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I am a Moscow-based bi-lingual blogger and investor. Started as a Russian mutual fund investor in 1999, I went for an ETF portfolio late in 2007. Survived the 2008/9 meltdown and love sharing the way I invest. Publisher of the Marathon Investor newsletter, a virtual primer of a balanced... More
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Finsovet (Russian) See also marathoninvestor.com
  • Should You Invest In The Stock Market? 0 comments
    Mar 25, 2012 12:03 PM
    Every now and then we are getting a piece of advice from some great entrepreneurs about the role of the stock market in one's financial future.

    Mark Cuban shared his strong opinion ('stocks are for the suckers') previously. This time I ran across a well supported case by Auren Hoffman, the founder and CEO of Rapleaf and venture partner at Founders Fund.

    In my view, many people expect from the stock market too much, while they should not. The entrepreneurs are right calling for self-development and investing in one's talents (just pay off your credit card debt first). It is indeed never overrated. Figure out and hone your best skills which are related to your passion and provide value to the public.

    I would only caution on 'become the newest singing sensation' piece of advice. Be wary of highly competitive pursuits like music/singing. You are more likely to succeed if you mix them in an unusual way. Think, a good statistician and presenter. For sure, marketing and networking would be key to success. So this takes care of a human/social capital component.

    Next -- to the financial component.

    To begin with, Auren does not claim that one can not make money in stocks. His intention seems to make people aware of the complex nature of the market and make them think, if the money will stay in stocks or leave in the long run. Auren supports the latter case. Let's look at the arguments.

    Auren starts building his point on something self-evident, as a quote from Buffett:

    "Never invest in a business you cannot understand."

    Understanding the stock market is key. So Auren goes on to the basics, 'fundamentals' of the stock market to see if supply and demand favor investors in the next 30 years, looking at the major trends. I will look at some of them below and share my thoughts:
    1. Retirement Savings are forcing money out of stocks and into bonds, as population ages. True, but this is common knowledge, likely priced in. Also, as the longevity increases, and people working more, this trend might be well overrated.
    2. Globalization. Increased competition? So what? Invest globally. But there is strong case for the developed markets. Sure you can and should go to the faster-growing developing markets, but the trend will be moving production back to the developed world, whereas local consumption is yet too low. The manufacturing story has run it's course. There is no difference where to place the robots (after labor costs have surged and technology cheapens by the day). Moreover moving closer to the consumers in the developed world would save transportation costs. Even energy production is bound West. This is just my view based on the growing evidence.
      And definitely I do not see how Auren's point on volatility hurts buy and holders - why not rather use V to your advantage?
    3. Tech companies staying private longer, limiting availability of returns to the public. My view was that Sarbanes-Oxeley was intended to protect the shareholders, and while the private companies offer great returns, the risks are way high. Public companies are less demanding to investors. NASDAQ is leading this cycle, and there is still good value in the 'old tech'! Do not see how this hurts investors.
    4. Taxes and
    5. Higher interest rates... Perhaps. But then again, investing is global these days, there will be growth somewhere.
    6. Actually point #6 is very valid. One should think how his income stream is already correlated to the market! (Attention, bankers and real estate people!)
    What is the financial alternative? Auren offers none. My concern, singing alone might not make it for a good plan to deal with the future. Financial future depends both on human/social capital accumulation and financial capital does matter. It is just not prudent to ignore any of them.
    If only you see Madonna or Lady Gaga in the mirror.

    A good thought provoking piece.

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