Tune out the Noise - ch 18 Bogleheads Series
November 30th, 2006 by digerati
This is Chapter 18 in the Bogleheads series here at Catch a Gideon. We are going through each chapter in the book and letting you know what we learned from reading it. You should buy the Bogleheads Guide to Investing
A fake fortuneteller can be tolerated. But an authentic soothsayer should be shot on sight. - Lazarus Long
The media (and even your broker) is constantly talking about winning investments, but these are rarely a win for the audience. Viewers often lose money through a combination of high fees and misinformation.
Most advertising messages from shows, magazines, and brokerage houses are a variation on the them of “invest with us because we can beat the returns of everyone else.” As we’ve learned in ch 13 of the Bogleheads Series, there are two ways to beat the market: better investment choices or market timing.
We’ve also learned that few investment pros outperform the market for any period of time. The longer the time frame the less likely it is that someone is outperforming the market.
Market timing is often seen as speculative, not a wise investment choice for the long term investor.
“Wall street wants you to believe they are there to make money for you, but their true purrpose is to make money from you.”
Effective investing can be very simple:
- Create a simple diversified portfolio.
- Invest part of each pay check into no load index funds
- Check investments periodically and rebalance as necessary (ch 17 of the Bogleheads Series)
Investment Pornography
T o fill all the space and to attract viewers and readers the media constantly puts out investment pornography. They give you not necessarily valuable information, but they put it in big bold letters and use bright colors. It holds your attention and gets you excited about investing. It also encourages you to buy products and inforrmation from the same publishers or brokerages.
“Actually calling it investment pornography is somewhat flattering. Real pornographers deliver what they promise.”
Three Biggest Lies, Wallstreet Style
Many of us have heard the old joke about the three biggest lies in the world. Some of those given are:
- “of course I’ll love you in the morning”
- “I’m from the government and I’m here to help you.”
Well here’s the Wallstreet version:
- “It’s a stock pickers market”
- “The trend is your friend”
The first says that everything in investing has changed. It hasn’t. It probably never will. Changes are a gradual thing, not something one broker suddenly knows about and can take advantage of. Stockpickers rarely outperform the market, especially in the long term. The second attempts to ride out the curves in the market, saying the historical trends can predict what will happen in the short term future. This is somewhat true, in a long term perspective. It is not true in the short term.
All Forecasting is Noise
Read the above line again. It’s been found that few can predict the direction of the market, let alone a particular stock or fund. (Read the book for details.) Marketers try to get you to believe they can outperform others using recency bias. They try to tell you that because the stock did great last week that it will do great if you buy it now.
The media is generally very wrong about these things. Business Week declared stocks dead in 1979 only to declare the biggest bull market ever 3 years later. Many similar situations exist.
Do Your Homework
Don’t listen to the media, the websites, or the brokers or anyone else who tells you they can outperform the market. Do your own research, look at the numbers and determine the wise investments. Often looking at works by financial professors are the best. They tend to be unbiased since the writers are not selling investment services or products.
If you haven’t bought the book yet, get to it! Purchase the Bogleheads Guide to Investing at Amazon.
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