Sunrays are peeping through the window of Mr. Average Investor’s home. Good morning! Mr. Average heads for the kitchen, makes coffee, and pulls a few cookies from the box. Heading toward the family room, Mr. Average detours to pick up the newspaper tossed at his doorstep earlier and eyes the headline: “Hot Stock Exchange: The Five Top Stocks.” Actually, that’s a good reason to move away from the stock exchange, but more on that later.
While sipping his coffee, Average turns on the television and watches a morning show. The word from the sponsors ends, and the emcee asks, “And how did our money do this week?” We’re shown an investment house. The transactions manager sums up the week’s events, ending with the statement: “The stock market is peaking. The public is streaming in.” That’s actually another good reason to take caution…but more on that later.
An hour passes. The insufferable thought runs through Average’s mind: “Everyone’s in and making millions in profit and I’m the only sucker still on the outside!” That’s when Mr. Average makes up his mind. “It’s about time my money worked for me, too!” Average proclaims, and decides to buy. He puts down his coffee and calls his investment consultant.
The Mistake of Investing with the Crowd
Why is Mr. Average Investor buying? Is it because someone recommended that action, or because it’s “in the media?” Does Mr. Investor know what to buy? When to sell? Which stocks to be wary of? Would you buy a refrigerator or car in the same frivolous way? Perhaps your investment advisor knows what and when to buy? From my acquaintanceship with investment advisors, I’d say that 99% of them have no idea what to buy. In fact, the person has yet to be born who knows with certainty whether a stock will go up or down in the long term. I don’t know, either.
The public tends to buy because of social pressure: others are buying, or a friend suggested it, or for fear of being the only one left out. The public will never be the first one in to buy a stock that has only just begun going up. A stock’s potential to rise in the short term is usually identified only by the professionals. The public observes the stock that has already risen and promises to buy if it “proves” itself as strong by continuing to rise. Usually, the public is only convinced when the stock has already risen too far, proclaiming it a “winner.” Who would you guess is selling to the public at the high price? That’s right: the professionals. Even if the stock does continue to rise, the public will tend to overstay, the stock will start to drop, and the public will absorb the losses.
The Role of the Professional
The pros have a clear role: they take the public’s money…and they have plenty of creative ways to do that. Their biggest advantage is the fact that they’re pros – this is their profession. The public generally arrives at work in the morning, answers phones, writes e-mails, and believes its money is hard at work. The public receives a salary at the end of the month, because each member of the public has a profession of their own. Each person earns his or her income because of an advantage that has no connection to the capital market.
As with the public, so too with the professional: the pro knows that the public will behave in a certain way. The public feels pressured and sells hysterically when the market comes close to a low, and buys enthusiastically when the market’s upward movement is already too tense and about to experience a correction.
Stock exchange trading is my profession. It’s a profession that does not require knowledge of economics, but rather of psychology alone. In fact, the less you know about economics, the better off you are. As an amateur psychologist, I know how to predict the public’s behavior. The simple outcome is that if both of us invest in the market, the probability is that I will come out the winner in most cases. Just as I cannot replace a professional in some other field, there is no reason to assume that such a professional can replace me in my sphere and take my money.
The professionals are not mere stock traders. They are also fund managers and investment bankers and anyone else who makes a living from the capital markets. All of these professionals have creative ways to take the public’s money. They manage it in return for management fees, commissions, and other kinds of income, without ever promising any results! Based on the past, we can see that over the last twenty years, 80% of the world’s managed funds earned their clients less than market index yields: in other words, fund managers know they are taking the public’s funds in vain, but with every advertisement they continue to promise: “Give us your money and everything will be fine.”
One simple and valid conclusion can be drawn in respect to every profession in the world: amateurism costs money, professionals bring money in. The dream of money working for you is not realistic, and in the best case scenario, works solely during occasional periods that can only be pinpointed in retrospect.
In short: no one is prepared to work on your behalf! If you want to earn profits, you need to press those buttons yourself. Learning is the key to success.
To learn more about the stock market and to begin your own journey toward financial independence, visit Meir Barak's site Tradenet and check out his book "The Market Whisperer."
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