In our last Insight I made a prediction about this new day-trading phenomenon: “Trust me, there is nothing new, and nothing good, in this GameStop story. This will not end well for any who get involved.” This brings to light a question: Is there a place for the individual lay investor, or should investing be done only by trained professionals?
I want to be clear: I am a huge fan of the individual lay investor and believe strongly we should have more of them. Does that seem strange coming from someone who makes a living professionally managing other people’s money? Many of my clients have heard me use this analogy before, but I (and any service professional, for that matter) am no different than a plumber. If one has a leaky faucet and is handy with a wrench, then he can save himself some money and fix it himself. On the other hand, if he isn’t that handy, he would be better off in the long run calling in the professional.
Investing is no different. If one has the passion for research and the right temperament, then she can easily do what we would do for her and save some money along the way. Of course, real life isn’t black and white, not one way or the other.
Just this past weekend we had two plumbing issues in my house. The first was the sink in our guest bathroom, which was draining slowly. A clogged drain is pretty simple, so we had no issue tackling this ourselves. It became a little more complicated when the original (we think) 1940 pipe broke. Still, replacing a pipe for a bathroom sink is not hard. The hardest part is the tight working area, so I practiced my Yoga poses and grabbed a wrench. It probably took me longer than it would have a professional, but it cost a grand total of $30 at our local Ace Hardware store. It was also a cold, rainy day, so nothing lost there.
Two days later we had a major backup. This was a little more serious as one side of the house, including our clothes and dish washers, kitchen sink, half bath and two full baths were out of commission. The other side of the house with two full baths was still good, so we were able to isolate the problem. I do own a small household plumbing snake, so we gave it a go. We removed some gunk (I’m pretty sure that is a technical plumbing term) and got a little relief, but it wasn’t completely fixed. For our house, it was time to call in the professionals.
Some of our readers would have called long before then, and some would probably be in their basement replacing pipes as I write this. We all have a different moment when we say, “Call the plumber.” It depends on many factors. What is true in plumbing is true in investing.
The lay investor can do very well for herself if she sticks to investing – researching companies she is familiar with, buying their stock at a good price and holding it for the long term. I know Apple lovers who have owned Apple stock since the early days of the Mac. They have done very well.
Several years ago it would be common for us to meet a client who was retired and was holding onto some shares of Coca-Cola that their father had bought or had been given when he worked there. It had made their families rich. That generation has passed, unfortunately in my opinion. We have never, and I’ll bet my retirement that we won’t ever, have anyone come to us with an index fund that they inherited from their father that made their family rich. This, also unfortunately in my opinion, is what people think of in terms of investing today.
This is what lay investors used to do: buy the stock of really good companies and hold on to it. That is investing. GameStop is not such a company, and the people buying its stock have no intention of holding it and gifting it to their kids. This isn’t investing, it is trading, and there is a huge difference. Trading is a game and a form of gambling. Please do not read into that any kind of judgement; games can be fun, as can gambling, if done responsibly.
The problem is when lay investors fail to recognize the difference between investing and trading. The lay investor can do very well, if he has a good disciplined strategy and is truly investing. However, there is a saying in poker that if you have been in a game for 30 minutes and you cannot figure out who the sucker at the table is, then you’re the sucker. The lay trader is the sucker at the table. He is going to get cleaned out, it is only a matter of time.
If someone wants to take a few dollars that don’t really matter and play that game for entertainment’s sake, then more power to you. However, never mistake that for investing or one will end up gambling away far more then she can afford.
If one wants to invest on their own, follow our three rules: Invest from the bottom-up, be absolute return-oriented, and be risk-averse. If that seems like too much work, well that is why we are here. Know when it is time to call the plumber, and you can live comfortably in a nice dry house with working toilets.
Chuck Osborne, CFA