The Perception Problem in Building Wealth

The Perception Problem in Investing

As a continuation of the theme of my last article, today I am going to discuss the massive perception problems that exist among the vast majority of investors today.

There are two major perception problems in investing, likely due to the nonsense spouted by financial “influencers” these days that just parrot what they’ve been told are cardinal investment rules that must not be violated but that have no real track record of every producing large gains in difficult investing environments. Again, many of these “influencers” rose to prominence by earning large gains during the cryptomania phase in BTC and other much smaller cap cryptocurrencies when a rising tide was lifting all boats and wealth produced during that time was a byproduct of being at the right place at the right time, but not of skill.

True skill in investing is always manifested by yields produced during extremely difficult investment environments when major markets are producing quite significant losses, not yields during times when everyone is making money. Even a demonstrated ability of someone to preserve capital during such times, like last year in 2022, is quite a remarkable feat compared to the average investor, but if someone can demonstrate a consistent ability over such periods to continue to produce large yields, then this would be the mark of a competent investor. Producing large yields when everyone else is also doing the same is not.

But as I stated in my opening paragraph, an onslaught of “influencers” with zero investment expertise and zero demonstrated ability to produce large yields, or even break-even yields, during large market downturns, has led to the following myths embraced by 99% of investors – myths that if embraced, will guarantee you continue to wallow in largely negative yields during downturns and positive yields during bull markets. However, this is a pathway to mediocrity. To build wealth, one has to avoid large losses during times of poor markets, and better yet, on some occasions of poor markets, produce substantial gains for one’s portfolio. And during bull markets, one should not aim for mediocrity and the same yields as market indexes but also aim for significant outperformance even during overall positive markets.

So, here are two myths that hold back investors.

ONE: Larger cap companies mean less volatility in price and better investments

Most people think large cap companies are better and safer investments than mid or small cap companies, meaning that they will appreciate more in price with less price volatility.  For a while, this was the case not due to reality, but due to historical patterns that no longer hold true, and also due to momo (momentum) stocks being the best performers for a while. But allow me to explain why this perspective is wrong and is simply a myth moving forward. In the mid-1990s, from 1995 to 1999, the US S&P 500 index returned nearly 20% to 34% annually every year and on the back of large-cap company shares that were familiar to all.

As well, Warren Buffet’s much publicized success with investing in massive companies like Wells Fargo, Bank of America, Walmart, Coca Cola, McDonalds, Microsoft and so on produced the perception of “invest in what you know” in order to make massive profits. Though I subscribe in that maxim of “invest in what you know” the problem today with most global stock markets whether the S&P 500, the DAS 300, or the FTSE 100, is that the companies we all know that trade on these markets are largely bloated in share price from 15-years of low interest rates maintained by Central Banks since the 2008 global financial crisis. Thus, these will not be the shares that perform well moving forward, providing significant yields with low risk, for the next 5 to 10 years. In my opinion, few asset classes provide value at their prices today, and we’re invested in two of them on my open substack portfolio here. However, the overwhelming amount of investors will be unfamiliar with the vast majority of companies in these two asset classes. Thus, while the maxim “invest in what you know” remains true, investors will have to learn about companies with which they have been typically unfamiliar with the majority of their investment lives, as no mainstream “influencer” or even financial advisor at any Wall Street firm is knowledgeable about such companies.

And regarding the “big companies are safer” illusion, Cathie Wood’s ARKK ETF has possessed some of the biggest, most well-known companies in the world like Square, Shopify, Tesla, Zoom, Coinbase, etc. but yet in 2021 and 2022, holding these multi-billion cap stocks led to big losses of 24.64% followed by another year of even greater losses of 67.45%. Thus, even though ARKK is up 19.88% this year, it still needs to rise by another 70% just to make up for the massive losses it suffered in 2021 and 2022. Which brings me to my next point. The “buy when blood is in the streets” myth. 

This rule is only one that would work under one of three circumstances:

(1) if Central Banks are going to recapitalize and save the faltering sector, such as they did with the banking sector back in 2008;

(2) if the company shares one buys is actually on the brink of a reversal in revenues and profits that will lead to higher share prices; or

(3) the company is a hedge fund darling and even though its fundamentals stink, the share price will reverse based upon its share price being propped up by hedge fund traders.

Otherwise, “buying the dip” is often not intelligent and will likely just result in buying shares at a low price and selling at an even lower price when rivers of blood flow through the streets. Certainly, “buy when blood is in the streets” makes sense for some sectors based upon my commentary above, but this is not an investment principle one can apply indiscriminately and this is a principle that has to be applied very selectively. If one believes that this principle works indiscriminately, then one should buy ARKK shares right now because they are still down 76% in price from their high from two-years prior. But were I to proffer a guess as to its share price 12 to 18 months from now, it would be lower than its high from 2022, which means that my guidance, for anyone that was holding ARKK to sell it here, when its share price was 56.25% higher than its current price, despite its holdings of massive large cap stocks, would still be correct.

Finally, regarding large cap companies being safer than small cap, even within the realm of typically volatile precious metal mining stocks, thus far this year, my large cap mining stock picks have been much more price volatile than my small cap mining stock picks and in fact, I much preferred owning the smaller cap mining stock picks over the larger cap mining stock picks over the past two decades, even when they have been more volatile in price. Why? Because though “influencers” always say diversify, diversify and diversify to lessen portfolio risk, diversification will never lead to building wealth if you are not starting with millions of dollars.

For example, my strategy of concentrating in what you know last year produced an annual yield of 69%+ for all my stock picks provided to my patreons last year. This simply would not be feasible with a strategy of diversification in large-cap stocks. I always prefer owning small cap PM mining stocks over their larger peers because smaller companies with few mines in a single geographic location are often much better managed, know their assets better than a massive company that owns 10 producing assets on three continents in six different nations, and maintain better relationships with governments due to their concentrated assets. In fact, over the years, sadly it is not even possible to own some of my favorite small cap mining companies because they have been acquired by larger companies. Even within the past rolling 12-months about a half dozen of my favorite small cap companies have been acquired by larger companies, when I would have much rather owned them as a concentrated smaller operation versus a giant behemoth of a company.

In fact, earlier this morning, with my patreons that receive my buy and sell opinions of smaller size companies, I issued sell opinions for three of these smaller cap stocks respectively at 25.02%, 42.03% and 28.72% profits. And this brings me to mistake #2 made by millions of investors.