Dis and Dat - It’s a long winding road - July 2009
It’s a long winding road
“When you come to a fork in the road…take it” ~Yogi Berra
“Two roads diverged in a wood, and I --- I took the one less traveled by, and that has made all the difference.” ~ Robert Frost
The kids are out for summer. Baseball is in full swing, and it’s too hot for words to describe. During these long and hot days of summer, we sometimes find ourselves at a crossroads, or fork in the road. The government and economy may be at one now. In relation to market and prices, there seems to be constant cross roads and forks popping up. Market participants deal with this uncertainty and unpredictability in various ways. We wanted to describe these approaches that we will label 1.) Gambler 2.) Speculator and 3.) Investors. With a broad look at participants, it is hard to distinguish, which is which. A given transaction may involve aspects of all three. Due to the roller coaster path of stock prices in recent history, we thought a discussion of this topic may help you to think about which type of transaction the various participants are currently engaging in. For example, every transaction involves a buyer and a seller. Is the gambler selling to the investor? or is the investor selling to the speculator? etc. Here is a possible description of each approach.
The gambler is hooked on market action. The dancing of prices gives them a high. They look for tips, and hot hands. The main focus is on the market price. A market price move in their favor is good; a market price move against them is bad. They typically sell because they believe prices are going lower, and buy because they think prices are going higher. They may have a reason for buying or selling at first, but it is quickly forgotten and turns into pure hope. The gambler’s main competitor is the professional gamblers, or “the house.” Due to the house’s edge, the gambler’s fate is usually told by the old saying, “Gamblers die broke.” The gamblers addiction to action leaves little time to reflect, study and change the approach. The use of leverage is usually involved.
The speculator has a “hypothesis” and tests it out in the markets. The focus is also on the market price. One difference between the speculator and gambler is that the speculator usually “pre-test” their hypothesis, keeps records of thoughts, actions, and reviews for ways to improve. They do not tend to give or take “tips.”
They also dedicate much thought to money management issues. In other words, they are constantly considering, “How much money should I use on this “hypothesis” They know their competition includes “the house,” as well as all other market participants. Due to the large amount of time, high stress, difficulty in keeping a cool head, most speculators end up frustrated, and with “average” returns that make them question why are they spending so much time for such little results.
The investor usually thinks in terms of searching for value and quality. They believe the market price is only what current market participants are willing to exchange for, not what the underlying value is. They think in terms of long-term wealth creation based on that underlying value, not just the current market quote. They attempt to use patience to avoid the extreme competition with speculators, and the grind of the house. They think in terms of win/win. They want to work with company’s managers to create wealth in the long-term for managers, customers, lenders, employees, and shareholders. They attempt to buy something that will survive a long time at a market price that is currently below what they believe it is worth. They believe that if they wait patiently, then one day the market will supply a price that is closer to what their underlying calculation suggest, due to the quality work of the company’s employees, and managers.
We do believe that true investors are few and far between, as they have to be contrarian, and that just may make all the difference. As investment advisors, we hope to take that patient, long-term path with our clients, that so few advisors seem to take. Hopefully in these long summer days, you will find yourself at that fork and be able to take the time to travel down the road less traveled.
See you next time
The information contained herein is the opinions of James Pope and Shane Haag, and is not intended to be investment advice.
Please remember to contact Advisor.Investments in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct Advisor.Investments to effect any specific transactions for your account. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request.
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