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The Strength of the Retail Investor

Proverbs Chapter 31 verse 30 states, "Charm is deceptive, and beauty is fleeting; but a woman who fears the Lord is to be praised."


This Bible verse is a wonderful truth for any girl or woman to be recognized for. I think of my mother and wife and am blessed to have the two most important women in my life imbue this trait. It is also a constant reminder that the kingdom of God lasts forever, while all that is of the earth is fleeting and often deceptive.


For investing, words like deceptive and fleeting conjure many various thoughts from public discourse, professional actions and statements, to investor considerations. I often find that many struggle with various elements of investing, but none is more important than distinguishing between the elements that should be focused on, versus those that are not worth the time.


I'll keep this brief. There are two crucial components when it comes to investing at the moment. First, there is the generational divide, and second, there is the Wallstreet game. These components are the strongest variables at play with respect to today's volatility.


There is a reason why companies like Amazon, Inc. (AMZN) and Roku, Inc. (ROKU) were able to and are in the midst of scaling and developing. There is also a reason why companies like Walmart (WMT) and Target Corp. (TGT) missed the boat for a very long time and still to this day are major laggards, while even newer entrants continue to leap-frog them. At the same time, there is a reason why companies like At&t, Inc. (T) and Comcast Corp. (CMCSA) have not been able to pivot to streaming as quickly, while Roku has emerged as the premier distribution and advertising streaming play.


For every new innovative and technology-based company that finds its niche and begins its assent, there are many legacy companies that dominate the market beforehand, affording a long runway for newer entrant growth. This ranges from Big-Oil, to banks and credit card companies, to retailers, to Big-Tech, among many others.


So back to the two crucial components being, the generational divide and the Wallstreet game. It's important to understand how these two critical elements factor into today's fundamental shifts in competitive markets, and how the Retail Investor sits at the forefront of the opportunity.


The Generational Divide


I've written about the generational divide within other topical areas, but today, I think it's important for a quick refresh. It is my opinion, that a core reason for why legacy/incumbent companies are seeing such a strong push from newer and more innovative competitors is predominantly a result of a lack of focus on the consumer.


It's been a longtime coming. Companies that were born out of the industrial revolution have hit a wall, and it's not simply manufacturers and retailers. The irony is that many of the oldest companies in the U.S. today are creating a similar environment and opportunity for investors with long-term horizons moving forward, as was the case during the industrial revolution.


Specifically though, the generational divide relates to the Baby Boom generation, and all other generations below them. The divide is much more prevalent for Millennials and Generation Z, and it stems from the idea of a lack of connection, which ranges from employment opportunities, development of a family and housing ownership, customer-business interactions, among others.


Today, when we look at government institutions, major corporations, and many leaders throughout the country, many positions and influencers are being led by Baby Boomers. And unfortunately, these Baby Boomers in power are not the "cream of the crop", which makes the entire generation look bad - since when did the U.S. seek to become socialist and take steps backwards to be like China and India?


What is really enlightening is the fact that major financial institutions, manufacturers, retailers, the list goes on, have completely taken the consumer for granted. If we really look at things critically, every newer innovative and technology-based entrant has done one thing the same - focus intently on the consumer. It doesn't matter what sector/industry it is. This has ranged from a company like Amazon giving customers the best e-commerce experience, to Fintech companies looking to eliminate unwarranted expenses, and giving customers a way to have tools and resources to achieve financial objectives. Something banks have never done.


All-in-all, the generational divide has led to a distaste for legacy/incumbent investment options. This distaste is a direct reflection of the same distaste that has and is brewing from a customer perspective. The forthcoming shift in brand awareness and loyalty is the big catch at stake. Many legacy companies believe that they are truly, "too big to fail", and are in many cases unaware of their folly. All the meanwhile, newer entrants are developing into market makers and takers, and will grow and grow for the decades to come.


Market volatility is becoming more of a battle between investors as a result of the generational divide that is upon us. Unfortunately, I don't think that it will end well for legacy/incumbents, especially as future long-term investors will have a once in a lifetime (actually 100-150 year) investment opportunity that is just beginning.


The Wallstreet Game


The Wallstreet game is quite simple. There are more than 6,000 public companies trading on major stock exchanges. Wallstreet has a very complex and intertwined connection with how they provide services for their clients and customers whether retail or institutional, as well as their research and analysis arms assessing and valuing these companies.


The Wallstreet game is not about winners or losers, and it does not generate transparency on who the best investment options are. There may be an analyst here or there that has a solid understanding of who winners are. But for every one of those analysts, there are plenty that will counter the position, and/or aggressively short it.


The reality is that the Wallstreet game is a game of musical chairs. At varying points throughout time, every company becomes a winner and every company inevitably becomes a loser. This is what drives trading and markets. And this is why hedge funds, short firms, and mutual funds alike all participate in supporting the volatility and inconsistency. All the pieces are in place to justify and support the game.


Another key element of the game is the publicized performance metrics for individual equities and mutual funds and other investments alike. Using metrics like P/E ratios, EBITDA, GAP, Non-GAAP, etc., set the stage for analysts to dictate coverage and influence trading activities. At the same time, benchmarks set up for mutual funds, ETFs, ETNs, indices, etc., allow for the herd mentality to alleviate any true standouts during boom/bust cycles.


For Retail Investors, it is best to avoid the Wallstreet game, or as many have said, "avoid the noise". Yes Wallstreet is one of the biggest drivers of noise and disservice to Retail Investors.


Conclusion


The best part of all of this is that the Retail Investor is in the optimal position to succeed. There are many bright people who go to work on Wallstreet with aspirations of doing something great. However, they quickly are trained to focus on greed and the propaganda of the firm. They are controlled and disallowed innovative opportunities to create products and services outside of the firm construct. Many leave to start their own firm, but lost time and greed turn them towards short-term focus, their jaded understating of the game forces them to replicate yet another cog in the system.


It really can be frustrating seeing an analyst randomly downgrade a company I own, but it really doesn't matter. Wallstreet is simply either just sitting down, or moving to another chair as they always do. And for me, I know what the focus is, so much of their commentary is irrelevant as it is poised to justify the orchestration of the musical chairs.


For the Retail Investor, the only real challenge is dealing with emotional pressure (the noise), and keeping a direct focus on what drives an investment return on owning a public company:


Revenue Growth - Gross Profit Margin - Operating/Free Cash Flow Margin - Financial Strength


Whether the Retail Investor focuses on fewer companies or is capable of building a detailed portfolio, the sky is the limit.

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