This blog post features the images of Larry Jenkins Jr. Larry Jenkins is a carpenter, waterman and a native of Virginia’s Northern Neck. click here to view more Images by Larry Jenkins Jr.
What If Stocks Were Boats?
Have you ever heard of the saying “a rising tide lifts all boats”? That’s one of my favorite investing analogies, it compares the movements of the stock market to the rising and falling of river tides and compares the movements of individual stocks to the boats that rely on those tides to stay afloat.
I love the quote because when the stock market is down, it can sometimes feel like it’s never going to go back up, and when the market is up, it sometimes feels as if the market will never drop.
But, I have found that the temporary ups and downs don’t bother me as much when I remind myself that the ups and downs are temporary. I like thinking of the stock market as a river and I love thinking of individual stocks as different kinds of boats.
I live in Virginia near the Chesapeake Bay, I have also worked as a dockhand at a local marina, so I know a thing or two about boats.
Lets talk about boats
Yachts – bluechips :
Yachts are generally big luxury ships that are decked out with all kinds of amenities. They generally have large luxurious interiors and are built to cruise smoothly on some of the most choppy tides. Like bluechip stocks, they are big, expensive, and look good just sitting in your portfolio. Blue-chip stocks, like luxury yachts, can be affected by tides or turbulent seas but they are generally less affected by market conditions.
Speed Boats – GrowthStocks:
Speed boats are as sexy as they are expensive. Speed boats as a category generally consist of motorboats and cigarette-style race boats, which as their name implies are built for speed, not comfort. Speed boats are generally race boats or pleasure boats, they are not built to protect you from the volatility and turbulence of a rough tide.
You can take them into rough seas but like a four-wheeler or off-road Jeep, you will feel every bump, which can sometimes add to the excitement. In my opinion, growth stocks remind me of speed boats because they are fun to ride despite their lack of stability and sometimes lack of profitability.
“Growth stocks are companies that increase their revenue and earnings at a faster rate than the average business in their industry or the market” –Motley Fool.
Growth stocks tend to get banged around when there is market volatility but most are great companies despite their lack of price stability, especially when they are speeding to new highs.
Sail boats – MomentumStocks :
“Momentum stocks are stocks that have risen over the past month, and over the previous two, five, and 11 months” and are expected to continue to outperform in the future (MarketWatch).
I hate sailboats, they are so darn pretty to look at but they are also a pain to operate. To me, all of the ropes and sails and their tiny motors for use when the wind isn’t blowing is a nuisance. Sailboats are also annoying because by default, they have the right of way
“Sailboats under sail generally have right of way over most recreational powerboats, because sailboats are assumed to have more restricted maneuverability than powerboats” –sailboats
In many ways, momentum stocks are the same as sailboats in my opinion. Momentum stocks generally have a low float, which means that there’s only a small amount of shares available for public trading and much like a sailboat, their movement is largely reliant on a catalyst (wind, news, guidance).
Momentum stocks also suffer from liquidity issues that make it hard to get in and out of, much like the added skill needed to pilot a sailboat when compared to other boats which can be a barrier to ownership. As far as difficulty goes, an inexperienced boater would probably find canoeing or yachting slightly easier and a less physically demanding skill to acquire.
When used correctly, momentum stocks and sailboats can be as fun stable and exciting as a bluechip/yacht ownership but generally speaking, some expertise or mastery may be required.
Canoes – penny-stocks and some small-cap stocks:
These are cheap stocks that are attractive to beginners, mostly because of their price and accessibility. As a person who has learned how to canoe, I do not recommend taking canoes anywhere other than a small lake, and as an investor, I do not suggest making these the bulk of your holdings unless you are an enthusiast or adrenaline junkie.
Canoes are fun but they tend to tip over very often. “Tend to tip over” is an understatement when it comes to micro-cap stocks and penny stocks, these stocks are frequently the play toy of the pump and dump scammers who purposely crash stocks after tricking people into investing in them
Back to the analogy
If a rising tide lifts all boats, then common sense would tell you that it’s easier to make long-term money when the whole market is down simply by waiting for the tide to rise once again.
Far too often, I see investors pouring money into the market at high tide while not knowing what kind of boat they are riding in. Not knowing what condition the boat is in, all they know is “this boat floats” so it can’t be that bad.
Similar to how some investors buy stocks without doing any research, they foolishly buy the boat because it looks good . They don’t hop into the neck-deep water and inspect its bow, stern, or hull. Because they failed to inspect their ship (investment), when the tide (market) eventually falls, as it always does. All of the newly purchased boats no longer look as attractive now that are dragging against the river bottom and being beat up by the tide .
Now that their boats (stocks) are exposed, the boaters begin to complain about how rough the waves are. Some are happy with their purchases and decide to wait for high tide to return, while other boaters slowly realize that the boats they purchased were damaged even before they purchased them! Nobody can set sail in this climate, so everyone is ready to sell their boat !
Smart money enters the chat!
Then along comes a group of smart buyers who were saving up their money for this day. Some of the buyers were previous boat owners, who sold their old boats and are ready to buy new ones.
These buyers don’t just hop on the boat and take it for a sail. These buyers are savvy, now that the tide is low, they hop in the water, which is only up to their knees, and start inspecting the boats. These buyers have done their research and took the time to inspect the boats that they are planning to buy.
These buyers are buying up all kinds of boats and they seem to know if the beat-up and broken yachts are worth fixing. While they are walking around inspecting ships in knee-deep water, they even discover a few canoes that are in decent shape but were abandoned by their owners simply because they sunk during high tide.
⚠️Warning: This is not investment advice.