Monday, May 2, 2011

Altucher: Market Going to 20,000, But Don't Buy Stocks?!

If you are a loyal reader of this site, you know my feelings regarding stock ownership:

- Historically, people who keep their money in the stock market will make money in the long run.

- Trying to predict the short term movements of the stock market is a prediction sure to go wrong (even for the experts).

- If you are going to invest in the stock market, you should be a passive buy-and-holder of stock index funds, since picking individual stocks is folly.

Recently, I came across an article by investor and blogger James Altucher where he gives his take on stock market investing.  His words are thought-provoking, wise, but ultimately wrong for most (at least in my opinion).  Here is his take:

- He is bullish on the stock market in general.  In fact, he says that the Dow Jones Industrial Average will hit 20,000 over the next few years.  However

- He doesn't think people should invest in the stock market ("you might as well flush [your money] down the toilet").

Here are his reasons in a nutshell (I am paraphrasing, but you can read his original article if you want his actual words):

1. You're not that good at it:  People buy high and sell low.

2. Competition:  There are professional investors out there who are ruthless.

3. Competition II:  There are professional investors who have much better information and research than you do.

4. Competition III:  Pretty much same as #3.

5. It's mostly a scam:  There are Enron's out there who are putting out false information about their company.

6. True wealth only comes if you make all the wrong decisions and get lucky:  Consider Bill Gates and Warren Buffet.  They did the wrong thing by not diversifying and never selling.  However, the one stock that they did own hit it big.

7. The best investors make 10% - 15%:  That's not a good enough return given the volatilty of the stock market.

8. Competition IV:  Companies with million dollar budgets make billions through high speed computerized trading.  How can the average person compete with that?

9. Daytrading stinks:  You can't make money at daytrading.

10. Stocks are boring:  Most companies make money in such mundane, boring ways that researching them is a chore.

His conclusion is that you are better off taking your money and investing in your own business venture by starting a company.  He thinks that this is a better path to wealth.

It seems to me that most of these reasons also are reasons to follow my advice and buy-and-hold passive index funds!

I totally agree with his points about competition ( numbers 2, 3, 4, and 8).  Most individual investors are at a significant disadvantage when it comes to picking individual stocks.  The big time investors have access to better information, better technology, and better brainpower than you do.  However, my conclusion is that you shouldn't pick individual stocks; you should diversify and buy them all.

In order to avoid the Enron's of the world (number 5), you need to diversify. Companies go out of business all the time, so if you own a piece of all of them, a single company's demise isn't going to affect you.

I agree that Bill Gates and Warren Buffet are exceptional cases (number 6). For the rest of us mortals, that sort of wealth isn't our goal. The goal of most is to accumulate a sizable nest egg for retirement, for our children, or whatever. Therefore, I would not use them as an example for the rest of us. Besides, even though Buffet may have made his money through one stock (Berkshire Hathaway), that one company owns dozens of other companies, so Buffet didn't just put all of his eggs in one basket.
If the best investors are making only 10% - 15% in stocks (number 7), that is still pretty darn good for most people.  Historically, the stock market makes about 8% per year over the long run.  For most people, that sort of return will earn them a comfortable net egg.

I agree with his statement that daytrading stinks (number 9).  Again, this is another argument for passive index investing.

Researching most stocks is boring indeed (number 10).  If you are a passive index investor, you don't have to worry about pouring over income statements and balance sheets that would make an accountant slit his wrists.

Note that I did not address number 1.  In my opinion, psychology is one of the biggests (if not the single biggest) barrier to investing success.  This barrier exists for index investing as well as investing in individual stocks.  The ups and downs of the stock market cause many people to buy at the wrong time and sell at the wrong time.  Doing that can cost you thousands.  However, that is not a reason not to invest in the stock market.  That is a reason to educate yourself so you have the mental fortitude to weather the storms in the knowledge that every storm will pass and the stock market will go up again (just as it did after the latest financial crisis).

Finally, I do agree with him that investing in yourself and becoming an entrepeneur is one route to financial success.  However, that route requires a certain mental makeup to be able to take that leap and to stick with it.  If he feels that most people don't have the intestinal fortitude to be a stock investor, then it is surprising that he should recommend being your own boss instead.  Working for yourself requires an order of magnitude more strength of will than being a index investor!

As you can see, Mr. Altucher's article provides ample food for thought (which is good); however, I ultimately have to disagree with his final conclusions.

1 comment:

  1. I think there is a bit of truth in what he says - some of the players have an unfair advantage but is the entire game rigged? No. Don't trust US markets? There are other markets if you must.

    Companies like Enron are trading as we speak, but so are honest companies.

    If you enjoy picking stocks, do it. If not, stick to diversification and build wealth.