Updated: Apr 5, 2019
The thought of investing in the capital markets can be a strong source of emotion to the point that some people are averse to putting money into listed securities at all. If you’re at least 40 years-old, you likely remember living through 2 major bear markets (The Dot.com hangover from 2000-2002 and the Housing Bust/Financial Crisis/Great Recession of 2007-2009), both of which exposed passive investors to the broad market declines of 49% and 56% respectively in the S&P 500. Having seen so much financial damage in such a short amount of time, some folks have had it with markets and would just as soon stuff their money in a mattress and not risk it losing value, a flawed strategy as money that earns no return can’t keep pace with inflation and ultimately loses purchasing power.
Investing in the capital markets can be scary and intimidating, confusing and frustrating, eternally humbling, and can seem completely irrational at times. It can make you feel like a genius or an idiot on any given day. How does one even begin to navigate the ocean of publicly traded securities, let alone feel comfortable risking real money to buy intangible pieces of various businesses hoping their values increase over time? There are thousands of publicly traded stocks, bonds, mutual funds, ETFs, options, currencies and more. And somehow, they are all interconnected in a continuous, dynamic flow. One day the market is up 1% the next day it’s down 2%, changing directions in a constant, noisy tug-o-war between the bulls and the bears. Meanwhile the talking heads on financial TV constantly opine against a backdrop of excessively replayed commercials (really bad ones at that…).
Investing in publicly traded securities and managing investment portfolios is an activity that deals largely with risk and unknowns. It is anything but easy and like most challenging endeavors, requires ongoing study, practice, an open mind and a heavy dose of humility. When these ingredients are combined, they help an investor to build the foundation for growth, learning and the development of wisdom and improved judgement. Like-minded people often take opposing views of a matter based on the same underlying information. “That’s what makes markets,” they say. But no matter what anyone tells you, there is no single best approach—every strategy and investment vehicle have pros, cons and risks to be considered, not to mention the sophistication, comfort level and risk tolerance of the underlying investor. There is no free lunch.
I know these challenges and emotions first-hand. I’ve felt them throughout my career and have learned to identify them so that I am better prepared mentally to deal with them when they present themselves. For example, the basic act of identifying and trading a few shares of a single stock can be intimidating to some and may come with immediate buyer’s remorse and a lot of second-guessing (this is natural). I remember the first time I made an “institutional” trade almost 20 years ago. I had received no formal training. While I did have someone looking over my shoulder, it was also presumed that I knew what to do because I had passed my Series 7 exam and worked in an office that had 2 traders (big wow 😊). It was trial by fire and I was simply handed a yellow piece of paper representing a live order to buy 150,000 shares of stock of a company that I had never even heard of, using my best judgement. Suddenly there were several million dollars of real shareholder money involved. I was a 24-year-old who had just paid off a $300 credit card bill. The thought of spending $5,000 on a trading commission alone was baffling. As a trader, my responsibility was to determine which broker to use to execute my order and to contact him/her throughout the day to manage the trade in smaller blocks so as to move the market as little as possible while getting the best purchase price possible (the final price being the average price of all smaller blocks traded during the day). Over the next 18 years I would perform this action countless thousands of times, sometimes managing 20-30 trades that required different actions (buys, sells and short-sales) for different asset classes (stocks, bonds, options) in a single day.
The market is like the ocean and I liken the act of picking individual investments to bodysurfing. The markets, like the ocean, provide a constant, arrhythmic stream of “waves” in the form of investment opportunities. And like the markets, the behavior of the individual waves is affected not only by their own internal dynamics, but also by external factors like the tide, current, prevailing weather and even the Earth’s proximity to the Moon. These external factors may even be powerful enough to keep some swimmers out of the ocean until the outlook improves.
One of the hardest things about bodysurfing is getting to a suitable starting location, being prepared to ride and then…patiently waiting. Waiting for a good wave to ride. It can be very trying when you see other perfectly good waves breaking in the distance, temping you to stray from your current spot while exerting both time and energy to constantly reposition yourself. The temptation to chase waves usually results in more wasted energy and fewer opportunities to actually surf. I remember someone once telling me a theory that every 7th wave was the “biggest”. So I’d start eying waves in the distance, thinking I saw a big one (must be the 7th) coming my way, only to see it disappear right before my eyes while a seemingly bigger one would form just a few waves behind where the first (7th) one was. It didn’t take long to come to the conclusion that there were countless perfectly good waves out there and any of them could be the 7thor the 3rd or the 1st. Theories were all well and good but out in the ocean among the waves, theory takes a back seat to reality.
Just as the ocean provides an endless source of waves upon which to surf, the markets provide a near endless source of investment opportunities that have different dynamics. Like the waves, some investments provide for a better “ride” than others (perhaps through higher returns or through lower volatility and a smoother ride—both attractive investment attributes). Just as some waves may build slowly before suddenly building momentum then crashing unexpectedly, some stocks may stay under the radar before suddenly appearing out of nowhere, grabbing investors’ attention, and tempting many to jump on board in an effort to catch that momentum (though they might just be chasing the momentum). And often when that momentum runs out, especially if the company behind the underlying stock doesn’t have strong fundamentals to justify the price action, the stock may crash without warning as momentum dries up and eager buyers suddenly head for the exits as panicked sellers. Still other waves may never even crest, just rolling to shore without much fanfare. These waves can still be ridden but may simply be passed over in searches for the bigger, more exciting opportunities. Similarly, there are many securities that don’t grab investor dollars because they don’t appear exciting enough if they are surrounded by more exciting opportunities. The point is that securities, like the waves of the ocean, all contain elements of risk and reward, but in the end, each has individual characteristics which must be analyzed selectively in order to increase (but not guarantee) the chances of a good ride.
Another important lesson is that investors/bodysurfers may be better served by not trying to have perfect timing and execution with every single wave. Not only is repeatable perfection nearly impossible, but very few waves themselves are “perfect” (whatever that may imply). Perhaps if the focus was more on trying to be “generally right” as opposed to “perfectly right”, the investor/body surfer will end the day having caught more waves than missed (not necessarily getting an ideal ride out of each) and with much less time spent treading water. I can’t recall how many times I’ve tried to bodysurf in the ocean and the resulting wave crashed over me and drove me face first into the sandy bottom. But I also can’t recall how many times I’ve ridden a wave expecting little and then being surprised that it carried me on its back much further than I expected. Point being, there are a lot of unknowns and even the best waves can turn out to be disappointments while some of the most unimpressive waves may turn out to provide a perfectly good opportunity. It’s a function of odds and doing what you can to improve your odds of success while being patient and persistent enough to see things through.
In the end though, there are a couple of universal truths. No matter your style, experience or level or risk tolerance, if you want to ride the waves, you’re going to have to get several feet deep in the water. Also, the bodysurfer who only spends a short amount of time in the water while holding high expectations of success is more likely to be disappointed than the one who spends much longer periods of time practicing and learning while understanding and paying heed to the dynamics of the ocean.
 The Series 7 exam, also known as the General Securities Representative Exam (GSRE), is a test for registered representatives. The Financial Industry Regulatory Authority (FINRA) administers the exam. In the United States, stockbrokers take this test to get a license to trade.
These are my own thoughts and points of view. Thank you for reading.