The ‘Roar’

The term ‘equity’ in financial markets has a fairly clear definition. According to Merriam Webster, equity is a:  the money value of a property or of an interest in a property in excess of claims or liens against it, b: the common stock of a corporation, or c: a risk interest or ownership right in property.

Most people are quite familiar with the first definition of equity – a - think ‘home equity.’ How much is the house worth in a sale, minus what is owed on the mortgage and other debts, and voila! your home equity is calculated, basically.

When financial professionals use the term ‘equity’ or ‘equities’ more broadly, they are referring to definition ‘b’ above – the common stock of a corporation. However, any investment professional would be considered imprudent, if not downright foolish if they didn’t consider the ‘a’ definition before electing to buy the stock of any corporation.

Private equity, another form of equity ownership that has grown to a significant slice of economic activity, is when a group of investors (working for their investors) buys out all the equity of a corporation. Doing so comes with control but without any of the compliance, price swings, or shareholder interference that is required of a publicly traded company. Often, these buyouts are done with significant debt, which amplifies returns – for better or for worse.

2022’s markets are another reminder of the ‘c’ above. The first half of this year has been the worst six months in decades on asset prices, especially equities, but bonds and commodities too. Driven by fears on inflation, worries about recession, and ongoing war in Ukraine, it has been a miserable half-year. Still, if you place the performance of the markets under a microscope, the movement, as always, has been driven by stock prices going down, but not necessarily correlative with actual earnings going down. The ‘market’ is forecasting that earnings of some companies are going to go down more in the future and therefore, it won’t pay as much for the common stock today. The ‘risk’ in risk interest has returned after being somewhat dormant for a little while.

When thinking about owning equities, the analogy to home equity is useful if not perfect. While on a technical basis, home equity values hit new peaks nationwide sometime in 2021, I know of no one who sold a home because the value had risen. The calculus of staying in a home clearly contains more than just the monetary value of the equity in the property. For individuals and families, ownership of stocks as part of a long-term financial plan that is multi-faceted and potentially, multi-generational, can be thought of in a similar way. Selling stocks, like selling a home, is ordinarily driven by life events, reallocations, or long-term planning considerations. The relative values in the middle are noise that can undermine long term goals if we pay too much attention to them.

Finally, equity, in 2022 goes far beyond the above. Social equity is evolving in many ways for the better and in other ways that are seemingly deprivative. If there’s one thing about equity, however defined, that will always remain true – it is that its volatility will be high. As always, please give us a call to review your portfolio or anything else financial in your life. We wish you an enjoyable summer!

Regards,

Scott Lasky, CFP™

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