here are 10 “think-like-an-amateur” secrets from our “Lazy Person’s Guide to Investing.” (review) Ten simple ways to get into peace-of-mind investing.
3. Peace of mind from knowing advisers have no special skills either
Actually it’s worse. Nobel economist Daniel Kahneman also used the casino metaphor in “Thinking, Fast and Slow,” neuroscience. Based on “50 years of research” he found that the “stock-picking skills” of managers and advisers is “more like rolling dice than like playing poker.” Their picks are no more “accurate than blind guesses.” In fact, “this is true for nearly all stock pickers ... whether they know it or not ... and most do not.”
5. Peace of mind: realizing markets are irrational, unpredictable, dangerous
Wharton School of Finance economist Jeremy Siegel, author of “Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies,” researched 120 of the biggest up and biggest down days in the stock market, the last two centuries. In only 30 of those big-move days did Siegel find a reason for market movement. In other words, 75% of the market’s biggest twists and turns in history were irrational and unpredictable black swans. Bottom line: 100% of the time Wall Street’s just guessing.
6. Peace of mind is deciding never to actively trade in the stock market
Active trading feeds anxieties and stress and kills peace of mind. Behavioral-finance professors Terry Odean and Brad Barber of University of California studied 66,400 portfolios at a major Wall Street firm for seven years. Three key factors reduced their returns: their stock-picking skills, transaction costs and taxes. Active traders averaged 258% portfolio turnover annually. But turnover was a mere 2% for buy-and-hold investors. Yet they earned seven percentage points more than the active traders.
8. Peace of mind means never trading on hot tips and emotions
Yes, the stock-picking and trading skills based on “gut feel” is invariably a loser decision. A Morningstar study says most investors get in and out of the market at the wrong time. Irrational exuberance fuels a buying frenzy at the top. Investors jump in, buy high, lose. Then when the market drops, they panic, sell, lose. You want peace of mind? Build your Lazy Portfolio.
9. Peace of mind vs. overconfidence: Your brain may be your worst enemy
A behavioral-finance study reported in Money magazine concluded that 88% of all investors have what psychologists like Kahneman call “optimism bias,” overconfidence. We take big risks, handicapping ourselves, lose. Then we make excuses. Over half the overconfident investors who think they are beating the market often underperform by 5% to 15%. But they can’t admit failure, so never learn. Bottom line: Our brains are often our worst enemies.
10. Peace of mind: Most day-traders don’t make a living, eventually get out
In the end, you wake up to the fact that trading is not the get-rich promises that overly optimistic newsletter gurus want you believe. Yes, you can trade online for a few bucks a pop. But you can still make lousy picks. Lose fast and furious. Another Odean-Barber study revealed that as many as 75% of traders lose money. And even the rare successful traders rarely make more than $100,000 a year. As David Dreman put it in his New Contrarian Investment Strategy, “Market timers, if they don’t die broke, rarely beat the market.”
[by Paul Farrell via roy]
see also Six Rules for Lazy Investors