Tuesday, May 24, 2022

The Myth of Growth Stocks

Let me start this off by saying that I am not a financial advisor.  I hold no certificates. No degrees in finance. No authorizations from the SEC or anyone else. I'm just a man who looks at stuff and wonders why nobody else questions anything, including investments.  And here's what I've found:

Everyone is getting head faked.

At the time of this writing, it seems that everything in the world is going to hell in a hand basket. If you listen to the media, you're getting some pretty heavy blood-letting in your portfolio. So the first thing you have to do is what every healthy, red-blooded American should be doing every day: ignore the media. Financial reporters have no idea of how, why or where to invest.  They simply repeat what the last guy reported on another channel, then go home to the wife and kids.

The second thing you need to do is look at the calendar:  If you're over 50, you have no business being in any kind of growth stocks.  Sound unreasonable? Not really. Because growth stocks are a huge head fake.  They're nothing but air until you sell them.  Most people strut around with their financial statements, bragging about how they bought low and now -- would you just look at how high this thing went?  What they don't realize is that there's nothing there.  That's why the IRS classifies that as unrealized gains. Until you sell them, those gains are nothing.

Talk to people whose growth stocks crashed in 2008, 2020 and again in 2022. Sure they bought low.  Then they watched them go high.  A few years later, they all cratered and all that was left was a few years of nothing. At the time of this writing, Amazon, Tesla, Twitter, Target, WalMart and a slew of other media sweethearts have lost about 30% of their value, dragging down all those "well-managed mutual funds" with them.

If you're going to invest in equities, understand the basics:  When the American stock market was invented in the late 18th century, it had one purpose:  profit sharing.  That's it. A company needed capital, you gave them some and they paid you dividends. Simple.  The only reason why share prices rose was that shares in any company were limited in number -- just like today. If you coveted shares in a company but couldn't find them, you'd have to offer a shareholder a premium over what he paid and voil√•: you owned those shares. Hence the notion of "growth stocks." But equity shares were never meant to be traded as a means of investment, because trading shares isn't investment -- it's speculation with odds even less reliable than those in Las Vegas.  You're essentially praying for a growth stock's share value to go up.  In the meantime, the growth stock pays you nothing while you're a-wishing and a-hoping.

The beauty of dividends is that they're real value, not promises; they're cold, hard cash. Once you receive your dividends, nobody can take them from you.  They can't go down in value. They're the only tangible, solid profit you can honestly say you own.  Which is why if you're over fifty years of age, those are the only kinds of issues you want. Leave all the fly-by-night, media-hyped growth stocks to people either too young or too stupid to understand they're investing in air with no safety net or tangible benefit.

Too harsh? Consider this: ever since Jimmy Carter's disastrous Community Reinvestment Act of 1977, financial institutions claimed to be "spreading the risk" by packaging super risky mortgage loans with legitimately A+ mortgages ("Collateralized Mortgage Obligations" or "CMO").  Then the highest caliber rating services assured investors that the CMOs were A+.  Except that in 2007, so many of those notes failed that they ignited a financial holocaust that destroyed Bear Sterns and a number of so-called "professional" financial houses.

So much for the experts.

Everything else you've ever heard or seen in the investment world is total banana oil, designed to make the system look more complicated so that you don't bother your broker with pesky questions.  Besides, they have no idea what they're doing, since most stockbrokers are actually salesmen whose only task is to bring in money which they hand off to "money managers" who know even less. Derivatives, futures, options, shorts, covered calls: you name it, it's all speculation, inventions with no real purpose other than attracting unsuspecting investors' money.

The truth is that none of those brokers will tell you how to generate real income because most are too lazy to figure it out.  But you're not, especially with today's online brokerage search tools (i.e., Ameritrade and other online platforms), that allow you to make really smart decisions and really decent returns.  If you can use a search engine to find porn, you can use an online brokerage's search engine to find great equities -- and you don't have to erase your browser's history!

Personally, I have a few guidelines that have treated me well: I stay away from growth stocks, funds, glamor stocks, international issues, tech, pharma, transportation and most but not all financials. I don't do bonds. I don't do metals. I avoid brokers, media and rating services.  I stick with American dividend-paying stocks that stay off the radar, where life is good and earnings can exceed 12% a year.