I really liked this piece by Ben Carlson. Particularly the conclusion:
“There will always be a handful of standout market performers that earn seemingly easy profits, but that’s really a pipe dream for 99% of investors. For the rest of us, getting rich at a painstakingly slow pace is still the best option.”
It’s funny how “investors” abuse the term “investing”. What we’re really doing when we buy shares on a secondary exchange is not really “investing” at all. It’s just an allocation of savings. Investing, in a very technical sense, is spending for future production. So, if you build a factory and spend money to do so then you’re investing. But when companies issue shares to raise money they’re simply issuing those shares so they can invest. And once those shares trade on the secondary exchange the company really doesn’t care who buys/sells them because their funds have been raised and they’ve likely already invested in future production. You just allocate your savings by exchanging shares with other people when you buy and sell financial assets.
Now, this might all sound like a bunch of semantics, but it’s really important in my opinion. After all, when you understand the precise definitions of saving and investing you realize that our portfolios actually look more like saving accounts than investment accounts. That is, they’re not really these sexy get rich quick vehicles. Yes, the allure of becoming the next Warren Buffett by trading stocks is powerful. But the reality is that you’re much more likely to get rich by making real investments, ie, spending to improve your future production. Flipping stocks isn’t going to do that for you.
This leads you to realize your portfolio is a place where you are simply trying to grow your savings at a reasonable rate without exposing it to excessive permanent loss risk or excessive purchasing power loss. It’s not a place for gambling or getting rich quick. In fact, it’s much the opposite. It’s a nuanced view, but one I feel is tremendously important to financial success.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.