Stocks x Forex – Part 2

Bubbles

In the late ’90s and the early Millennium, I used to play golf – this time in Florida – with an enjoyable group of older gentlemen… and Paul, a dear friend of mine and my family.

A few months before the “DOT COM” bubble burst, though, we were at the nineteenth hole enjoying the usual shandy, and the conversation ended in déjà vu at its best… 25 years later! This time, though, only the “Suckers Team” was at the table! No dangling guys around, since:

  1. We were in America, and those kinds of sharks tend to choose weaker winds;
  2. And times had changed. There was no more room for amateur predators – only professionals!

Anyway, here’s the conversation:

“My son bought XYZ tech stocks 2 weeks ago, and he made tons of money so far!” – one of the elders came up with, all excited.

That “so far” was HIGHLY suspicious…

“Did he sell already? Or at least did he cover his initial investment?” – I asked, instinctively regretting it… Regretting because I can be HIGHLY naive sometimes… for pathetically thinking that, unless you actually MADE the money SELLING the paper, what you have in your hands is just… “PAPER”! 😉

“Why on Earth would he do that? This thing will go up FOREVER!” – was his candid and condescending answer.

I could understand that. It came from an old gentleman, conservative, one of those people that put their pensions and kidneys on GM stocks, blindly believing in the “GM’s Forth Reich – The Thousand Years Supremacy” over lesser machines!

But I’m also persistent, when I want to.

“What’s the P/E on those stocks?”

The response came mockingly sharp:

“Who the f… gives a sh.. about P/Es anymore?”

At a glance, I saw the locker room in front of me all over again… and man, oh man, was it an unpleasant feeling? This time I was not a mascot, though, and I suddenly realized that the sharks’ protective shield wasn’t in place anymore. I really was in the “Suckers Team”… unprotected and psychologically naked!

For some reason, my mind was stubbornly fixed on John D. Rockefeller and the shoeshine boy. That very next Monday morning I sold everything left in my already tiny portfolio.

I don’t need to tell you the rest of the story. The bubble exploded a few months later, taking with it some promising but timely unlucky good companies. XYZ was among them…

 

How Do I See Stocks?

I’m sure stocks are a wonderful thing for some people… and I mean smart people. I’m NOT one of them! I just can’t visualize stocks in the short-term trading game. I might learn, though, since I’m highly curious!

I keep that old image of total manipulation in my mind. I also think that the noble spirit of “owning a share of the productive world” mumbo-jumbo is totally trashed by the little game between sharks and suckers!

Furthermore, they’re usually at the mercy of some crazy loud-talker TV guy, that in most cases has no clue whatsoever of what he’s even talking about! But arrogance sells, and most people, usually those that will influence – in the short term – the price of those particular shares, will buy his opinion.

For stocks, I am definitely aligned with “Value Investing”, or the Warren Buffett way!

But that’s NOT Trading… it’s Investing. And that is a whole different type of game…

 

Value Investing

Stocks have, at least for me, that uncomfortable stigma of wild manipulation. But a friend asked me recently why I’m so adamant about stocks:

“They are, after all, the most broadly traded instruments worldwide, by far!” – he said.

I must respectfully disagree.

Forex – all of us Forex traders know by now – is a far, far larger Market than ALL Stock Markets put together. Nowadays Forex moves between 4 and 5 Trillion Dollars daily.

Under these circumstances, it’s pretty hard to imagine that an individual, or a group of individuals, can significantly manipulate it. If even possible, the cost would be too high.

My second objection is in regard to the “nature” of its trading activity.

I agree that the majority of people, at least in the developed and developing world, “hold” stocks in their portfolio, in one way or another. That in no way means that they “trade” stocks in a systematic and disciplined way.

That makes Stocks, once again, a great “Investment” instrument, but a relatively poor “Trading” one.

Why?

It’s hard to compete with the concept of “Value Investing”, the strong foundation upon which Warren Buffett built his financial success.

The sheer understanding that an enterprise may build “value” over time, and that we can be part of that journey by simply owning “shares” of it, is at the heart of modern economic development.

The earlier we understand where that enterprise is heading, the better for us as “Value Investors”.

Simple as that? Simple as that!

There’s no “Value Trading”, though. The sheer thought is ridiculous – if we’re thinking of short-term trading. That’s why I believe, in principle, that “Trading Stocks” is a contradiction in terms… as long as “trading” is understood as a short-term activity.

What intrinsic change in “value” could a stock have suffered in one week, one day, one hour… or, as usual nowadays, in a single minute?

When Warren Buffett understood the “value” in a corporation such as The Coca-Cola Company, for instance, early on in his carrier, he did not focus on Quarterly results, oversold positions in short-term charts, the most recent marketing campaign, changes in middle management carriers… or the spot price of its shares on a certain date.

He focused on the company’s strategic goals, on the understanding and pursuing of its long-term identity.

He understood, for instance, that Coca-Cola was NOT a “Soda Company”… but it was an enterprise on its way of becoming the largest and more efficient DISTRIBUTION Company in the world. At the right moment, Coca-Cola would be ready to distribute pretty much everything it wanted. And that’s what happened!

Ray Kroc, the founder of McDonald’s, once asked the audience at one of his conferences:

“Does any of you know which is our business?”

Nobody had the guts to answer that, but a general mumbling was the obvious response. Kroc insisted. Someone finally came to the rescue:

“Well, it seems pretty obvious. You guys are in the fast-food business, of course!” – said the guy, proud of his sudden courage.

Ray Kroc expected this answer, obviously.

“Unfortunately, young man, you’re only partially right. We’re actually in the REAL ESTATE business. McDonald’s owns the largest inventory of prime square footage in the world!”

Understanding where you are now, and where you want to be in the future, is the core “value” of “investing” in Stocks.

Like my father used to say:

“If the fabric is good and the tailor is good, chances are the suit will be good!” Wise words!

Where, in all this, is “short-term trading stocks”?

That’s why for me, once again, “trading stocks” is a contradiction in terms… a poor management of a good concept!

Finally, just to mark my point for the last time, why do you think Warren Buffett made his life far away from Wall Street?

Can the trading “noise” become a loud distraction for “value investing”? I don’t know, but probably yes.

Enough with stocks.

Thanks for watching…

 

… will continue tomorrow, at “Stocks x Forex – Part 3”.

 

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