Debut Column
Since this is my debut column on my new web site, I don’t want to waste my 900 words on chitchat. Here’s what’s been gnawing at me for years: Most investors are stupid.
Actually, the financial industry thinks many of you are stupid. So do academics at places like the University of California, the University of Chicago and the Wharton School of Business, who have generated exhaustively footnoted research papers that dispassionately conclude that lots of investors are dumber than dumb.
Editors at money magazines also believe your investing IQ is borderline Forrest Gump. Why else would they keep shamelessly publishing lists of the best stocks, bonds and funds to BUY RIGHT NOW? Why indeed, when they know that their chances of pinpointing the exact mutual funds that are going to break the year’s speed records (if any do) are as remote as guessing what year the Chicago Cubs are going to win the World Series.
For obvious reasons, all the sniggering by these insiders is done privately. You can, however, catch a glimpse of what the financial world really thinks about average Joe investor if you flip through its trade publications. Within the glossy pages, industry types, who feel free to talk candidly among peers, complain about any number of reforms that would benefit people just like you. Requiring mutual fund companies to disclose just how much each investor is paying in yearly fees is just one of many issues that have insiders riled. William J. Bernstein, one of the smartest investors that I know, jokes that these industry rags are the financial industry’s equivalent of a trade magazine for concentration camp guards. (Sophisticated investors or those who aspire to be should visit Bernstein’s Web site at www.efficientfrontier.com.)
There’s a big problem with the financial world thinking investors are dim. They treat you that way. And when they treat you with contempt, your portfolio can end up looking as jumbled as a carry-on bag after airport security has rifled through it. Ever hear of a variable annuity? If you’ve ever exchanged business cards with a stockbroker, you may have one. Most people would enjoy a better chance of winning American Idol than explaining why a variable annuity is burrowed inside their retirement portfolio. The short answer is usually this: a broker wanted to make money off of you. If you don’t understand why a variable annuity is a terrible idea for all, but an infinitesimal number of people, chances are you’ve got other Tar Babies stuck to your portfolio too.
It’s not just financial predators that you have to protect yourself from. Even if you invested in a hermetically sealed room, chances are you’d still have to worry about y-o-u. People tend to be irrational investors–that’s what those tenured finance professors keep telling us. Consequently, when people invest money, too many of them abandon common sense.
Consider this: People will push super-sized shopping carts through the Saturday afternoon throngs at Costco or Sam’s Club to save a few bucks on 1,000 rolls toilet paper, but they freak at investing in the stock market when prices are hovering at Costco levels. Remember back in 2000, 2001 and 2002, when stocks were pummeled and left for dead? If you were a true discount shopper, you’d have continued stuffing money–perhaps even more than before–into the market for your retirement or other long-term goals. Millions of otherwise smart consumers, however, waited until stocks prices soared in 2003 before they jumped back into the market. How is this behavior different from patronizing the highest-priced gas station up until the day it lowers its prices?
Okay, enough of the downer messages. Here’s a far easier one to digest: Contrary to what the financial industry would have you believe, being a smart investor needn’t be difficult. You don’t have to subscribe to The Wall Street Journal or pour over Smart Money Magazine with a yellow highlighter. Neither do you need a business degree to figure this stuff out. Even if math beyond the fifth grade scares you, you can manage just fine.
To become an intelligent and wealthier investor, you need to be able to distinguish Wall Street hype from reliable, if dull, common sense. This is where I hope to help. Once a week, I’ll be sharing a new column to help you become a more successful investor. Why me?
I could make the case that I’m a poster child for the average investor. When I left my reporting job at the Los Angeles Times 16 years ago to move to San Diego, I had to figure out what to do with my 401(k) and pension money. Most of you reading this column probably know more about investing than I did back then. I ended up teaching myself how to invest, in large part, by becoming a financial journalist. One of the true perks of being a journalist is that you are paid to research and interview people far smarter than yourself and arguably learn as much as someone shelling out $700 a credit hour for an Ivy League education.
Having spent many years as a financial journalist, here’s one of the favorite lessons that I’ve learned: Managing money successfully doesn’t require a lot of time. If you sat through the latest Pirates of the Caribbean movie, you spent more time eating popcorn (almost three hours) than many of the most brilliant investors spend on their own finances during an entire year. Once you learn the simple basics and discover the short cuts, you can devote more time to the important things in life.
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June 24th, 2007 at 8:50 pm
I have limited time to read anything these days. Your column in the Sunday paper was one of the few I read consistently. The information you provide is fresh and relevant!! You can bet I will be here every Sunday to read this Blog!!