Why Are People (Still) Scared Of Investing?


Why Are People (Still) Scared Of Investing? by John Szramiak was originally published on Vintage Value Investing

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The opening chapters of Larry Harris’ 2002 textbook Trading and Exchanges paint a bleak reality for the average retail investor…

Calling your broker on the phone, wondering if he’ll act in your best interests, and then paying a hefty fee if your order gets executed isn’t my idea of a good time or a system that is welcoming to new investors.

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Thankfully, electronic trading has changed markets dramatically in the last fifteen years.

So why does such a small subset of the population invest?

Only about 4 in 10 Americans and only 1 in 3 Millennials have money in the stock market. The most common justification – that those who don’t invest simply don’t have the money – doesn’t cover all the bases.

What governs the behavior of those who have the money and choose not to invest is fear.

To a seasoned market participant, the fact that everyone with the means to invest doesn’t invest is baffling, but the implications are far more dire than just missed opportunities.

Many Americans’ financial futures are uncertain, not because they don’t have the money, but because they don’t know what to do with it. Innovations and market events of the last decade haven’t dramatically improved financial literacy or investor confidence either.

The Non-Savers

The first and most populous category of should-be investors will instead spend disposable income on disposable goods.

While this isn’t what I would call prudent behavior, it’s what makes the economy function.

If everyone was as disciplined and as frugal as some of the self-help books suggest, the world would be drastically different. Not to say that Rolex Submariners and $100 power lunches would cease to exist, but entire segments of certain industries would be forced to consolidate.

It’s important to realize that there are countless entities that have a vested interest in getting the general populace to spend and consume more: from your neighborhood burger bar, to American Express, to the United States government.

While the “working poor” expand their lifestyles to match discretionary income, many share the same insecurity: a bleak financial future.

Within the scope of saving for retirement, we know that regularly investing money through tax-advantaged accounts is the tried-and-true way to do it.

However, for those in the heavy spending group, this is a wake up call they just don’t want to answer.

Whether 25 or 45, it isn’t easy to confront the realities of what it takes to build up a nest egg, achieve financial independence, or even take up investing as a hobby, when your current lifestyle is unsustainable.

The Scaredy-Cats

The other group that doesn’t invest is much harder to categorize.

This group has disposable income, spends some of it, but then parks all excess funds in a checking account, savings account, or perhaps even an asset with an extremely low yield.

In general, this group tends to be financially secure but, over time, shuns opportunities to invest in assets with higher risk profiles and higher average rates of return.

The tragedy here is that this is often due to feelings that the market is unapproachable, that it is difficult for investors to come out ahead, or even the narrative that the investor at one time suffered a crushing loss and that that will be indicative of future performance.

In reality, it has never been easier or cheaper to invest. Furthermore, over any sufficiently long period of time, investment returns in the United States have been overwhelmingly positive.

While this group would benefit the most from financial literacy campaigns, swaths of people will never purchase stocks, bonds, or other investments, and we’ll forever be stuck trying to figure out why.

So… What Are You Waiting For?

Having disposable income and managing disposable income are two prerequisites for those looking to start investing.

However, to overcome fear and simultaneously take care to not blow your life’s savings, it is necessary to spend time forming a basic understanding of how markets operate and all the options available to you.

If you want to get started investing today, then you can start by reading the Vintage Value Investing 101 series: How to Start Investing.

Remember, its never too late to begin your journey!

Article by Vintage Value Investing

This post was written by Tim O’Hearn (Guest Contributor). Be sure to check out his awesome blog right here, where Tim writes about entrepreneurship, business, technology, programming, algorithms, and the many books he reads!

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Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…
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