(noun, etymology Dutch from ‘boedel’: estate, possession, inheritance, stock.). 1. Crowd, pack, lot, as in ‘the whole boodle.’ 2. a. Counterfeit money b. Money acquired or spent illegally or improperly, particularly when used in bribery for political purposes. 3. Slang for money in general.

What is on Each Side of the Money Coin? (Part I)

Posted on: Jul. 18, 2012  |  By: Ronnie Kahn  |  Category: Advice, General

The magician’s trick pulls the coin out from behind our ear.  On one side of that coin is risk and the other is control.  They are part of the same coin; a sleight of hand that we call money.  We love to watch the illusion and ask “how did they do that?”  We tell ourselves that is what we saw but we know it is a deception.  Does the magician control what we see or are we seeing what we want to see?

Life is good if you don’t pay attention to it.  Of course, that can’t be said for those who don’t know where their next meal is coming from.  Otherwise, for most of us, especially when it comes to money decisions, we will usually talk ourselves out of doing something; fail to do anything at all in order to avoid doing something we would regret, or do something that feels right based on what is good against what is bad.   Paying attention to it doesn’t mean thinking things through, which is of course, very helpful.  It is more like making choices by wrong thinking or overthinking things based on our emotions, anxiety, fear, regret, and what others are doing.  It is the illusion of being in control by avoiding or taking as little risk as possible.

Remember some silly philosophy discussion where someone disputed how you know anything is real and that everything isn’t made up in your head.  Usually this banter would end up with someone saying “how does this have anything to do with me?”  If this was a philosophy class or even a statistics discussion, this debate might have come about because there is a problem with logic around statements that are absolutes.  If one party claims that “there is no truth” then that statement by itself must be false too.  So it is with money.  If I tell you that all money is a socially constructed made-up illusion, then what if that statement is part of the made-up illusion?  In a money conversation though, we don’t usually end up asking “what does money have to do with me?”  We know it is a proxy or fiat that we must all believe in and agree to, for it to work.

If you don’t think money is a largely social construction, first start by looking at wages and salaries.  Wages and salaries vary immensely but the differences between one job and another and between one person and another seem to have no rhyme or reason.  It is certainly not merit that compensation is based on, for it is not tied to those who work the hardest, those who make the most revenue for their company, or those who produce results.  It can be based on norms for an industry, what others make in that type of position, what others make in the firm, who you know, how generous or cheap your boss is, or how long you’ve been around.

Stock prices are social too.  If you want to buy a stock, you don’t really care that what makes up the price to pay has been determined by some imaginary leprechaun, as long as other persons keep paying more and more for your stock and the price keeps going up until you have that pot of gold at the end of the rainbow.  Most of us know this as the greater fool theory.  Most of us though figure that we’re not the gullible one but it is the next guy who is the greater fool.  So we are only buying in order not to be left out of a good thing and will end up selling before we tiptoe through the precipitously price dropping tulips.  A few of my clients couldn’t resist calling me about Facebook before the stock came onto the market.  Each client had substituted a question of whether the stock would be worthwhile with their own experience with Facebook and its virtual ubiquity making it a good strong bet that it would appreciate in price.  If everyone is using it, they figured, then how could the social networking stock not keep going up in price?  In an ideal world, my advice as to whether the stock has value should have started out with the analysis of ad revenue, let’s say, which has not yet proven to be a generator of big revenues.  There would be no investment counselor, however, that would tell you “I have no idea what it is worth but I am sure people will keeping paying more and more for it.”  Now, if there were to be a bubble, it wouldn’t really matter what the logical advice was.  In other words, if everyone just thought this stock was hot and more and more investors would keep propping up the price by buying more, than wouldn’t it be best to get in early, regardless of revenues, users, analysis, research or whatever?  The opposite side of this coin is that no matter how great a company this is, if no one is buying then this stock is going nowhere.

Whether to buy or not based on whether the worth of the company would translate to the worth of the stock was really not the main driver of my clients attraction to the stock anyhow.  Nor really was the bubble mentality of get in early and let the greater fools get in later.  It was a reference point about how high shares of Google and Apple are and if this was a stock in that category than you could only make a killing by buying in early.   With share prices of these companies in the hundreds of dollars, it sure seems cheap to buy in at $35.  Ubiquity and popularity doesn’t equal stock value though as evidenced by Microsoft or Yahoo or a handful of so-called Web 2.0 companies IPO’s, including Zynga Inc., LinkedIn Corp, Yelp Inc. and Groupon Inc., that have gone public and have come falling back to earth.

As an advisor, I know that clients want to make money decisions more on one side by the “I don’t want to lose out on a good thing” and the other side by “I hate to lose money.”  This is not about worth translating to value but about social bets on direction of mass likes and dislikes.  I can’t ignore the irrational side of the Facebook question or the irrational, volatile, and herd like behavior of the markets in general.  The problem is this, if you fail to buy in and the stock goes sky high, I will have some big disappointments on the other end of the phone or across the table looking back at me.  Since clients are loss averse, I can remind them of a time when they thought something was a sure thing only to be kicked in the gut as they and countless others found out just how tough predictions can be.  So I try and reframe the issue to the broader market in general compared with other opportunities out there.  More importantly, when thinking about being disappointed if they fail to buy in and the stock goes up, I try to have someone visualize what happens when the money that is taken to buy this stock goes down over the long run compared to if the money were allowed to grow.  Would it not disappoint you too that you are now farther from you goals and dreams?  We cannot just trade on the illusion and must trade on the value of what we are buying in relation to where we are trying to get to.

In Part II we will continue with what to do with the illusion of money and how to make our decisions work best by a loftier principle than just tossing the risk/control coin.

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