LifePro Asset Management’s investment process is a proprietary framework crafted to guide you through the necessary steps to enhance your wealth and bring stability back to your financial life. In this episode of Money Script Monday, Robert provides insight on how the stock market can be a useful tool to generate long-term wealth.
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Welcome to another episode of Money Script Monday. My name is Robert Reaburn and today we're going to be going over four of the most commonly held myths about the stock market.
The reason why we're going to be doing that is because the stock market is one of the greatest tools that we can use to create long-term wealth for both clients and institutional investors alike, if we're properly coached and have the proper guardrails in place so that we can get from point A to point B and realize most of those benefits.
The first myth that we often hear about the stock market is that it's fixed and is like a casino.
In other words, it's the equivalent of gambling. And that, of course, could not be further from the truth.
The main reason why that's the case is because, unlike a casino, stocks are actually investments and it's very, very key that we understand that stocks are not trading vehicles, they're actually real businesses that grow or shrink in value.
So, when we're targeting those businesses to invest in, it's really important to understand the fundamentals.
Just as important is that the stock market is completely transparent.
In other words, when we buy a stock, we know the exact price that we're getting and when we sell it, we know exactly what we're selling it for, and while we are holding it, we can see the investment changing in value in real-time.
That, of course, is a double-edged sword.
As our investments increase in value, we all think we're really smart and we think that nothing can go wrong.
Versus on the other side when investments go down in value, we feel that pain in real-time and often can make decisions that are unrelated to the actual long-term fundamentals.
So, it's very important that we're well-coached in understanding what affects the fundamentals versus why prices are changing from day-to-day.
The second thing, of course, is that the stock market has become increasingly democratized.
In other words, a lot of fundamental research that used to be the purview of institutional investors has now been made available to the everyday investor.
What we do here at LifePro is we take a lot of that research and process it for our clients to make those decisions in terms of where we want to invest our client's long-term money without having to pay soft dollars to institutional broker-dealers such as Goldman Sachs or Morgan Stanley, we can actually get that organic research because it's out there for free.
Thirdly, we talked a little bit about this before about we're buying a business. We're not buying a trading vehicle.
If you're a day trader, you're absolutely correct, it can certainly be hard to compete with a lot of those quantitative trading hedge funds out there that are trading stocks second to second and often can have a speed advantage versus a retail investor.
But that's not what we do here. We invest for the long-term.
We are looking for businesses that are going to have that capability and are positioned to grow over and above what the average business on the S&P 500 is expected to grow at.
Therefore, trying to target above-average long-term returns.
The second myth that we see often held by most clients and advisors alike is that rebalancing is good.
Now, rebalancing sounds prudent, right?
If a stock runs up in value, we want to sell a little bit of that and buy a little bit of that stock that has shrunk in value, but that can often lead to under-performance.
Why is that? When we look at our own portfolios and when we construct client portfolios, we want to let our winners run.
In other words, finding a good business is really hard to do.
What we see a lot of the times with most investment strategies is that we end up rebalancing away most of the value that is created by some of those great companies that are going from good to great.
In other words, if we had bought Apple in 2005 and held it all the way until today, think about how much value we would have sold away by continuously rebalancing the weight of that stock in the portfolio.
The way we approach investment management is that once we know and once we have a higher level of conviction that we've spotted a good business that we've invested in, we often let that stock run and increase in value in the portfolio.
Versus, a lot of the times we will have stocks where we've gotten it wrong and we want to make sure that we're holding ourselves accountable.
So, when a business or a management team is not executing at the company level, we want to make sure that we're not holding our client dollars in a business that is deteriorating from a fundamental standpoint.
What that really means is that over time, it's like a baseball starting lineup.
What we want to do is make sure that our starting lineup has the best and the greatest companies that we think based on our research are available to our clients and that we're investing our dollars into those companies and not necessarily rebalancing back into our bad stock picks.
Rebalancing is one of the big factors that leads to long-term underperformance, and that's one reason why we just don't automatically rebalance in client portfolios.
The third big myth out there is that volatility is bad.
The reality is that volatility is neither good nor bad. It really depends on what your time horizon is.
In other words, if the stock market were to go down 20% from now until the end of April, that's a problem if you need that money for a home renovation, a new car, vacation, some outstanding liability that you had set aside that money for.
But, if your time horizon is 10 years or let's say 5 years and beyond, then really the short-term moves in the market is just noise.
In other words, the longer-term risk is inflation and that you don't grow enough to offset the increased cost of living.
We really want to make sure that we're utilizing volatility the right way.
For clients that have short-term cash needs, what we want to do is identify the amount of cash they need over the next one to four years, set that aside and reduce what we call that sequence of return risk.
In other words, that risk, that short-term price movements in the market will affect their ability to fund outside liabilities or outside needs such as a new house, a mortgage, etc.
So that's the first thing.
The other thing is that what we have to understand about volatility is that volatility is really at the end of the day a function of growth or potential growth.
The higher an asset's potential growth rate is, the more volatility it's going to have because any minor changes in that potential growth rate in the future is going to dramatically impact that end market price.
In other words, what we call the terminal value of that stock price. So, really, volatility is neither good nor bad.
If we have a long-term time horizon, then what we want to do is we want to utilize volatility to our advantage to increase our potential growth rate.
But, if our time horizon is short, in other words, we need cash for the next one to two years, then we actually want to stay away from volatility, reduce it and make sure that we're taking a more of a preservation approach to our investment portfolio.
The fourth myth is that it's impossible to beat the market.
I've seen, our team has seen, so many strategies out there that push the idea of an efficient market hypothesis.
All we have to do is look back to 2007 at the peak of the market, the bottom of the market in March of 2009 and any other prior peaks such as 2000, 1991, 1987, etc. to really understand that the market is in no ways efficient.
Where the market is efficient is understanding and reflecting what is currently taking place in the news, what's been released in headlines or the last earnings report on that specific day.
Where the market is inefficient is understanding the true long-term value that an asset has.
In other words, Apple releases its new iPhone in 2007 I believe it was, the stock price moved to reflect the release of that phone that specific day.
So that news is reflected in the price.
But what wasn't reflected in Apple's price was the true secular shift that Apple had caused by moving away from the feature phone, introducing the smartphone to everyone and opening up the applications feature for independent developers.
That's the concept of where the market is truly inefficient.
It does not truly understand what can happen over the next two, three, five, six years and beyond and how that will impact the long-term value of a stock, a bond, or any other asset that we are investing in.
So, what we really want to do when we're investing, we want to ignore the short-term noise of the market.
Benjamin Graham, who is one of the investment legends in Wall Street way back said over the short term the market is a voting machine.
In other words, it's a popularity contest.
Over the long-term, however, it's a weighing machine and it weighs both the good fundamentals and the bad fundamentals.
What we do here at LifePro Asset Management is we weigh the long-term prospects for each of our investments and then we compare it to what we are expecting from the overall market and try to target a set of investments that we expect based on our research will deliver returns that are over and above what can be obtained in a low-cost index fund.
So, again, we're very appreciative for all of our clients, all of our advisors, and those clients and advisors that do business with us in the future.
If anyone has any questions, please do not hesitate to reach out to myself or anyone else here at LifePro Asset Management, at 888-543-376, and we would be more than glad to help.
Have a fantastic week and thank you again.
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