Do you think you’ve made the right investment decisions in the past two, four, six years?
With Wall Street on the longest bull run in history – more than 10 ½ years and counting – it would be hard for any investor to dispute that they’ve made good investment choices. Anyone and everyone have made paper gains in the past 10+ years, but if history is any indication, the bull market is bound to end sometime.
Many experts agree that although good economic fundamentals fuel the latest bull market, the fact is most stocks and the stock market overall, is overvalued. What overvalued stocks mean is that most investors are speculating on stocks and not investing in companies for the long-run.
What’s the difference between speculating on stock and investing in a company?
Speculators …
- Buy or sell because they sense a price movement for some reason (market/sector news, internet hype, etc.).
- Are interested in profiting from a price movement and, most likely, selling and moving on to the next big stock.
- Have no real interest in the company behind the stock.
Investors …
- Complete a thorough analysis of a prospective company and believe it has long-term growth potential or undervalued assets.
- Analyze the balance sheets to conclude the probability of a large loss is unlikely.
- Understand what the company does and its sustainable competitive position in its market.
- Understand that if the stock price drops, they know why and can determine whether this is a short-term situation or a change that will have a long-term impact on the stock’s price.
Most investors are speculators playing the lottery – hoping to hit that next big home run. And just like the lottery, most investors lose.
Consider this stunning statistic. According to robeco.com, only 4% of all US stocks were responsible for all the wealth creation on the US stock market over the 1926-2016 period. In other words, over the years, there have been many more losers than winners on the stock market.
Some of the most successful investors ever weren’t speculators. They understood the difference between trends that would last and fads that would fade. Trends are often not as sexy as fads, but they tend to stick around much longer.
Investing in trends avoids short-term hypes. It relies on a set of fundamental tools with longer time horizons. The key is to separate the longer-term investment opportunities from the short-lived hypes.
With a goal of investing in long-term trends, keep the following in mind:
- Avoid crazes and fads.
- Find a gap in the market that, once filled, will be sustainable for years.
- The investment must have intrinsic value.
- Seek to profit from the predictability and sustainability of multi-year developments.
- Look at long-term profitability and not short-term gain.
Over the last few years, many investors have made vital investment decisions based on the wrong principle – and that overriding principle has been to get rich quick. Their investment was based on suppositions and not sound financial fundamentals.
In other words, they are merely playing the lottery.
Here are some examples of fads and unproven businesses that under performed.
- Cannabis – Scores of investors flocked to this new gold rush, but did you know that in California and other states excessively tax Cannabis up to 40%? With those types of taxes, it’s hard for legitimate Cannabis businesses to compete against their black market counterparts who don’t have overhead and don’t pay the high taxes. Those who rushed into Cannabis got a cold dose of reality.
- Bitcoin/Crypto – Bitcoin and the other hundreds of cryptocurrency lack one essential element that investors in trends seek – intrinsic value. Cryptocurrency has no inherent value, is not backed any underlying asset, is not protected by any government authority, etc. Bitcoin’s price, for example, is purely speculative and based on the “next big fool” principle. That’s why its price has been wildly volatile – touched off by the slightest speculations and rumors.
- Netflix (or any other trendy stock) – For the longest time, Netflix was the only streaming service and saw its subscriber count grow at crazy rates year after year. But now, with increasing competition from the likes of Disney, Apple, Amazon, etc., Netflix is losing subscribers and share price.
Predictability may be boring, but investing in the right trend that will have lasting power that will result in predictable profits.
There are several current trends in real estate, including the rise of multifamily properties and commercial real estate in secondary markets. These trends are poised to have long-lasting power as Baby Boomers retire in droves, Millennials move away from gateway cities, and businesses move to tax-friendly havens.
Investors who invest in trends and for the long-term look at the underlying fundamentals that speculators who chase fads ignore.
That’s why investors with a long view are unfazed by market movements. They always keep their eye on the prize.
And in the world of real estate, prizes like trending multifamily and secondary market commercial property will be profitable for years and years to come.
Michael
