We all love rags-to-riches stories.
Seabiscuit with trainer Tom Smith. Public Domain. Source: Wikipedia
Like the story of Seabiscuit—a short horse with an old trainer and a history of injury—we’re captivated by the turnaround. The Apple Computer that Steve Jobs brings back from near bankruptcy, so he can introduce the iMac, iPod , iPad, and iPhone. Apple has been so successful that almost every active manager is now under-weight the stock.
Or a plucky emerging market company, like Infosys, that markets its outsourcing services to an increasingly interconnected market and ultimately becomes one of the largest programming companies in the world. We like to cheer for underdogs.
That’s why so many people are enticed into buying penny stocks and hard-luck stories. An internet ad or hot tip from an acquaintance promises stunning wealth in a very short time. Just look at what $1000 invested in Apple in 1994 did, they say. It would be worth $50 thousand today. We’re pre-programmed to listen to narratives.
But lottery tickets rarely pay enough to justify their purchase. That’s why states sell them. For every Apple out there there’s a hundred “Innovative Software” or “Magnetic Technologies” that either go nowhere or into bankruptcy. That’s why they call it speculation. We don’t think about them because they don’t make much of a splash. Rags-to-rags stories don’t sell papers.
Investing is hard work and people can be pretty successful if they establish disciplines, manage risk, and learn from their mistakes: that is, if they do the work! That’s the side of Horatio Alger stories that’s often forgotten—the sweat equity of equities. Equity investing can be profitable, but only if you work at it.
Douglas R. Tengdin, CFA
Chief Investment Officer