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Investing In Stocks: There’s Guessing and Second Guessing

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I love listening to technical analysts talk about the market—the jargon drips off their tongues like honey off a spoon.

In fact, you can not attend a financial conference without at least one “expert” providing their best bets, top picks and can’t miss prognostications. Of course, each one of those presentations also has a disclaimer that every word uttered can and may be completely wrong. So much for market predictions.

The best type of analysis happens AFTER an event, like a market correction or recession. Once the dust has settled and the bets have been collected, the so-called experts swoop in to make sense of the whole pile of rubble. We know that there’s an entire industry devoted to writing and distributing market newsletters and bulletins. It is surprisingly similar to the guys who tout the odds on football games. Just call 1-888-SCR-WYOU for the guaranteed picks of the week. 

But where would we be without these people filling up panels on the cable shows, writing newsletters or penning content for the web? There’d be lots of empty pages and unfilled hours of television—perish the thought!

We live in a society that expects—and even demands—the so-called experts to stand up and tell the masses the answers. The problem is that while the gurus are counting their cash, the consumer’s pockets are being drained by the hopes and dreams that someone will show them the Promised Land. How many years do we have to spend walking in the desert until we get it? The answer is not a quick fix, just add-water, instant pudding solution.

The academic community has long proffered their findings on stock picking your way to success.

Nobel Prize Winning Professor Eugene Fama from The University of Chicago presented his argument in the 1960’s that financial markets are, in the long run, efficient and that since all information is available for investors to act upon, securities are properly priced. Stock pickers believe they can find the mispricing in the securities market consistently enough to make the smart play. Unfortunately for them, once you add in trading, operating expenses and tax costs, there aren’t many opportunities from which to profit. Especially once you factor in the level of risk you’re taking on the bet, er-investment.

The big idea here is risk.

When you can only focus on the upside of an investment without understanding the downside, then you are falling prey to the rose-colored over-optimistic view that a stock will rise because it found out you just bought it and will naturally respond in kind by skyrocketing to new, unexpected heights. But let’s come back to earth for a bit here. Your long-term investment success depends more on getting through the inevitable down years than by scoring big hits during the up years. Those who believe they can pick the right stocks for you and time the market accurately are probably not explaining the degree of risk that you’re accepting.

So when you hear the 10 best bets or top stocks to buy, or funds you absolutely HAVE to own, make sure you read the disclaimer that these are guesses, at best. Make sure you ask about and understand the risks—the real risks—meaning whether you will achieve your goals. And by goals, we’re not referring to the percentage increase in your portfolio, but your LIFE goals: buying a home, financial security, sending your kids to college, retiring with peace of mind. Yeah, THOSE goals.

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