Vegas-Proofing Your Investments

Vegas-Proofing Your Investments 02 24 2015Consumer Alert: Unless you are a day-trader, why should you care where oil prices are today or where they will be tomorrow? Unless you are a speculator, why should you give a moment’s notice to guessing where interest rates will be six months from now? Unless your life is wrapped up in the world of rumor, expectations and stock guessing, why pay any attention at all?

There are two answers that seem to lead the pack of possibilities.

One is, as Simon Sinek points out in “Leaders Eat Last”, we are like drug addicts looking for that dopamine rush. That fix we get from watching the cable shows with the ticker on the bottom of the screen and the talking heads on top and a veritable Rose Parade of charts and graphs. Very exciting indeed!

The other possibility is that we believe we can outsmart the market, simply by watching, reading, listening and synthesizing data.  Which doesn’t make you a dopamine addict, but simply deluded by the media spectacle, commercials, newsletters, books and other grinders of pulp fiction.

In “What Investors Really Want“, Professor Meir Statman demonstrates how playing against professionals is a completely different game than hitting a tennis ball against the wall. The odds of success change dramatically. So why are you—a rank amateur—trying to compete at the US Open? Why would you even think it makes sense? It’s like the commercial with the guy who feels smarter because of the hotel he stayed in the night before.  Thinking you know something isn’t the same as actually knowing it.

We become blinded by our own belief that we are smarter and therefore able to make rational decisions, supported by advertising that expounds on the simplicity of investing. All you need to do is follow a green line, buy a newsletter or answer a few questions on a website. Right? Of course, it makes as much sense as skydiving without a parachute. We are using the wrong set of assumptions when gauging our decisions. We assume that markets are rational, that we know when to buy and when to sell and then will act accordingly—all of which are generally completely wrong beliefs.

Let’s be perfectly clear: speculating on an investment is gambling. It is no different than going to Vegas, buying a lottery ticket or handicapping the trifecta at the track. It is gambling. If you have the ability to sustain the loss without impacting your financial security—more power to you, if that’s how you define entertainment. But if the loss would negatively impact your financial security, well, how shall I put this? You are either nuts, arrogant or completely fooled by the babble.

Does anyone really believe that the talking heads on the cable shows have any knowledge or information that makes what they say important or meaningful? Let’s face it, if they had real answers, they wouldn’t be on cable—they’d be on a yacht in the Caribbean. Get it?

So let’s get back to reality. Stocks go up, go down and even stay static depending on a variety of factors both micro and macro. Markets (small cap, large cap, value, growth, mid-cap, international, domestic, emerging, interest rates, commodities) all move based on cycles—political, economic, and meteorological, etc.—as they will. Interest rates will hover near zero and will rise to ridiculous highs. Companies that seem like they will last forever will disappear. Where is Remington Typewriter or F. W. Woolworth today?

It’s time to get wise before you speculate yourself into financial oblivion. Long-term investments should not be treated with short-term strategies. Measure performance appropriately, over a long enough period of time to judge your investments against appropriate benchmarks. If you’re invested in a blend of growth and value large cap stocks, using the S&P 500 is a pretty good indicator of your success or failure. But if you judge your large cap stock portfolio against the performance in micro caps or emerging markets, you are clearly using the wrong measuring tool. That would be like trying to measure the distance from NYC to Los Angeles with a yardstick.

If you’ve been on the speculation bandwagon, maybe you’ve had a success or two that fed your excitement (like the slots forking over $100 every now and then). But overall, your chance of long-term success using this strategy is dismally small. Instead, turn off the TV, close your browser window, discontinue the newsletters and approach your financial future with realistic mature expectations. It’s one thing to say you have a high-risk tolerance and quite another to watch your nest egg disappear on a whim.

Comment (1)

    Great article Michael!

    Reply

Leave a Comment

So you decided to leave a comment—that's great! Just fill in the three fields and hit submit. The first time you comment there will be a short delay before it's posted.