It’s funny the things you hear back in the endless low cubicle walls of corporate hallways. I heard two previous colleagues discussing a recent stock transaction one of them made. He liquidated his stock position from his company’s employee stock purchase plan. The other guy reacted with a chauvanistic analogy “the stock market is like…”. I missed hearing the punchline so I just couldn’t help to google it only to realize I probably shouldn’t have searched it at work.
He was comparing the stock market to a particular piece of women’s clothing. I will not repeat it here, but it got me thinking.
Is there any truth to these analogies? Or are they just foolish fun. Either way, I thought it would be fun to review some of my favorites.
A casino is a place for gambling. Investors should be investing, not gambling!
Sure there are people speculating all the time. I have been known to dabble with options for the fun of it, in my tiny speculative fund. I would never build a strategy on this, but its fun and keeps me interested.
The stock market, more or less, is based on the collective underlying earnings of the companies that participate in the market. Mix in some investor sentiment and economic policy to increase the volatility from time to time, but over long periods it is weighted to the underlying earnings. A long term investor can avoid the short term swings and avoid the casino analogy all together with a buy and hold strategy.
An Old Man Swinging a Yo-Yo Walking Up Stairs
This is a great visual analogy and you immediately get a sense for its meaning. I first heard this analogy from a blog posting years ago commenting on a quote from Timothy Lewis of Realty Income. In the short term, that yo yo will be swinging fast on every step the old man is walking. But over time, that old man will slowly get to the top of the steps.
This trend benefits an investor who has a long term focus. I love this analogy and one I remind myself during the short term ebbs and flows of Mr. Market.
Yikes, did he fall down a few steps in the last 20 years. Now if only I could find an old man to act this out for me so I can include a picture…
A Roller Coaster
I never liked rollercoasters as a kid. I would get so nervous on the steady climb up hill. Once you reach the summit you are allowed just one breathe to take in the view only to be plummeting face first back to the earth.
Do you ever have that feeling with your investments? Will we see another huge disastrous market like we felt in 2008 or was that just a once in a generation type event?
I have always been uneasy riding high, or better yet, fearful when others are greedy. This might be the reason why I have been collecting cash instead of redeploying as actively as I have in prior years.
This one is quite strange, but it hits home. In John Maynard Keynes book The General Theory of Employment, Interest and Money, he makes a comparison to a person who was to choose the six most attractive faces out of a hundred. He noted that:
“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”
Wow, this is deep. Does this exist with great stock pickers? I have heard this strategy many times, pick the quality companies that are downtrodden and out of favor. Maybe the opinion of the company is so low that the average price an investor is willing to pay is at a discount to its intrinsic value. This seems like the knack of a value investor.
What is your favorite stock market analogy?