This post is part of a series where personal finance expert Dan Solin looks at money secrets that help the rich stay rich. See them all.All information about listed companies is public. It is widely and instantly disseminated. This information is studied by millions of investors, who establish the price of a given stock based on this data.
Many of those looking at this data are professional analysts. They are well trained in finance and have access to powerful computer programs that assist them in crunching the numbers.
There is one piece of information they don't know: tomorrow's news.
Future events move stock prices. The market has already discounted for current news.
Because no one knows tomorrow's news, many "sure bets" turn out to be losers. Fannie Mae, Lehman, and Bear Stearns are recent examples. Past failures of top-rated stocks include Worldcom, Enron, Bethlehem Steel and Polaroid. In fact, of the 500 companies that made up the S&P 500 in 1957, only 74 of them were in the index in 1997.
Here is the real kicker: Only twelve of those companies outperformed the S&P 500 index in the period from 1957-1998.
As you can see from this data, trying to pick stocks that will outperform the markets is a long shot, more akin to gambling than investing. Are you really smarter than the millions of investors looking at the same data? Do you know tomorrow's news?
Rich people go for the sure thing. They try to minimize risk and capture market returns using diversified portfolios or, better yet, broad-based, low-cost index funds. Over $4 trillion of the most sophisticated pension and trust money is invested this way.
You should join them. Otherwise, you are just making the rich richer and yourself poorer.
Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books, 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, 2008).
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Reader Comments (Page 1 of 1)
12-04-2008 @ 12:20AM
BHarrison said...
Quote from article: ". . . trying to pick stocks that will outperform the markets is a long shot, more akin to gambling than investing."
And with all of the undisclosed and/or FRAUDLENT financial information, the insider manipulations of the market pricing (short selling, etc.), "investing in the stock markets" is a "fool's game for most individuals at this point in time.
Congress MUST implement rigid basic regulation of the mrkets and the croporations in order to restore the INTEGRITY to the markets and corporations; otherwise there can be "no fiath or confidence" in the markets or the corporations.
The article about Sears Holding's market prices being manipulated by the "insiders to benefit their stock options" is a perfect example of how the American people, the potential investors are STILL BEING RIPPED OFF.
For the most part, only a FOOL would invest in the markets under the current economic conditions and situations. if the people refuse to invest in such markets, then Congress will have little choice other than to work to restore INTEGRITY and enforcement and compliance with "good accounting principles" and to persue CEOs and CFOs who CRIMINALLY violate those basic standards.
Without the restoration of INTEGRITY to the markets and corporations, prudent Americans will NOT invest in the markets or the corporations. It would be more simple and enjoyable to go to Las Vegas to gamble where "the "house" wins 90% fothe time.
The 'average Aemrican middle class" has little chance of "winning" in a manipulated market.
12-04-2008 @ 10:20AM
Thanh T. said...
I would have to somewhat disagree with you on your number 4 theory, Dan and agree with BHarrison.
Unfortunately, in today’s business environments some people do try to outstmart other people looking at the same data.
Over the years I have met many wonderful affluent people who work hard for their money and are very wise with their investments.
Sadly, there are a few unethical business people in our society who use “illegal-dirty tactics” to get ahead-manipulate the markets.
For example, when you compare and contrast the recent wire fires in California to the recent hurricanes along the Gulf Coast what do you see?
Perhaps, many people and analysts may see some similarities and differences in a man-made vs. natural disaster scenario forcing many residents to move away from their homes and businesses thus having a significant affect on regional markets.
Similar scenario in Hurricanes’ Katrina, Rita, Ike, and Gustav along the Gulf Coast. (Hmmm, would you think new real estate developments-land deals???)