What game are we playing?
In his excellent book “The Psychology of Money”, author Morgan Housel warns against labelling people we don’t understand as “crazy”. In all likelihood, he says, they are not crazy; they are probably just playing a different game than you, and have different goals. The recent action in stocks such as GameStop, AMC Theatres and Blackberry, among others, may look crazy to those of us in the more sober, calm and unhurried end of the capital markets; but in fact it does not affect us at all because we are indeed playing a different game.
For decades, Vancouver was the infamous centre of “pump and dump” stock market schemes. Typically, a Howe Street promoter would find a valueless company, say “Consolidated Giant Gold Mines”, and enlist a boiler-room full of cold callers to sell the stock to unsophisticated retail investors. The salespeople would promise their victims that shares they could buy for 10 cents would soon rise to a dollar or more; but only if they bought right now. Of course the shares would rise briefly, as hundreds of suckers would fall for the dream of easy money; but at the top of the “market” the promoters would dump the stock and the bag-holders would find that suddenly the salesman was not answering the phone and that there was no market at all for their now worthless paper.
What has been happening for the last while in the “Reddit” stocks is not much different, except that the promoters of this new flavour of fraud, on social media platforms instead of the phone, will ultimately find that they have made themselves the victims. Believing that they are “sticking it to Wall Street”, defeating evil hedge funds or somehow upending capitalism, they are providing the “pump” part of the scheme. The “dump” will take place when the sophisticates behind this, who understand what is going on, decide that there is no more easy money left to extract. I have little doubt that the huge gains that have been seen in these stocks will evaporate at least as quickly as they built up. Many people who cannot afford it will lose a lot of money. Some will become very rich. Three thousand years ago King Solomon taught: “What has been will be again, what has been done will be done again; there is nothing new under the sun.” As true now as it was then.
So a brief refresher about what we at Baskin Wealth Management are trying to do in the capital markets and why it is do different from the activity that is getting so much media attention.
We build and monitor diversified portfolios of suitable high-quality securities to help our clients achieve medium to long term financial success.
Let’s break that down to understand what it means and how it differs from the game the Reddit folks are playing:
We build and monitor diversified portfolios
Not one stock but usually between 20 and 35 because diversified portfolios are less volatile and give us exposure to different sectors of the economy. We monitor constantly because we need to know what is happening with the companies in which we have invested. Economic conditions, markets conditions and the fortunes of individual companies change all the time. Constant monitoring is at least as important as the initial buying.
Of suitable high-quality securities
The securities markets offer an almost infinite range of choices, from the equivalent of run-down shacks to palatial mansions. Reddit players are buying the shacks and convincing many that they are simply mansions that need a fresh coat of paint. Our investment research and analysis concentrates on finding investments that are suitable for our investors who favour lower risk, well managed companies. Since we insist on buying only high quality securities, we are looking for companies that are profitable, growing and available at a price that reflects the economic value of the company. It is our belief that this is the method that is most likely to lead to success.
To achieve medium to long term financial success.
Financial success is a long game. Short of winning a lottery, having a fabulously rich uncle die, or defrauding others, the road to lasting wealth is one that requires sustained effort over years. That is the game Baskin Wealth Management and its clients are playing. It requires diligence, professionalism and persistence. We don’t think there are any shortcuts.
Finally, a brief comment on two popular acronyms you have no doubt encountered:
FOMO or “fear of missing out”. One of the most dangerous things a person can do in the financial markets is to be lured into an investment or situation that is not really understood simply because other people seem to be making a lot of money. Much momentum investing is driven by this, and undoubtedly it can work in the short run. Eventually the momentum reverses, the tide goes out and many are left high and dry. Instead of being afraid of missing out, we should be afraid of messing up.
YOLO or “You only live once”. A twenty year old risking his life savings of $2,000 may feel that chancing it all on a roll of the dice makes sense. His perspective is necessarily very different from a sixty year old with family responsibilities and a recognized need to fund a retirement coming into view. You do, indeed, only live once, but the meaning of that phrase is very different depending on where you are in that one life.
We cannot predict what will happen next in the Reddit saga. Our experience leads us to believe that it will end in tears. One thing we do know: it will not change our outlook, our mission or our approach to helping our clients meet their financial goals.
David Baskin, President