Outside of some important unforeseen event in 2012 (such as a massive disaster, assassination, terrorist attack, alien invasion), I believe that the two biggest investing events of 2012 will be the Facebook IPO and another round of European uneasiness. I am more thinking about major things that drive the public’s attention to the capital markets.
The Facebook IPO seems to be touted as a “get rich quick opportunity” and drumming up the demons of the dot com bubble. I pride myself in training my clients on investing principles – my house rule is that clients have to understand how I’m investing their money. The more talented I am at educating clients, the less they seem to ask me about things like the Facebook IPO. Other than simply talking about it conversationally, I only had two clients ask me about it. One was literally my youngest client who’s only been in my fold for about six months – perfectly understandable. The second asked me to move all of her portfolio into the Facebook IPO. I explained to her why I thought it was a bad idea. She insisted, so I dug in my heels and said that I flat out wouldn’t/couldn’t drop the trade with a clear conscience and that if it was really what she wanted to do with her money, she’d need to take the funds elsewhere.
The Facebook IPO is a good example of how I believe that there’s no shame in refusing to even look at an investment or dabble in it simply as a matter of principle. The principle is: don’t buy over valued securities. I think that this is pretty easy to do. You could add to it: don’t buy investments that have a price that is supported by hype. You could further add: don’t put your money in something where the only realistic way that you could make money in it is because you think that somebody dumber than you will buy it for a price that is even more overvalued than what you bought it for. When you buy something and expect the price to go up, only because you think the price will go up it is not investing at all, it is speculating. If you want to do it, call a spade a spade and embrace it for the literal gamble that it is.
Speech done. I passionately find it tragic that the masses fall into this.
The second big investing event that I think will drive the masses to the markets will be what I believe to be a tumultuous summer in Europe. So, admittedly I am venturing into Nostradamus territory here, but here are two ingredients that I’m worried about:
1. In many parts of Europe, the unemployment rate among 18-25 year old males is north of 50%
2. This year is looking to be the hottest summer on record
This could be a very bad mix of things. I rejoice whenever I’m reminded that Europe has not had a continent wide war for the longest stretch of time (67 years … 1945-present) since the Roman Empire. That’s wonderful. But as a statistician, I fear the “over-due” phenomenon. I am an optimist with the human race, I believe optimism is perfectly rational. However, the human race is wired such that the women make babies and the men go to war. A record stretch of peace does not guarantee its longevity.
But I bring this up, not because I am making a prognostication that Europe is going to war, but because I would like to ask you, “How would you react if suddenly Europe were thrown into war?” I hope to anything higher than me that this doesn’t happen, but let’s just say hypothetically, would you pull your money out? Or I’ll ask myself, how would I tell clients to invest?
For me, the conversation remains always upon value and never upon the current events. It is my principled belief that current events always become history, the apocalypse is always temporary, but value is what’s important over time. The overvaluation of Facebook ‘s stock will be shown in time; if a bad event causes the masses to panic out of the market, it will cause an undervaluation opportunity which will be shown in time. In the short run, the stock market is a voting machine; over time it’s a value machine.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing in securities, including stocks and bonds, is subject to market fluctuation and possible loss of principle. No strategy can assure success or protect against loss.
