I often write on Quora.com, where I am the most viewed writer on financial matters, with over 329.4 million views in recent years.
In the answers below I focused on the following topics and issues:
- Why is it difficult to “Buy Low Sell High” in the stock market, beyond the market timing issue? I look at how some common valuation measurements, such as CAPE and P/E, can’t always predict future stock price movements.
- Is China’s Evergrande too big to fail? It is said to be the second largest property developer in China, with eye-watering debts. This has resulted in many people assuming that the Chinese Government will directly, or indirectly, bail them out, especially with property being 30% of China’s GDP. However, is this really true in an age where the drive is to reduce inequality, including through reducing high house prices? I look at both sides of the argument, and say which one is more likely to ultimately win out.
- For a start-up founder, is being frugal really important, as people such as Shark Tank judge Mark Cuban suggest, or should we make a distinction between personal and business spending, and being cheap versus frugality?
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Why is it difficult to “Buy Low Sell High” in the stock market?
It isn’t difficult to do it once. Or even twice. The issue is over an investment career.
To continuously outsmart the market from your 20s until retirement is very difficult.
The main reasons are:
1. It is difficult to know when the market is low or high for sure. People who have been surprised by the stellar performance of assets during the 2016 and 2020 elections, Covid in 2020, and other recent events, are probably well aware of this one!
This point is especially salient when the market is high. There are so many unknown variables at play. Take p/e or CAPE ratios which measure valuations.
If these measures were the be-all and end-all, nobody would have purchased Amazon’s stock which looked overvalued for years.
Everybody would have started buying emerging, Mainland European and UK stocks from around 2016, and dumped US ones (especially technology).
The last decade or so is another example of how difficult it is. Interest rates are 0%.
They only briefly went up in Australia, the US, and a few other places, but they have basically been close to 0% in most of the developed world for 12–13 years since 2008.
Interest rates are like oxygen for stocks as Buffett and others have said because when firms can borrow cheaply to expand, it is good for the long-term.
What is more, people don’t really want to put their money in bonds or the bank with such low rates.
Therefore, comparing the valuations from the 1970s to now isn’t a fair comparison.
Even if we do compare them, some markets outside the US look very cheap. That doesn’t mean they will beat American markets for sure though, in the coming years.
2. If it was easy to know when markets are high, everybody would do it.
If it was as easy as doing some research, looking at some ratios and so on, then everybody would beat the long-term performance of the stock market by going in and out of positions.
3. Gross vs net returns
In most, but not all countries, you pay capital gains every time you sell. In some places, there is even a distinction made between long, and short-term, capital gains to discourage speculation.
Even if you do buy low and sell high, you have taxes and transaction fees to pay.
If you are paying 20%, or whatever the rate is, whenever you sell, that is a big hurdle to overcome
Dividends have historically contributed massively to overall returns. If you sell, you don’t get as many dividends to reinvest.
5. The general market usually goes up
If the asset was relatively stagnant in nature, then buying the dip might work.
However, when you have had an asset go from 60 (in 1900) to 2,000 (the early 1990s) to 35,000 today in the case of the Dow, you have to be very lucky to get in and out each time
6. You probably shouldn’t be 100% in stocks forever
Most people shouldn’t be 100% in stocks forever. Other assets, such as government bonds, should play a role in a portfolio for an aging investor.
Those assets tend to go up in value, or at least go down less, during stock market crashes.
This means that the fully invested stock and bond investor can rebalance during those moments, and therefore take advantage without needing to be in cash.
7. We all need to market time involuntarily
Finally, even though market timing doesn’t work, we all need to do it involuntarily.
Most of us are either salaried or have a business income. Apart from a very small number of people who are poor all their lives before getting a big inheritance, most people need to invest at different time intervals.
This means that if there is a big market crash, the investor will naturally benefit from such moves anyway, as he/she is investing more money.
It is for all of the above reasons that it is better to invest asap, but also inject smaller, fresh sums of money periodically.
Is China’s Evergrande Group too big to fail?
It is a question that many people are asking, especially with a looming deadline this Saturday, October 23.
