Beyond The Headlines
Words Do Matter
I remember standing in front of Casino de Monte-Carlo in Monaco when I was a kid. I enjoyed looking at some of the cars parked in front of it. I have visited this sovereign city-state three times since. I like the windy roads, the vistas, the weather. I don’t recall ever being inside a casino in my life, though. I have never gambled in one, but I consider myself a lifelong investor, a stock picker, a business owner. It worries me how much the vocabulary, the words around investing, start to sound like something one would overhear among roulette players or slot machine enthusiasts. I believe that words do matter, and the more investing sounds like gambling, the more unwanted trouble you may get yourself into.
Casino de Monte-Carlo is almost 160 years old. It was opened to help save the ruling family House of Grimaldi from bankruptcy after losing tax revenue from nearby towns. You could say that they made a fairly sure bet since the house always wins. It has, in this case, too. The idea turned out to be a success, and the casino served as the primary source of income for the Grimaldis and the Monaco economy until recently. Its name was even borrowed to label a class of computational algorithms – Monte Carlo methods.
We know well that many patrons of casinos have gone bankrupt looking for quick riches. We even know that there were casinos that have gone bankrupt. It had more to do with poor management combined with economic recessions rather than an unfavorable outcome of any game of chance. The casino is a business, though, and any business can’t be mismanaged and fail.
The stock market, or more precisely a stock exchange, used to be a physical place where buyers and sellers came to exchange ownership of shares of companies. Shares are pieces of businesses, not just tickers with prices. They represent participation in an actual operating company. The company can be offering services or goods to customers. They do it to earn a profit and enrich their shareholders in the process. Today, we still have buildings that house or housed stock exchanges. The actual trading happens almost anywhere, and it’s virtual. How stocks change hands is really secondary. The nature of the stock exchange might have evolved from physical to virtual, but its role remains the same: a place to buy and sell stocks.
An investor buys shares of companies because they want to become an owner of the businesses that those shares represent. It’s no different than buying 20% of a local restaurant, laundromat, or gas station. Stock ownership allows us to build a collection of businesses. They could be local and operate in the same state or country where we live or be global and have operations worldwide. An investor’s success is correlated with the success of the business. An investor could be seen as a modern-day tycoon, just like Carnegie or Rockefeller. You don’t need billions or trillions to own pieces of great businesses out there; a smaller amount will do.
To me, the best test, whether one is an investor or a gambler, starts and ends with a simple question. Would you be comfortable holding what you own for at least a few years without being able to see a price quote or sell your shares? An investor carefully follows the fundamentals of the business. He or she wants to know if the company delivers profitable growth or is getting closer to that path. This means that each sale of a service or a good comes with a profit. If I own a growing, successful gas station in a promising neighborhood with healthy sustainable traffic, and I have a manager running the operations who finds new creative ways to monetize the location with other services, coffee, food, car wash, etc., I don’t need to know how much I would get for my 20% participation every minute of the day. As long as I know I haven’t overpaid for this business, I remain a happy holder, an investor.
We see our investment capital as money that our clients and we don’t need (at the moment) and money that our client and we can’t afford to lose. That sets a very particular framework for risks we are willing to tolerate and rewards that we choose to accept. Because the capital is not needed to cover any near-term expenses, it can be committed to a longer-term investment. At the same time, the capital may be hard, if not impossible, to replace; thus, we choose to avoid the risk of a permanent loss in any individual investment.
By eliminating large swaths of the stock universe, we lower the odds of coming across real lemons. We don’t buy companies with lots of debt, companies in fast decline, companies with questionable managements, and more. We often mention that what we buy matters as much as what we would never buy.
Some stock gamblers may chase those very lemons with hopes that they will turn less sour in a heartbeat, but they rarely do.
A stock gambler lives and breathes every stock price movement. They believe that the price is everything. It tells them whether they are wrong or right about their bet every minute of the day. This perspective turns the stock market into a casino, a ticker into numbers on a roulette table. With that mindset, it’s almost unnecessary to even know what they represent.
For stock gamblers, the money placed on bets is not only the money they do need but often money they don’t even have. It may feel new, but the phenomenon is as old as the stock market itself. There always those seeking quick riches with borrowed money-making quick bets on coin toss like gambles. Today, we see a record level of margin debt. That’s borrowed money used to buy stocks. It jumped over 70% year-over-year alone, and it’s approaching a trillion dollars quickly.
Gambling has its appeal to some, and stock market gambling is no different than other gambling. Last year’s study showed that among those who traded for only one day, about 30% made a profit after fees. I imagine that very few leave the casino after a winning streak, and very few end their day trading gambles either. That’s enough success to invite more cohorts of gamblers. The study explained further that for those who traded daily for more than 300 days, 97% lost money.
Some argue that COVID-related restrictions led to a shortage of gambling opportunities and brought gamblers to the stock market. That might be the case. Unfortunately, it’s not just the new breed of stock market enthusiasts that are reshaping the investing vocabulary. I notice how the media is embracing it as well. I recently read how a very reputable, old investment research firm offers help identifying the next best bets on the new undiscovered meme stocks. These are stocks that have experienced an increase in trading not due to the company’s performance but social media hype. That’s a firm that made its name providing detailed business fundamentals for investors for decades now. Few can resist, and the gamble is on.
Investing takes both skills and luck, but with caution, experience, discipline, and patience, and most of all, with a long-term investment horizon, skills start to matter more than luck. I see our good fortune as a bonus rather than the reason for our success. A well-researched, well-chosen, well-bought stock can prove to go up much more than what we expected. We welcome those surprises, but we don’t leave our investment success to chance.
There is a method, there is a process, and the words we choose matter.
The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.
This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.