The market this month was fairly flat or up a little depending on what index you are looking at. The year to date, of course, is up huge.
In past newsletters we have talked a lot about the dangers of fear, about how being too scared to invest will cost you a lot of potential profit. In this newsletter we will talk about the other side of that issue, which is the dangers of greed.
The reason why an asset goes up and down in price is expectations about how much that assets is truly worth in the future. For example, you buy a stock if you believe that is will be worth in the future more than it costs today. Expectations, however, can be wrong. While prices can temporarily diverge away from its true intrinsic value, it eventually will revert. History is filled with examples of when assets were driven up to ludicrous valuations and eventually crashing. The classic example is tulip bulbs in Holland from 1934-1937. Some bulbs sold for over $700,000 in today’s money, which most would consider unreasonable. When the price of bulbs eventually reverted to normal, many people were left financially destitute. A modern example would be the housing crisis of 2008. Many mortgages and loans were backed by the inflated valuations of the properties. When the real estate market crashed, all those loans defaulted. In both of the examples we mentioned, greed made people believe that prices will keep going up and thus they took too much risk. There is a good reason that we utilize a lot of diversification in our portfolios. If one thing fails, we don’t want the entire portfolio to be destroyed.
There is a risk to investing, but there is also a risk to not investing. That conflict between investing and safety must be carefully balanced and considered in all investment decisions. Like the gas pedal and brake pedal of a car, both are needed. Without the gas pedal, you aren’t going to go anywhere. Without a brake pedal, there is an extremely high chance that you will crash. /span>
If you have any questions about this newsletter, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.
Daniel and Eli
As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.
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Questions for the comments
Did the newsletter make sense? Do you agree or disagree with what we said?