By Nick Fisher, Portfolio Manager
"Where is the wisdom we have lost in knowledge, where is the knowledge we have lost in information?” T.S. Elliot
In a recent trip to Las Vegas, I was reminiscing how the casinos have changed over the years. Gone from the main floor are the card games, craps and roulette. Over the years, they have been replaced with slot machines. Of course, the motivation for the casinos is obvious they make a lot more money from the slots. We all know the odds, “the house” has a minuscule edge in card games. "The House" edge with slot machines is much greater, so much so that they generate 70% or more of the casinos revenue. The more noisy, flashy and blinky the better, they pull you in and there is zero skill involved.
You know what else is noisy, flashy and blinking…And to most of the crowd involves zero skill? The stock market.
The stunning 4 Seasons Hotel lobby in Las Vegas, taken on a trip my wife and I enjoyed this last year, is one of the only hotels on the strip that does not have a casino. It's a breath of fresh air, literally.
Grant Williams over the summer wrote a wonderful expose on the rampant speculation in the stock market. Of course, it’s easy to see that Las Vegas’ celebrity chefs, musicians in residency and slot machines have been replaced with the new online brokers, social media, tv channels, etc. And the new slot machine: zero day expiration options trading. It doesn’t get any more speculative than that.
“To a speculator, the broader picture isn’t really so important. You don’t need to zoom out too far, you’re just looking at momentum, you’re looking at price action. And you’re trying to, for the most part, grab a trend you see in motion, exploit it as best as you can and get the hell out before it ends.”
Speculation has gained an increasing share of markets, as we have glorified the short-term trade. In the 1950s the average holding period of a stock (ie. a business) was 8 years. Today it is closer to 5 months. A businesses performance has become all about the stock price. CEOs are compensated, not on the success of the business, but the gain in the stock price.
The late Charlie Munger once said, “Show me the incentives and I’ll show you the outcomes.” As such, the product of many businesses has become the stock price according to Grant and I think Charlie would have agreed.
Grant continues,
“The ugliness of speculation, however, is that you’re much more exposed to short-term volatility. This presents a psychological test for people, both in trying to stay on that bucking horse and in having the humility to admit to being wrong…”
Grant’s prescription to today’s rampant speculative culture is to extract ourselves from markets, acquiring a collection of businesses who go about their business independent of financial markets. Ignoring the stock price, focus on the business performance and over a long period of time, the stock price will take care of itself.
This is and will always be the focus of our work at Pilot Wealth Management.