Behind the Curtain of the Stock Market

Behind the Curtain of the Stock Market

“Pay no attention to that man behind the curtain!”

Remember that line from the Wizard of Oz when Dorothy, the Tin Man, the Cowardly Lion, and the Scarecrow are confronting what they think is the Wizard with the loud, booming voice and the smoke swirling around the image? Then Toto, Dorothy’s dog, pulls the curtain aside exposing the fake wizard with his machinery and projection equipment. The wizard says the famous line in an inept attempt to distract the others from the reality of who he is.

Well, that is how many potential investors look at the stock market. On the face of it, investing in stocks seems to be a viable way to make money, especially with the market on such an upward trajectory the past several years. It looks like a no-lose prospect, right? While the stock market is not all smoke and mirrors like the Wizard, many misconceptions about investing in it escape most people. The reality is much more complicated than looking at the rise and fall of the market like some economic tide chart that is consistent in its rhythm.

While you can look at the history of stock market crashes to see the ongoing trends and cycles, you better have an MBA and actuary license to understand the dire picture it paints. No matter what a broker tells you, he or she doesn’t have a crystal ball and cannot predict the future. The truth is that investing in securities and stocks can actually set you up for failure.

Stock prices seem to be a mystery to even the most experienced investor. I never could establish the fundamentals in a layman’s perspective for investing in the stock market. However, from my basic knowledge, I do understand that demand is the key factor in the price of a stock. While supply does change, its impact on stock price is minimal relative to demand. Demand is defined as the amount of people and their money looking to invest in the market. Thus, the market cap (value) goes up and down based on how much money consumers invest in the market. It sounds simple. However, what does this mean relative to your market investments? That’s where things get complicated, and Americans feel disengaged from their investments and savings.

Many people will tell you that the inequality of the market deters individuals because of the small percentage of people who control a high percentage of money in the market. According to a recent paper by New York University economist Edward N. Wolff, the top 10 percent of American households, as defined by total wealth, owned 84 percent of all stocks in 2016. CNN Business reported that “the richest 1% of families controlled a record-high 38.6% of the country’s wealth in 2016, according to a Federal Reserve.” The numbers paint a stark picture of the inequality problems gripping the country. Not only that, according to the same CNN Business report, “the richest Americans are taking home an even bigger part of the nation’s overall earnings.” In 2016, the top 1 percent of families brought in a record-high 23.8 percent of the overall income. That’s up from 20.3 percent in 2013 and about twice as high as the low point in 1992.

On a side note, now you have a better understanding of who composes the “1%” so talked about in the media today.

When you look at that economic data, you have to wonder what makes your average stockbroker any more qualified than the average educated citizen to make market recommendations. If you follow the financial news, the people running the US Federal Reserve can’t figure it out, at least with any degree of certainty! They are sometimes surprised what happens to the economy.

In part, that realization is what pushed me to consider going against the flow and looking toward another option and opportunity. That is what led me to real estate. It’s cut and dry—an acquisition price and then hard and soft costs determine total development cost. It’s loan to value, equity required, projected revenue, and cash on cash on cash return. These seem much more straightforward than the numerous factors necessary to track a mutual fund with various companies, let alone the market and world conditions that affect US markets.

This is one of a series of articles based on my book, Modern Wealth Building Formula – How to Master Real Estate Investing. I have a passion for helping others secure their future. As the professionals say, “The best time to start is now!” Please follow me as I continue to give you insight and strategies for achieving your retirement dreams. We can do this together!