In the 1920s, a soft-spoken investor named Benjamin Graham did not follow the market herd, buying everything he could just because it was going up. Instead, Graham quietly developed his own measure of quality which he called Value Investing. This method compared the value of a company’s assets to its selling price.
The result was that following the crash in 1929 when most speculators were wiped out, Graham’s investments were stable and some even grew. Graham eventually became a professor at Columbia’s School of Business. One of his students seemed to see the value of researching a company before investing in it. Graham hired the boy as his only employee, a young Warren Buffett.
By the 1960s, the top investors moved away from “value” and asked different questions. “How will this company do in five years or ten years? In five or ten years will Coke-a-Cola be selling more or fewer Cokes? In five or ten years will more or less freight be shipped by rail?” The Growth Investor bought into long-term trends and let them ride.
By the late 1990s and early 2000s, we saw the coming of the Spectator’s Market. Unlike Value or Growth Investing, Spectator Investors bought anything that looked flashy. Did it work?
Remember pets.com, icecreamscoop.com. or internetinabox.com? These and others were 100% losers for their investors. When the Dot Com bubble burst in 2000, Nasdaq lost 78% of its value in just 60 days.
Welcome to the 2020s. Today is not Value, Growth, or even Spectator Investing. What we are witnessing is Follow-the-Other-Guy Investing.
- American Airlines is going up – Grab it.
- American Airlines is going down – Dump it.
- Wynn Casinos is going up – Grab it.
- Wynn Casinos is going down – Dump it.
Stock market investors are no longer doing careful research about the companies. They are not attempting to project future earnings; meaning they are not considering company quality. Instead, today’s investors are playing musical chairs. Remember when your mother said, “Just because someone else jumps off a bridge doesn’t mean you should too.” Mom was right. This market is more akin to musical chairs than it is to careful investing, and eventually, only one person will have a seat.
Invest in what you know
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