I had a conversation with an investor earlier this week, and got me to thinking, “This stock market is a funny thing.”
And our perception of it is even funnier.
Well not really.
Our perception of it is wrong.
We perceive that somehow there is a connection between a company and its stock price, as if the company somehow controls the price of its stock.
It doesn’t.
Investors – you and me, we control the price of the stock, through our buy and sell decisions.
It does control the dividends that are paid out, but it doesn’t control the price of the stock.
So, the next time you are tempted to buy a stock because you “think the company will be successful,” try saying to yourself instead “I am buying this stock because I think I am one step ahead, and have figured out the emotions of the thousands of investors who happen to be buying and selling this stock as well.”
Why try this? It gets back to the conversation I had with an investor earlier this week. Stay tuned.
My timing couldn’t have been better.
A couple of days ago I suggested that you needed to take the numbers game called “Sudoku” seriously if you were to become a successful investor.
In yesterday’s Wall Street Journal, a book review on the very subject appeared, titled Taking Sudoku Seriously.
Okay, Okay, the book review didn’t directly correlate Sudoku with investment success, but it was an interesting article, nonetheless.
What does Sudoku have to do with successful investing and reaching your financial goals?
Not much, you say? Well, I’m with you.
I’d be hard pressed to present any evidence of any correlation between reaching your financial goals and mastering the the game of Sudoku.
But, what happens if we exchanged some words on the above statement? It would read something like this. . .
What does (following the stock market, picking top companies, keeping up with world events and economic news) have to do with successful investing and reaching your financial goals?
Not much, you say? Well, I’m with you. I’d be hard pressed to present any evidence of any correlation between reaching your financial goals and (following the stock market, picking top companies, keeping up with world events and economic news).
Ah, now you probably aren’t so ready to agree with the above statement.
I can assure you that the entire industry of Wall Street would vehemently disagree. Why do I know that? Because they continue to bombard society with the opposite notion – that (following the stock market, picking top companies, keeping up with world events and economic news) IS important to you reaching your financial goals.
Did anyone watch the recently completed Australian Open Tennis tournament? Financial firms flooded the advertising airways with the myth that somehow (following the stock market, picking top companies, keeping up with world events and economic news) is vital to your success.
One ad in particular caught my eye, that of a gorgeous young woman standing on a beach with her iPad in hand, checking charts, stocks, graphs and trends. Who sponsored the ad? Fidelity, of course, in conjunction with Apple.
Hmm. If our culture says it is important, it must be important.
Or is it?
This thing called “investing” is a strange animal.
Somewhere along the line we got it all mixed up, and I am not quite sure how it happened, or how we can untangle it.
First, let’s start with an assumption. . .
For the most part, our “investing” decisions” are made with retirement in mind, or at least building a nest egg to support ourselves when earned income stops.
Of course sometimes we will use this money for other things like paying for college educations, buying new homes, and so forth. But for the most part, “retirement” is the focus.
With that in mind, what does “playing Sudoku” have to do with “investing” for retirement?
Say what?
That’s right, what does “playing Sudoku” have to do with investing for retirement?
“Not much,” you say?
Well, maybe somebody could come up with a logical explanation why playing Sudoku could positively impact your investing decisions today and the quality of life during retirement, but it would be a stretch.
And yet our culture is obsessed with playing Sudoku as a means of investing wisely and preparing for retirement. Why is this so?
See, I told you this thing called investing is a strange animal. . .
Stay tuned.
The sensible solution would be for investors to put their money into low-cost index funds and just keep it there. But that’s hard to do when the market is extremely volatile. Most of us find it difficult enough in normal times to take a long-term approach. So when prices are rising and falling two per cent a day, and when it seems like getting in or out of the market could be worth ten per cent of our portfolio’s value, the temptation to try to time the market is hard to resist. (The way the financial media covers the stock market—with each rise and fall treated as a major event—only exacerbates this problem.) Unfortunately, the same psychological forces that make investors bad at rating money managers also make them bad at market timing: all else being equal, they’re prone to sell at the bottom and buy at the top. And, the bigger and more dramatic the swings in the market, the more likely we are to make the wrong decision.
James Surowiecki The New Yorker
I am heading out the door to enjoy the slush of Seattle. But before I do, I wanted to share this article with you – a thoughtful reflection of 2011, that includes some sage advice, highlighted above.
Now, it might seem like I am oversimplifying the obvious by focusing on saving (and spending) as an important component to building wealth, ignoring Wall Street and getting on with our lives, but as we begin to think about this subject I think you will agree with me that the emotional complexity of saving, combined with the magnitude of its importance, is something many of us need to look at and evaluate.
This passage is taken from my book, The New Coffeehouse Investor, and sums up the role “saving and spending” have in building long term spiritual, emotional & financial wealth.
I am putting a strong emphasis on “financial education” in the coming year, and want to start by putting a few things in perspective.
In the world of investing and building wealth, which presumably go hand in hand, we have become obsessed with things that aren’t really that important when it comes to reaching our financial goals.
What is important is how we put this thing called “saving” into perspective in our everyday lives.
To start, I came across this article by Megan McArdle, who provides an interesting reflection on the importance of Saving in the New Year.