Most investors have a fairly simple view of their world. Invest in businesses, hold until something makes you sell, respect dividends, understand the product, pay attention to the integrity of management, cash flow and cash are real and everything else is opinion. The simple view serves well.
People must know that on a day-today basis the value of a business and the value of its shares are not necessarily closely connected. Well run businesses ignore the market and the market ignores them. Market prices arise from an auction and the most optimistic or the most pessimistic participants set the price.
Real value is not so emotional.
Typically it is someone who buys a security hoping for a profit. That is not quite sufficient. How long is the future?
I have had clients who own and develop real estate where the long term ranges from a hundred years for two of them, to lunch next Tuesday for some of the others. Both types invest in real estate, but their pricing mechanism and their decisions are vastly different.
In my way of thinking one is an investor and the other is a trader.
Investors own securities for future income and capital appreciation. They participate in the economy through their chosen investment. For them to win, their investment must add value. They must understand how businesses work and how they fit into society.
Traders on the other hand don’t care about businesses. They care how other participants in the market will behave given information. The idea is to be quicker or smarter, ideally both, and move in and out as prices change.
While business valuation is no simple thing, compared to understanding the millions of people in the market, it is trivial. Traders have a harder job.
Investors have decided that index funds and their ETF expression are better than analyzing securities. For most, true. They may have overlooked the fact that everyone is going that way. People are a little out of touch if they think indexes are simple. A Bloomberg article here reported on May 12 that there are now more indexes than stocks. A bit startling.
At the same time, traders are facing bigger problems too. It is becoming more difficult to stay ahead of the crowd. High frequency traders are upping their game. It once was enough to gain advantage measured in thousandths of a second, but no more. Bloomberg again, reported on a curious antenna just outside Chicago. Its purpose seems to be to gain millionths of a second advantage for trades on the Chicago Mercantile Exchange. That article is here.
Understand what investing means for you. If you need money 20 years from now, a microsecond advantage is insignificant. If you are going to be moving in and out of index funds, passive investing won’t work for you either. Just because an index is passive doesn’t automatically mean that the people who buy them will be passive.
Investing is hard because of the emotion of the marketplace, the complexity of the people in the market, and the relative boredom of buying a sound company and keeping it. We are our own enemy.
A good investment for 20 years is one that you can nearly ignore. Investments are to make your life easier, not more dramatic.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772