You scan the news one morning and come across this company that just beat Wall Street’s expectations. Or about a company that is getting acquired by another one. What usually happens to its stock price following such news? It jumps and sometimes by a lot and you wished you owned that stock before that event occurred. To that I say, resist that urge. Resist that urge of constantly looking for that hot stock or that home run because just as there are home runs, there are strike-outs and they outnumber home runs 10 to 1 in any given week or a month or a year. And anyone who has studied financial history knows that chasing a hot stock here or that trend there is a fool’s game.
But folks don’t wanna give up trying. And I am not just talking about normal earthlings like you and me. I am talking about the smartest of the smart…those hedge fund managers and private equity investors. Just this week, I come across two separate news stories where in one case, a hedge fund that had $1.3 billion in assets is left with just $68,530 (link) to its name and is filing for bankruptcy protection (excerpt below).
“The Platinum Partners’ Value Arbitrage fund filed for Chapter 15 bankruptcy protection in Manhattan bankruptcy court late Tuesday.”
A Value Arbitrage Fund? Yes, arbitraging your way to bankruptcy. And how a fund can go from $1.3 billion to nothing in such a short span of time is beyond me. But then it makes sense. These hedge fund managers are in the betting game and are playing the odds that if their bets pan out, they win big. And if they don’t, they still collect their fees with you left holding the bag.
And talk about betting, we all remember John Paulson who famously shorted the US housing market back in 2007 and subsequently made a killing. Well, his luck…scratch that…his investors luck ran out too and that same hedge fund is getting shellacked since then (link).
And these hedge fund managers have all the advantages…the smartest folks, cutting-edge algorithms and immense computing power and still can’t deliver. And while you are looking for that home run, so are they.
Now let’s assume that you find that next Amazon or that next Netflix. You buy that stock and it doubles. What do you do? You watch that stock like a hawk and are tempted…extremely tempted to sell and take your “chips” off the table. But then your saner half (your wife of course) interjects and tells you to keep your hands off that stock. So you oblige and wait. And then it doubles again. What do you do then? Very unlikely that you hold that stock beyond a few doubles because we as humans are not wired like that. Millions of years of evolutionary genes come in the play that almost forces us to sell. And we sell.
Now let’s assume that on the other hand, you bought Cisco Systems in 2000 at $80 and it immediately sinks to $70. Now you will wait and you won’t sell because if you do, you are a loser. And you wait and it drops to $60 and keeps dropping. It is 2016 now and that stock has and likely will never go to $80.
So in one case you sold too soon and in the other case, you held too long. And if you have a 10 stock portfolio, for every Amazon, you will own 3-4 Ciscos. And you might not be doing any better than holding a diversified portfolio that is guaranteed to match the returns of what capitalism has to offer across the globe. But you could do worse, a lot worse. The statistical odds of having an Amazon or a Netflix in a 10 stock portfolio are infinitesimally small. Do the math.
Our message is and will remain the same…spend less than you earn, design a goal-based investment plan, populate that plan with those savings, watch for drifts in allocation, optimize that plan as you approach your goals, diversify and remain invested.
And once that is done, you are done.
But if you still want to play this game, set aside a few thousand dollars (not a life altering amount, of course) and go crazy. And don’t try to mingle this with the rest of the money you have and will continue to have invested for the various life goals because there is no do over in life, there is no second chance. You lose money and you lose time.
Better yet, go use that time you would have spent watching and stressing over a stock here and a fund there to learn a new skill, volunteer or starting a side business. That I bet would be a far better investment of your time and if it takes, your money.
Image credit – K.M. Klemencic, Flickr