Investing Is Not What Most People Think It Is
Most of us know someone who tries to fix their own car, rewire a light fixture, or argue their own case in court. Sometimes it works out. Often it doesn’t. The honest reason is that skilled trades and professions exist because they require knowledge, experience, and judgment that take years to develop.
Investing is one of those fields. It looks approachable — you open an account, you buy something, you watch a number on a screen. But the judgment required to do it well is harder than it looks, and a few common misunderstandings can cost people significantly over time. Two of them are worth addressing directly.
Owning a Business, or Betting On a Stock?
Here is a distinction that separates most long-term investors from most short-term traders: a share of stock is a partial ownership stake in a real business (its assets, its earnings, its future cash flows). It is not just a number that goes up or down.
Why does that matter? Because if you own a piece of a good business, and the price falls, the business didn’t necessarily get worse. It may simply have gotten cheaper. That’s actually good news for a buyer. A professional investor, or anyone who thinks like one, sees lower prices on sound businesses as an opportunity, not a sign that something is broken.
Most people find this very difficult in practice. When a stock they own drops 20%, the instinct is to worry, look for reasons to sell, and assume the worst. When it rises 20%, the same person feels confident and looks for reasons to hold or buy more. The result is a pattern of buying high and selling low, which is the opposite of what you’d want.
The antidote is to know, before you buy something, what the business is worth — and why. Then, when the price moves, you have a basis for deciding whether that movement is signal or noise. In the short run, markets react quickly (sometimes too quickly), and not always correctly. Over time, prices tend to reflect what a business is actually worth. We try to take advantage of that gap. But taking advantage of it requires patience.
Be Careful When You Can’t See a Real Price
One of the things that makes public stock markets useful is that prices are visible and continuously updated. You may not like what you see, but you can see it.
There’s a large and growing category of investments (private credit, private equity, venture capital) where that’s not true. The prices in these funds are often estimates assigned by the managers of the fund, not market prices determined by arm’s-length buyers and sellers. That creates a problem: it’s easy to report good numbers for a long time by simply not marking assets down to what they’d actually fetch in a real sale.
This isn’t always intentional. Illiquid assets are genuinely hard to price. But the result, in some corners of private markets, is that there is a significant gap between what funds report and what the assets would actually be worth if they had to be sold. In recent years, private equity and venture capital in particular have seen very few real sales, which means very few real prices.
We’re not predicting when or how this resolves. But we want our clients to understand that not all ‘investments’ are priced the same way, and that investments with smooth, low-volatility reported returns sometimes hide risks that only become visible when someone actually needs their money back. Remember Bernie Madoff.
So…
Bear markets happen. Market dislocations happen. The question isn’t whether you’ll face one, it’s whether you’ll be in a position to weather it.
If you own good businesses at reasonable prices and have a clear sense of why you own what you own, a falling market is not just a loss. It’s also an opportunity. Prices fall to levels that make future returns more attractive, and you’re in a position to take advantage of that rather than being caught off guard.
That’s the business of investing, really— building a portfolio grounded in fundamentals and having the patience and financial stability to hold it through the inevitable periods when the market disagrees with you.
That’s what we do. If you have questions, we’d love to hear from you.
The opinions expressed are those of Muhlenkamp& Company and are not intended to forecast future events, guarantee future results, or offer investment advice. Investing involves risk. Principal loss is possible.
