Common Sense Investing: Markets, Magicians, and Misdirection

As a teenager, I belonged to a magic club in Las Vegas where professional local performers volunteered their time to teach us the tricks of the trade. One of the guiding principles of magic that I learned was that of misdirection. It is the skill used by magicians to get the audience to pay attention to one thing, while the real trick is happening somewhere else. This is exemplified by the old phrase “Watch me pull a rabbit out of my hat”. What the magician is really saying is “Don’t mind what my other hand is doing.” Because of my training I usually look for this rabbit everywhere except where the magician wants me to look.

Last week, I wrote about the new Meme stocks that are capturing a lot of the attention on Wall Street. Every day, morning market headlines are filled with stories about these companies. Because of all this press, a lot of money has been poured into these often overpriced companies, and a significant amount more is being spent trying to figure out who the next hot meme might be. Observing this behavior kick-started my training as a magician, which made me wonder if a little misdirection might be happening right before our eyes on Wall Street.

Investors need to understand that there is a certain amount of money available to invest and as it moves towards one company or sector, it moves away from others. As these hot meme actions take center stage, much of the markets attention and money is focused on them. As this drives their prices to sometimes unbelievable heights, it also diverts money from other areas. That leaves solid, long-standing companies with solid products and huge future potential with stagnant stock prices.

Now, it’s certainly possible that some of these meme companies will turn profitable, but the math works against most of them at current prices and I suspect that over time those usually impatient bucks will start looking for another place to to go. Like a magician focusing the audience in one direction while the real action is elsewhere, I feel like the market is telling everyone to “watch carefully while I pull a rabbit out of this hat” (a good analogy for a stock of memes) when the real deal is happening elsewhere. In other words, some of the best companies are being overlooked, opening up an opportunity for long-term investors who are smart enough not to let their attention be diverted by a misleading market.

I suggest taking a week to ignore the news about high-priced meme stocks and instead seek out those real bargains lurking behind the magician’s curtain. I believe some of the current excitement is intentionally designed to direct our attention one way, while opening up wonderful opportunities elsewhere if we take the opportunity to seek out that hidden rabbit.

Dan Wyson, CFP® is the author of “The Gold Egg” and “21 Financial Myths” and owner of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 — 435-986-9525 — Securities and Advisory services offered by Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser.

Brian L. Hartfield