Why You Can’t Beat Wall Street
April 9, 2009 by Miranda Marquit
Filed under Finance
This is a guest post from T.E. Scott, the author of The Losing Game: Why you can’t beat Wall Street. It’s part of his virtual book tour. I’m very excited to be a stop. You can visit thelosinggame.com for more information, and read excerpts from the book.
We go into great detail in The Losing Game to map out how the odds are stacked against you. At best, investing and trading are “zero-sum gains,” which means that every dollar you make comes from one or more investors. So, once you add in fees, commissions and other added costs, you will likely lose money in the deal. (It’s important to note that if you own stock, that money is lost until you sell to another investor, so you are in a minus-sum game until you exit the market.)
We make a strong case in the book that investing in Wall Street is equal to gambling. People as a whole know that if you gamble consistently, you ultimately will lose money. Very, very few people make money long-term gambling. So, ultimately, when you are betting money trying to predict an unpredictable, (stock prices) you are more likely to lose. Most importantly, Wall Street scandals go back 100 years, there are still no reporting systems in place to track investors’ money, and there is no accountability or transparency required. Why trust a system that has repeatedly violated that trust?
Now, our goal in writing The Losing Game is to get Americans to break the mindset that Wall Street is essential to their financial success, when in fact it’s the opposite. That having been said, that does not mean that the only option left is to stuff your money in a mattress. (That’s what they WANT you to believe.) What I’m recommending to you is not any plan for investments, as I’ve showed you the stock and commodities markets were not designed for that purpose. First of all, here’s what I recommend:
GET OUT OF DEBT!
If you’re going to invest, invest in yourself. Pay off your mortgage, get rid of your credit cards, become debt free. This will likely take time and discipline, but if you take what you’re putting into a 401 (k) or other retirement plan and pay off your debts, that will put you in a much stronger position than any investment risk.
In addition, it will teach you the discipline to plan for your later years with much more confidence than just hoping your 401 (k) will be there when you retire. And before you scoff at that notion, remember this: More than likely, if you are reading this book, you are part of, or will see the results of the largest group of people in human history to reach retirement age. Those people will all be cashing in their 401 (k)s and buyers for those stocks will be needed. Will Wall Street guarantee those investments? Will the government? And if so, at what percentage of the perceived value you thought you had initially, and how much of your taxes will go to secure these payments?
I invested my money in starting a company and buying land. People have purchased tangible objects like land, classic cars, bonds, T-bills, bank CD’s, etc. Your expected return will be lower, but you are participating in a true “investment.” Investing in something hoping to make a huge return is another way of saying that you’re gambling.
If you are debt-free and have money to invest, while I’m not a financial advisor, here is what I would recommend:
- Place $100,000 or the maximum federally insured amount, into a CD, to have some money that will always be secure. Your bank then can use that money to invest in your community by making loans for small businesses, home loans and personal loans.
- Be wary of gold, art and similar investments that can be just as risky as stocks. If you purchase gold, make sure you receive the actual gold or commodity, not just a piece of paper that claims ownership.
- Forget about commodities options, short selling, derivatives and similar complex investments that even specialists don’t fully understand. Let me put it this way, if Warren Buffett doesn’t understand derivatives, you think you do?
- Ignore anything that’s “securitized” (assets packaged into securities, there is no chance you can evaluate the underlying assets).
- It’s OK to purchase real estate or tangible property, but only if your plan is to hold it for many years. Don’t purchase real estate, or any form of real property, thinking you will “flip” it for a huge profit, you’ll have more payments than buyers.
- Anyone promising “confidential tax avoidance strategies” or “a once in a lifetime opportunity” is someone you should run away from as fast as possible.
As I discussed earlier, the impact of large publicly traded companies on local communities is robbing the country of the entrepreneurial spirit that makes this country great. By smartly investing in your community, you will build wealth and build the confidence of a new generation of business leaders.
What do you think of this conservative approach? Do you agree that Wall Street is out to get us? Leave your thoughts in the comments section.
“People have purchased tangible objects like land, classic cars, bonds, T-bills, bank CD’s, etc.”
How is that different from investing? They are also zero-sum games; unless you are planning on using your classic cars or land for stuff directly. Also, T-bills, bank CD’s, aren’t the returns dependent on the stock market?
“invested my money in starting a company and buying land. People have purchased tangible objects like land, classic cars, bonds, T-bills, bank CD’s, etc”
Are CDs really safe? Yes, we get our principal, but the purchasing power will be constantly eroded by inflation. Ditto about T-bills. The government is printing money like crazy now. It’s also borrowing astronomical amounts. What exactly is going to happen if Chinese decide stop buying our debt? To avoid runaway inflation 2 years down the line they will have to do everything right when economy starts to recover, even if “doing everything right” may be politically unpopular. Do you really trust the government to do it?
Talking about bonds. The current rate is 2.8% for 10 year bond. Would investing money at 2.8% for 10 years protect you from inflation? Yes there are TIPs and I bonds, but the numbers that government use to calculate inflation there seems to be very different from what we see in stores. Oh, right, they exclude food and energy. But we care about it.
If you invest in bond fund, rather than individual bonds, then your fund can lose value. In fact, it is guaranteed to lose value as soon as interest rates start going up. Given a current panic buying of the US treasuries, their resale value is virtually guaranteed to drop, so unless you bought individual issues at auction and plan to keep them till maturity – good luck.
Corporate and municipal bonds carry risk too. Bondholders of Washington Mutual, for example, were wiped out. And if you buy a fund then you have no option of waiting till maturity, so the value of bonds will drop as soon as we get higher interest rates.
Given that 95% of businesses fail, I don’t see starting a company as a safe investment either. Land – maybe, but you really need to buy it at a right time. I imagine it would take an extremely long time for land bought in California at the end of 2006 to get back to its value. The price of land and real estate fluctuates just as much as the stock market.
There is no investment without risk.
The author offers some sound advice on getting out of debt, probably the only sure return in investing. But I don’t agree with the premise that investors should abandon the stock market altogether. What they should abandon are complex products offered by wall street firms designed to take a larger and larger share of their money in sales charges and high recurring fees. The simplest solution is often the best solution. Index funds with expense of .1% or less are a pretty good deal, but investors need to be prepared to hold a number of years to increase their odds of a positive return. The return of the stock market is roughly equal to earnings growth + dividend yield. Over a thirty to forty year period the historical averages point to returns of 8 – 11% for stocks and 5 – 8% for bonds. The “losers game” is any get rich quick scheme like day trading or currency trading that wall street is marketing at the moment. For the average investor, “enough” is buying and holding indexes for long periods of time.
You make a good point. I think the author of this book isn’t against all investing. His book makes the case that we’ve been led to believe the Wall Street is THE only way to prosperity these days. He’s about making investments that are not directly connected to Wall Street and the fluctuating values there. Large amounts of money are taken in fees and commissions. Also, he asserts that the stock market is more easily manipulated by a few people at the top.
Of course all investment results in risk. The author is making a case for a diversified portfolio that is weighted away from Wall Street. No matter what you invest in, your earnings can be eroded — or you could lose outright. The author’s contention is that you are far more likely to lose with Wall Street.
I think you hit it on the head. I love presenting different viewpoints on my blog from guest posters, but sometimes it’s hard because I don’t always agree with everything they write, so it gets confusing for some. But I think you are right — the real key is to stay away from the opaque and complex investments. I like index funds and value stocks myself, as well as a healthy sprinkling of bonds.