Dumb: “Don’t invest; you can’t beat the pros”
September 09th, 2005 - 25 Comments
My oh my, I have heard this idea many times. I was giving my finance talk at Intel last month, and afterwards, one of the employees and I started chatting. He told me about his uncle, who had built some kind of technology firm and sold it for $100 million. Obviously a smart guy, no doubt about it. But then his uncle told him to never invest in stocks because–that’s right–”you can’t beat the pros.” In other words, those guys on Wall Street do this every day, so how can the lone, individual investor hope to compete?
I didn’t want to insult this guy’s uncle, but after fumbling around for a polite phrase, I just told him that his uncle had no idea what he was talking about. (Oops.) Look, being a CEO doesn’t make you an expert on gardening, making spaghetti, or doing my laundry. Same with individual investing and personal finance.
Now, I agree–the guys on Wall Street (and they are almost all guys) work an ungodly amount and know what they’re doing. But they don’t have the same objectives as individual investors, nor do they go about achieving their goals in the same way. Let me break it down: Wall Street looks for quick profits that are built on fees, existing relationships, and extremely sophisticated sales and trading strategies.
In fact, as Jim Sinegal (CEO of Costco) recently said,
“On Wall Street, they’re in the business of making money between now and next Thursday,” he said. “I don’t say that with any bitterness, but we can’t take that view. We want to build a company that will still be here 50 and 60 years from now.”
I like Jim!!!!!
Compared to Wall Street, individual investors like you or me should be looking for long-term growth.
In other words, if you try to beat Wall Street at its own game, of course you’ll lose. Uncle Billy is at least right about that. But smart individual investors play an entirely different game than Wall Street.
|Wall Street||Individual Investors|
|Strategy||Gigantic profits through fees & relationships & and sophisticated sales/trading||Long-term growth through diversified investments (e.g., buy and hold)|
|Hours worked||A lot||A lot less: A few hrs/month after you create a good infrastructure|
|Type of food eaten||Filet mignon at the Four Seasons||Taco Bell (I will eat this till I die)|
|Barriers to success||Very high–interviews, Ivy League degree often required, “hard work every day”||Moderate and decreases over time: Read this site, a few other financial guides, and manage your money with the proper risk/time perspective|
I’ve said this before and I’ll say it again: When someone says, “I don’t invest in the stock market. It’s too risky!” it’s not as if they’ve carefully weighed the risks/rewards and educated themselves about personal finance. That’s like me saying “Honestly, I prefer fossil fuels over energy cells and nuclear energy as a matter of personal preference.” I literally have no idea what that means, but I bet I could pass it off as haughty and scoff at you if you disagreed. Ugh.
The people who are afraid of the stock market are almost always the same. Their view is a guttural, emotional reation that is ultimately self-defeating. I can only offer my gold-crusted throne in 15 years as proof.
So when you hear someone saying that you shouldn’t invest in the stock market because you can’t beat Wall Street–that’s why they don’t–recognize it for what it is: an excuse to not get educated about properly investing and managing risk over the long term.
And if you’ve read this far, that’s one more excuse you can cross off your list.
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