Learning to invest is like learning a martial art:
- You have reflexes but they aren’t that useful in a fight (flinch, freeze, etc.) or in investing (buy high and sell low, invest emotionally, etc.). You need new reflexes.
- There’s lots of advice out there (from basement ninjas claiming black belts in 27 arts and well meaning but discredited magical get rich quick methods. You need training, not wild speculation.
- It sounds scary, but it’s worth it. Getting more physically fit helps everything else you do. Getting more fiscally fit aids all of your financial objectives.
There are basic assumptions that are wrong:
- You buy a stock to sell it to someone else. But then why would someone else want to pay you for it? Don’t kick this metaphorical can down the road; think it through.
- Experts know how to pick stocks. This is the myth of Market Timing. Better to be guided by monkeys throwing darts, since they’re more often right. Experts underperformed the DJIA by 1.4%, Cowles Commission, 1928-1932
- I know how to pick stocks. Better to hire the monkey. Investors lose over 1%/year trying to time the market, The Power of Passive Investing. Be above average by not trying to be above average.
- The stock market is gambling. Only if you gamble with it. Use it for what it’s good for–long term investing.
- Managed Mutual Funds are better. The average managed fund made 1.1% less than the S&P 500 Index, Jensen 1945-1964.
- I’ve got a system. This is the myth of Technical Analysis. It loses .65% to .92% per month, Hoffman, Shefrin, and Penniongs
- I’ll buy what did well last year. This is Buy High, Sell Low. 80% of new purchases go to last year’s best performing funds—which tend to underperform this year.
- I’m different, I really do know how to pick stocks. Sorry, no. We think our stock picking is better than average because we remember our successes and forget our failures.
Remember: A few percentage points are a very big deal. Losing 3% from a 10% return takes away 1/3 of your profit.
