I spoke to a gentleman on the phone last week. He was convinced the market was rigged by the investment banks.
That shares were only worth 'what Goldman Sachs says they're worth'. How can Commonwealth Bank (ASX:CBA) have traded in the $30s and in the $90s in the space of 6 years, he wondered, somewhat conspiratorially.
I'm not one for conspiracy theories, but I let him finish. It wasn't the conspiracy I was interested in, but his motivation. It soon became clear.
He'd been given some terrible advice during the pre-GFC boom, and was loaded up with resources and energy companies. His portfolio fell 60% in the GFC, and then he got out — burned and miserable.
Once bitten…
I feel incredibly sorry for him. A relative of his had lost a similar amount. He's spent the last few years trying to fight back against the system, and missed out on the gains others made by holding on to high quality businesses.
Now, the system of financial advice is woefully, horribly, awfully broken. But not in the way he thinks.
The original advice he received was clearly ridiculous. Maybe his advisor was mis-incentivised, or maybe just wrong, but it wasn't nefarious forces that took his money in the GFC — it was the market doing what the market does. (And lest you think I'm tarring an entire industry with the same brush, there are some great brokers and advisors, by the way.)
His conviction was that our readers (and members of Motley Fool Share Advisor) shouldn't be investing for the long term, just short-term trading instead. "You know I'm right" he told me. I politely told him that I disagreed, but that I wished him well.
His problem wasn't that the market was manipulated, but that he was unprepared for the volatility that will always be present in investing.
And I don't offer that as a criticism. It's a reality for far too many people. The stock market isn't a casino, but it's treated that way by many… those who lose by trying to make a fortune on speculative stocks and quick profits, and those who never play at all, convinced the house will win.
More than a game of roulette
It's easy to see the sharemarket as a casino, or as the province only of the investment banks and so-called 'smart money'.
If you're so inclined, it's easy to imagine that it's characterised by backroom deals, insider trading and supercomputers that regular investors don't have access to.
Now, I'm sure there are backroom deals and I'm sure there's insider trading. Greed likely makes it inevitable. There certainly are supercomputers trying to make very, very small profits on thousands and millions of super-fast trades.
And there are plenty of people in the financial world who'd have you believe that investing is too hard for individuals, and that you need to pay them a small fortune for their 'help'.
Those things are going to be ever present, unfortunately. But they're not reasons to avoid the market, or to avoid investing.
Just as in life, the presence of what economists would call 'bad actors' don't undermine the potential for good outcomes. Warren Buffett has been investing — and thumping the market — for years from a small office in the US midwest.
Australian investors who just tracked the market would have achieved an 11.7% per annum over the last 30 years.
Criminals steal, assaults are committed and frauds are perpetrated. But despite that, life is well worth living. The same applies to investing. Don't let the fear (real or imagined) stop you investing.
In my opinion..
Had the gentleman in question owned quality companies, and had he held them until today, his story would be a very different one. The stock market has proven to be a wonderful way to build your wealth, over time.
It's not a casino, unless you treat it like one — and if you do, you'll lose. And it's not the province only of the insider, the super-computer or the financial salesman, broker or advisor.
It's mostly real companies, with real products and real customers — and with businesses you can understand. If you start (and even finish) there, you'll stand a good chance of building a very nice nest egg indeed.