How Do I Know You Aren't Full of It?

One concern about the [book] is that I'm young and new to investing, and because you're a persuasive writer and I'm not well-versed in finance you could be selling a lemon.  I'm not looking for a guru to blindly follow.  Outside of your reading list, which I am looking into, especially those books I've seen elsewhere, would you be willing to offer up a contrarian perspective or publication -- one that may be well viewed by some but that contradicts your work? 

Jan 4, 2007

RESPONSE:

Thanks for the thoughtful note.  I think the fact that you recognize that a persuasive author could lead you astray puts you in a very good position NOT to be led astray (an insight that many investors don't have).  One point I make in the book is that you should never take one person's word for it, and my hope is that pointing readers toward others who have arrived at similar conclusions will provide enough evidence and support that one can eventually embrace the ideas with confidence.

As for the counter-arguments, bookstores, newspapers, financial TV, and much of Wall Street are full of those who argue that, if only you use this system, or study this technique, or follow this guru, etc., you'll beat the market and leave your less-ambitious friends in the dust.  (A good example of such a book, one I was a devoted follower of in my early days, is How To Make Money in Stocks, by William Oneil.  Another great book--and a great read--is Reminiscences of a Stock Operator, from 1923.  As you read it, just remember that the super-trader, Jesse Livermore, eventually shot himself.) 

I think such success is possible--some people do beat the market.  After 15 years in and out of the business, though, I think the odds of it are so low that the vast majority of investors who try will fail (and, in the process, end up wasting money and time.)

What finally persuaded me of this were the academic studies showing the percentage of professionals who fail to beat the market (3 out of 4 over short terms and 9 out of 10 over long terms). Contrary to the intimations of the popular financial press, professional investors are not stupid or incompetent.  On the contrary...they are extremely competent.  It's just that there are so many of them that they are the market. And if this is the best the professionals can do, then the average part-timer is facing long odds indeed  (I refer to some of these studies in the book, but many are available online as well.)

Thanks again for the thoughtful note.  Hope you enjoy the book.

Comments

[Jens Köhler]

I'm envious of the letter-writer: "young and new to investing"... how marvelous! (If only I'd started sooner.) In any case, I'd like to follow your point to the reader about the necessity of cultivating one's own point of view. I agree with the idea that there is nothing like having skin in the game to accelerate one's investing knowledge. In other words: put a small amount of money in the market now--while you are learning--because it will actually make you smarter. For instance, the first time I bought stock through my online brokerage account I paid much more for the stock than the amount at which I had seen it quoted. Because it was real money I was wasting and not just "Monopoly money," I learned very quickly the difference between a market order and a limit order.

[Paul Alers]

Mr. Blodget
I have found your book to be quite helpful and an "entertaining and fun book" to read. In fact I finished it and went back to page one and started over. Being a member of the media, not the financial media though, I am glad you went to great strides to blast the talking heads like those on CNBC. Though interesting to watch and gain some insight, much of what they say is just talk. It is unfortunate though that it seems that many take it as Bible verse (i.e. observe the Cramer effect). Currently I am happy with my family's retirement course and feel we are well diversified but I wanted to thank you for shedding the light on our future. Its better than much of the blather that you read that says "Yes you too can beat the Market" just subscribe to our pieces of paper and you will be rich to your wildest dreams.
Thanks for an entertaining read and best wishes in the future

[Don Wall]

These are good points, but what has been forgoten is that some of the best advise is under your nose.

You are probably an expert in your particular industry and can spot trends well before they become "self-evident."

Further, most index funds (eg S&P 500) are based on big stocks that are well known. The most fantastic returns are had from investing before the stock becomes an index fund darling. Of course, most (ne almost all) small stocks will never make it, but your own intelligence is better than the reports.

Put another way, sometimes you are your own industry's report writer. Now you know something before the "pros."