“The stock market is filled with individuals who know the price of everything, but the value of nothing.”
That’s the late Philip Fisher commenting on what he saw happening in the stock market.
Fisher is best known for his great investment book Common Stocks and Uncommon Profits. It was published in 1958. I’m told that this book had a big influence on Warren Buffett.
What Fisher pointed out so clearly is that two things set successful investors apart from the crowd. Time preference is one. The other is a focus on economic value, not financial value.
Time preference refers to the ability to delay gratification.
People with a short time preference want everything to happen soon. In the investment world, they are constantly searching for the next hot stock. And when they find it, they want it to go up right away.
Those with a long time preference think years, decades, and even generations ahead. They focus on what’s important for the long-haul. And they care little for short-term price movements. It’s all about resiliency.
Then there’s this concept of economic value versus financial value…
Economic value is the value an individual places on a good or service based on the benefit it provides to them. This concept is fundamental to having a robust economy.
Meanwhile, financial value is simply the value of an investment based on its financial performance. In other words, financial value is what an investor could sell something for today.
We talked yesterday about how the time period from 1982 to 2022 will go down in history as The Age of Paper Wealth. That’s because the U.S. government and the Federal Reserve created over $8 trillion from thin air during this time.
That monetary debasement led directly to the “financialization” of everything. It shifted our focus from economic value to financial value. Suddenly the stock market became a giant casino.
As a result, we started shifting resources away from activity that creates economic value and towards activity that creates financial value.
The rise of the private equity industry illustrates this perfectly.
Private equity firms raise money from institutional investors to acquire entire companies. Then they perform various financial engineering tricks to make the company’s financial numbers look better. This is all about boosting the stock price in the short-term.
Private equity firms typically have a time preference of seven years or less. They want to get in and boost the financial numbers. Then they want to quickly sell the company at a profit.
The focus here is all on financial value. And often whatever economic value these companies were providing previously is hamstrung or shut down in the process.
And it’s not just private equity. Many corporate CEO’s also make decisions designed to boost their stock price in the short-term… regardless of how this impacts economic value.
That’s the financialization of everything.
This dynamic created a world in which rates only went down and stocks only went up. That’s been our world for the last forty years.
But those days are over. As we discussed yesterday, the Age of Paper Wealth ended last year.
And that means we’re going to have to deal with the fact that we’ve neglected economic value for the last several decades. There’s a lot of debt and malinvestment that will need to be liquidated… which means a recession is guaranteed.
That’s why it’s so critical that we structure our finances in a manner that will be resilient in the years to come. The Age of Paper Wealth may be behind us… but the Age of True Prosperity is ahead.
That is, for those who understand that the rules of the game have changed.
And this is where our flagship course Finance for Freedom comes in. This course walks through the process of building a robust asset allocation model, step-by-step.
The name of the game is true financial security. And it’s perhaps easier to attain than we may realize.
More information right here: Finance for Freedom Course Page
-Joe Withrow