Shiny Objects

Free Money

I grew up racing BMX bikes, which means I spent a lot of my weekends traveling the country and competing at different venues.  Arrive Friday, compete Saturday and Sunday, and then head home – that was the routine.  In between the traveling and competing there was always some time for leisure and fun.  Some of my fondest memories of my racing life were made in these “in-between” times.  One of those times involved a comical and slightly mischievous set of circumstances that sets the stage for this week’s TOM.

If my memory serves me well, I was competing in Phoenix, Arizona.  There weren’t a lot of options for activities except for this tiny little arcade in the hotel lobby.

As with most pay to play endeavors, at some point, you eventually run out of money, and thus out of fun, right?  Because I had frequented the token machine quite a few times – converting dollars to tokens – I found myself with one quarter left and wanted to exchange it for a token and a quick game.  To my surprise and delight, after inserting my last quarter the machine spits out 4 tokens (a dollar’s worth of tokens).  In disbelief, and to test my luck, I took one of my ill-gotten tokens (I had no more quarters, mind you) and put it back in the slot and sure enough, another 4 tokens released.  JACKPOT!!

This led to hours of fun.  The ultimate demise of my good fortune was sharing this best-kept secret with some of the other arcade patrons.  When the security guard saw all of the excitement around the change machine, he knew something was going on and put an end to it.

No Such Thing as Free Money

Although I am quite fond of this memory, it didn’t teach me a very good lesson.  Being young and dumb, I was left wondering what other quick and easy payoffs I might bump into in life.  I can tell you some 20 years later, there haven’t been any, besides stumbling across a $5 bill on the ground here and there.

The idea of this thought of – free money – isn’t it an enticing one?  Although these kinds of opportunities are rare, why do we still seek them out as if we are like the metal-detecting-beach-scavenger, hoping to stumble upon that hidden treasure?

A Theme of the Times

In this COVID moment, it feels like a lot of idle hands have taken to investing and they are in search of “free money.”  I have had three encounters in the last few weeks where a family member or a friend of a friend has sent me a glimpse of their “trading account” and boasted about their short-term success.

I’ve heard some financial pundits blame this spike in speculation on a lack sports – the theory is that when gambling dried up with no events to bet on that these gamblers found a new game to play, the stock market.  Many of them migrating to platforms like Robinhood, an application that portrays a user interface much like that of a game – bright colors, erupting confetti when stock purchases are made, etc.

It’s Not a Game

Here’s the problem… when stock “trading” becomes the hot topic on social media and the conversation du jour at your social gatherings (or FaceTime gatherings) it is hard not to blur the lines between what is being treated as a game and what is actually investing.

There is a HUGE difference between throwing some play money at a stock you hear about from a friend and investing real money in companies that you will one day depend on to replace your income.  These two practices are not the same.  I am concerned though that many people are no longer understanding the difference.  People are putting real money at risk with hopes of turning a quick and meaningful profit – this is not investing, this is not financial planning, this is gambling.

It broke my heart to read this story about a young, curious investor who got into an investment trade that he didn’t understand, and when he thought he created what he saw to be an unsurmountable loss he took his own life.  In his final note he penned, “How was a 20-year-old with no income able to get assigned almost a million dollars worth of leverage?  There was no intention to be assigned this much and take this much risk, and I only thought that I was risking the money that I actually owned.

Again, investing is not a game.

The Strength of a Narrative

In the world of venture capitalism, a company that is able to make it from start-up to a billion-dollar valuation is deemed a Unicorn.  The name is fitting because these success stories are rare, they almost feel fairytale-esque, and they are indeed the exception, not the rule.  A majority of new businesses fail.

We know these success stories though, we know them well.  We follow them closely and they feel normative.  We look back at stocks charts of these darlings and wonder “If I only would’ve invested $10,000 back then, I would have millions today…”  We fantasize about these winning lottery numbers and it leads us to poor decisions.  We chase unicorns.

Eventually, Valuation Will Matter

What history has taught us is that valuations absolutely do matter.  We have a word for this in finance, a word to describe when prices begin to disconnect from the value of an asset – we call it a bubble.  The reason this name is so appropriate is that we know that bubbles get bigger before they actually burst.  The “getting bigger” phase can be the tough part to live through.  I get it.  Speculators have a tendency to share their successes and it feels crummy to be the tortoise when the hare is leading the race.  This is human nature, and we are in a season where your patience and convictions about investing will be tested.

I want to reiterate this point that what you pay for an investment matters; the price you pay will determine your future expected returns.  Stocks feel obscure sometimes because you can’t easily do the mental math to resolve what a fair price is, but if I asked you to pay $100 for a fast-food cheeseburger would you do it?  I guess it would depend on how hungry you were, but I assume you would reject this proposition 10 out of 10 times.  This same financial law applies to stocks, there is a defined intrinsic value whether it is clearly agreed upon or not, and in the long run, the price you pay will matter.

A Close to My Rant

If this feels like a rant, it’s because it is.  It breaks my heart to hear the story of a young man taking his own life for an incident that could have been avoided.  I am scared for my friends and family that are taking on more risk then they realize and playing games with their hard-earned money.  To me, this is a serious topic and one that entails meaningful consequences.

So much of my job as an advisor is helping my clients avoid bad decisions; striving to keep them out of harm’s way and guiding them to achieve their financial dreams.  My hope is that sharing this message on TOM will lead others to slow down in their decision-making process and assess the risks and unknown aspects of what they are partaking in.

If you are unsure about your strategy or how you are approaching investing, please do reach out and we can discuss this further.  You can reach me at tcummings@thebahnsengroup.com.

As for now, this is TOM signing off… Until next week…

The Bahnsen Group is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.

About the Author

Trevor Cummings

Private Wealth Advisor, Partner

Trevor is a Private Wealth Advisor focused on building customized financial plans for his and many clients of the team.

As the author of TOM [Thoughts On Money], Trevor endeavors to write and speak about financial concepts and principles in a kind of “straight” talk demeanor and posture.

He received his Bachelor’s degree in Organizational Leadership from Biola University and his MBA from California State University, Fullerton.

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