I apologize that it took me quite a long while to wrap up this series. Part 2 of Ten myths of stock market investing was made available last October 2021. It took me some time to come up with Part 3 ! The reason was not because it took me a while to figure out what the other four myths were. The reason was that I became so busy with my other roles, especially with regards to my responsibilities in the academe.
Now that all of my deadlines are done, here are the next two myths of stock market investing.
7.)Stock market investing is risky
In anything that we do in this world, we take a certain kind of risk. Day to day activities like simply crossing the street or trusting that the food you eat or the water you drink will not make you sick do require that we take some kind of acceptable risk. Well admittedly, there is a certain risk involved when investing in the stock market however the risk I am talking about is not the same kind of risk that most people think.
If you view the stock market from a business perspective, the only risk that you have to take is the kind of risk that comes from being in business. Besides, as I have stressed out before, stocks are merely fractional ownership of businesses. All business ventures have a certain kind of acceptable and calculable risk involved. Since stocks are merely fractional ownership of business, they come with the risk that comes with operating a business.
The “risk” that most people fear in stock market investing is the volatility in the stock market. Some people call it the “roller coaster” ride of the market. At times people get so excited with a stock that they drive the price insanely high to the point that they do not care what the fundamentals of the underlying business is anymore. Sometimes they price stocks ridiculously and insanely low that it is as if people are giving stocks away like crazy even if the real value of the business is way above what they are selling it for. This manic-depressive behavior of the market caused by fear and greed is what makes the stock market seems risky since no one can absolutely predict when the market will be at its peak or at its bottom.
As you can see, the risk that most people fear in the stock market is not caused by the underlying fundamentals of the business; it is the “risky” behavior that people take in the market. People do stupid things in the stock market because of fear and greed.
If you approach stock market investing from a business perspective, you will be more prone to avoid risky behavior. This way, the risk you take is only the risk that comes with operating a normal business.
Also take not that the “risky” behavior taken by other people because of fear and greed can be utilized to the advantage of those who approach the stock market from a business perspective. When asked the question on how to get rich in the stock market Warren Buffett simply replied “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” I’m sure you would like me to expound more on what he meant by that, but that would be the subject of another post.
8.) Stock market investing is best left to the professionals
Now before I am accused of bashing professional fund managers in general and before I make an enemy out of those who are in professional money management, let me just categorically say this, there are professional money managers who are very good at what they do. They give you a higher rate of return and have been successful at beating the market for a long period of time.
However there are only a handful of them. Unfortunately, it will take the ordinary layman-investor some digging in to find out who the really good professional money managers are, and I tell you this is not an easy job.
So is stock market investing really best left to the professionals? Is it really true that to get a higher rate of return in the market, you will have to let the professionals take care of your investments? Is it possible for the ordinary investor to get a higher rate of return in the stock market than the professionals?
While it is true professional fund managers have years of experience in investing in securities, the sad truth is that most professional money managers do not give a high rate of return to their investors nor do they beat the market for a lot of reasons. Warren Buffett lamented once about this sad state of professional fund money managers, “Professionals in other fields, like dentists, bring a lot to the layman, but people get nothing for their money from professional money managers.”
It’s not that full time money managers are dumb. Reasons ranging from hyperactivity (too much buying and selling), wrong investment strategy (pure technical trading), holding stocks for the short term, having a “lemming like” behavior (following the crowds) and charging exorbitant and unreasonable management fees are probably among the few reasons why most professional fund managers fail to give investors the best value for their money.
I’ve let professional fund managers handle my funds before and sadly the returns they gave disappointed me. I got more value for my money when I started to handle my own funds instead of entrusting it to them. I do not have to cite statistics on how many people got burned in the stock market by entrusting their money to the wrong kind of professional money managers.
Take note of this interesting quote by Warren Buffett “An irresistible footnote: in 1971, pension fund managers invested a record 122% of net funds available in equities – at full prices they couldn’t buy enough of them. In 1974, after the bottom had fallen out, they committed a then record low of 21% to stocks.”
It is of no wonder that instead of entrusting your money to the “professionals,” Warren Buffett gives this advice to the ordinary layman instead, “By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.”
With that quote the master investor himself proved that stock market investing isn’t just for professionals. In fact professionals get beaten a lot of times by seemingly ordinary investors.
Now I want to emphasize again that the point of this post is not to bash professional money managers. The point here is Stock market investing can be done by the ordinary layman. True that some professional managers are very good in giving you the best value for your money but there is also truth in the fact that ordinary layman-investor can beat the professional money managers and that the statement that “the stock market is best left to the professionals” is simply a myth.
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