A Light Switch Change
As we moved into 2023, it was like a light switch was flipped: what struggled last year suddenly rocketed upward. Netflix was up 20%, AirBNB up 30% and Tesla up 60%…in January alone!
Why is it that a flip of the calendar can create such a change in fortune? Certainly, these companies’ prospects did NOT improve that dramatically in one month. Instead, it seems the markets–likely institutions using fancy algorithms–determined that these stocks should be added to the 2023 ‘grocery cart’ of stocks, where they were scorned last year.
This is not investing but instead a short-term popularity contest. Thus, long term investors should ignore this ‘information’ and stick with their long-term plan and approach. I’ve long believed if a piece of information is not important 6 months later, then it should not be important now. That includes most information we read and hear about and suggests simplification is the way to go – it’s both easier to execute and provides better results! Warren Buffett is known for avoiding the complex in favor of the simple, and if it’s good enough for him it should certainly be good enough for us!
Banks – A Wake-up Call
When SVB bank got into trouble seemingly out of nowhere in early March, alarm bells rang from coast to coast, if not around the world. Was SVB a canary in the coal mine? What will happen next in the financial world?
SVB focus was on a concentrated client base of start-up companies which were encouraged to keep the majority of their money at the bank. These companies constantly need to churn cash and their large, uninsured balances became vulnerable since SVB was thinly covered for large and sudden withdrawals. When word got out that the bank might not have a reliable reserve, a classic run on the bank sprang up.
SVB played a dangerous game and got burned. It appears the issues with SVB were more unique than common, which is a relief for the banking industry overall, their customers…and for investors. With the dominos in the banking sector not falling and the federal government stepping in to backstop SVB’s deposits, runs on banks stopped and calm returned.
Again, Less is More
Our modern, computerized world has absolutely no shortage of data and information (just look at the data usage on your monthly phone provider invoice). Ironically, this abundance of information does NOT necessarily result in improved decision making or outcomes.
Why? It turns out humans live up to their reputation of not always being rational decision makers (shocker). Intangible, hard-to-define elements play a larger role in our choices and outcomes than we’d perhaps like to believe. Further, more data doesn’t necessarily translate to better data for improved decision making. We can only process so much.
For example, professional sports teams rely more and more on ‘analytics’ (decision-making based on processing large amounts of data to increase the odds of success) to make ‘optimal decisions’. The NFL leans heavily on these metrics to determine who to pick in the draft each year. Despite all the resources utilized to make the ‘right’ choices, the draft results in retrospect have been surprisingly mixed. It turns out human judgment still works best.
Speaking of judgment, in the auto industry, I believe fully-autonomous vehicles are still many years away from being the norm because cars and computers, as advanced as they are, cannot yet come close to processing what humans can. For example, you and I can easily differentiate a real stop sign from one imprinted on a t-shirt worn by a pedestrian walking by. A computer is not there yet…and maybe not even that close.
In investing, algorithms developed by super-smart Phd’s are all the rage at many big investment firms in a quest for top results. These algorithms, which process incredible amounts of data, don’t necessarily make superior investment decisions. They don’t factor in nuance, chance, and extenuating circumstances which good human judgment can. Judgment is based on combining logic and fact with feelings and intuition – things computers cannot yet fully process (and perhaps we should hope they never do!). The importance of the human element, to me, is encouraging. It means the robots aren’t taking over, at least not yet.
Investors: Time is Your Friend!
As the market goes through continued volatility and downdrafts, investors should
keep their focus on the long-term, because simply, the odds of success scream: you must! Stock market data over many decades tells you the following: on any given day in the stock market, there’s about a 54% chance the stock market will go up (just above the odds of a coin flip). Over a year, odds of seeing an ‘up’ market are almost 80%. In any decade, the odds of the stock market going up is about 94%, suggesting it’s hard to lose over time.
As you can easily see, time puts the odds solidly on your side. Isn’t that what good investing is all about (or any important decision) – putting the odds of success on your side?! I strongly believe in ‘matching’, where you match the type of investment to the purpose of that bucket of money. The above statistics strongly suggest that for long-term money, the stock market is your good friend. For short-term needs, the stock market is closer to a flip of a coin…and thus short-term needs are better kept in safe investments that don’t have the ability to go up OR down. If you need the money in the near term, make sure it’s there and not up to a flip of a coin!
Way Too Familiar
Late last year, Wells Fargo had to pay a penalty of $1.7 billion (yes, with a ‘b’) for charging fees and interest rates to customers that weren’t reasonable or warranted. Recall that Wells Fargo is a bank and not the mafia. How can a company (and Wells Fargo used to have a sterling reputation) built to serve customers be found to be purposely and aggressively bilking the very customers they were supposedly trying to serve?!
This is sadly all too common in the finance industry and comes down to values. Making a reasonable profit for a valuable service or product is the essence of capitalism and makes common sense. However, to profit by deceit or lack of transparency is wildly unethical. This type of story is way too common and speaks to a failure of our system and to the highly flawed ‘leaders’ who ultimately make these decisions.
Brian Weisman, CFA,CPA,CFP,CMA