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Tags: invest | what | you | know

Follow Your Inner Voice: Invest in What You Know

Follow Your Inner Voice: Invest in What You Know

Bryan Kuderna By Tuesday, 05 December 2017 07:42 AM Current | Bio | Archive

“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” - Mark Twain

It was the summer of 2005 and we had recently graduated high school. A few buddies and I decided to take a day off from being beach bums and spice things up with a trip to Six Flags.

The high diving show was cancelled, the overpriced burgers tasted like hockey pucks, and most ride attendants didn’t speak English. “Dude, this place turned into a mess,” my one buddy said. We made a quick exit and crossed Six Flags off the list.

Two years later, I was a finance major with $500 in a checking account ready to proliferate into millions. September 20, 2007 I excitedly transferred my fortune into a Scottrade account and bought SIX Class B trading at $3.33, the one and only Six Flags stock. A Five-Star, AAA, Strong Buy, undervalued steal.

I listened to the market experts, but in the back of my head was my buddy’s voice, “Dude, this place turned into a mess.” All I could envision was garbage, broken rides, long lines, disgusting food, and people screaming and cursing at each other. But man, these were the masterminds, commentators that smiled on the covers of international magazines!

Fast forward a couple more years to June 13, 2009 and what did all the local headlines read:

Six Flags Files for Bankruptcy”

Awesome first investment for Mr. Millennial Millionaire. As a result of their Chapter 11 Bankruptcy proceedings, all Class B shares were eliminated. Bye-bye hard working money. I failed the first and most important tenant of investing, INVEST IN WHAT YOU KNOW! Those who base decisions on principle, not public opinion, are often vindicated in due time.

Valuing Your Investment

In a recent survey by Gallup, pollers asked respondents which investments were the best value. Real estate was the top pick at 31%, followed by stocks/mutual funds at 25%, gold at 19%, savings accounts and CD’s followed at 15%, and 6% chose bonds (Gallup). But check out this statistic… if you invested $100 in gold in 1926, it would be worth about $5,455 today (WSJ). $100 into the average home that year, you’re looking at a value of $2,839 in (Ycharts.com). Lastly, $100 into the stock market (even with The Great Depression and Great Recession), your money is worth $11,128! (Measuringworth.com)

So why does the average investor stink at stocks? Ask your parents what they paid for their home twenty years ago and they can probably recount it to the penny. Then ask them what the DOW traded at that year, probably not a clue. I bet they know how their stocks ended up yesterday though. Therein lies the dilemma, market information is instantaneous and published relentlessly. Home values are evaluated with the timeframe of decades. However, the public is inundated with meaningless short-term stock gains and losses that throw emotions on a whipsaw, resulting in irrational decisions. It’s not a fair comparison of investment vehicles, rather Real Estate makes us smart and Stocks make us stupid.

When doing your homework on past performance, which is not always an indicator of future performance, take into account the entire context. Regarding the study above, I hear regularly from my clients that their parents purchased their home in 1971 for $28,000 and now it’s worth ten times that! Guess what a gallon of gas in 1971 averaged- 36 cents and today- roughly ten times that! (2014) What sounds like a great investment may be clouded by the unassuming effects of inflation and timing.

Fake News

Thus which investments are the right ones? Einstein once stated, “Reality is merely an illusion, albeit a very persistent one.” Reality is crafted by the talking heads; these blabber mouths shape most investors’ decisions. There are only two kinds of talking heads- The lemur with no balls, and the guy at the racetrack.

The lemur with no balls easily goes with the overall consensus, satisfied with his current status in the world. Each week his editorial comes out, he casually gives you his current assessment on the economy. He hops on the bandwagon, never jeopardizing his job because the outcast can be fired, but not the herd.

On the other hand you have the guy at the racetrack. Ever notice your one buddy at the water cooler that can’t wait to tell you his story at the track Sunday, he called the 50-1 Longshot in the Exacta and nailed it! What a friggin genius! Please disregard the absurd gambling debt he’s meanwhile racked up. The guy at the racetrack is the financial “guru” looking for a big break. Each week in his modest column he makes a bold prediction no one else would think of. Life goes on and his column maintains an audience of ten viewers. Then all of a sudden, WAMMY, the markets go soaring and flying and exploding from the most unthinkable source, and he called it!

The accountability people assume for the media’s financial authorities is nonexistent. When the meteorologist misses the blizzard of the century, we might face the unfortunate walk home without our snow gloves. When Cramer blows the stock tip of the week, it could cost millions in fans’ portfolios. How do they discipline these experts/entertainers? Depends on their viewer ratings and corresponding advertising dollars.

Joe Wuebben, Senior Editor of Muscle and Fitness, mentioned in a editorial how similar fitness and financial planning are, discussing how the best advice is always boring, and almost common sense. Be a consistent saver vs. workout four times a week, don’t max out the credit cards vs. go easy on the sweets, and address every body part vs. plan comprehensively. However, the magazine cover that grabs readers’ attention is Get Shredded This Month or Double Your Money in the New Year! Please resist the temptation, success lacks shortcuts.

The Contrarian

Warren Buffett, an envied contrarian, has made a career on finding treasure in other’s trash, and trashing what other’s call treasure. He laughed at the experts at Businessweek who in 1979 ran the infamous cover story, “The Death of Equities”. Savvy investors spot the diamond in the rough, they call it a discount.

Lastly, when you have a stock or fund in mind, do not ignore the Gambler’s Fallacy. No professional or company is ever due. No matter how many times you flip a coin hoping for Heads, there is always going to be a 50% chance it hits Tails. The laws of numbers apply to economics, and the risk/reward spectrum does not mind your emotions.

Investing is one of the cornerstones of Financial Planning, but never confuse it for Financial Planning. Few have made their fortunes in the markets alone; it can help your cause, but don’t think it’s a get rich quick scheme. Hard work and economical thinking still the pave the way.

Bryan Kuderna is a Certified Financial Planner™, Life Underwriter Training Council Fellow, and Investment Adviser Representative with Kuderna Financial Team. He is also the author of the best-seller "Millennial Millionaire."

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I failed the first and most important tenant of investing, INVEST IN WHAT YOU KNOW! Those who base decisions on principle, not public opinion, are often vindicated in due time.
invest, what, you, know
Tuesday, 05 December 2017 07:42 AM
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