Different Incentives, Different Advice

When I listen to people talk about their investment strategies, it seems that a lot of them take advice from people with incentives very different from their own.

For example, the other day I was talking to someone about SpaceX, and they argued it was a good buy at today’s levels because a Morgan Stanley analyst had put a price target on SpaceX between $300 and $600 per share.

The analyst is a very smart person, and I’m sure his spreadsheets are beautiful. But Morgan Stanley, the company writing the analyst’s paycheck, made over $100 million in direct advisory fees for orchestrating the SpaceX debut, and their wealth division brought in more than $70 billion in new assets in Q2, thanks in part to promising new clients access to a share allocation in the IPO. They also help manage the SpaceX workplace plan, which will continue to provide a significant source of revenue for the company in the years ahead.

This isn’t to say the analyst is wrong, and I certainly don’t accuse him of lying. What a man wishes he generally believes to be true. But he is incentivized to love and believe in SpaceX more than most.

It is also worth remembering:

• The billionaire crypto entrepreneur who forecasts Bitcoin reaching $1 million has much different incentives than you.

• The CEO who is excited about his company’s business outlook has much different incentives than you.

• The YouTube personality who is revealing “all the secrets the big banks don’t want you to know” has much different incentives than you.

• The person who has nothing to lose has much different incentives than you.

Again, just because they have different incentives doesn’t automatically make them wrong. It just means that what makes sense for them may not make sense for you. And that is a very important distinction.

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For whatever it is worth, at this point in my career, my incentive is for my business to be as sustainable as possible, which means not doing anything that is incredibly risky, cutting edge, or without historical precedent. And since I work primarily with stocks and bonds, I’m biased to believe those are the best tools for an investor to use.

This means I will never be the advisor who encourages his clients to use their 401(k) s to speculate on a new food truck venture or buy a bunch of apartment buildings.

Those things may be right for some people, but probably never me.

And since I mentioned SpaceX, here is an updated chart (See Houston, We Have an IPO and Price vs. Valuation) comparing the current SpaceX listing to the average path of the top 10 US IPOs by size.

Be careful out there.

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Personal Note:

I don’t pick up my kids from camp until tomorrow but here is a picture from drop off.

Hopefully they still remember us.