With the pandemic hitting in 2020, we found ourselves stuck in our houses which was hard for
everyone. My family and I had moved into our house about six weeks before COVID-19 shut down and
with little to do to entertain our two-year-old, I did what everyone else did. I looked at buying a swing
set. I failed to realize how expensive they were and that it was virtually impossible to even buy one since
most for sale were out of stock.
Luckily, I started looking around for people in my area that were getting rid of their swing set. I found
one for $150 when most new ones were going for over $2,000. I had to put some sweat equity into
restoring the set and get a few hundred dollars of new lumber, but now my son has a beautiful swing set
which he enjoys almost every day.
Cute story, but what does this have to do with assets? Often, we tend to follow whatever the hottest
stock, trend, or even real estate area. Everyone is telling me I need to invest in Bitcoin or Tesla or name
some other type of asset.
I initially did the same thing with my son’s swing set. I and everyone else out there stuck at home
wanted to buy a swing set. The prices rose along with demand and the supply fell. I looked at buying
new and where everyone else was looking. I was chasing the hottest trend.
People have a recency bias with investing. If a market, sector, or stock has been performing well
recently, then they assume that is the best asset to own for the foreseeable future. Value comes in
looking at places that other people are not looking, much like my son’s swing set. Most people wanted
new swing sets, but I found a used one and paid a quarter of the price. I was able to get good value for
mine.
Understanding value comes from doing research on the historical prices, getting to know the impacts of
events on markets and financial metrics. The below chart outlines the historical forward 10-year
performance of stocks based on their comparative valuations (Shiller Adjusted P/E ratio). Stocks that are
more expensive than average have tended to underperform stocks that are priced below average over a
long period.
Investing goes back to the classic Wayne Gretzsky quote, “I skate to where the puck is going, not where it has been.” Investors are too often putting money where the puck has gone, not where the puck is going. To be fair, identifying upcoming future stock winners is nearly impossible and very few if any people can do that on a consistent basis.
Investors should avoid following the crowd and trying to pick the next big thing. Investors should pay attention to valuations, but they should not revolve their whole strategy around it. The fundamentals tend to win out over time: having proper diversification, staying invested and avoid trying to time the market.
Derek Mazzarella is a CFP® professional with Gateway Financial Partners.
The opinions voiced in this material are for general information only and are not intended to provide
specific advice or recommendations for any individual. All performance referenced is historical and is no
guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not protect against market risk.
All investing involves risk including the possible loss of principal. No strategy assures success or protects
against loss.
Companies mentioned are for informational purposes only. It should not be considered a solicitation for
the purchase or sale of the securities. Any investment should be consistent with your objectives, time
frame and risk tolerance.
LinkedIn
Facebook
About the Author
Derek Mazzarella
I believe that everyone deserves to live the life they want. My purpose is to help others grow and be the best version of themselves. I do this by setting a good example, educating and managing their wellness with a focus on three key areas: health, wealth and fulfillment.