“Wall Street would like us to believe that the stock markets are a logical extension of free market economics, and to a large degree they are. But they may be more than that too.”

Expectations and disappointment go hand in hand.

We’ve all experienced this, haven’t we? Whether it was a birthday, anniversary, job promotion, relationship, we’ve all been disappointed. But that doesn’t stop us from having expectations. They are a natural part of who we are. As humans we have hopes and dreams. But to the extent we rely on those outcomes for our happiness, we create expectations, and thus sometimes, disappointment. It’s a fact of life.

A good philosophy is to make plans, and then work hard to achieve them. Accept the results for what they are, knowing that if they are unsatisfactory, we can always try again having learned from our experience. Make the plans, but don’t plan the results.

Some would say this is fatalistic, and it is, but only if we leave the result totally to chance. We know that by working hard to achieve the result we desire, we greatly increase the chance of the desired outcome. As the saying goes, “The harder I work, the luckier I get.”

Vocabulary is powerful, and the words we use to describe this idea of chance or luck covey important connotations. For instance, “probabilities” for particle physics sounds scientific, “serendipity” sounds happy and refers to the bright side, and “bad luck” causes disappointment on the down side.

But how about “gambling?” What connotation does it bring to mind? It’s certainly not scientific. What city pops into mind? Las Vegas, or maybe Macau? Many would say these are the gambling capitols of the world. But are they really?

Gambling holds an allure so powerful that people are willing to travel thousands of miles to get there and then spend life savings chasing the hope of a big win. This is a case of seeking good luck; something we know exists, but that we have no direct control over.

If we rationally examine a casino, we quickly see that the odds are clearly stacked against us. For example, the roulette wheel has 18 red and 18 black holes for the ball to land in, but it also has one or two green holes. Without the green holes, the odds would be 50-50. With one green the house gets a 2.77% advantage. Two greens offer a 5.5% advantage for the house.

This advantage guarantees that the house will always be a winner in the long run. The house always wins. Always.

The parallels to another house of gambling are striking, but since vocabulary is so powerful we’d never call gambling. We call it investing, trading, or sometimes with a slip of the tongue, “playing the market.” Wall Street would like us to believe that the stock markets are a logical extension of free market economics, and to a large degree they are. But they may be more than that too.

Using the free market to define the actions of the stock market we may actually prove that Wall Street is also like a very large casino, except that no one wants to label it as that. Again, vocabulary and labels are powerful in shaping how we perceive reality. How we perceive reality dictates how we interact with it.

Trying to beat the market really means trying to outsmart everyone else. But remember, for the market to work, there needs to be a seller for every buyer, and a buyer for every seller. But what happens when everyone wants to sell?

We’ve heard it said many times, one of the reasons that the markets have done well in the last 20 years is the large amount of money in IRA’s and 401K’s that poured into the markets. If there is more money chasing stocks than there is stock, prices will rise. If there are more sellers than buyers, stocks will fall.

This is clearly a free market analysis. But watch out, you didn’t see the words “profits” or “earnings” once. Scary isn’t it? P/E’s are largely irrelevant in this analysis. The fundamentals of supply and demand are driving stock prices. It’s pure market, but not what we’d like to believe drives the price of stocks. It certainly doesn’t value stocks at some measure of their inherent worth does it?

The reality is that the stock markets move like a market should. Higher prices when more money is chasing lesser supply and lower prices when less money chases a greater supply. In times of speculation and certainly in bubble scenarios, supply and demand drive the stock market valuations higher. But when the tide turns and investors are looking to liquidate stock for use in retirement, watch out.

Bottom line: the sale of a stock requires a buyer. Right now there are 80 million Baby Boomers headed into retirement. On the upside, there are currently about twice that number of workers working in the work force. On the downside, many of them are young, just out of school, working at Burger King and Radio Shack.

How much of our stock are these young folks going to buy? How much can they buy? If they can, will they want it at twice the price we paid just so we can have a stock that doubles in value? Or will they simply wait on the sidelines for a better deal.

The market forces of supply and demand will drive stock valuations far more than corporate earnings over the next decade but probably not in a direction we’d all like to see as owners of stock.

Unfortunately, many investors are betting on what is called the “greater fool theory.” They are hoping that someone will come along and pay more for their stock than they paid. Maybe. Maybe not.

What if no one is willing to pay more? What if these buyers simply can’t pay more because their salaries are on average far less than the previous generation’s? What is our “Plan B?” Social Security? I was born in 1964, the last year of the baby boom, and I have no delusion that there will be any money for me in the social security system. Do you? And even if there is, what will the money be worth?

As my good friend Steve Sjuggerud says, “Politicians are stuck with a tough choice. They have made a promise to the seniors, and by golly they are going to keep it. But how are they going to pay an obligation from an empty treasury? Raise taxes (not a winner), cut spending (probably not), print more money (hmmm, might get away with this one)”

This is the most probable reality. It’s certainly the least painful for politicians. What would all this mean for you and I? Stocks worth about the same as when purchased, monetary devaluation, and continuing waves of Boomers moving into retirement ever increasing the sell pressure in the market just described. It doesn’t have to shake out this way, but it could. Even if the chances are only 10% wouldn’t it be nice to have a contingency plan?

