I’m really bullish on stocks and the economy but I don’t think most should waste their money investing in stocks. You might as well flush it down the toilet. Or throw a big party. We already went over that. And please don’t buy a home. Just relax a little bit if you have some extra money.
I’ve been writing about stocks for almost ten years now. The first time I ever got paid for writing anything was a check for $200 I got from thestreet.com when I wrote in late 2001 about stocks that were trading for less than the cash they had in the bank. I never cashed the check.
(Should you put your money in stocks?... Are we in a bubble?...How about mutual funds?...I answer all of these questions and more in my Ultimate Cheat Sheet for Investing.)
10 Reasons Not to Buy Stocks
1. You’re not that good at it. Its really hard to buy stocks. Its not just picking stocks and watching it go up 10,000%. Its buying them and watching them go down 80% before they end up going 20% from your original price. Its waiting. Psychology is at least 80% of the game. I don’t need to go over the statistics. Most people sell at the bottom and buy at the high.
The average return of the market over the past 70 years: 10.7%. The average return of the individual investor? 1.9%. And that’s probably generous.
(9 out of 10 people think they are an above the median driver. 9 0ut of 10 people think they are an above the median investor. Both are impossible)
2. Your competition wants to slit your throat in a dark alley. You know how Batman’s dad got killed? He’s walking in the street with his beautiful bejeweled wife and his innocent little son, Bruce.
Then this guy comes up to them and says, “give me your wallet and your jewels”. So Dr. Wayne (somehow he made billions being a doctor but thats another story) hands over his wallet and his wife’s jewels. Bruce, the son, is scared to death. Then you know what happens?
The thief shoots the father and mother in the head and runs away. He ALREADY had the money and he still shot them in the head and killed them when they had nothing left. Little Bruce watches and screams while blood streams out of his both his parents. Hopefully they died instantly.
I happen to know who that thief is. Warren Buffett. And you are Bruce Wayne’s dad.
Warren Buffett, Stevie Cohen, all the great investors go outside every day and they want to take your wallet, steal your diamonds, maybe slash your face for fun, and then after they’ve gotten everything they can get from you, they are going to shoot you in the head in front of your child and run off into the dark of the night.
Good luck fighting that kind of competition.
3. Competition, part II. A broker once told me this about Stevie Cohen. (see also, “How Stevie Cohen Changed My Life”) I don’t know if its true. I don’t care. Its just gossip.
Maybe it was even a joke but he was a broker and he told me this. I’m not making any accusation. But the story was this. Cohen would find out where the CFO of a public company was going on vacation. Then he’d send a guy over there. Suddenly on the beach, the two would just happen to be getting their tans right next to each other, share a few margaritas, the information starts flowing.
I’m not saying inside information. Its all just conversation. And it might not be Stevie Cohen. Its any of these guys. Every day there’s one dollar up for sale. Who is going to win that one dollar. You? Or the guy who sends his private detective to lie down on the beach next to the CFO of the Next Big Thing.
4. Competition, part III. I know another guy. He has code that scours the FDA databases looking for any microscopic changes in any documents.
You know what happens when some of those documents change just a little? A press release comes out a week later. A stock gets halted. It opens up or down 50%. Who is going to win the dollar? You, or the guy who wrote 100,000 lines of code scouring the FDA databases.
5. It’s mostly a scam.
I’ve seen the worst, many times over.
I would never ever trust any number that comes out on a 10Q, no matter how GAAP compliant it is according to government standards. Enron was GAAP compliant. Until they were bankrupt and everyone either went to jail or mysteriously died. If you were fully loaded in their stocks you might die also. From pills or a noose or from mistreatment in a mental health clinic. Because its not fun what happens to the shareholders.
6. True wealth in the stock market comes if you can hold forever and not diversify.
Warren Buffett says, “Wide diversification is used only by investors who don’t know what they are doing.”
I’ll give you an example: imagine having 100% of your portfolio in one stock, never ever diversifying for 20 or 30 years, and watching it sometimes go down over 50%, maybe even in a day. Guess who makes mistakes like that. Bill Gates (MSFT stock) and Warren Buffett (BRK-A stock) [See, 8 Unusual Things I’ve Learned About Warren Buffett].
So the guys who make real stock market wealth never diversify and never sell. You know how many guys get rich like that? Less than 100. Then there’s the other 100 million people who own stocks.
