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Investing Well When the World Has Gone Mad

Am I the only one, or does it seem as though Truth has taken a holiday? And doesn’t it look like his good friends, Logic and Sanity, went along for the trip?

While I’m strongly tempted to veer out of my lane, I’ll do my best to keep this article/commentary focused on financial issues—in particular, investing, where there’s been plenty of strangeness going on.

Here are just a few examples:

  • With professional sports pretty well shut down during the early days of the pandemic, the founder of a sports content and gambling site turned his attention to the stock market, live-streaming his day-trading for all of his millions of followers to see. 
  • An incredible 10 million new brokerage accounts were opened in 2020, and many of the new market participants were drawn to an online trading app that “gamifies” trading, even sending digital confetti showering down on user screens after trades.
  • Millions of traders on a Reddit sub-forum banded together to drive up the stocks of ailing companies, prompting a surge in people joining the online group. 
  • The billionaire CEO of an electric vehicle maker tweeted about a crypto currency that was launched as a joke, sending its price skyrocketing.
  • A new online trading platform plans to let users bet “yes” or “no” on future events, such as the weather (“Will there be more tornados in the U.S. this year than last year?”). Inexplicably, the Wall Street Journal described this as a new platform for “investors.”

To my eyes, these events paint a picture of an investing world gone mad. And it points me to two investing ideas I continue to cling to in the midst of all the madness.

1 – Biblical principles are always relevant. Always.

In the face of what looks like a run on unbridled greed and a desire to get rich quick, I can’t help but think of…

  • Luke 12:15 — “Then he said, ‘Beware! Guard against every kind of greed. Life is not measured by how much you own.’”
  • 1 Timothy 6:10 — “For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs.”
  • Proverbs 21:5 — “Steady plodding brings prosperity; hasty speculation brings poverty.”
  • Proverbs 23:4 — “Do not wear yourself out to get rich; have the wisdom to show restraint.”

2 – Always choose process over picks. Always.

A common investing mistake is to turn too quickly to choosing investments. Our culture strongly encourages this, feeding us a constant stream of headlines about this year’s hot stocks and where to put our money now. And we do ourselves no favors, being drawn to conversations about what our friends or relatives are investing in. It’s all very ad hoc.

Far better to find and follow a trustworthy process-driven investment strategy—one marked by:

  • Objectivity. Look for a strategy that uses mechanical, unbiased rules, not people’s opinions.
  • Clarity. Only use a strategy that you understand so clearly that you could explain it to a 12-year-old.
  • A good track record. There’s no such thing as a perfect strategy. They’ll all have bad days, months, and even years. But as you look back on a strategy you’re considering, you should be able to see a track record of delivering the level of returns you need to meet your investing goals.
  • Emotional acceptability. In part, this is about looking at how volatile a strategy you’re considering has been, and making a conscious decision that you can live with that level of volatility. This also has to do with understanding how much work will be required of you in order to follow this strategy (how many trades may be required over the course of a typical year, for example) and deciding whether you’re willing to do that work.

The longer I’ve been an investor, the more I’ve seen the importance of guarding my heart with biblical truth and making sure our investment decisions are driven by a logical process. Especially at times when the world seems to have gone mad, it helps me cling to some semblance of sanity.

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2 Responses to Investing Well When the World Has Gone Mad

  1. Marlin Sommers March 3, 2021 at 2:38 PM #

    Thanks for pointing out this craziness, and its roots in greed etc.

    As a long time reader I would love to see you address a couple of related issues. One, what is the essential difference between investing and gambling? In for example a casino situation, the gamblers will obviously have a negative expected return, while the house has a positive expected return. Similarly somebody good enough at playing poker (relative to those they play with) can have a positive expected return. Do you make a difference between investing and gambling that doesn’t boil down to simply expected return and levels of risk?

    It seems to me that the source of the return is an important factor in investing decisions. Stock dividends from a home improvement chain seem quite different from stock dividends from a cigarette manufacturer which in turn seem quite different from dividends from a porn company even if the risk and expected returns all pencil out the same. What is your take on ethical investment criteria?

    • Matt Bell March 3, 2021 at 9:10 PM #

      Great questions, Marlin. I’ll address them in more detail in future posts, but I’ll touch on a few points right now. What’s the difference between investing and gambling? While the Bible encourages us to multiply the resources God entrusts to us, it teaches us to do so as faithful managers of God’s resources, to take a long-term “steady plodding” approach, and to diversify. Gambling does not seem to fit with any of that.

      I agree that the source of return is an important factor in investing, although I would point to a distinction between direct and indirect involvement. Directly investing in a company that manufacturers cigarettes would not seem to constitute the wise management of God’s resources. However, I would not see an issue with investing in an S&P 500 index fund, for example, even though it is likely to own the stock of an objectionable company. When you work out your ownership stake in that company within the context of the billions of dollars managed by the fund and the hundreds of companies it invests in, you would own such an incredibly small portion of that company’s stock (one piece out of more than a billion pieces is a very realistic estimation) that even calling it incidental contact would be an overstatement.

      There’s certainly more to unpack here, but I would offer up those initial thoughts.

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