Control is Key to Investing
One of the major challenges with investing in stocks, mutual funds, and index funds is that we have absolutely no control over the asset. Our buying or selling does not move the price of the asset. And calling the CEO of a public company to give advice probably won’t work either.
It reminds me of a recent trip on a commercial jet. You’re sitting in the passenger cabin of a 747. Right at the moment that it takes off, the plane begins to shudder and shake. Do you know that moment? I get that feeling that I am powerless over what happens with the plane. At that moment, we have absolutely no control over our lives. We could live or die in an instant.
Many investment vehicles are just like sitting in the passenger seat of a 747. We have no control over what’s going on, and are at the mercy of other people. It’s a bit scary because sometimes those other people are not completely honest.
Trusting other people to manage our money increases our risk. Stock issuing compaines have CEOs who run the business. Mutual funds have managers that control all the clients’ money. The managers of Enron and WorldCom, as well as Bernie Madoff, are examples of people who were in control of the money, but were not trustworthy. Billions of dollars of investor money was lost because of these people.
Now consider someone like Warren Buffett. He has control of his investments. When Warren started out, he could only purchase small numbers of shares of stock in public companies. But as he became more successful he gained the ability to buy the entire company, or enough shares to gain a controlling interest. This gave him control over the asset. if the management turned out to be dishonest, or did not do a good job running the company, Warren can always fire them and bring in a new management team. He rarely has the need to do that, but if necessary, he has the power.
Bill Gates is another good example. One of the reasons that he became the richest man in the world is that he has control over a large, powerful asset. That asset is Microsoft. He has the power to hire people, fire people, and determine the direction of the company. It’s through the ownership and control of this powerful asset that he became so wealthy.
There is a flipside to controlling an investment. And that is that control requires skill. Although buying a stock or mutual fund requires no skill, running a company that has issued a stock does require significant skills. Most investors have virtually no investing skill at all. The good news is that we can all learn to improve these critical investing skills.
This is the third post in a series entitled Secrets the Financial Industry doesn’t Want you to Know.
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Related posts:
- Buy and Hold Investing vs. Hedge Funds
- Does More Risk Really Mean More Reward?
- Automated Trading Compared to Mutual Funds
- Mutual Funds and the Concept of Value Creation: Part 1
- Why Most Financial Advice Is Useless
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is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
