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God Almighty does not know the proper price-earnings multiple for
a commonstock. Market prices must always be wrong to some extent. But at any particular time, it is not obvious to anyone whether they are too high or too low. The fact that the best and the brightest on Wall Street cannot consistently distinguish correct valuations from incorrect ones shows how hard it is to beat the market. – A Random Walk Down Wall Street
Summary: Mathematicians call a sequence of numbers produced by a random process (such as flipping a coin where even if you flip ten heads in a row, the change of getting
“Journalism is subject to the laws of supply and demand.”
You can still watch the news for entertainment value, but you should not watch the news to inform yourself about what the markets will do tomorrow, because the obvious, yet hidden, the secret is: no one knows. If you’re on Twitter, here are 50 great accounts to follow that are remotely close to knowing what the hell they’re talking about on Wall Street on a day-to-day basis. But be forewarned, because these individuals typically use facts to inform their opinions rather than cliche opinions to inform their clicks, they are not near as entertaining as your national news anchor. As far as which source you’d rather rely on to inform your long-term investment strategy? The choice is yours.
If you’re so smart, why aren’t you rich?
Investors Would Be Far Better Off Buying and Holding an Index Fund than Attempting to Buy and Sell
Narrator: And upon reading this infuriating title, an angry army of active investors and day-traders did amass from the trolls of the internet and begin forging their way to the comment section of Paychecks and Balances, LLC.
Only if technical schemes produce better returns than the market can they be judged
effective.Not one has consistently outperformed the placebo of a buy-and-hold strategy. By following any technical strategy, you are likely to realize short-term capital gains and pay larger taxes (as well as paying them sooner) than you would under a buy-and-hold strategy. Thus, simply buying and holding a diversified portfolio suited to your objectives will enable you to save on investment expense, brokerage charges (advisor fees), and taxes. Analysts can’t predict consistent long-run growth, because it does not exist. Analystwho did better than average one year were no more lieklythan the otehrsto make superiror forcesastin the next year.
Alas, dear trader-friends, I must forewarn you that your comments would be a poor use of all of our times. The above attribution is a Burton G. Malkiel quote, not Marcus Garrett. Before attempting your failed comment coup, you should also know that I gave up arguing for Lent so your attempts at engagement would be futile. Nevertheless, I do admit that I agree with the sentiments expressed in Burton’s quote, as well as the similar themes found throughout his book. In my investment life, I use an index fund at the core of my investment portfolio.
“At least the core of every investment portfolio ought to be indexed. I recognize, however, that telling most investors that there is no hope of beating the averages is like telling a six-year-old that there is no Santa Clause.”
Investment Advice for Beginners and Experts
In full disclosure, I am not an investment expert. Some would argue I’m not an expert at anything. Luckily, the lack of hubris that comes from accepting you’re not an expert in all things, or possibly anything, allows me to reach a very simple conclusion when it comes to money management: I want to know the easiest way to grow my money.
The “cycles” in the stock charts are no more true cycles than the runs of luck or misfortune of the ordinary gambler.
When it comes to investing, I have a simple belief system: computers are smarter than people. Are computers flawless? No. But, neither are people. If I have to choose between a person trying to charge me a high-fee to divorce me from my money and a computer charging me a much lower fee to divorce me from my money with far better odds of helping me make more money, the decision is fairly simple. In one scenario, the more-expensive investment expert not only has to beat the market, he or she also has to beat what they charge me to beat the market. Now, as we’ve already covered above, I’m no genius, but paying someone to quite literally take my money doesn’t make common cents.
The market prices stocks so efficiently that a blindfolded chimpanzee throwing darts at the stock listings can select a portfolio that performs as well as those managed by the experts.
More Than Two-Thirds of Professional Portfolio Managers Cannot Outperform Unmanaged Index Funds
In full disclosure, we interview investment and money experts all the time. An optimistic reader might even note that the above title itself allows that one-in-three professional portfolio managers do outperform broad-based index funds. Touché, friend!
I’m not a gambling man, but if I was, I would gamble on the odds that are in my favor. What you do with your money is your own choice. Given that the overwhelming majority of my current investments are meant to support me in retirement, I have chosen to take the low-risk approach. Specifically, an index target-date fund.
