The Playing Field

As a business owner you may want to consider this blog writing because the thinking associated with many of today’s advisors is so complacent as to potentially bring negative effect to your business opportunities. If your advisor’s ideas do not include real growth and opportunity thinking which matches your ability or desire to achieve your expectations then you may need different advisors…

The front page article on Yahoo! Finance today, written by Richard DeKaser, is titled “Stocks: Why Investors Can Still Expect 8% Long Term”. We see this crazy stuff all the time and many “investors” fall for it. You may not think so at first, but maybe this is very destructive to actual returns. 

The first question I want to ask is why anyone considered to be an “investor” would ever ponder the market average rate of return. If you are an investor then don’t you try to invest in something worthy of the risk? Yes, yes this does assume that as an “investor” your risk tolerance is above the market… but hold on! Does it really mean that? What if your risk tolerance is lower than the market but your expectations are higher than the market? It’s how I would want to be, I guess. Personally my risk tolerance is way above the market but so is my expectation of returns. I’m not representative of the majority but isn’t this also what makes me more able to consider the merits of the market since I am fully capable of considering a much broader range of investments? In order for me to see what is typical or basic, shouldn’t I have wider vision in order to understand it? Okay, enough said about that.

The article mentioned above refers to market performance since 2000 and the potential expectations of the next few years or even decades. As usual the institutionally minded financial “expert” who wrote the article is focusing on the mean or average expectations of the mean or average person who really isn’t an investor. Usually the average person is depositing some of a paycheck into a retirement account and then not really paying attention to what they are invested in. Even if we assume that they all end up in the highest long-term performing style which is growth and income, then we can also assume that those average assets can only achieve the market rate of return less expenses. The reason for this is that most of the assets will be so broadly represented in the markets that they can’t achieve anything else. They are over-diversified to the point of having zero risk and zero growth in comparison to the markets.

The point of all this is that you must decide if you are an investor or a depositor. If you are a depositor then why even read the articles like the one mentioned above since you are not likely to make any investment decisions? If you are an investor then why read it since it does not represent realistic investment strategy, intelligent business decisions, and effort worthy of the title “investor”?

If we were to go back and measure the market average return since commerce began, we may find that it has always been somewhere between 6% and 8% with little deviances here and there, give or take 2%. So we know that the playing field is 8%. This is the base to operate from. If you go below 8% you are under-performing the markets and if you go above your are out-performing. This is simple but too often these days they are speaking of the playing field as if it were the entire experience of the investor and that makes no sense! It’s like saying that baseball as a game is the field it is played on and we should only consider which field it is. Are we playing on Arrowhead or Wrigley? What if the names of the fields represent market segments. Are we all going to ignore the teams (corporations) and who is winning? Are we going to ignore the home runs, doubles, bunts, strikes, and all the other statistics of the game (performance)? Are we only going to note that there is a game going on at our favorite field and not even care who’s pitching, batting, or fielding? In football would be only stare at the lines of the field and be satisfied that we saw the field? If the field is the only thing that matters then it won’t be long until the playoffs don’t matter.

Aren’t fantasy teams the same thing as picking stocks and other investments? Shouldn’t we have a portfolio of investments which represent our favorite picks? And then, since we aren’t watching the poor performers shouldn’t we expect better performance? How many questions do I need to ask until someone sees reality?

So why do the professionals, the institutional professionals, want you to only see the field and forget that there are teams playing the game? Why do they want to represent the sport of investing as something you cannot cheer and root for? Why do they want you to ignore how the game is played and who wins? It has a lot to do with getting you to deposit your money and then not move out of investments when the going is tough. They want your fees to be consistent and as long as you are making deposits the institutions will get the higher fees combined with the leverage they can use when investing their own accounts. Simple. Now be a real investor.

As a business owner you have to consider the above in how it relates to your business investments. If you were to purchase ownership in other businesses in your area then you would definitely consider the merits of doing so and you would hardly overlook the players in each business opportunity. The management teams, administrative staff, close advisors, support and technical personnel, sales and marketing can all make or break any business and the cost to upgrade or replace them can be expensive and cause your investment to take years longer than expected to produce real results.