正文
Why Investment Advice is Hogwash
NEW 2/6/2007 8:56:33 AM
There is no dearth of freely available investment advice. Detailed analyses on TV, in newspapers, magazines and on the Internet explain why a currency X, a stock Y or another investment Z should be bought or sold. Most of that advice is hogwash and es even harmful to your financial health. It's easy to understand why.
The prices of X, Y or Z represent the boundaries between the haves and the have-nots. The haves are those who are thinking that X, Y or Z will go up and are therefore long (let's call them the “bulls”). The have-nots are expecting X, Y or Z to go down and are therefore neutral or short (let's call them the bears). The price ensures that, weighted by the capital they are willing to put at risk, there is always an equal number of bulls and bears. If the bull camp should suddenly grow larger than the bear camp, prices will rise in order to re-establish the equilibrium between bulls and bear, and if the bear camp should suddenly grow larger than the bull camp, prices will fall in order to re-equilibrate bulls and bears.
As there is, by definition, an equal amount of bulls and bears, there exists an equal amount of bullish and bearish arguments. For every argument you read or hear, there is a counter-argument (which you probably don't read or hear) from the other camp. When reading any investment advice, one is always looking at just one side of an argument, where the other side has an equally valid counter-argument.
The story goes even further: One of the two sides is right and is making money, while the other side is losing money (or is not making any money). People from which camp are more probable to work for the media? The winning or the losing side? Or asked differently: is the financial journalist of your local newspaper a winner? Does the guy on the financial network look like a winner? Or is the Internet nerd writing about the undervalued investment Z a winner? Or in other words: why should the winning side work for a newspaper, a financial network or write investment advice on the Internet if they are making money in financial markets?
Most specific investment advice is worthless and will even result in below-average investment profits. Being an above-average investor is extremely hard, as one is competing with the brightest minds on our planet. Most individuals should therefore stop trying to beat the market, stop listening to the financial media and invest their money in a diversified indexed portfolio with the lowest possible fees. Active investing is only advisable if your IQ is significantly above the mean and you have a lot of time for doing your own research. If you don't meet these two criteria, you can of course still be lucky in the short term. However, in the longer term, your below-average profits will subsidize the above-average profits of those who are cleverer than you and are doing better research than you do.
NEW 2/6/2007 8:56:33 AM
There is no dearth of freely available investment advice. Detailed analyses on TV, in newspapers, magazines and on the Internet explain why a currency X, a stock Y or another investment Z should be bought or sold. Most of that advice is hogwash and es even harmful to your financial health. It's easy to understand why.
The prices of X, Y or Z represent the boundaries between the haves and the have-nots. The haves are those who are thinking that X, Y or Z will go up and are therefore long (let's call them the “bulls”). The have-nots are expecting X, Y or Z to go down and are therefore neutral or short (let's call them the bears). The price ensures that, weighted by the capital they are willing to put at risk, there is always an equal number of bulls and bears. If the bull camp should suddenly grow larger than the bear camp, prices will rise in order to re-establish the equilibrium between bulls and bear, and if the bear camp should suddenly grow larger than the bull camp, prices will fall in order to re-equilibrate bulls and bears.
As there is, by definition, an equal amount of bulls and bears, there exists an equal amount of bullish and bearish arguments. For every argument you read or hear, there is a counter-argument (which you probably don't read or hear) from the other camp. When reading any investment advice, one is always looking at just one side of an argument, where the other side has an equally valid counter-argument.
The story goes even further: One of the two sides is right and is making money, while the other side is losing money (or is not making any money). People from which camp are more probable to work for the media? The winning or the losing side? Or asked differently: is the financial journalist of your local newspaper a winner? Does the guy on the financial network look like a winner? Or is the Internet nerd writing about the undervalued investment Z a winner? Or in other words: why should the winning side work for a newspaper, a financial network or write investment advice on the Internet if they are making money in financial markets?
Most specific investment advice is worthless and will even result in below-average investment profits. Being an above-average investor is extremely hard, as one is competing with the brightest minds on our planet. Most individuals should therefore stop trying to beat the market, stop listening to the financial media and invest their money in a diversified indexed portfolio with the lowest possible fees. Active investing is only advisable if your IQ is significantly above the mean and you have a lot of time for doing your own research. If you don't meet these two criteria, you can of course still be lucky in the short term. However, in the longer term, your below-average profits will subsidize the above-average profits of those who are cleverer than you and are doing better research than you do.
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