Serious Business
Stock market indices once again experienced a week of volatility and losses. The S&P 500 lost over 3% on the week and is now down close to 6% from its high a few weeks ago. The Nasdaq was down the most with a 5.5% loss last week—its fourth straight weekly loss.
The most notable losses among the technology names occurred on Friday when Nvidia lost 10%, and Super Micro Computer lost over 23% to close the week. As we’ve briefly noted, these are among the most active and speculative names in 2024, so it’s interesting to see the big one-day drops—even if not particularly surprising given the hype around the stocks.
Whether this is the start of some of the speculative steam being taken out of the markets is too hard to say. But what we can say is that, during the last few years, there have been several periods of euphoria—meme stocks, technology, crypto, NFTs, etc.—and this has often made the market look more like a source of entertainment for people and gamblers than the serious business of investing hard-earned savings.
But investing should be taken seriously. There is, no doubt, a place for “fun money” to speculate a bit—or invest in a company solely because you like its product. However, over the long run, the care and skill with which one invests their own or client's capital can make a huge difference in one’s financial security. As Seth Klarman writes in his book Margin of Safety:
Investment success requires an appropriate mind-set. Investing is serious business, not entertainment. If you participate in the financial markets at all, it is crucial to do so as an investor, not as a speculator, and to be certain that you understand the difference. Needless to say, investors are able to distinguish PepsiCo from Picasso and understand the difference between an investment and a collectible. When your hard-earned savings and future financial security are at stake, the cost of not distinguishing is unacceptably high.
As we’ve written plenty of times in various iterations, the trouble and downfall of so many people in the investing process stems from one issue: emotions. Humans tend to get greedy and fearful and envious and overconfident, at times. They tend to make decisions when they shouldn’t, like when they are hungry or angry or lonely or tired.
And those emotions, and states in which emotions can be amplified, often lead to bad decisions that can’t be reversed until it’s too late. As Klarman continued in his book:
Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands. By having confidence in their own analysis and judgment, they respond to market forces not with blind emotion but with calculated reason. Successful investors, for example, demonstrate caution in frothy markets and steadfast conviction in panicky ones. Indeed, the very way an investor views the market and its price fluctuations is a key factor in his or her ultimate investment success or failure.
…Unsuccessful investors are dominated by emotion. Rather than responding coolly and rationally to market fluctuations, they respond emotionally with greed and fear. We all know people who act responsibly and deliberately most of the time but go berserk when investing money. It may take them many months, even years, of hard work and disciplined saving to accumulate the money but only a few minutes to invest it. The same people would read several consumer publications and visit numerous stores before purchasing a stereo or camera yet spend little or no time investigating the stock they just heard about from a friend.
…Many unsuccessful investors regard the stock market as a way to make money without working rather than as a way to invest capital in order to earn a decent return. Anyone would enjoy a quick and easy profit, and the prospect of an effortless gain incites greed in investors. Greed leads many investors to seek shortcuts to investment success.
…High levels of greed sometimes cause new-era thinking to be introduced by market participants to justify buying or holding overvalued securities. Reasons are given as to why this time is different from anything that came before. As the truth is stretched, investor behavior is carried to an extreme. Conservative assumptions are revisited and revised in order to justify ever higher prices, and a mania can ensue. In the short run resisting the mania is not only psychologically but also financially difficult as the participants make a lot of money, at least on paper. Then, predictably, the mania reaches a peak, is recognized for what it is, reverses course, and turns into a selling panic. Greed gives way to fear, and investor losses can be enormous.
It’s far easier to spot speculation than to predict when it will end. We’ve had about four years of it, interwoven with a year in 2022 when it seemed like some of the froth was subsiding, which it did in some areas of the market.
So far, the decline during the last few weeks has been what we might expect in any given year in the overall market at some point. But given the sharp moves in some larger market capitalization stocks, this move feels a little different than past moves, even if that feeling still doesn’t do much to help one predict the future.
“The bottom line on the quest for superior investment returns is clear: You shouldn’t expect to make money without bearing risk, but you shouldn’t expect to make money just for taking risk. You have to sacrifice certainty, but it has to be done skillfully and intelligently, and with emotion under control.” —Howard Marks
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