Weekend reading: It’s a jungle out there

by The Investor on May 24, 2014

Good reads from around the Web.

I really liked this extended metaphor of the stock market as a forest, from Nate at Oddball Stocks:

I want you to think of the market as a forest. A healthy forest is filled with a variety of trees and plants. There are tall trees, short trees, pine trees, oaks, maples, beeches, bushes, grasses, weeds, as well as numerous other plants. A forest doesn’t grow all at once, it starts with a few grasses and slowly evolves into something mature. Markets are similar, they don’t develop at once, they grow into maturity.

In a forest not all saplings grow into towering trees. Many saplings thrive for a while only to be deprived of enough sunlight or good soil before perishing. Sometimes a sapling falls victim to a grazing deer, or other destructive animal. Likewise there are more smaller companies in the market and not all of them will grow large. Some are small trees won’t ever grow tall. Some fall victim to a predator, or are crowded out of the market place.

Given the right conditions, the right soil, and the right seeds a tree can grow large. A tree doesn’t grow all at once, it takes decades. As a tree journeys from a sapling to a stalwart many things can happen destroying its progress. A tree might drop hundreds or thousands of seeds of which only a few become full fledged trees. Even less seeds become giant trees. A giant tree needs perfect conditions to crest above the other trees. Once it obtains a certain size it’s own size becomes a strength. A larger tree can steal sunshine and nutrients from the rest of the forest. Size becomes a strength for a while.

Trees don’t grow to the sky, eventually all trees, even the giant sequoias face an untimely end. Large trees are more susceptible to violent wind storms, they aren’t as flexible as smaller trees. If the soil or environment changes large trees they have trouble recovering. Large trees are also targets for lumberjacks whose wood is more valuable.

The market as a forest – or an ecosystem – is hardly a new metaphor, but Nate puts it really well.

Still, metaphors shouldn’t be entirely mixed up with reality.

As an active investor you are usually trying to either smaller trees that will grow faster than those around them, or else big trees that mistakenly seem small to other lumberjacks. A real forest has few such optical illusions, while attempts fence in promising saplings are doomed to legal and possibly biological failure.

Perhaps passive investors fair better with the metaphor? Like an owner of forestry assets or even a tribe of hunter gatherers, they get to benefit from all the riches the forest provides, whether the fast growth from seeds, the cool shade of the giants, or the fruit that falls from the more productive trees (as dividends).

Again though the metaphor founders slightly. Running a forest for profit is not cheap, which is why forestry funds tends to have high fees. Yet passive investors prize low costs above all but an accurate index.

I’m really nitpicking to extend the discussion though – I think elegant metaphors are useful, whether you’re a new investor or an old hand in danger of losing the wood for the trees (boom boom!)

Happy Bank Holiday – may all your garden centre trips yield bargains.

From the blogs

Making good use of the things that we find…

Passive investing

Meet the passive investing dream team – Mintlife Blog
Change happens in real-life investing – Retirement Investing Today

Active investing

Chuck Akre: The best investor you’ve never heard of – Clear Eyes Investing
The world’s markets, by size and valuation [Table] – Reformed Broker
Analysts should focus on valuation, not forecasts – The Value Perspective
Sainsbury: Buy, hold, or sell? – UK Value Investor

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1