It is a difficult question to answer because the way decisions are made in China is opaque and there are two different interpretations about what will happen.
The first interpretation is that growth and “stability” still matter a lot for the ruling party in China.
Unlike an economy like the US, UK or even an emerging market democracy like India, the party doesn’t even like the idea of a few years of sub-par growth.
Therefore, under this first scenario, they get bailed out, or the debt gets restructured. A disorderly situation is avoided.
There is a second, minority, position. This position is that the “growth at almost all costs” mentality that has existed, off and on since the opening up in the late 70s, has come to an end.
Now the focus is on issues such as rising inequality, green issues, and “quality growth”.
As the government is worried about a falling birthrate, and many Chinese people still need to buy a home before getting married, they want to see lower house prices, given how unaffordable they have become.
What is more, if the bubble in Chinese property has already got too big (property is already 30% of GDP and the leverage ratios are MUCH higher than the US ones were before the crash in 2006–2007), it is better to burst it now.
If growth is stagnant for a few years, that is a price worth paying for a more stable long-term outlook.
In truth, nobody knows. I guess we will know soon enough though.
I suspect the first option is still the most likely outcome.
More specifically, a bailout in all but name or restructuring, but I could be wrong.
If that does happen, it would probably only delay the day there is such a “Lehman moment” for China.
Every country needs to face those moments of volatility, and ironically, volatility can actually make a system more robust and stable long-term.
Either way, Chinese debt is likely to be a recurrent story in the next decade.
How it is dealt with will be interesting.
For a startup entrepreneur, being frugal is important. But being too frugal can hurt the business. How do you understand that you are being too frugal?
There are numerous things to remember here.
Firstly, being frugal in your own life versus spending in the business. If you don’t live frugally in the early years as a business owner, that means there is less money for the business to grow.
If you take out $3,000 a month as an income, the business will grow much more quickly than taking out $10,000.
One of Mark Cuban’s biggest tips is to live like a student when you are starting out:
However, one of the biggest mistakes most people make is not delaying gratification and becoming complacent.
Not being frugal once you are strong enough is fine provided it doesn’t become extreme, but not when you haven’t established yourself.
If you have a successful business, a net worth of $3m, and an income of $500,000 after-tax, which includes $300,000 of recurrent/residual income from existing clients, it won’t be the end of the world if you start spending $300,000 a year.
That is because if the business suffers, you can just adjust your spending, and you have wealth to fall back on.
If, on the other hand, you are just tasting success, and you spend everything you have on luxuries, that is a problem.
I watched a great video with the author and business owner Daniel Priestley (below)
He tells the story about how he made a lot of money at a young age, which he admits was partly due to luck – the right industry at the right time.
He went to London and did well once again Then the 2008 Financial Crisis began.
His business suffered. He went from living in a Penthouse in London to sharing with his sister.
The reason isn’t that his income went down. The reason is that he didn’t shine the roof when the sun was shining.
If he had invested and saved more money during the good times, and simply lived in a nice place rather than a penthouse, there is a reasonable chance he wouldn’t have had to move in with his sister.
The analogy I would make is building a financial life, and business, which is built on stone and not sand.
If you make loads of money but spend loads of money, your house (metaphorically speaking) is built on sand.
That is because you don’t have wealth, which is possible future income if your primary earnings dry up. So, any event can blow the house down.
If, on the other hand, you have private wealth and a sensible business which is built on multiple income streams, then it is much safer.
The same is true for business earnings. Sensible companies want to build up their residual/recurrent earnings streams so they don’t need to rely on new customers to pay the bills.
Shortsighted firms focus completely on new customers and a transactional-like business.
As a final comment, there is a difference between being frugal and cheap in business.
If a new business starts out, it is important to be sensible with money. That is being frugal.
Being cheap, in comparison, can actually cost you money long-term. Investing in staff and technology can reap rewards in some situations.
Therefore, there are plenty of sensible business start-up founders who are frugal in their personal spending but invest back into the business.
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Adam is an internationally recognised author on financial matters, with over 329.4 million answers views on Quora.com and a widely sold book on Amazon
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