Making major financial decisions that are truly best for you requires non–conventional thinking. There is a reason why the gap between Wall Street’s annual profits and the average investors is so wide. There is a reason why Wall Street revenues break records almost every year and the average investor hardly ever achieves their financial goals. It’s simply a matter of how both groups think, which leads to the action that drives the results.
I started my career on the Wall Street side of the business on the trading floor of the Chicago Mercantile Exchange years ago. What I saw first-hand was how vastly different the Wall Street professional “thinks the markets” vs. the average investor, for whom Wall Street serves. Wall Street returns may be a big stretch for the average investor, but if you even want to get close you had better start thinking and acting like Wall Street when making financial decisions.
“Price” is the one word Wall Street doesn’t want you to think or ask about. The reason for this is because just about all financial decisions you’re going to make requires you to buy something: Stocks from your broker or financial advisor, Annuities, Mutual Funds, Life Insurance Policies, and more. In all cases, you are essentially buying something from someone which means they are trying to profit from your decision. With Stocks for example, Wall Street owns the stock at a certain price and sells it to you at a higher price. That’s one of the many ways they profit, from your purchase of the stock at their retail prices. Don’t blame Wall Street, this is how the system is setup. Instead, realize that the responsibility to make the right decision is on one person, you. The goal is to first become aware of this issue, then understand how to make the right decision and lastly, feel comfortable and confident doing it.
The average investor almost never asks what “price” they are buying a stock at. However, it’s important to make sure you buy it on sale, just like Wall Street does, at wholesale prices. Wall Street professionals suggest buying and holding, but are they doing that? Wall Street focuses on “price” more than anything else when buying stocks, bonds, and any financial instrument. The problem with “buy and hold” is it really means “Buy at Any Price in the Market and Hold with No Plan for Risk or Profit”. Does this make any sense to you? Do you think this is the strategy financial institutions use for their capital? Wall Street isn’t doing anything wrong, the average investor is and this is simply because of a lack of understanding. To really change your financial trajectory, there is only one answer in my opinion: Stop thinking and acting like an average investor and start thinking and acting like the big banks and financial institutions.
Buy and hold works but you must focus on “when” to buy and “how long” to hold. Consider someone who invested $1,000,000 in 2000 in the S&P 500 Index and that investment’s performance since 2000. If you’ve been in the market since 2000 the profits have only been made the last couple of years. In this example, our $1.0 million beginning balance grew to $1.4 million at the end of 2014. That’s an average annual rate of return on an IRR basis of about 2.0%. Considering that this investment return is at par with long term CD rates, was this a smart financial decision and worth the risk?
How do you think Warren Buffet has made his fortune? His strategy is simple. Along with his insurance business, find strong companies and buy them cheap, just like Wall Street but opposite of the average investor.
What if we start thinking and acting like Wall Street and other financial institutions? It’s not as hard as you may think. To start with, understand that how you make money in the financial markets is exactly how you make money buying and selling anything in life. When buying a stock, think and act the same way you do at the store, try and buy something really good on sale. The next time you make a key financial decision, make sure you’re asking yourself these two simple questions: Is this decision benefiting you, or the person selling it to you? And, are you buying at wholesale prices or retail prices?
Hope this was helpful, have a great day.