Which type of investing will ultimately result in greater success? (#18)

Beginning with a  tale from Aesop's Fables, how the tortoise beat the hare in their race has a message to those interested in the world of investing.  The question is which type of investing will ultimately result in greater success? Getting there fast, or slow and steady? In this episode of The Wiser Financial Advisor host Josh Nelson talks about what a stock really is.  He talks about problems that  come up when investors get into "bubble territory".  He talks about how it is always inevitable that eventually stocks decrease in value and how you can be prepared for it. Then he asks you to consider, are you going to be the hare or the tortoise when it comes to your investment strategy.

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Transcript

Hi everyone Welcome to the Weiser Financial Advisors Show with Josh Nelson where we get real, we get honest and we get clear about the financial world and your money This is Josh Nelson a certified financial planner and founder and CEO of Keystone Financial Services. We love feedback and we'd love it If you would pass it on to me you directly at josh at keystone Financial dot com. Also please stay plugged in with us get updates on episodes and help us promote the podcast and also subscribing to us at Apple Podcasts, Spotify or your favorite podcast service. Let the Financial Fund begin. 

A hair was making fun of the tortoise one day for being so slow. "Do you ever get anywhere?" he asked with a mocking laugh. Yes, replied the tortoise and I get there sooner than you think. I'll run you a race and prove it. The hair was much amused at the idea of running a race with the tortoise, but for the fun of the thing he agreed.

So the Fox who had consented to act as judge marked the distance and started the runners off. The hair was soon far out of sight and to make the tortoise feel very deeply how ridiculous it was for him to try a race. With that the hare lay down beside the course to take a nap until the tortoise should catch up. The tortoise, meanwhile, kept going slowly but steadily and after a time passed the place where the hare was sleeping. But the hare slept on very peacefully, and when at last he did wake up the tortoise was near the goal. The hare now ran his swiftest, but he could not overtake the tortoise in time. Moral of the story, the race is not always to the swift.

I'm sure that if you had never heard that exact reading before you've probably heard at least illusions of the tortoise and the hare, and of course it has a lot of applications for life and for the area of finance. So  in the world of finance you  probably heard that there were a bunch of people online you know enabled by social media, but a lot of people that kind of teamed up effectively and went after the big guys and the big guys meaning the hedge funds that oftentimes one of their strategies is to short stocks that they think are bad to to short companies that they think are bad and will go down further in price. So the people on social media got together and colluded, and they said alright we're all gonna buy these stocks like crazy. One of them was GameStop, one of them was AMC both companies that have been struggling greatly of course this last year and the prices had been down and so forth. There could've even been bankruptcy in the future. We don't know. But that's why somebody would short a stock because they think that it's bad. They think that it's gonna go down in value. So these hedge funds were doing shorting of stocks which means that they were selling stocks that they didn't own.  In other words, they actually borrowed the stock, and sold it. What that means is that later on, someday, they've gotta buy that stock back and be able to return it to the shareholder.  There's nothing wrong with that necessarily, but of course there's some risk because if the price goes way up then that means you're actually losing money the more it goes up. Well, the folks online on Reddit and other social media platforms they got together and said, hey we're gonna make money doing this. Buying these stocks like crazy. So what would end up happening then is that if the prices went up and up and up then it would eventually force the short sellers to cover their trades actually buy in and then end up losing a bunch of money. Meanwhile, there were people that made millions and millions of dollars reportedly by doing this. It was also enabled by a lot of trading platforms now where there are companies like Robinhood, for example, that have kinda popped up and what they've offered is, they've offered, commission free trading. Now that's always been a thing and one barrier to entry on trading is that there used to be a cost to buy or sell something write a stock or a bond or a mutual fund. There used to be a transaction charge. Now that's largely gone away. Big companies as well Fidelity TD Ameritrade Charles Schwab, these companies have all followed suit now. From a competitive standpoint, don't worry, they still make lots of money other ways.

