Losing Big with Stock Investing

I read a thread on Twitter this morning about Apple’s reaching three TRILLION dollars in supposed value, and about one person’s crushing regret that they did not invest in Apple stock some time ago. Thinking about this gave me a few insights that are worth sharing.

Stock trading in a nutshell

A quick note for those who don’t know how single-stock trading works. When you buy one or more shares of stock, you own a piece of paper (more on this later), and you hope it will increase in supposed value. Then you can sell it at a later time, ideally for more than you paid, and you have a profit, or net gain.

That’s how you want things to go. If it drops in value, or if you need your cash back in a hurry, you can sell it at a loss and just take your money to do something else. This happens a LOT, and more than investment firms probably want you to dwell on.

Still, it’s possible to make plenty of money trading stocks, especially if you don’t care where it comes from. See, to strike it big with stock trading, you almost always take money from other investors; it rarely has any contact with the actual company in which you’re “investing”.

Q: Then how does it keep going?

That’s a great question!

The easy answer is cynical but probably accurate. I’ve heard more than once that the reason no one ever brings down this house of cards is that, if you’re smart enough to understand how it works and what’s wrong with the structure, a giant investment firm will usually try to snap you up and offer you an absurd amount of money to keep the deck stacked in THEIR favor, and help them make even more from it. They benefit, you benefit, and nothing changes.

The other side of that is that while some professors/lawyers (I’m looking at you two, Robert Reich and Elizabeth Warren) do explain the very real effects of this in pretty clear terms, they don’t pay to advertise. Investment firms and stock-trading apps are everywhere, and they pay huge sums to keep the promises of big returns and the dream of passive income (“easy money”), right in your face, every day.

So a lot of people might never hear the dark side of this unless they lose out, and even then, if they don’t dig into the process, they might think it’s just bad luck, and not the natural result of a flawed process in which the house almost always wins. Traders and exchanges have been streamlining the system to ensure that for centuries now.

Preferred versus Common stock

It gets weirder, of course. Consider this as well, before you think you’ve missed out on something fantastic.

Preferred stock is a specialized investment into a company you believe in, when you want money and not control. Preferred stock is far more likely to repay your initial investment if the company liquidates for any reason (bankruptcy may or may not lead to liquidation of their assets), and the tax incentives to owning preferred stocks are ridiculously generous. If you have tons of money and want more, this is your safest bet.

Plus, if a company actually earns money by providing valuable goods or services to their clientele, they can pay real dividends to stockholders. But preferred stockholders always get paid first.

Common stock gives you voting rights over a company’s board of directors, and even the CEO. It will be a percentage based on what you own (usually one vote per share, with however many shares there are in the company’s holdings). While you can influence policy at times with your votes, that same board of directors can easily decide not to pay dividends to common stockholders at all. So, pros and cons for each.

Q: But what about trading?

You can still sell stock shares, and for more if the company is doing well in the public eye, or less if they’re visibly struggling. However, this is 100% subjective with common stock (preferred gives the company that issued the stock, the chance to buy those shares back from the market, so again, you’re more likely to get your money back at some point with preferred stock than with common stock).

As with art, the value of common stock is purely in the eye of the beholder, or in this case, the buyer. While art may provide real emotional or mental benefits that make any price you pay worthwhile (and how I do love museums and showcases, too!), common stock just gives you a piece of paper that someone else, someday, might try to buy from you.

Convince others it’s worth less when you buy, and convince them it’s worth more when you sell. You’re making money by trading hard-earned cash for a piece of paper. It is literally something for nothing. And I won’t even BEGIN to explain “futures” in this post.

Q: How did we get here from there?

I started this with a few brief points to mention, but the background is there if you need it, too.

Here are your takeaways:

1) A stock purchase without understanding, or made from sentimentality, or from jumping on the bandwagon, is just throwing away your real money on ephemeral items of questionable worth. Might they turn out to be terrific investments one day, if you know when to sell? Maybe. Casinos supposedly pay out to players once in a while, too, but most people who visit them spend a lot on the experience and gain nothing more. (Experience is the only thing you can buy that always makes you richer, by the way. That part can be worthwhile anywhere.)

2) It is NOT a loss to look back on a skipped investment years ago that you think might have made you wealthy by today. And did you have any expenses back then that you’ve forgotten about now? If your money was tied up in paper slips that you wanted to sit on for twenty years, what else would you have missed out on along the way?

3) Finally, anyone who has studied the observer effect knows that things might have gone quite differently if they HAD taken the other road. You literally cannot expect that things would be the same everywhere, except for your new fortune today. That is not how causality works; not at the quantum level, and not at the macro level.

Q: Some of that is awfully specific. Got anything else?

Live in the moment and look at what you can do now. Not decades past. Haunting your regrets will make you miss out on the rest of your life. Literally. What can you do today and tomorrow to make your life better now, more interesting, more enjoyable?

What’s past is past, for everyone I’ve ever known.

What’s next, for you?