Deluded by sell-side hype, retail investors are prey

Intermediaries perpetuate the myth that investors benefit from short term increases in share prices

Traders lose money. That is more than a Wall Street myth, it is reality. There are many reasons why they lose as a group, but the main reason reliance on advisors.

Source: Tradeciety

You only have to watch MSNBC, BNN or Bloomberg for five minutes to have another talking head promote investment in any given stock on the basis that the price is about to rise, as if that were a benefit to investors. Higher stock prices are inimical to higher returns. It is tautological that if you can buy an interest in a future earnings stream at a lower price you are certain to enjoy a higher return. The beneficiaries of higher prices are brokers, portfolio managers and traders. Brokers benefit when you trade more often. Portfolio managers are paid a percentage of assets under management at trading prices. Traders can sell at a profit but as a group incur losses, with every gain in secondary markets at the expense of someone else’s loss with the combination certain to lose in aggregate owing to fees and commissions.

Instead of jumping off buildings when markets sell off, investors should be jumping for joy. Real wealth is accumulated by buying well and holding your interests for long periods, often decades. Every profitable sale attracts a tax penalty unless in a tax-deferred account, and the gain is reduced by the trading costs. Following a profitable sale, an investor faces the dilemma of finding a suitable new investment at least as good as the one sold with enough potential to produce not only a return equal to the one the sold stock would produce but also high enough to offset the costs and tax burdens of the sale decision.

If share prices fall but the underlying businesses are unaffected and continue to grow as profitably as they were before the prices fell, no one has “lost money” - instead they have been given an opportunity to earn more money by adding to their holdings at a lower price. But the anchors on business news networks decry days when prices fall and are cheerleaders for days when prices rise. The trading price is irrelevant unless you sell, but the future stream of earnings is always relevant.

Sure, higher profits will lead to higher share prices most of the time and likely to growth in dividend payments as well, but the existence of higher trading prices is not a reason to sell. Many examples typify the dangers of selling when prices rise.

Home Depot went public on September 2, 1981 at $12 a share. Investors who held their shares froom the initial public offering (IPO) through today enjoyed a cumulative return of over 400,000 percent.

Microsoft went public on March 13, 1986 at $21 a shares. Investors who held their IPO shares through today enjoyed a cumulative return of over 300,000 percent.

Amazon went public May 15, 1997 at $18 a share. Investors who held their IPO shares through today enjoyed a cumulative return of 196,000 percent.

Netflix went public May 31, 2002 at $15 a share. Investors who held their IPO shares through today enjoyed a cumulative return of 56,000 percent.

Exxon went public in 1978 and the cumulative return on IPO shares is over 2,000 percent.

There are many other examples including Apple, Meta, and Tesla.

Founders of these companies became billionaires by taking their companies public and by and large retaining a major portion of their shares. Retail investors who supported the IPOs as a group have likely lost money as a group, encouraged to sell and “take profits'‘ by “advisors” whose liveihood depends on clients trading.

As the late Charlie Munger reportedly said: The market is an efficient mechanism for transferring wealth to the patient from the impatient. Advisors describe “volatility” as “risk” since they can prompt trades by clients who fear changes in the trading value of their holdings, but volatility is not risk. Risk is the possibility of loss of capital or the realization of a return that is unsatisfactory. The current obsession with changes in the Fed policy on interest rates is typical of the sell-side - as if a few basis points of interest rate changes altered the long term fundamentals of large and well established public companies, an absurd proposition.

In sum, brokers, portfolio managers, advisors and intermediaries are predators and investors are their prey.