But it's important to recognize that that used to be a barrier to entry that people buying and selling stocks would end up losing money every time they placed a trade. Now that's not a thing. Also, the Robinhood trading platform really was meant to be something for the little guy the little investor. And what they've done is they've actually gamified it which is smart from a business strategy standpoint. They've gamified it and made it very attractive and fun you know it makes it look like hey I should be trading all the time. In fact that's what they're doing is actually encouraging trading activity on their platform and making it seem that hey that's how you make money is by placing lots of traits. Now meanwhile, full disclosure you should know that they make money by people placing more trade simply because they have the ability to direct that traffic to different market makers and the way those market makers make money is that they actually have…spread.  So in other words there's actually a difference You may not know this but there's a difference between the buy and the sell price, always. There's always some spread even if it's very tiny and that's how those market makers make money. So again don't worry. These guys have ways of making money. Now where did all this come from?  Well the root of it actually is that people were bored. People have been at home now going on a year In a lot of cases, people are bored at home either they're unemployed or maybe they're working from home but they just don't have enough to do. And so they're kinda poking around online doing different stuff. That's one of the things that this was kinda born out of I think is the fact that people were just bored And I know this you know even my own brother actually called me up I remember last think it was last spring actually. This is probably a month or two into the pandemic and  he's actually a school teacher. So we're stuck at home.He's a PE teacher that  loves his job and everything, loves the kids. But, if you're a PE teacher and you're not at school how much can you really do online? How much can you do as far as teaching online? So, you know, he did everything he could, obviously recorded some lessons and some fitness stuff the kids should be doing at home. But at the end of the day you know he had some time on his hands. So he called me up and asked about different stocks and things like that. Ultimately, where does all this come from?  Well there's two big emotions that drive personal finance decisions in the market overall as fear and greed and there's a a thing called FOMO.  I'm sure you've heard of it fear of missing out. Of course, that's a big thing.  Not only just in our personal lives and social media drives it.  And we see stuff on social media and it makes us look like everybody else is having fun and we're not,  so forth And so it kinda drives some different decisions but it certainly can in the area of finance because FOMO or if you're missing out that basically means greed We're we're greedy You know we we don't wanna lose out on an opportunity. And it seems like everybody else is out there making money. Now one thing to be aware of is that there's always a bubble that's forming somewhere. Now where's the bubble today I don't know I could just tell you what I'm hearing a lot of from individuals what I read in the news and so forth is there are certain things that have gone up in price a whole lot And and then the more that that goes of course a lot of people start to think I'm missing out you know maybe I don't have enough of whatever. So some of the things that I've noticed anyway would be gold, coin Tesla the FANG stocks which will be Facebook Apple Amazon Netflix and Google stocks. Because really looking at the last year, there's been an outsized portion of the market increase that we've seen that has been tech stocks.

And not that there's anything wrong with these companies. I think most of us use these companies and they've got great business models and so forth, but recognizing that sometimes these prices can get bit up so much on certain companies that it actually can form a bubble. And ultimately a company is only worth its earnings. And when somebody buys a stock if you really think about the underlying factor of what is a stock a stock is just a piece of a business when we own shares of a company We own stock and it's great that we have the ability to do that It's very democratized in the fact that anybody can go out and start looking at stocks and and buy little tiny pieces of them, versus in history really had to be a big big you know person to own a whole company or a whole piece of real estate or something like that. Now we can own bits and pieces of them. So there are some big advantages to that. It's important to recognize that sometimes these things can actually get into bubble territory meaning that the prices can get bit up so much because so many people are buying them It actually can drive the prices much much higher than what that company probably is really worth. Now when has this happened in the past I can tell you because I started at a very interesting time in this industry and the financial planning and investment industry in the late nineties.

And in the late nineties, you might remember, for those of you who were around and investing that that was a big time for tech stocks. In fact there was a massive bubble that formed largely from internet stocks. The internet was fairly new at the time  so there were so called dot com stocks that had come out.Some of them had very good business models like Amazon was around at the time, and there were other companies that don't exist anymore. In fact most of them don't exist anymore because they didn't have business models that were sound. They never made any money. They never had your earnings to begin with but there was just pure speculation that those companies eventually would make money and people didn't wanna miss out. So therefore many many people ended up losing money in the dot com crash in the year two thousand. One of the other things that ended up happening is that there were some big assumptions that people made at the time. One of those was that hey this is gonna just keep going up forever.

So it doesn't matter what I'm paying. Eventually they'll keep going up It doesn't matter to the fact that they're not profitable We don't care. There was some disregard of what a stock really is to begin with. Again it's earnings. Earnings is really what a company is worth. Is what their current earnings are and what their future earnings are expected to be. So a lot of people were just assuming well you know eventually they'll figure out a way to make money because this is a no brainer. It's the internet .The internet's not going anywhere. So that's one thing to be very careful about when you're investing is to say that oh this is a no brainer, this can't go down. Everything can go down and everything will go down eventually I feel quite confident about that. In that any kind of risk asset which is most investments would be considered some type of risk asset There's always some risk associated with it. Eventually if you hold on to an investment long enough it will go through a period of time where it loses value even if it's just temporary.

