I Don’t Trust the Market

No, not me, in fact I don’t really know what this means. But a friend who wanted advice about retiring lately said this to me and it made me wonder, because actually I hear this fairly often. So this is a muse about what it means to ‘not trust’ the market.

Bill, my friend, likes real estate, and plenty of RE investors don’t ‘trust’ the market. They like assets they can touch, and they feel like they can control physical assets. This, of course, is an illusion. Many also think they’ve made money in real estate, but they tend to recall purchase prices, and not the myriad other expenses such as property taxes, interest on the mortgage, refi fees, transaction fees, yard care, repairs, expansions, remodels, etc. Most non-professionals don’t make money on real estate; they only think they do. But real estate has a special relationship with its owner, who is always doing something on its behalf, and thus … feels in control.

Other folks don’t ‘trust’ the market because its price can crater, for seemingly unfathomable reasons. Because they don’t understand the reasons for price movements, they don’t trust it. These folks actually don’t trust themselves, because the market defies their logic. Usually they haven’t followed markets for decades, don’t know a thing about market history, can’t understand the math around internal returns and compounding, and let emotions rule their decision making. Further, real estate prices DO change, but RE is not transparent about price changes. It’s hard to figure out how much your property is worth. Even if you sell it, you are not sure you got the best price.

Weirdly, while stock quotes are far more granular (down to the hundredth), and far more frequent, this constitutes a reason not to ‘trust’ them. It’s as though better information is not desirable.

There’s also a suspicion around price manipulation, and a sense that the market is only for high rollers, or gamblers. We can concede on price manipulation. We see it happen. But, why not take advantage of it, instead of mistrusting it? One of our stocks, Digital Realty, was the target of short sellers who relentlessly hammered the stock. We kept buying it, since the shorts only made it cheaper. Once the shorts went off to play somewhere else, the stock recovered dramatically.

But we can’t understand the ‘high rollers/gambling’ bit. Plenty of ordinary folks have made lots of money in stocks by holding them forever. Stocks represent bits of businesses; okay, some businesses do gamble, and many stocks represent a gamble, but you don’t have to buy those businesses.

The other public relations problem that stocks have is that understanding returns, and what might give you a good return, requires more than a vague facility with math. Many people don’t understand compounding, or internal returns such as return on capital or equity and what those mean over the long haul. They don’t understand the difference between principal and dividends.

All this said, we haven’t seen many folks who don’t trust the market flip, and begin trusting the market. Or if they do, it happens at the top of the market, and getting in then is a great way to reinforce your lack of trust!