Perhaps when I have big baller brand money to blow fast and lose even quicker, I may venture into riskier investments with higher chances for a reward. To be clear — not including bitcoin — higher-priced investments should pay off with higher returns (or losses), hence the term, “high-risk.” Or, put simply: Go Big, or Go Home.
An Investor Buys Stock to Produce Dependable Future Streams of Cash Returns and Capital Gains
I am a simple investor. I don’t like investing in anything I can’t understand with a basic calculator or explain to myself in the mirror. I’m not trying to beat the stock market, and I’m perfectly content getting the exact same average returns as thousands of other investors. This is the personal investment strategy that works for me, and I completely made it up using nothing more than my opinions, reading a bunch of books, and relying on the advice of people I trust. Reading A Random Walk Down Wall Street only further solidified my belief that I’m on the right path. On the other hand, maybe you want to learn how to put six figures in your investment account in six months. I support you.
To the victor go the spoils! I have a simple theory on managing other people’s money: I don’t. Instead, my advice is don’t let anyone tell you how to spend your money that didn’t help you make your money.
But, in neither of these scenarios should you believe you need to be an expert before you can start investing. This is false. If you want to become more comfortable with investing, then, by all means, consult with an expert. Just don’t let your fear or lack of expertise justify the reason that you make no money moves to improve your financial future. In all most every instance, doing anything is better than doing nothing. The earlier you start doing something the better for your potential financial returns.
A successful investor is generally a well-rounded individual who puts a natural curiosity and an intellectual interest to work.
A Thing Is Worth Only What Someone Else Will Pay for It
As sophisticated as the Stock Market may seem — and there is clearly a vested interest in Wall Street to make it appear that way, or why else why would you pay “experts” exorbitant fees to [allegedly] solve it for you — no one can predict what the market is going to do on any given day with 100-percent accuracy because of human psychology. “The market is only 10 percent logical and 90 percent psychological.” Stated two other ways:
- “There is no reason, only mass psychology.” – Burton G. Malkiel
- “Think about how stupid the average person is and then realize that half of them are stupider than that.” – George Carlin
This theory might less charitably be called the “greater fool” theory. It’s perfectly all right to pay three times what something is worth as long as later
onyou can find some innocent to pay five times what it’s worth.
I have a similar theory about lottery tickets. Rather than chastise people for their lottery-winning dreams — even if the odds are greater that they will break their leg after being flung from the unicorn they were riding to claim their pot of gold from a leprechaun that got hit by lightning — I simply point out the other fact: The lottery is only a bad investment until you win.
It is not hard to make money in the market. What is hard to avoid is the alluring temptation to throw your money away on short, get-rich-quick speculative binges. It is an obvious lesson, but one frequently ignored.
In most things in life, you’re playing the odds. The stock market is no different, so it is not guaranteed. However, unlike “investing” in the lottery, the stock market has a proven historical record with a very clear, demonstrable, and measurable probability of increasing your money in the long-term. Maybe that’s why the richest 10% own over 80% of the market. I’ve already tried doing what broke
Any idiot can sell a one dollar bill for eighty cents.
A Random Walk Down Wall Street was a really great read and surprisingly entertaining. There are several other investment options and vehicles in the world beyond the stock market, the merits of which this post is not here to argue for or against. This author will argue that the one guaranteed bad investment option is to do nothing at all because doing absolutely nothing is itself a financial risk.
Just as the warning on packs of cigarettes does not prevent many people from smoking, so the warning that this investment may be dangerous to your wealth cannot block a speculator from forking over his money. The SEC can warn fools, but it cannot keep them from parting with their money.
I’m positive that anyone who read the book for their thesis or masters program will gladly brag there are far more details within the book itself that I did not cover today. You are correct.
For one, the book has some complicated sections that were difficult for me to follow. This is not because the analysis was incorrect but it is precisely because the analysis is complicated. I purposely kept this piece simple to drive home the inevitable conclusion all readers should reach. If you have no other take away from this summary, the main outcome should be that anyone can get started investing (and you all should). Wealth building should not be limited to the so-called experts, especially when so many of them clearly don’t know what the hell they’re talking about. You can do bad (or good) all by yourself.
Lastly, if you’re still not sure where or how to invest, or you want to keep your investment risks and fees low, this is all you really need to know:
Stock investors can do no better than simply buying and holding an index fund that owns a portfolio consisting of all the stock in the market.