“..and they wonder why I rarely smoke now, imagine if you’re first blunt had you foaming at the mouth.” – Kendrick Lamar “M.A.A.D. City”
It is entirely natural to attribute more weight to things that happen to us and are easily recalled from memory. Psychologists call this the availability heuristic and piss-poor rappers call it the grind. Ignoring the existence of biases is a foolish endeavor yet we do it all the time. Mostly it concerns frivolous bits, yet on decisions that really matter, and tend to be more complex, we go with the default; which is often ripe with irrationality.
The implications for investing are overwhelming. Take this report on a Federal Reserve finding that America is the most underweight on stock ownership than it has been in the last 18 years. What is holding the percentage of stock ownership from falling even more is the wealthy elite holding stocks at a new high. It would be remiss to attribute this as the sole reason for the growing disparity between the 1% and middle America but it certainly should raise some eyebrows in the midst of a surging bull market.
One of the worst qualities in a money manager is overconfidence. Psychologists have a term for this too, it is called the illusion of validity. Like the trolling rapper posting in the comments section of a Chance the Rapper YouTube video with hyperbole like “I’m the lost member of Odd Future the next Jigga/Yeezy/K-dot y’all gotta check out my shitty soundcloud” it is painfully obviously the perils overconfidence can get you, and more importantly, others into. What makes overconfidence the worst quality in money managers is they attribute skill to success in one of the most unpredictable and dynamic environments in the world: the stock market. Sir Isaac Newton said it best, after losing a small fortune in the stock market “I can calculate the motions of heavenly bodies, but not the madness of people”.
Of course some people can deliver market-beating returns over an extended period of time but they are as rare as finding a gem in the comments section of YouTube. Rarer I’d wager, as at least the rapper has control over the quality of his output, where the stock picker is at the mercy of many more uncontrollable and unforeseeable elements.
So what? Maybe middle America is best served by being underweight stocks. No this compensation is overconfidence in other assets and equally misguided as our stock picker. This can lead to people sticking their necks out trying to tease returns out of historically low return assets (Read: chasing junk). Over the course of time no asset class has come close to delivering the returns the stock market has averaged. The evidence for holding stocks in an investment portfolio is overwhelming- see here, here, and here. Patrick O’Shaughnessy makes the case very clear for the importance of stocks in a diversified portfolio, while also addressing some of the reasons why millennials, his specialty, are underweight stocks. To be clear, no case is being made for stocks to be the only asset you hold; diversification is as fundamental as protect ya neck. Designing a strategy suited to fit your neck exposure is a post for another day.
Yes, stock market crashes happen. Millennials have unluckily experienced two major market crashes, one laced with subprime mortgages and the other being the infamous tech bust. However, forecasting the next market crash is as futile as the debate over who is the greatest member of Wu-Tang. A forecast should be treated as an opinion not a statistical fact. The real damage is done when the inevitable scares people out of the asset class all together. If you can deal with volatility, then your best vehicle to achieving wealth over an extended amount of time is the stock market. “Deal with volatility” is a big “If” as is "extended time" and both are not easily realized. If these contingenies frighten you than stocks ain't nuthin to fux wit.
Some verbal courage for the stock-clan. The first from a renowned poet whose full poem is required reading in most high schools worth their weight in blunts. The second poem comes from an equally as renowned poet, if not slightly more obscure.
Some verbal courage for the stock-clan. The first from a renowned poet whose full poem is required reading in most high schools worth their weight in blunts. The second poem comes from an equally as renowned poet, if not slightly more obscure.
“If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting….
If you can meet with Triumph and Disaster
And treat those two imposters just the same….”
- Rudyard Kipling “If”
“If you’re holding up the wall then you’re missing the point”
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