Sir Isaac Newton is purported to have said, "I can calculate the motions of the heavenly bodies, but not the madness of the people."
By
Joe B. Womack, CFP
Senior Vice President
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Sir Isaac Newton is purported to have said, "I can calculate the motions of the heavenly bodies, but not the madness of the people." |
His remarks were sparked by an investment phenomenon in the 1700s that bears a remarkable resemblance to some of the happenings in today's stock market. When the King of England bought some shares of stock of the South Seas Company, the public bought the stock in a wildly speculative frenzy which pushed the price beyond all reasonable expectations of earnings. Then the stock price collapsed.
There is a fundamental difference between buying a lottery ticket or a highly speculative stock and investing for your future and the future prosperity of your family. If you buy a lottery ticket, you participate in a system that gathers vast sums of money from ticket buyers and then rewards one person at random.
The winner has exercised no discipline; has not performed in-depth analysis; has not calculated the odds or doesn't care about the odds; does not have a team of professionals who make their living studiously researching the possibilities in a historical context; gave no prior thought to safety of principal; and the winner's total probability of success depends upon exact timing of his number coming up as a winning number.
There is really nothing new about the lottery mentality. Getting something for nothing has been with us for centuries. There is a striking similarity between buying a lottery ticket and investing in the latest craze. There is a winner, but there are vast numbers of losers. Students of investing history can relate today's internet craze to the Holland tulip bulb mania in the 1630s. Tulip bulbs prices climbed and climbed on the assumption that there would always be a buyer or a greater fool. Prices collapsed on February 3, 1637.
In the 1840s speculators created British railway companies with the same speed that internet companies are created today. More recently the conglomerate craze of the 1960s saw prices climb to unsustainable heights. The biotech craze of the late 1980s and the casino craze of the early 1990s provide other examples that demonstrate momentum investing is dangerous to your financial health. Buying a stock simply because the price is going up has a predictable way of turning into disaster for the average participant.
Another trend we see blossoming across the land is day trading. A day trader is an individual who speculates on minute-to-minute pricing throughout the trading day. There are instant winners and instant losers. Most are losers. Timing is everything. The only thing new about this trend is that computers make the process faster.
While I would not suggest that you buy lottery tickets, I would suggest that you contact us immediately if you do buy a winning ticket. We can help you move from speculation to solid investing so that your wealth is preserved and enhanced over time. The enemy in the investing world is inflation. Enhancement of purchasing power is the legitimate goal of thoughtful investors. We at the Trust Company have a solid record of striking the balance between safety of principal and enhancement of purchasing power over time.
The Trust Company's philosophy is founded on the premise that common stocks have been, and will continue to be, superior growth investment vehicles for investors with a long-term perspective. When we purchase a stock for your portfolio, we believe that company will be an earnings generator over a ten-year time frame and that includes high quality companies that make money from the exploding world of technology.
We believe that investors can take advantage of growing companies from all sectors of the economy. We reject the notion that buying a stock simply because its price is rising is proper investing. The company must have earnings and the potential for rising earnings. Otherwise, we would succumb to the lottery mentality that is sweeping the globe.
There are numerous advisors that are making money by selling the stock de jour or their own newsletters.
In today's media frenzy, as in many times of the distant and recent past, advice is cheap, but wisdom is priceless. Professional, experienced, disciplined and caring financial management is the result of the investment philosophy of The Trust Company of Oklahoma.
We pledge to continue our disciplined and consistent approach to equity invsting which has achieved excellent results for our clients over the years. We have every confidence that it will continue to be successful.