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The #1 Investment Mistake Most People Make

February 20, 2014

… is paying someone to manage your investments.

1. The average stock trader can’t beat the average return. This is tautologically true; that’s what the average means.
2. There are many, many professional stock traders, many of whom wield portfolios measuring in the billions. This is an empirical fact, which is easily verifiable.
3. The best stock traders charge extremely high fees. John Paulson made $5 billion in fees in 2010. Every dollar earned by traders is one dollar less earned by the portfolio under management.

Two things follow from these propositions. First, if you are an amateur stock trader, you won’t beat the market, except by luck. Simply put, there are tens of thousands of people who do this for a living and when professionals go head to head with amateurs, the amateurs usually lose. Second, a large number of professional stock traders will not beat the average market return. To wit, 49.999999% of them won’t. Third, after accounting for fees, almost no one beats the average market return. From a casual investor paying a mediocre stock broker 1% to manage their portfolio to the hardcore wealthy paying 20% to a hedge fund, they will all lose compared to an index fund. Not only can’t you pick stocks which will beat the market, you can’t even pick mutual funds or hedge funds which can beat the market.

Read this article. Investing is not about being smart. In 1994, Long Term Capital Management was founded with two economics Nobel prize winners. They were bankrupt in a mere 4 years, because they were wrong about the EMH.

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If you are not a professional financier, do not waste your time buying individual stocks or other investment vehicles. Anyone telling you to buy XYZ Stock is trying to scam you, nothing more nothing less. If they truly thought the stock would go up, why aren’t they buying it themselves? The truth is anyone spending their time telling other people what to buy is unwilling to put their money where their mouth is. If you really thought a stock was more valuable than its market price, you’d actually want other people not to buy it, because then you would be able to get it at a lower price. Don’t fall for an investment scam, and all investment advice is a scam.

More here.

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