Mobile Home Investor · Spanaway, WA · Member since 2008 · 1k+ posts · 578 votes
With millions of baby boomers getting ready to retire between the years of 2012 to 2016, just how comfortable are you leaving your money invested on Wall Street? The demand to buy pushes prices upwards. With these retirees drawing on their retirement funds, they will be selling. As the demand to sell increases - the price drops. More money comes out and prices drop even lower. Will this lead to another crash of the market or will it cause a complete collapse? Let's hear some different viewpoints on this topic.
That is not true in secondary markets. Supply is always equal to demand in the stock market because there is always a buyer and a seller on every transaction. What changes is people's perception of valuation, risk, etc. And that cannot be out of line with intrinsic value for a very long time.
Bryan-- You know what my buddy Warren (lol) says about diversification? I think Vikram knows. Diversification is for those who don't know what they are doing! :)
Dale-- Social (In)Security is a Ponzi scheme & if it wasn't gov't, would have been shut down for being illegal.
I agree about diversification being the "safe way" to invest. There are tons of people that simply spend less than they make, spread their bets, and let their wealth grow over time. Everyone invests differently!
My point is that this is the safest course for MOST, because they never take the time to develop expertise in any asset class to exploit mis-priced assets. That is obviously not the case for many on this message board and thus the game needs to be played a bit differently.
The OP was questioning the safety of Wall Street products though. There is plenty of money to be made investing in equities, fixed-income, real estate, judgments, tax deeds, small businesses, pork bellies, etc. Questioning the validity of any investment type is misplaced. All have their merits!
BTW...I also think that people as wealthy as Vikram have the ability to concentrate some of their holdings in an effort to grow wealth rapidly because they can stomach the downside risk IF the investment doesn't turn out as planned. The average investor cannot stomach this risk with the same absolute quantity of wealth and thus it is not suitable for them. That is why our securities laws are designed the way they are in theory. I am not saying I agree with it, but there is some method to the madness.
I think as people grow and develop in expertise they are more apt to concentrate portions of their wealth in ventures where they feel like they have a competitive advantage. This is completely logical. To say that diversification is for people that don't know what they are doing is misguided IMO...most people don't have the intellectual or business brainpower of Buffett. This is masked vanity to an extent in my estimation.
Nope, you are not missing anything. There is a dollar of old money leaving for every dollar of new money coming in. (Not including brokerage costs and taxes.)
Yeah, I like a good sized stash of gold, silver & platinum, as well. Most of my positioning is not for physical delivery, either. Its just fun to tell people you make money in things like pork bellies! ;)
Fundamentally, the "value" of a share of stock is the net present value of its future cash flows. Cash flows increase with rising earnings and thus the value of the share of stock also increases. Interest rates serve as a measure of "alternative investments" (alternative uses of capital) and thus have an inverse relationship with the value of the stock.
I used the term "value" rather than "price" because lots of factors cause the "value" of a share of stock to diverge from its "price". Speculation being one of these factors.
To address the OP's thesis, who does not know that there are lots of baby boomers recently retired or soon will be retired? Do you think that this effect is not fully priced into general stock prices? That prices are lower today because current shareholders feel that no or a reduced market will exist for the shares the current owners want to sell?
With all the good food from this Thanksgiving meals - doubt if I could even do 10 right now!
Anyway - perhaps we need to meander back to more of a Wall Street discussion. I can hear the news reporter now. "The Street got upset with the off-topic side discussions so has reacted negatively by dropping the Dow Jones Industrials by 500 points!"
If the market valuation (price x total shares) of a secondary market increases over a period of time, how can that happen without more money entering that market than existed before? . . . And over a period of time, the increase funds moving into the market will be factored into share prices.
Tom, over the long run, market value increases because the intrinsic value of the share goes up, not because new money enters the market. In the short run, of course, your normal demand and supply forces determine price, but not over an extended period of time. And, whether over the short run or the long run, new money cannot enter the secondary market.
Think of it this way. Let us say you have a business that is doing well. It is privately held and you own 100% of the shares in the business. Over time, the value of your shares will go up even if you do not sell a single share to anyone. It is this same phenomenon that happens with the value of shares on the stock market, except that it fluctuates in price quite a bit based on market sentiment but, over time, does track the intrinsic value. (Intrinsic value = PV of future dividends.)
New money does enter the market when a public offering is made, and leaves the market when companies do share-buybacks and extinguish the stock.