So recognize that there is no sure thing. Even if the idea is sound for example Bitcoin if we look at Bitcoin and that's one area that gets a lot of press these days it's a cryptocurrency… meaning that what it is essentially is a currency that's created by computers, not backed up by any government or anything like that.  So in other words, when you buy Bitcoin if you if you put your money into that what you're counting on is the fact that somebody else is gonna come in and buy it for a higher price later on and that's how you could potentially make money is just the fact that other people will buy it. Now what are you buying? Well not really anything You're not buying earnings. Certainly it's not a company. And you're not buying debt. You're not buying something that's paying interest . And so simply, it is a speculative vehicle that somebody's counting on the price going to up or at least not going down when they're putting money into it. Now is Bitcoin going anywhere? Is cryptocurrency gonna disappear? I don't think so. Probably not.  I I think it's a legitimate investment it's a legitimate thing that probably is gonna be used for some type of currency in the future. In other words, actual buying of stuff and so forth. Maybe it's some kind of an alternative investment that we could consider as part of somebody's portfolio. The underlying technology blockchain technology is very sounded as getting applied in lots of different areas with companies that aren't even tech companies. So it's a way of basically tracking transactions and tracking information. And that's a big innovation that's not going anywhere. Does that mean that Bitcoin's guaranteed and can't go to zero? No.

So it's important to recognize that even if the idea is sound that doesn't necessarily mean that it is a safe investment and that it can't go down in value. Same thing with the dot coms in the late nineties. I know this is dating me a little bit right now But of course the big assumption was hey it's the internet. The internet's not gonna go anywhere. And people were right The internet didn't go anywhere. Did that keep most of those companies from going broke? No, of course not. So the other thing that came out in the mid two thousands was a real estate bubble. And not all areas of the country got caught up in this here in Northern Colorado it wasn't quite as add maybe as some other areas, but I think the poster child for these things were like Florida South Florida, people were flipping condos and people were speculating in these big high rise condominium complexes. In a lot of cases these whole buildings they didn't even have any people that had signed up to buy these things but people were just speculating and say well it's but it's real estate. Real estate can't go down There's always gonna be somebody who wants it. And the other big assumption that went into it is hey you know you've got people that are getting older and Ford is gonna be a big deal and everything.  And they were right about some of those assumptions. But that doesn't mean that the bubble didn't form. And you know, those did not end well. Let's just say that in a lot of situations those did not end well.  Many areas forward of Vegas, you know other parts of California in some cases, went down over half in value. And that's in a asset that actually somebody could live in and use and pay rent.

So again the big assumption there was that, hey it's real estate It's safe It's not ever gonna go away And you're right It didn't go away That doesn't mean that there is an associated with it I throw all this out to you simply because there's always risk with an investment and there's always a bubble forming in some place The worst thing I would want is that you know Warren Buffett who's ninety now In fact, is one of my heroes from an investment standpoint and for many of course he's one of the most famous investors of all time. Ninety years old he has got a net worth of eighty six billion dollars making him the fourth richest person in the world and he would be a lot richer actually but he's given a lot of his money away to charity which is great. But he says some interesting stuff too He's got some great quotes and he's a great investor. One of his quotes is only when the tide goes out do you discover who is swimming naked In other words when the tide goes out when the bubble bursts, you don't wanna be the person who's swimming naked because that's the people who would lose a lot of money. And certainly for people that are serious about building wealth, they're not the ones that wanna get caught up in bubbles They're not the ones that would you know fall for that essentially and get caught in that greed cycle so it's important to recognize you know and the difference between speculating and gambling and trading you know I I would equate that all to the same thing because that's what's happening on a lot of these to online trading platforms.

And with any kind of bubble activity, it's really about trying to get rich quick It's not about buying things that are gonna be held over the long run. And you know going back to the tortoise and the hare it's trying to be the hare. I would exhort you to be the tortoise and being the tortoise means a couple of things. Ultimately, it relates to being a long term investor which is not always the most exciting. I get that. But is it more reliable Is it much more likely to work out for you Yes. If you look at Warren Buffett you know there's a couple of things that he said in the past I think are really really wise for us to pay attention to. One of those is he said that if the market is only open one day a year that he would be completely happy and that he could do all the trading that he would need to do He's also said that if you can't buy an investment that you're willing to hang on to for a five or ten years you shouldn't be buying it to begin with. Obviously that's the polar opposite of what we're talking about with these trading platforms and people trying to make money very very quickly. It's tempting to be the hare but I would exhort you to be the tortoise.