7.The best investors in the world make on average between 10 and 15%. We already know because of the above that you are probably not going to be among the best. So, if you pick some stocks and passively hold them maybe you’ll earn half that: 7%. Are you happy with that? Then fine. But given the volatility in the market I don’t think thats a good enough return for most people. Look,some people are good. And some people should invest. But most shouldn’t.
8. The other people who make money only hold for 1/trillionth of a seond.
Some trading firms set up their operations right next to the buildings with the computers that process all the trades on the exchanges.
They then pay for high speed cables to go right into these exchanges so their trades get their before yours. These guys make a lot of money in the markets by getting in the middle of every bid-ask faster than anyone else can.
Its a race to the bottom but billions are made. So we see now the way to huge wealth is to either trade in millionths of a second or to hold huge blocks of your net worth in one stock for years. This is not a good strategy for 99.9% of people.
9, Well, what about daytrading? A lot of people claim to do that successfully. They are lying.
Please see my article “8 Reasons Not to Daytrade”. I got a lot of criticism after that. People wanted to show me their tax returns to show me how good they daytraded. Get lost, punks. Some people make millions playing the violin also.
Doesn’t mean the other six billion people on the planet should perform in Carnegie Hall. In any case, we’re talking about investing in stocks. Not scalping like a little kid with eight terminals in front of him. And guess what, even the best daytraders in the world with twenty year track records go broke sometimes.
10. Stocks are really boring. Other than Apple, which is a fun stock. I own a stock right now that cures irritable bowel syndrome, for instance. You know how many hours I had to research all the drugs for irritable bowel syndrome? And then talk for many more hours with the CEOs of every irritable bowel syndrome company? And then try to figure out how big the market is? Not an easy task.
Would you admit in a poll that you have irritable bowel syndrome? And some of the cures for IBS sound worse than the disease. And then how do you value one of these companies?
Oh my god. Its so boring. And so now I own this irritable bowel syndrome stock that I think will do well. But when? Maybe it goes down for five years before it goes up 1000%. Who knows? Maybe someone has a bad day at the FDA (maybe an undiagnosed IBS “incident”) and a drug that everyone thought was a no-brainer gets rejected. Who knows? Who really knows? No matter how much information you have about a stock we’re all going to be dead in 100 years anyway. But hopefully a few less people will be dead from irritable bowel syndrome. (Btw, aren’t you happy that I didn’t include an image about IBS here?)
So wait, not so fast. You said you were “incredibly bullish on stocks”. And you even write about stocks sometimes. So what are you talking about? Is it all a big scam?
Yeah, it is. But 200mm ipads are going to sell in the next couple of years. So I happen to like Apple. (see also, “Apple will be the first trillion dollar company“)
I don’t believe in stocks. I believe in innovation.
We are seeing innovation in energy, tech, biotech, 3D Printing, Sensors, the internet of things, robotics, synthetic biology, and so on.
Here’s my strategy: I like to follow hedge funds that hire PhD research scientists who know everything about these areas. I like to see what they do. Whenever they make some noise.
So I like stocks in general. But I don’t think people should buy stocks or play with index funds (then you are just subject to the random volatility of the market).
Not everything has to make perfect sense. Make your own decisions. Financial media pretends to hold your hand but thats a big scam also. I’ve worked for many financial media firms. They all love four or five stocks: Apple, Amazon, Twitter, Tesla, etc.
But there are 8000 public companies. Not just five. Look at all the data, then make your own decisions.
The best way to take advantage of a booming stock market is to invest in your own ideas. If you have an extra $50,000 don’t put it into stocks. Put it into yourself. You’ll make 10,000% on that instead of 5% per year.
But if you are a bit older and don’t feel like starting a company, it’s ok to find the right hedge fund managers and follow the stocks in their public filings whenever they take a big position. This isn’t an easy strategy. If you’d like to hear more about it, I’m happy to write about it.
I’m sitting in a cafe right outside the Wall Street Journal as I write this. I think lots of stocks are going to go up in the next few years. I think a lot of people are going to be happy if they wait out this economy.
There’s a guy who works here who doesn’t seem to like me because he’s sweeping all around me. I think they want to close up and I’m clearly in his way right now. He wants to go home early, maybe, and kiss his wife and kids. Hopefully his wife is in a good mood. Maybe they’ll fool around a little tonight. He’s had a hard day here today. I hope to god five years from now he’s happier than he is now.