expected return on a range of quality companies, you can wait until Mr. Market offers to sell you stock in one of these companies that will give you the return that you want!
* * * * *
posted by Bob Moser at
5:05 PM
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