Gambling…Speculating….Investing…What Are You Doing?

Each week I discuss the dangers of speculating and gambling with your investment dollars. Many people I talk with believe that there is someone out there who can beat the market and earn superior even gaudy returns. At the same time these investors believe someone can tell them when to get into and out of the equity markets.

English: Bernard Madoff's mugshot
English: Bernard Madoff’s mugshot (Photo credit: Wikipedia)

I personally was following an analyst who had a great track record. At least that’s what his literature said. He gave examples of all his great trades. He bought the right stocks and timed the market perfectly. Given this data I believed I found the right analyst who had the magic touch. Well apparently this success was short lived because the trades were a disaster.

After some painful experiences I began to realize that no one could consistently beat the market.

What I learned in college and graduate school finance classes proved that stock picking and market timing DO NOT work consistently.

The Wall Street bullies taught me that the academic research did not apply in the real world. This was huge mistake for me to believe.

Why not take advantage of over fifty years of academic research and earn great returns without the need to correctly predict the future. No matter what the past success of any analyst, it is a matter of luck and not skill.

There is no repeatable method to beat the market.

All investors should treat their investment money with the care of a fiduciary. Some examples of fiduciaries are trustees…managers of pension funds and others responsible for managing other people’s money. Of course there are examples of fiduciaries that violated their duties and invested the money imprudently.  There has been fraud committed, Bernie Madoff comes to mind.

Here is a guy with all the inside connections and theoretically inside information. With this help even Bernie could not consistently beat the market.

What makes you think you can? Or that there is some guru who can?

Find an investor coach who will help you develop a prudent portfolio and keep you disciplined.

Your coach will help you with three simple rules of investing:

  • Own equities and fixed income
  • Globally diversify
  • Rebalance

With the help of your coach you can reach your long term goals with less anxiety and with the knowledge that you are invested correctly for your situation.

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What Is An Investors’ Number One Enemy?

Is it the conmen like Bernie Madoff or Reed Slatkin or Allen Stanford?

Or is it the insurance companies with their excessively high fees along with so many restrictions and limitations that the only ones to make money are the insurance companies and the agent?

English: Bernard Madoff's mugshot
English: Bernard Madoff’s mugshot (Photo credit: Wikipedia)

Or is it the Wall Street bullies who feed the fears of investors and facilitate the trades to the next ‘hot’ investment?

As an investor your number one enemy is yourself.

We are constantly bombarded with information that affects us emotionally. We receive information from

  • the media
  • the internet
  • Our neighbor(s)
  • Our co workers
  • and on and on….

The media is constantly explaining why the market is destined to go down. Or the next great fund manager who is can’t miss or the hottest asset right now. Of course, they exclaim that you must act now BEFORE the opportunity passes.

What they are asking you to believe is that they can predict the future.

The internet has information for any occasion. Whichever way you wish to see the financial world you can find ‘evidence’ on the internet to support your view. We all have biases as to what is the best way to invest our money.  Should I get out of the market? Of course, you can find evidence to support this. At the same time you can find evidence to support your view, if you believe the market is headed up.

The problem we have as investors is we allow all this often tainted information to affect us emotionally. Often we hear what we want to hear. We allow what we hear from friends and co-workers to determine how we will invest our money often our retirement money.

This is akin to gambling and speculating with our financial future.

Many times we hear how a friend or a friend of a friend was successful in a highly speculative investment and you immediately ask “Why not me?”. We allow the emotion of envy to guide us to some very destructive behavior. Keep in mind that there is zero correlation between someone’s ability to pick a winning investment and their ability to repeat in the future.

It was a matter of luck and not skill.

Remember the Wall Street bullies goal is to keep you trading, to keep you looking for the next get rich quick scheme. You need to decide if you want to remain victims or find a better way to invest for our long term financial future.

There is a scientific process backed by academic research to build a prudent portfolio designed specifically for you and your family.

Your goal from that point on is to remain disciplined. With one exception, we will lower your level of risk at different intervals as you age.

Because your emotions play a great role in the type of person you will be. You should find a fiduciary adviser to keep you focused on your long term goals.

Hire an investor coach and your financial goals can become a reality.

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This Time is Different!

There continues to be experts proclaiming their ability to predict the future. These experts will use alternative investments or some other ‘magical’ strategy. Most of these ‘experts’ have impeccable credentials with a strong track record.

Bernard Madoff under house arrest 3
Bernard Madoff under house arrest 3 (Photo credit: Red Carlisle)

Money is being moved into these new strategies seeking risk free, high returns. Apparently investors have very short memories.

The late fall of 2008 was highlighted by the confession of Bernard Madoff of Madoff Investments for his $50 billion “ponzi” scheme.

Mr Madoff started his firm in New York in 1960, initially it was a market maker for Wall Street, broker/dealer. Subsequently, Mr Madoff began managing money for individuals and institutions. He is a past president of NASDAQ and a respected professional on Wall Street. His success was unprecendented, he promised as much as a 20% return.

His performance was positive until he confessed this week. Many sophisticated investors and institutions invested enormous sums of money.

He did not hide his strategies, using equities and options. This is where it gets strange based on his strategy and based on the published volume of options he could not have traded the amount of money he purported to have under management. It would be impossible.

The question becomes, how could some of the most prominent banks in the WORLD and many very successful and sophisticated people blindly invest with Mr Madoff? What would possess them to believe the results without proper due diligence?

I believe it is because they wanted to believe because they were ‘rich’ they should earn above average returns with little or no risk. They were wrong.

Will these new experts be successful? I don’t know about the short term, but I doubt their ability in the long term to ‘beat’ the market. Unfortunately, we do not even know for certain which will be successful in the short term.

As I have said because these are free (relatively efficient) markets no one can consistently beat the market, no one knows the future. The most prudent way to invest is to own equities, have a long term focus, globally diversify and rebalance. Any other method is in essence gambling and speculating with your money.

Please comment or call to discuss how this affects you and your portfolio.

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