Common Sense Investing

TruePoint Capital

Thanks to stimulus checks and the free trading platform Robinhood, there was no shortage of new money or new investors flooding the stock market in 2021.

However, the one thing that was in short supply was common sense. Fueled by free money, inexperience, social media, and the internet, investors flocked to head-scratching stocks with no rhyme or reason.

2021 was the year of the meme stock – the rise of stocks fueled by social media and internet hype. All types of irrational behavior that drive mind-boggling investing trends were on full display in 2021 – from the fear of missing out (FOMO) to herd behavior.

Remember Gamestop (GME) and AMC? Backing up subreddit investing forum wallstreetbets, hordes of investors jumped on the bandwagon to put the squeeze on short-selling hedge funds by driving up the stock prices of struggling brick-and-mortar gaming retailer Gamestop and theater chain AMC.

The result was the loss of billions by hedge funds who were forced to cover their shorts with high-priced stock. Hedge funds weren’t the only ones hurt. Investors who jumped on the bandwagon then saw prices crater after the hype died down also suffered losses.

The lack of common sense has poured over into 2022. Rivian Automotive, Inc. (RIVN) is the latest meme stock. The electric-truck maker, backed by Inc. and Ford Motor Co., now has a market cap higher than Daimler, GMC, and Ford despite not posting a single sale to date.

Whatever happened to common sense investing where economics and fundamentals mattered?

The problem with investing in a pool of investors where common sense, mathematics, and fundamentals don’t matter is that you can never predict your investments’ outcome.

Investments fueled by hype and irrational behavior are a recipe for volatility. Smart investors know better. They prefer to use common sense when investing, where economic fundamentals matter and predictable returns.

Where do smart investors go to surround themselves with like-minded sensible investors? The private markets – where stocks are insulated from the ultra-liquidity of free trading and the volatility of meme stocks borne by the internet and social media.

Requiring a minimum level of financial status and investing sophistication to participate, the private markets are insulated by the type of newbie, inexperienced investor that drives Wall Street volatility. Also, because private investments are structured through built-in illiquidity from long lockup periods, normally sensible investors are prevented from acting on the type of impulses more common with their public investing counterparts.

Smart investors flock to private alternatives where common sense rules because they seek predictability to build wealth.

What type of predictability? The predictability of:

  1. Cash Flow.
  2. Appreciation.
  3. Recession Resistance.
  4. Inflation Insulation.
  5. Tax Benefits.

These types of common sense and predictable fundamentals are what the public markets lack, and it’s why smart investors seek private alternatives.