Warren Buffett's also said that he's never met a person who can consistently time the market And he readily admits that he is not a market timer He's not somebody who is going to be doing a lot of trading. And for Berkshire Hathaway is the company that he has been operating for years and years and years decades now and he still works by the way he still says that he tapped answers to work every day, and he does a lot of reading a lot of thinking I think that's instructive for a lot of us as far as how we spend our time is I think we could all stand to do more of that reading and thinking And that's one of the ways that he has said that he doesn't make impulse decisions because he does most of his time thinking and reading not on jumping around and trading and so forth. I think it's important to recognize that Warren Buffett's not the only successful investor out there There are many of course. And it's very very unlikely that you're gonna find somebody who can consistently time the market Sometimes people get lucky Will they continue to get lucky Well it's the same as the casino? You could go up and gamble ultimately unless you're cheating you eventually will lose because the casino knows the odds They have a business model that works and they know that most people are going to lose If they play long enough and that's why they are able to build these big fancy casinos and give people free hotel rooms and things like that because they know their business They know that it works And the stock market can work the same way if you let it use you or if you get caught up in one of these manias.

So before we wrap up today I did wanna leave you with three different ideas Things to be thinking about and ultimately again I don't want you to be caught up in the people that are swimming naked. I don't want you to be caught up in something that ends up hurting you financially over time. So it's important to recognize that number one uh be aware of your own biases We all have our own biases. And if somebody is saying there's no risk if somebody is saying that you know this time it's different things like that I would run the other way Be very very afraid of those assumptions. So be aware of your own biases and other people's biases and recognize that we know some things but there are a lot of things that we don't know. It's important to recognize that there's always risk.

 Number two that there are a lot more famous and best than there are market timers or traders  Remember what Warren Buffett said is that he's never met anybody who can consistently time the market and be successful at that. And so that should be instructive in that there are people that get lucky And of course they don't talk about their losses.  They talk about their big wins, but be very very careful about that and recognize that being the tortoise, although it's more boring I get that it's tempting to be the hair there are a lot more long term successful investors than there are people who have consistently traded and done well. There are a few out there but that is a game that you are not likely to win and neither will.  

Lastly I think the foundation of financial planning and being a six successful investors a few things. Being the tortoise what does that actually mean It means spending less than what you make. Ultimately, that's one of the first things that we need to look at is how much are we spending and are we spending less than what we make.  Paying off your debt.  Making sure that all your debt is paid off as fast as possible maybe except for the home mortgage if we're not as concerned about that. That'll kinda takes care of itself over time but all your other debt paid off as fast as possible and then be automatically investing anywhere between ten to thirty percent of your income and be putting it some place that's very diversified, knowing the amount of risk you're comfortable with and investing accordingly and having the discipline to stick with that plan especially in extreme times especially when you're hearing extremes of fear or greed, where there would be extremes of that. Again, like the late nineties where everybody was making money on dot coms And so forth don't get caught up in stuff like that uh or individual companies don't get caught up in that greed stuff where you feel like oh my gosh I've gotta buy Tesla or you know I'm gonna miss out something like that. You'll own a piece of it If you own the S and P five hundred you will own a piece of Tesla You will not own all of Tesla You will not have all your eggs in one basket. That's a good thing. Then on the fear side of things, remember it wasn't that long ago in the spring of two thousand and twenty the market dropped about thirty percent very very quickly. The stock market was down considerably when there was a lot of fear about the pandemic. And before the government stepped in and injected trillions of dollars into the economy the market was down thirty percent and would have gone down I think a lot more I'd say at least double that had the government not stepped in and been so decisive about the Federal Reserve.  And also Congress passing trillions of dollars worth of support for the economy. Now, there are consequences for that too. We'll talk about that at a different time but ultimately the government stepped in If they hadn't that would have been very very ugly uh before things bottomed down. So recognize all of that again being the tortoise means that you're you're basically electing to get there slow. There are a lot more people that have gotten wealthy and stayed wealthy by being the tortoise than by trying to be the hare.

 I hope you're doing great. I hope uh you have a wonderful week And if there's anything that we can do to support you or your family or your friends, let us know. Of course help us promote the show. If you can send it out to any friends, family, coworkers, that you think would benefit from this. Please have them subscribe on Spotify, Apple Podcasts or whatever you get your podcasts.  Of course anything you can do to help us promote the show would be great.  I hope all is well and God bless.

 The opinions voiced on the Wiser Financial Advisor show with host Josh Nelson are for general information only, and are not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult your attorney, accountant, financial or tax advisor prior to investing. Investment advisory services offered through Keystone Financial Services, an SEC registered investment advisor.