Let’s start with the so-called “smart money.” Big institutions used to have better access to company data, to make their forecasts.
Taking some advantages for granted, and pressing other edges over the line, Wall Street got distracted, in my humble opinion. So, I voted with my feet. By the time I escaped Wall Street in 2006, to open an independent money management and planning firm, many of its stock research reports had legal disclaimers longer than the research.
If I had to politely summarize in one sentence what I am so fortunate to have learned, inside the belly of the beast at the largest global brokerage/bank, it would be this one:
Informed simplicity beats complicated solutions.
Look at one measurement of how remarkably wrong some of that smart money has been, over the past decade. One of the smartest sounding arguments is why good news is missing the big picture and optimists are going to have the rug pulled out from under them. Perversely, predictions of doom sound smarter than stubborn progress and quiet improvements.
The smart money’s fear has consistently grown, during the stock market advance, over the past decade. Yale has conducted a survey since 1989, where they ask institutions and individuals “What do you think is the probability of a catastrophic stock market crash, in the U.S., in the next six months?”
Notice, since March of 2009 (when the stock market bottomed), the smart money’s confidence that a stock market crash was coming soon has more than doubled. Over the same time, the stock market advanced 455%.
“Markets are never wrong, opinions often are.” -Jesse Livermore
What is more difficult for Wall Street to explain right now is the widest spread between institutional and individual fears. The “little guy” was not afraid in March 2020, as you can see above.
Keep in mind, online trading commissions for individuals just went to zero, right before all of 2020’s craziness. Making fearlessness also frictionless gives birth to this chart, one of the most astounding I have ever plotted.
Looking at the data shared by my friends at Sentiment Trader, these online trades averaged 589k per day going back to 2004, all the way until free commissions were announced, in October 2019. Then, in March, April, and May of 2020, you are looking at more than 4 million daily trades.
There is zero doubt that some wild speculation is mixed into some individuals’ trading activity at home, and much of that will end very badly.
But, do not let the smart money bullies make you believe you are incapable of avoiding disaster. Your mom was right, bullies do not feel good about themselves. Many institutions are underperforming individuals, and that is bad for business.
Also, do not let the wild speculators make you believe that trading more is capable of repealing the laws of math, business, and gravity.
“We have 2 classes of forecasters: Those who don’t know…and those who don’t know they don’t know.”
-John Kenneth Galbraith
New rules for the economy are being written in 2020. It is hard to imagine the words “without precedence…” included in so many stories and still not be hyperbole, but another weekly update.
Remember, our job is not to figure it all out. If you feel like pools of digital information are being filled with quicksand, offering little time to breath, before having a chance to separate fact from fiction – you are not alone.
Rather than futile attempts to stay on top of everything, be among the very few focused on getting to the bottom of anything. If you have an edge, can define your risk, and love deep dives into math, you can do this. If your disciplined investing operating system is evidence-based and repeatable, you will not care what any crowd is convinced of or speculating about. They are trying to BE right. YOU are the most underrated investor, only trying to get it right.
For me, that means consistently rising dividends, I affectionately call Mailbox Money. I am lucky. I serve families that put a tremendous value on what they can count on. A dividend is not a prediction and is not speculation.
A dividend from a business generating cash flow, is delivered to stakeholders to be held in their hands, so they know what is real. There is an endless supply of complicated investment solutions made. None of them can match the history of dividends paid.
“The winner of the match is not always determined by who is right, but in the end, by who is left.” – Victor Niederhoffer
Strong balance sheets and accelerating cash flows, of businesses able to expand their advantages, can provide consistently rising dividends of the highest quality.
One of those families was kind enough to pull off the road, in the middle of Texas, and take this photograph for me. He knows this non-chart is what the stock market looks like in my head, as all the research is being done to determine which businesses are candidates to compete for a roster spot in our Mailbox Money portfolio.
Remember the other side of all those institutional predictions of what should happen, and individual speculation about what might happen – both crowds still have to also figure out the best times to make withdrawals.
Mailbox Money tells us exactly what is happening.
Whether you choose to do this on your own, or find a trusted partner and guide, the key is an evidence based repeatable process. Deeply informed simplicity is the Holy Grail to solving endlessly confusing charts, like those two above.
One of the reasons I chose to escape Wall Street is the ability to communicate freely. My belief that the most underrated investor is the one who does not need any of their complicated products or poor predictions, would not have made it past the compliance department. And, all their departments would hate my belief that the most underrated investor is the humble individual, who is not wildly speculating about what they do not understand. Confusion is big business.
I have expanded my team to include coders, working on backing that belief system by building a digital sandbox for the most underrated investors to build their own plans in. There is much more to come on this, but I have never been more excited to share with individual investors and advisors. The sneak preview is we do not have to know all the right answers about the markets, just the right questions to ask, inside the market…and of ourselves.