There are many novice investors who buy, hold, and sell certain securities in the stock market. A novice investor tends to buy into one specific security, and he often pours more than fifty percent of his cash into it. His security may be a stock of a publicly traded company, an exchange-traded-fund (ETF) based on risky underlying assets, or a popular cryptocurrency. A cryptocurrency, for which there are only about 20,000 different types of them in existence, is basically a computer program where its issuers, dealers, and promotors, by means of large-scale advertisements, have managed to persuade others that it has store value. “A store of value is an asset, commodity, or currency that maintains its value without depreciating.” Source: https://www.investopedia.com. Unfortunately, A cryptocurrency has no store value, nor does it have any intrinsic value. It is not even a currency — The word currency is used as a marketing term because this word already means something to us – Tell people it is a currency, and they would want to have it. It is just a high-risk security, although some may have applicable technological utilities.
A novice investor tends to take a bottom-up approach. He first identifies the security he wants to invest in – Often times this investor picks a security that has no intrinsic value (like the stock of a publicly traded company with prior annual losses). For example, he may pick a pharmaceutical company because he has reasons to believe that the stock price will appreciate while he is willing to take high risks for his expected return. He finds reasons to justify his perceived future price appreciation. After he has made his investment, he shares his (flawed) reasoning and information with his family and friends to encourage them to do the same. Someone dear to me once said, “Now everybody is an expert.” He awaits its price appreciation. Meaning, he doesn’t even consider the possibility that the stock price may fall way below his purchase-price. Since the beginning of 2022, many of these novice investors have been proven wrong, and they are mostly under water. In other words, novice investors were too optimistic about their investments before January 2022.
A sophisticated institutional investor, who is often known as an investment advisor and is in the business of asset management for his clients, takes a top-down approach. Some are economists and university professors. The sophisticated investor sits in his office and often wonders about macroeconomics of the United States and other developed countries, the global economy, current and future geo-pollical factors (Ukraine-Russia war, China-Taiwan tensions, Israel-Iran-Persian-Gulf issues), the central banks and their monetary policies, the government’s fiscal policies, the value of dollar inside and outside Unites States, United States 10-Year Treasury Note rate, mortgage interest rates, and the industries that seem to be sound investments. Other factors include the rate of inflation here and abroad, how investing in certain industries would pay off in an inflationary environment, the debt levels of the United States and the balance sheet of the Federal Reserve, the tightening and loosening of money supplies, the direction of crude oil and gasoline prices, the changes in prices of goods and services, and how high-priced crude oil and gasoline may lead to an economic recession. What would happen if the shipping of crude oil is disrupted in Persian Gulf? How can this impact my clients’ security investments in good and bad ways? We now see a new series of unintended consequences — the sanctions on the Russian oil’s exports have caused a shortage of gasoline, natural gas, and aviation fuel worldwide.
If a central bank wants to indirectly increase the money supply in one country, they may purchase bonds, mortgage-backed securities, and stocks, and they can pay for it by printing money. A few years ago, Bank of Japan and Swiss National Bank purchased American stocks. An increase or decrease in the money supply usually has a direct correlated effect on the stock market. One way of fighting inflation is to pop asset bobbles like real estate, stock markets, and cryptocurrencies.
A money manager must look at all these factors before he can decide what companies are worth buying for his clients. Each stock must be researched and evaluated based on quantitative and qualitative security analysis. Once the research and evaluations are done, then the diversification phase starts which is to figure out how many shares of what companies must be bought for each client’s portfolio.
As little as I am (I got my investment advisor license nearly three years ago), I am considered a sophisticated institutional investor in the world of finance. In a recent Robert Duvall movie, his character said to a young professional golfer; you must know your game, if you don’t know your game, something someone says or does can put you out of your game [at the golf tournament]. This same principle applies to money management. If the money manager knows his game, the ups and downs of the securities markets and the changes in the economic and non-economic factors won’t put him out of his game.
Finally, do you need a money manager to manage your money in the stock market? I can help. My practice is all about asset management for my clients (alongside with investment consultation and helping people). We would need to sign an investment advisory contract. You are welcome to call me, and we can discuss this further.