But taking control of one’s destiny is scary. It requires courage, action and responsibility for outcomes that are in many ways outside our direct control. These are things that too many folks are unwilling to accept today. The entitlement mentality is taking away our spirit to live in the full capacity we poses and desire to live. Not for all of us though.

My accountant sent me a chart showing the taxes paid by bracket. Ever heard of the 80/20 rule? In the sales profession, 80% of the sales are made by 20% of the salespeople. 
For example, the top 25% of wage earners pay 83% of the federal taxes in the United States. The top 5% pays over 50%. Incredible, isn’t it?

Garrison Keillor of Prairie Home Companion has a cute quip that ends with, “and the children are all above average.” It’s not just in Lake Woebegone anymore. It’s all over the United States.

The field of pediatrics has produced the miracle that all parents could have only dreamed of. The height and weight chart. It is incredible the number of parents who have proudly proclaimed to me, my child is in the 95th percentile for height, weight, or whatever it is. Being a proud father, and not to be outdone, I used to proclaim my baby to be in the 95th percentile for poop production. Maybe folks with children in the 25th percentile never brag.

But seriously, the reason this is important, is that we all believe that averages are for other people. My child is in the 95th percentile and so is every other kid that I’ve ever heard about.

Just like all these kids, I’m different. I’m special. I’ll beat the odds. There will be money for me in social security. The stock market will do well and give me the compounding 7%, 10%, or 12% return that I need to deliver the lifestyle I want in retirement. Will it? Will I be one of the lucky folks that hit the jackpot?

At least going to Vegas, we have knowledge that it is fantasyland. Hopefully we know we will lose our money. As the sayings go, they didn’t build billion dollar Venetian look-a-likes in the desert on the winnings people take home.

But the market is different; at least it’s supposed to be different. It’s not gambling. It can’t be. We’re talking about our future nest egg that will carry us through our golden years.

But the parallels are striking. Just like Vegas, the Wall Street house always gets it cut, except it’s called commissions and loads. And as the Merrill Lynch pump and dump scandal shows, brokers may have their own best interest at heart, not ours. (Imagine that) At least in Vegas, we know the casino is out to get our money.

Let’s face it. No amount of SEC regulation is going to eliminate the selfish motives of brokers. It’s human nature and therefore will always be a market reality. And let’s be honest, brokers exist to buy and sell securities. That’s how they make money.
They depend on faithful minions while they sing the songs that we want to hear about bull markets, and retirement funds that will provide for us in our old age. The mantra of brokers is buy and hold. Until when? Who is going to buy all this stock at a higher price? Your kids, the Chinese, the Brazilians, who?

So the fundamental questions are these. Are we betting the farm in the traditional stock markets? Are we expecting to have social security bail us out if the market doesn’t deliver? If so, aren’t these some huge expectations? Will we be disappointed if they don’t come to pass? Or worse, will we be devastated if they don’t come to pass?

I don’t go to Vegas expecting to win. That doesn’t mean I’m a pessimist. I am an optimist and a realist. Likewise, believing that the markets may not provide for the total or even a great part of our retirement doesn’t make us pessimists. There are way too many forces at work similar to a casino to bet our financial future on the traditional markets. Yes, there will be new companies whose stock shoots to the moon. Some of those companies will have products and earnings. Some of them will be Dutch Tulip Bulbs too.

I own stocks, and always will. The percent of my portfolio in stocks is probably considerably less than most folks, but I do believe they are important for diversification. The stock market may have an incredible rally. Who knows, a major breakthrough in nuclear fusion technology will happen tomorrow. Think about what almost free unlimited energy would do for the world’s economies. Serendipity happens and we need to be positioned well to take advantage of it when it occurs.

Likewise, it is important to have a portfolio diversified into hard assets and commodities, maybe more so than ever before, because of the number of uncertainties that face us, from terrorism, to energy costs, to a bankrupt social security system. Sure owning hard assets is gambling too. But diversification spreads the risk and allows us to catch the upside and cushions the downside.

In an article I wrote a while ago called “The Perception Gap”, I suggested that investors take responsibility for their actions and do the little bit of extra work required to be truly successful with their investments. Good luck does indeed follow hard work.

But where to begin? There’s a lot of information about the stock markets, but not so much about hard assets and pioneering opportunities. Hemispheres can help. We concentrate on the hard asset class primarily because it’s where we believe we can make the most difference.

Hemispheres contributors are people with years of experience in their areas of expertise. Many of us are on the ground, literally, working on projects, getting our hands dirty. We believe we can help folks see outside the box, shake stereotypes with fact, and open windows into possibilities most folks never even hear about. It is our mission.

Your mission, should you decide to accept it, is to do the little bit of extra work required to establish diversification outside the traditional stock markets. It won’t be as easy as dialing into Ameritrade. You may even need to get on a plane and visit a place your friends don’t think is worth going to visit. Do the research, spend the time to find out about opportunities that other folks think might be a bit odd, and draw your own conclusions. You’ll be glad that you did.