The problem with stock market advice

There aren’t any secrets to stock market success, Hamm writes. If the stock market secret did get out, it would be completely dominated by someone who studies this information far more than you or I.

Let’s say, hypothetically, that I figured out some ingenious way to predict the stock market so well that I would always significantly beat the annual returns of the S&P 500. Every year, year in and year out, I could get a 30% to 50% return in the stock market.

Assuming I’m not so altruistic as to just give away that knowledge, what would I do with it?

Logically, I’d use it to secure my family’s wealth. Then, if I could demonstrate the results to others, I might privately start a hedge fund or something to make more money from my newfound talent. I could make far more money doing these two things than pretty much anything else I might come up with.

One might argue that I could make a lot of money writing a book outlining my methods. Sure, that might work, and I’d probably sell a bunch of copies of that book. After the secret was out, though, everyone on Wall Street would begin using my “secret” and I’d no longer have an edge of any kind. 

In fact, as soon as I shared that knowledge with anyone I didn’t have absolute trust in, I would essentially no longer be able to get those great returns (at least, not after a very short period) because everyone else would be doing it, driving up the prices on those stocks and making it so I couldn’t actually earn money. By letting the cat out of the bag, I would be seriously damaging the financial future of my family.

What if I were being altruistic? Let’s say, for some reaon, I just want to let the world know this secret. Whichever investment banker sees the value and capitalizes on it first will hit the jackpot and few other people will earn much of anything on it. In essence, I’d give up my own family’s financial future to make some very wealthy person much, much richer without anything in return.

Would you tell anyone that secret if you had it? I’d be willing to bet you wouldn’t. There’d be no good reason for you to do so. Given that, why would you ever put much value at all in someone telling you they have the secret to beating the market?

Let’s say the secret that someone is trying to sell to you actually is real. If that’s the case, they’d make far more money by keeping it to themselves and making a quiet mint. If their secret is real and they tell many people, then their investment advantage goes away and they’re back where they started.

It is extremely unlikely that the person offering to sell you financial tips actually is selling you anything that will give you any sort of advantage, let alone a lasting one.

What about the guy giving away tips for free? Again, if there was a real advantage to what the person was saying, you wouldn’t be able to get near it. The big investment banks would beat you to that advantage before you could even blink.

There is no specific investment advice that someone would give to an “average joe” that will actually beat the stock market. For that pitch to be true, the person selling the tip would have to have the faultiest business model of all time, because they’re selling you an asset at a pittance that would be worth a gold mine. You would have to assume the person selling you the tip is extremely dumb, and if they’re that dumb, why would they have been able to break the stock market when the big banks could not?

If you want to learn about investing and figure out what you should be buying, visit your local library and start digging around in the personal finance and investing section. Read several books, compare what they’re saying, and figure out which elements are consistent and make sense. The advice in those books is public knowledge, so the big investors already know it. The goal of reading them is to know what they know and try to match what they can do.

From what I’ve read, the best thing that I can do as an independent stock market investor is to mostly just buy broad-based stock index funds with the lowest annual costs so I can essentially ride the stock market. Aside from that, there is some sense in buying stocks in very stable companies that pay a nice dividend, like Coca Cola. The rest of your money should be in real estate or cash to protect yourself against a stock market failure.

There aren’t any secrets to investing success, in other words. If there is, it’s something that’s buried inside a hedge fund somewhere and, if the knowledge did get out, it would be completely dominated by someone who studies this information far more than you or I.

Play it safe. Don’t fall for people trying to sell you investment strategies or tips. Learn the basics of what you’re doing, understand why they work, and stick with them.

The post Why I Never Use Stock Market Predictions to Invest My Money appeared first on The Simple Dollar.