Since the GameStop valuation roller-coaster there has been much speculation in the media on the implications for the future of investing. It’s easy to view the stories of market speculation that have dominated the news recently as cautionary tales for individual investors.
For me, one of the notable points of this drama was a disclosure by (trading app) Robinhood that it earns income from selling details of user transactions on to hedge funds, AKA payments for order flow.
Suddenly retail traders using the app were struck with a realisation that they were the product – their trading activity commoditised and sold onto to the hedge funds.
This is the logical conclusion when we take a moment and recognise that technology companies offering services at no cost, such as this ‘commission free’ trading app – do not reach a c12billion valuation through purely charitable enterprise. There will be a commercial aspect.
More concerning for me was that much commentary in media seemed to confuse trading in markets with investing in markets.
Investing and trading are two very different methods of attempting to gain in the markets. Both investors and traders seek profits through market participation. In general, investors seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter timeframe, seeking smaller, more frequent profits.
An unglamorous fact about investing is that when done right it is boring. The special ingredients are time and patience. A world away from the thrills of getting in on +800% ‘stonks’ or collaborating to deliver a short squeeze black eye to mighty hedge funds.
If you were asked who you thought was the world’s best investor, there’s a fair chance you may say Warren Buffett, the Chairman and CEO of Berkshire Hathaway. He is also often held up by those who advocate ‘market beating’ strategies as the poster boy for that approach.
A staggering fact about the Sage of Omaha is that he earned 99% of his wealth since age 50, and 97% of it since age 60. The power of time and compound interest is amazing.
Buffett started early, and has been investing for almost three quarters of a century. By 32 years of age he was worth just shy of US$2 million.
At 90 years old, longevity is a major factor in his legendary status. It might surprise you to know that had he stepped out of the game at 60 in 1990, he would have been worth a paltry US$ 3.3 billion! In other word’s he would have been worth under 5% of his net worth today.
The fact is that it is time in the market that offers best prospects for successful investing. This sounds easier than it is in practice – especially during periods of extreme volatility. This was made crystal clear in the past year when investment values fell sharply in Feb/March only to rebound and post strong returns by year end.
If you’re looking to become a long-term investor, commit to a long-term strategy that takes your own personal goals, situation, and risk tolerance into account. Having such a structured investment strategy gives reassurance and confidence that helps avoid behaviours that are inconsistent with investment success.
Chartered Financial Planner