3 Investing truths (that are ridiculously untrue)

I saw the fol­low­ing tweet and relat­ed to James’ sen­ti­ment:

https://twitter.com/BasonAsset/status/780402228175581184

I love div­i­dends, but “pay­ing a good one” is an awful argu­ment for buy­ing or keep­ing an invest­ment.

Other con­tenders for “least informed” invest­ing state­ments are:

I’d buy com­pa­ny X, but it’s expen­sive and I could­n’t afford many shares.

Usually this is said when dis­cussing a com­pa­ny like Apple, which even now at ~$100 a share means that some­one with $1,000 could pur­chase only 10 shares. If they bought some­thing cheap­er, like a dol­lar, they could buy a lot more shares (a thou­sand shares to be exact, in this exam­ple). Then, as their think­ing goes, it only needs $1.00 growth to dou­ble, where with Apple it has to grow one hun­dred times more to dou­ble.

There’s a lot here to unpack. That said, I can’t tell you how many times I’ve had con­ver­sa­tions like this. Needless to say, the actu­al price of the share does­n’t mat­ter. And, growth is best thought of as a per­cent­age — so 100% growth is equal­ly dif­fi­cult regard­less of whether a share is $1 or $100, unless for some rea­son one is not priced cor­rect­ly.

Another mal­formed sen­ti­ment comes into play when peo­ple pre­pare a per­son­al bud­get (includ­ing set­ting aside mon­ey for invest­ing). I often hear:

I have a cash flow prob­lem.

 

When what they real­ly mean is “I knew my expens­es ahead of time, but I did­n’t have the discipline/interest/ability to put mon­ey aside ahead of time.”

In busi­ness, a cash flow prob­lem often has to do with not-yet-col­lect­ed receiv­ables (mon­ey you’ve earned, but not col­lect­ed), mon­ey that was a receiv­able but is for some rea­son uncol­lectible (a cus­tomer refus­es to pay), or deals you were expecting/hoping to close, but haven’t.

Individuals usu­al­ly use it to mean, I’m going to get a pay­check in two weeks but have already spent it… now we have to wait two weeks until I have the mon­ey to pay for what I’ve already spent.

These two sit­u­a­tions dif­fer in a very impor­tant way.

In the for­mer case, busi­ness­es were rea­son­ably expect­ing to have the cash they’ve already spent.

In the lat­ter case, peo­ple should nev­er have been expect­ing to have future pay­checks today. They just did­n’t have the dis­ci­pline (or the sit­u­a­tion did­n’t allow them) to post­pone their spend­ing.