“If a thing cannot last forever, it will stop.” That’s thanks to Herbert Stein, who was chairman of the House Committee on Economic Affairs in the Nixon and Ford administrations. That pithy aphorism taught me a lot about hoarding. The second important idea for me is that when the price changes (or the price of almost anything changes), it’s hard to know whether the change is the beginning or the change is the effect. Even if the change is only a temporary blip, it will soon return. People think about which of these options will work and invest accordingly. When they’re right, they win; when they’re right, they win. When they’re wrong, they lose.
Putting these simple ideas aside for a moment, most investors fall into two groups: those looking for profitable products (essentially bets that will continue in the near future) and those looking for unprofitable products. In fact, there are those who say that the first type of investor is someone who wants to buy growth stocks, while the second type of investor is someone who loves stocks. Second, interest rate history tells us about the sensitivity to future interest rate expectations. In general, I think it’s safe to say that growth stocks tend to be more attractive than value stocks, even if they have higher volatility (i.e. risk). It’s a decision about where investors should place themselves on the risk/reward spectrum.
Given the difference between growth and value, it is important to understand that most growth stocks have had good returns in the early stages of recent history, but Herbert Stein has said that we do not think this performance can continue indefinitely. At least in theory, the rise in equity interest rates can reverse, while stock prices can rise to the point where both stocks are at risk of falling.
It is possible that uninformed or inexperienced investors will be drawn into the investment due to a history of price fluctuations; this will happen more often as stocks grow. The motivation behind the investment here is usually fear of missing out (FOMO) rather than a careful assessment of risk and reward; however, the result of this FOMO investment is that it will lead to more price changes than we see associated with highly visible investments (products that attract attention). Check out the answers to unusual (and useless) businesses. Psychologically speaking, someone who entered the market before the price mattered would not feel bad about giving back most of their unrealized profit. However, this comfort in the face of an economic downturn will not be felt by those who entered the economy at a higher price.
Of course, the sweet spot in stock picking is identifying good stocks that have attractive earnings (and appear to have good growth potential) but have zero value relative to their estimated earnings. More power to you if you do your due diligence, but according to influential investors, it’s no easy task when stocks have a track record of outperforming the S&P 500 (the accepted benchmark for the stock market) over the long term.
Last year was a particularly good year for financial managers. But in the first half of the year, fewer than half of the big fund managers led the index. But this behavior turned out to be quite unusual. S&P Dow Jones Indices show that only 10% of managed funds outperformed the index. Commodity stocks (such as mutual funds and exchange-traded funds) that track the S&P500 Index make up the bulk of the portfolio, while stock options account for a small portion of the data.
