My Disillusionment With The Stock Market

Stock Market Returns

I grew up in an interesting household. My dad owned and operated a construction business and my mom helped people plan and save for retirement. Whether on purpose or not they both instilled a couple of beliefs:

  1. Owning your own business is harder work than having a job, but the control and flexibility are worth it.
  2. Think way ahead into the future and plan for it.

Here’s an example: When I was 16, I was able to work for my dad because he owned the business and could decide to hire me. It wasn’t too crazy about work. In fact, it probably wasn’t worth what I got paid (parents are awesome in that way). As a result of this work, I made a couple thousand dollars each year. However, I never “saw” the money because my parents put it straight into a Roth IRA for my retirement. Flexibility from a business + long term thinking = retirement nest egg before entering college.

Now, here’s where my young-adulthood got interesting: My mom helps people save for retirement by investing in the stock market via her large company’s investment options. She’s on a salary which enables her to be unbiased and non-pushy because she’s not dependent on a commission. She sees her job as providing education and guiding people to realize the importance of save for the future. Again… by investing in the stock market.


Disillusioned With The Stock Market

She passed that education down to me. However, the more I learned about the stock market the more I became disillusioned. For starters, there are 3 basic types of stocks/companies:

  1. Growth Stocks: As the name implies, these are stocks that are growing. The issue with these is that the stock price already incorporates the current company’s growth pattern. The problem? The only way to make the price go up is to grow faster. The company can’t merely be “as good as last year”. They must be better!
  2. Value Stocks: This is a growth stock before it’s started growing faster. So you’re job is to identify companies that have more growth in them than they currently do. It is possible to do, see Warren Buffet’s net worth for proof. Although, there’s a reason he’s famous: because it’s hard to do! My biggest issue is that even if you recognize the potential, it’s up to the managers to also recognize it and execute on taking advantage of it. You have zero influence.
  3. Income Stocks: These companies typically pay a dividend. In other words, they’re successful and don’t see a need to re-invest the money to try and grow. I actually really like this and applaud these companies for showing restraint. Since they don’t need the money, they give it back to the investors in the form of a dividend. These are really nice because a) you get money back without having to sell the stock and b) it’s highly predictable. My only issue is that because there’s little risk, the returns are lower, sometimes not even out pacing inflation.

To recap: To get solid returns, it’s not good enough to invest in solid companies. You need to find, and invest in companies that, for some reason the general population hasn’t figured out yet, are going to grow MORE in the future. There’s a reason why Warren Buffet’s nickname is “The Oracle of Omaha”. It’s hard to do without putting in a lot of research. Because, once everyone else does the research and figures it out, the price goes up and your opportunity is gone. And finally, once you invest, you have no influence. You’re at the mercy of the management team’s decisions. You have no opportunity to add gyroscopic value to your investment.

Can you see why I became disillusioned?

My parents and I would go round and round on this topic. It was similar to the late night dorm room conversations in college. My mom ultimately agrees with me, but has a solution: invest in a total market index fund. Essentially you’re admitting that you can’t pick winners and losers. So instead, you’re going to bet on everything with an index fund which uses computer algorithms to automatically buy and sell stocks to keep the portfolio balanced. Then you buy a share within that portfolio (very meta). This smooths out the ups and downs and historically on average earns you ~7% every year… 100% passively. This, by the way, is exactly how they set up my Roth IRA. It’s also what almost every single personal finance advisor suggests.


Gyroscopic Investing vs Passive Investing

7% without any extra work isn’t bad. This is one of the reasons why I still have my Roth IRA. But what if you have the energy to put in extra work? What if you had the opportunity to add your own value to your investments and increase your returns? What if you wanted direct input on decisions being made? This is exactly where passive investing falls short. You can’t do any of that (hence the term “passive”)!

This is why investing in rental real estate is so powerful: it provides Gyroscopic Cash Flow. After you get your rental up and running, which does genuinely take effort, you only need to provide extra effort every once in a while to keep it going. Then each month, like clockwork, it will spin off some cash for you. Then YOU get to decide what to do with the cash: You can invest in an improvement so you can charge more in rent AND increase the value of the rental (double bonus!). You could also save it to buy another property (compound growth!). I wouldn’t spend it on a vacation, but that’s technically another option because YOU are making the decisions.

Here’s the craziest part of all: The risk is much lower than the stock market for equal or greater returns. Let me explain.

The price of the property is known. The average rental rates are known (learn how much to charge for rent). The condition of the property is known. The monthly expenses are known (and you can budget for repairs). Therefore, you’ll know exactly how much you can expect your return to be. There’s no guessing. No gambling. The risk is low, and you can look for the right investment for you, with returns you’re happy with. Then you can put in gyroscopic effort to ensure you get those returns.

You’re not dependent on someone else’s management skills or a requirement that you grow faster each year. You don’t need to settle for lower returns to get steady payouts. This is why I invest in rental real estate.

This is freedom.

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