INVESTMENTS: IS IT BETTER TO BE LUCKY OR GOOD?
As originally appeared in The Jerusalem Post on August 8th, 2019.
Luck is a very thin wire between survival and disaster, and not many people can keep their balance on it. Hunter S. Thompson
A few days ago, I was Whatsapping back and forth with my brother about the prospects of a few stocks and I had mentioned that one that I had recommended to him a while back had just announced that they were being acquired. He then decided to remind me of one of the less successful moments in my career, when I was all gung ho about a company named iBasis. I mentioned it to many people as a great investment and much like the Beresheet lunar lander, it rocketed up and then crash-landed!
What I can say about that experience was that since I almost never give one-off stock recommendations. As I have written in the past, one key to becoming a successful investor is to learn from past mistakes. I did that!
The day after the correspondence with my brother, I was approached by someone who wanted me to use her portfolio management services. In hopes of securing a meeting with me, she emailed me her “track record.” The “track record” was from all the way back to October 2018 until the end of July. The money she was managing was solely invested in Cannabis stocks. No technology, no banks, no consumer companies. Just marijuana. I wrote back that I wasn’t interested. In the infamous words of former New York Yankee great Yogi Berra, “It’s like deja-vu all over again!”
Luck runs out
There is a fascinating article on forbes.com written by Ryan Frailich. His topic is “How “Resulting” Impacts Your Personal Finances”, and he starts the article with a question. “I’m at a bar with a friend, and we’ve each had too much to drink. I schedule a car to pick me up via Uber and leave. Unbeknownst to me, my friend decides he’s fine to drive himself home despite the six beers we each consumed. On my drive home, my Uber was sideswiped as we passed through an intersection, leaving me with months of physical therapy. He drives himself home and parks, slightly crooked, in front of his house. Who made a better decision upon leaving the bar? I made the better decision and had a worse outcome. He made a poor decision and had a positive outcome. Put another way, he got lucky and I was unlucky.”
While on a one-off the outcome of a bad decision may have worked out fantastically, the chances of continually making bad decisions and have them keep working out is negligible. Frailich continues, “All around us people confuse the results of a decision to be completely linked to the decision making process that went in. This is the concept of “resulting”, or drawing a conclusion on the soundness of a decision based on the outcome, rather than whether there was a sound decision making process that gave you the best chance of a favorable outcome.”
Traditional investments
When it comes to investing, it’s the cumulative impact of sound decisions and their mostly favorable outcomes that is the path to growing wealth. Just like people made huge amounts of money back in 2000 before the tech bubble burst, and then gave all their profits back, so to I fear that Cannabis only portfolios will meet the same fate. Keep in mind that I am not opposed to investing in this sector- I have even written about it- it’s just that like any other investment fad we have been through, they tend to not end all that well.
I recently gave a talk to a group of teens about budgeting and investing. One issue that came up was how to know if an investment was too good to be true. I gave some tips to recognize a scam, and then commented that they should stick to investing in more traditional investments like stocks and real estate. The reason traditional investments are traditional is that they have stood the test of time.
When it comes to investing you may hit it big on an investment or two, but over time your luck will almost certainly run out. The time tested approach to growing wealth is to use quality investments and have a long-term horizon. This is the cumulative effect of solid decision making.
Don’t focus on one bad decision that worked out well, and think that that is the secret sauce to success. It’s not. In fact, it’s a terrible way to make any decision and an even worse way to run your finances.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.
