As busy people with only so much room in our heads for extra information, a normal tendency is to lump things together that seem similar but are actually different. I see this a lot with investments: horse pants, start-ups, publicly-traded stock… all risky!
I think horse pants was a hoax but it's not so crazy when you look at lists of other harebrained ideas that never took off.
A friend of mine invested a small amount in her friend’s start-up beverage company; when the company lost most of its value, she wondered if that might not happen to all the investments she owned. It’s easy to see why she might worry about that!
Recent statistics show that 10% of start-up companies fail within a year, and 90% after that fail in the long-run. Bless us for trying- innovation and a system conducive to entrepreneurial capitalism is what keeps improving our lives and the economy, but also brings us… horse pants.
"When you've got 10,000 people trying to do the same thing, why would you want to be number 10,001?"- Mark Cuban, Shark Tank Host and Investor
Companies have a long way to go before they make it into our investment portfolios- we do not speculate with our retirement savings. The investors who gamble on novel ideas are simply playing a different game than we are- apples and oranges.
Not all entrepreneurs begin by pitching their ideas on Shark Tank, but they have to borrow or raise capital from private investors, who are usually wealthy enough to have 90% misses and 10% hits.
At this stage, investing truly is a risky enterprise that could fizzle or be the next world-changing innovation. After some sustained success, entrepreneurs can either sell their idea to a bigger company that can take it to the next level, or take their company public by offering shares to the wider investing world.
That horse would have to jump through many hoops while wearing his pants to make that happen.
Publicly-traded companies have boards that govern their business activities and must make decisions in their shareholders’ best interest; CEOs that don’t innovate, evolve, or profit don’t last long.
"I love entrepreneurship because that's what makes this country grow, and if I can help companies grow, I am creating jobs; I am setting foundations for future generations. It sends the message that the American Dream is alive and well." - Mark Cuban
By the time they’re worthy of our investment, companies have some inherent value- not just a hope that they “may” be worth something in the future, but actual brick, mortar, inventory, intellectual property, and revenues- and the expectation of sharing future profits in the form of dividends.
That is the essence of what we are doing during the wealth accumulation phase of our lives: we are buying a future income stream based on the growing values and dividends of successful companies.
That doesn’t mean companies are no longer vulnerable at this point- remember Blockbuster Video? Blockbuster was a cultural fixture for almost 30 years until Netflix came along. As streaming replaced DVDs, Netflix evolved their business model; Blockbuster didn’t.
The reason we use mutual funds is that the analysts often see the writing on the wall before we can- I’m sure most didn’t wait for Blockbuster to close all its’ stores before unloading the shares, just like I’m sure they didn’t wait until every home in America was “Netflixing and chilling” to invest in streaming.
We also diversify among hundreds of companies through mutual funds, so that the occasional Blockbuster scenario won’t derail our success.
What the market says companies are worth on any given day reflects any number of factors- and some of them aren’t linked to reality, much less a company’s intrinsic value.
It’s a pity that shares of a company every bit as real as physical property are interpreted so differently by the intellect- like an mental concept- but think of what those line items on your portfolio statement actually are in real life: companies selling our healthcare, housing, cars, entertainment, energy, materials, and food to name a few.
I doubt many are selling lots of animal clothes.
All a temporary decline means to me is someone is making a mistake that I refuse to:
“..we who experience a market decline as opportunists don’t merely outperform those who experience it as victims. We prosper quite directly by buying the shares they shouldn’t be selling.” Nick Murray
I believe a little investor education can go a long way to dispel misperceptions and make us all better investors, and improve our chance for long-term success. Please let me know if there is a subject you would like to learn more about!
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