A10, Stock Trader Dude

What armchair investment strategy works? Here are the eight criteria for a near-perfect investment strategy:1. The strategy must be easy to start.2. The strategy must be easy to maintain.3. The strategy must be easy to understand.4. The strategy must be inexpensive to implement and maintain.5. The strategy must be tax-efficient.6. The strategy must be widely available.7. The strategy must have a lot of history to judge it by.8. The strategy must make a lot of money.The author claims there is only one way to do that which meets all the criteria – indexing. This book could have been one page long: it simply suggests buying an index fund. The author cites Warren Buffet as saying that it is the best approach for 97 percent of all investors. Why does the author think buying an index fund is a great idea? Well, he cites that from 1995 to 1999, nearly 85 percent of all mutual funds that were set up to beat the S&P 500 failed to meet that goal in any particular year. Eight out of ten mutual funds can’t beat the market. For the ten-year period ending in mid 1995, the S&P 500 index beat 83 percent of all actively-managed general stock market mutual funds. Here is what the author is missing, from a fundamental standpoint, over the very long term, like a thousand years, all investments have done poorly. Also, there are ETFs in addition to index funds, and ETFs might be better for lump sum investments. More importantly, after a boom period, the S&P 500 doesn’t do very well and it can stagnate with low returns for seventeen years for example. So, while index funds are great, why limit yourself to the S&P 500 when other world stock markets may see better growth or the bulk of the growth over the next fifty years? So, while it is important how you invest, the primary factor in determining your investment returns is what you invested in. For most folks, investment grade life insurance contracts may offer the best blend of tax benefits and stability, as you can opt for a guaranteed rate of return so that you never lose, with or without it linked to the S&P 500 index. And in case you’re wondering, no, I don’t sell insurance. Most of these books have a fancy way of making a point when one page will do fine… so while these criteria are fine to evaluate an investment, no one can see out fifty years and know which investment will be the most promising.

There are plenty of books on making money by men and women who haven’t made much. That’s exactly why I like this book by J. Paul Getty, there is no disputing the author’s credentials. He wrote it to convince young businessmen that there are no sure-fire, quick-and-easy formulas for success in business, that there are no ways in which a man can automatically become a millionaire in business.

And specifically when it comes to stock investments he discusses why the average person will not attain wealth in the stock market. The average person may risk a little of his or her capital and if the investment doesn’t work out the person loses a little. It is precisely this kind of risk that everyone can take that negates the creation of wealth. If the investment works out, the gain is usually little. You would have had to invest a substantial amount in a superior asset/stock in order to benefit from the movement of the share price and this is the kind of risk that few are willing to accept.