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When someone gets lost, it doesn’t happen suddenly, nor does the realization of it. It’s a progression from being “not lost”, to being a little turned around, to getting somewhat concerned, more concerned, then officially lost. If one gets lost in the presence of their spouse, then there’s generally some debate about the issue along that progression. Throw in overconfidence, denial, blame, and eventually, if we’re lucky, maybe an admission of some responsibility for getting lost. We all know the feeling when it comes to being lost on the road. Most, if they’re being honest, know the feeling of being lost directionally in life, and many are waking up to the fact that we’re a bit off the path with respect to social and public health issues. To assume that we aren’t or expect we never will be is naïve. Drift happens even with the best of intentions. To the degree that these things tie into financial markets (a lot), and that we seek to be good, well-informed people, we care about making sure we’re never too far adrift. When it comes to financial markets and investing, most are lost. Definitively. Without question.

A few months back, we referenced the Scott McNealy quote during the tech stock collapse where he spoke about how irrational it was for investors to pay as much as they were for his company’s stock. The gist of the quote was that investors were paying so much for the stock that they couldn’t possibly ever expect to recoup their investment through the company’s earnings, which means that investors could only make money over time if there were other investors willing to pay more for the stock. This is called “The Greater Fool Theory”, and it lives deep in the woods well off the “investing” trail that historically has led hard workers and savers, more times than not, to Financial Independence Peak. The vast majority of investors today, whether they know it or not, are not investing. By putting money into the major market indexes – the S&P 500, Dow, Nasdaq, Russell 2000, etc. – at record valuation levels, they are speculating. They are speculating, because in most cases they cannot expect to earn any reasonable return from dividends or corporate earnings over a reasonable period of time. That, after all, is investing. Instead, what 401(k) participants and others are doing is hoping they can make money through the magic of a rising stock market and without that rise being supported by similarly rising corporate earnings. This is speculation.

Here’s the bad news – extreme and widespread speculation doesn’t end well. Just as Scott McNealy’s company, Sun Microsystems, lost well over -90% of its value, other speculative markets have lost tremendous value as well. The 1929 bubble, over -80%. The tech bubble, over -80%. Japan in late 1989, also over -80%. These are whole markets, which represent hundreds of individual stocks, so one can rest assured that there were many stocks that fell much further than -80% in order to get to that average for the index. And if one thinks today’s situation is different, they would be right. The level of speculation is arguably bigger and broader today than in those previous episodes. We are more financialized, have more societal participation in markets, and have been kicking the can on natural corrective forces for years now. This kicking the can part is akin to intentionally keeping the hiker lost and from finding her way back to the trail. It’s probably more accurate to say that it’s more like guiding entire bus-loads of hikers deep into the woods where there is little chance of survival. Speculative manias, after transitioning to panics, do incredible damage. Most of us over the age of 40 remember plenty of people personally affected by the last two bear markets (2000 and 2008). We were fortunate they were short-lived.

As critical as we are of policy-makers, central banks, and the narrative pushing corporate media for helping to create the hyper-speculative environment we find ourselves in, it’s also important that we understand our personal role in all of this. Regardless of the forces that are incentivized to lead us off the responsible path, we still have control and we still have decision-making ability. We can choose not to speculate or limit our level of speculation by saying “no thank you” to the options that no longer make good investment sense and seek out others that more closely resemble an actual investment. We’ve discussed at length how most commodities and companies that deal in commodities are actually very reasonably priced, making money, and returning a good portion of that money to shareholders. This is “on the path” investing and a good example of where we direct our focus. But, in order to make the best choices, we must also be responsible for understanding the landscape. First, we have to be aware of the wildlife in the woods that could harm us. We should never feel as though our walk down the path is free from danger. Having this awareness is the first step to survival.

The second step is knowing what actions we need to take to stay on the “investing” path. Say no to creepy speculative narratives and check your compass periodically, which means educating yourself on the current status of the markets and your portfolio holdings to see whether they’ve drifted into speculative territory. If you have neither the time, interest, nor inclination to do this, then get help from a professional to evaluate these things – a trail guide if you will. Although it can be done alone, it’s often wise to team up when embarking on such a perilous journey. An extra set of eyes and a brain that’s trained to fend off creatures and read a compass properly can be a real retirement-saver.

We’ve often used the term “anti-bubble” to describe the assets that we currently hold in our client portfolios. The asset class and individual stock positions we favor for the medium to long term we do so because they are sound investments, not popular, speculative ones. We are genuinely concerned for the vast majority of savers today who are lost in speculation. I’m both sad for the inevitable outcome and the fact that our system and its players have led them to speculate without their knowing it. I often ponder what more we can do to help people understand the risks and protect themselves from the fallout when this speculative cycle turns. This is why we write every month, without fail, about things that we feel might be relevant and impactful. Our hope is that our clients forward these scribblings to those they care about who may not be as well-informed. Our main focus and mission of course, is to help guide our clients as best we can, and although growing our firm exponentially is not our goal as it would compromise the personal nature of our work, we will invariably extend our reach to others by serving our clients well. Our job, and one that we take very seriously, is to deliver our clients to their destination regardless of the circumstances. To do that, we need to stay true to the definition of investing and not conflate it with speculation. And to do that, we also need to understand more than just financial instruments, or the boots and apparel for the hike. We need to understand the woods, everything that lives in them, and their ability to pull us off our path.

Editor’s Note: This article was originally published in the February 2023 edition of our “Cadence Clips” newsletter.

Important Disclosures

This blog is provided for informational purposes and is not to be considered investment advice or a solicitation to buy or sell securities. Cadence Wealth Management, LLC, a registered investment advisor, may only provide advice after entering into an advisory agreement and obtaining all relevant information from a client. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Past performance is not indicative of future results. It is not possible to invest directly in an index. Index performance does not reflect charges and expenses and is not based on actual advisory client assets. Index performance does include the reinvestment of dividends and other distributions

The views expressed in the referenced materials are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.