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The Fear Of Stock Market Failure

Jul. 22, 2020 3:29 AM ETBKNG, CACC, DHI, LEN, NVR1 Comment

Summary

  • The stock market is a big place with thousands of investments that you can make as an investor. It’s a frustrating place.
  • There is a myriad of investing disciplines that you can seek out.
  • As a millennial, my generation is learning this for the first time. Don’t kid yourself for one second: they will destroy wealth.

The stock market is a big place with thousands of investments that you can make as an investor. It’s a frustrating place. There is a myriad of investing disciplines that you can seek out. As a millennial, my generation is learning this for the first time. Don’t kid yourself for one second: they will destroy wealth.

This element of speculative risk was underlined by an article in The New York Times on July 8, 2020, "Robinhood Has Lured Young Traders, Sometimes With Devastating Results." The author, Nathaniel Popper, writes about Richard Dobatse, a husband and father, who signed up for Robinhood through credit card advances. As he repeatedly lost money, Mr. Dobatse took out two $30,000 HELOCs to get more money involved with the trading platform with more speculative stocks and options, hoping to pay off his debts. His account value shot above $1 million in value, but as of the article, his balance was $6,956.

To digest this for Smead Capital Management clients and investors, we call this stock market failure. Many investors never find an investment discipline which provides them long-term stock ownership. What Mr. Dobatse experienced is not uncommon. Investors who share these experiences look at the stock market for years after this type of failure as a place that is big, frustrating and very confusing. Most investors can empathize with these emotions.

The other way investors experience stock market failure is by just being human. This causes them to feel excited at high points and depressed at low points in overall stock prices. Mr. Market is good at this. As Dalbar and many studies have shown over the years, most investors never attain the returns they seek in stocks.

As an example of Dalbar’s work, the investors in the crash of 1987 did far worse than they

This article was written by

Smead Capital Management is a registered investment advisor headquartered in Seattle, WA; founded in 2007. The company was formed to allow investors to benefit from long-term ownership of common stocks meeting the firm’s eight proprietary investment criteria. The firm manages a US Large Cap equity strategy in separate accounts and a mutual fund for advisors, family offices and institutions.

Analyst’s Disclosure: I am/we are long NVR, LEN, DHI, CACC, BKNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

The information contained in this missive represents Smead Capital Management's opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Cole Smead, CFA, President and Portfolio Manager, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request. ©2020 Smead Capital Management, Inc. All rights reserved. This Missive and others are available at www.smeadcap.com.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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