Coming back to the topic of the thread, I agree with Tom that you should buy when everyone thinks stocks are a lousy investment and sell when everyone thinks they are a sure thing. In addition, of course, you should put some effort into figuring out whether the particular stocks that you are buying are undervalued or overvalued. I think there are a couple of options available to investors:
A. The Easy Option. Keep your money in cash except when the market suffers a severe shock, and then buy the index at a very low value. It takes guts to do this, but not brains. (Wall Street "experts" have plenty of brains but very little courage or common sense, so you should be able to find several such opportunities during your lifetime.)
B. The Fun Option. This is what I like and it should yield you in excess of 50% annualized over time for up to a few million dollars in capital. As your capital increases, your ROI will decrease. :( This option involves picking individual stocks to create a portfolio that will typicall be comprised of a very small number of stocks - 6 to 10 stocks, typically. Stock picking is conceptually quite easy but hard with the execution. (Like RE.) Here's what you need to do:
- Find well-run companies,
- Evaluate their industries to see if the industry has good long term prospects,
- Evaluate management to see if it has a shareholder-friendly culture,
- Evaluate the competition and easy of entry,
- Monitor the company's progress regularly,
- Do a simple company valuation every year so that you always know how much the stock is worth,
- Make a list of all such companies that you like and their current worth per share,
- Then wait. This is the hardest part but also the most important one. You should just sit tight and do nothing other than watch the stock price, which you can automate either through an employee or, if you are technically proficient, by having alerts sent to you. What you are waiting for is a collapse in the stock price of this company due to some short-term event or some macro event that should not affect the company. And when that happens, you just buy as much of the specific stock as you can. Having a good list of 20 to 30 companies that you regularly follow and know the intrinsic value for should enable you, over time, to create a nice little portfolio of stocks which you would have bought for maybe 50 cents on the dollar. (Even less if you play in Asia - investors are crazy there.)
- The next step it so sell the stock. This again requires you to have some idea about its intrinsic value. You should start selling the stock as it gets close to intrinsic value. Do not hold out for it to become overpriced. In this way, it is similar to flipping homes. Buy at less than ARV and sell at ARV - don't wait for the next bubble.
Tom, I enjoy going to the occasional financial seminar to hear experts tell people how now is not the time to buy RE. Typically they suggest investments in stocks or other alternative investments most with very low yields and claiming safety first.
Many are scared to invest in much of anything. Though I am seeing more people going back into stocks and mutual funds.
I agree that index investing is the way to go for most investors. But for those who have the inclination for it, stock picking is really a lot of fun. Picking a stock actually requires you to analyze an enormous amount of data and vastly increases your knowledge of the global economy.
Let me give you an example of how it can work. A few years back, I had to analyze some oil stock. (Don't remember which one, but my curiosity was triggered by Buffett's investment in ConocoPhillips.) As part of my research, I evaluated several things, including:
a. The so-called peak oil theory,
b. Oil extraction costs in different places, including new sources of oil such as tar sands, oil shale, deep sea oil drilling, etc.
c. Global oil consumtion trends, including the rapid increase in emerging economy consumtion and also the increasing energy efficiency per unit of GDP in many economies,
d. Alternative energy sources, including conventional alternatives to oil (coal, gas) and the various alternative energy sources that depend on government subsidies (wind, solar, etc.) Some of these have had rapidly declining cost per kWh and one has to consider that when evaluating oil stocks because stock prices largely reflect future expecations and not past results.
e. Changes in the technology used for transporting some alternatives. For example, there has been a rapidd build-up in gas liquifaction capacity - gas has traditionally been a local (within one continent) market rather than a global market due to the cost of transporting it. But with liquifaction, it becomes a global commodity like any other.
f. A little bit of geopolitics, although this is somewhat overrated.
g. A whole bunch of other stuff as well. Too many to list them all here.
As you can see, this is the type of research needed to evaluate just one stock. Now imagine you play in half a dozen industries. You get the opportunity to research so many things that, over time, you become more proficient at evaluating all industries because the economy is really quite interrelated. And the analytical approach is also somewhat similar across industries.
I really enjoy the learning that comes with this type of research. If you are also into that kind of stuff, you will find that you can make much higher returns than index investing while also having a very enjoyable career.
I still like my over simplified view: As the herd buys - the prices rise and when they stop buying and the selling starts prices fall. What is perceived therefore becomes a fact.
Personally, I would not invest a penny into the stock market. I will be moving on to other threads so will cede this thread to Bryan or anyone else who wants to pick up the ball and run with it.