Devil's Advocate 

Don’t Invest In The Stock Market

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This is a Devil's Advocate post.

We are led to believe that the best place to invest our money is in the stock market. Low barriers to entry, low barriers to exist, plenty of information, high probability of success in the long run and a lot of success stories. We also hear some of the horror stories of people who day traded tech stocks in the early 2000s, gamblers who lost it all on penny stocks, and all the chop shop, pump and dumpers like in the movie Boiler Room. However, through it all, we’ve been taught, over and over again, that if you buy for the long term, you will always win.

For today’s Devil’s Advocate post, we’re going to break down the stock market and show why we really are just little guppies hoping not to get eaten by the sharks.

You Have No Advantage

In the stock market, the average investor has absolutely no competitive advantage over other investors. I’ve always said that you need an advantage to succeed and most of us don’t have one in the stock market. The traders on the floor have the advantage of seeing up to the second activity. The traders on Wall Street, even if they aren’t on the floor, may have a network of contacts in the media, may know other analysts in other brokers (or their own), or have good relationships with company employees so they can get a slight edge in information. Whatever the case, they have an edge you and I don’t.

Is it a make or break edge? Sometimes, yes. Most of the time, no. I liken it to playing a sport without knowing how much time is left on the clock. It won’t make or break you but in the long run, but occasionally the clock will run out on you or you’ll shoot too early. Either way, it’ll hurt and the stock market is a long run type of game.

Buy & Hold is not a Complete Strategy

If you’ve done any reading of stock market investing, you’ll know that all the introductory texts talk about the idea of buy and hold. They warn against trading and they suggest that you diversify. The basic stuff is pretty straightforward and it’s appealing to follow and write because it’s simple. However, buy and hold only gives you one direction to win and stocks move in two directions.

The point of this reason isn’t to slam the buy and hold idea, I think it’s valid as long as you have a long time to hold. The reason I bring it up is because all too often we stop here and thing we’ve accomplished the mission. Stock market investing is very involved and if you stop at buy and hold, you leave yourself open to a lot of risks.

If in the last two years you had a trailing stop loss and you were nearing retirement (or whenever you’d need the money), you could’ve saved yourself some money by selling. Buy and hold until the bitter end may seem honorable but the only person benefiting is the guy shorting your shares. 🙂

Actively Managed Funds Suck

It’s a well known fact that the majority of actively managed funds don’t beat their benchmarks but many of us are forced into actively managed funds in our retirement accounts. Why? Brokers don’t make much off index funds! Both of my former 401(k)s offered a mix of actively managed mutual funds with fairly reasonable expense ratios (they were all under the industry average). Neither, to my knowledge, offered index funds, the cheapest mutual fund options available.

Saving for your retirement is important and it’s great that vehicles such as 401(k)s and IRAs exist, but ever wonder why, in most cases, you can only invest in the stock market?

Insufficient Analysis

Finally, most of us don’t do nearly enough analysis of a stock or a mutual fund before we buy it. It’s because it’s not our passion. Do you really want to pore through income statements and discounting cash flows based on your expected return? What about calculating the return on equity for the last five years and using that to project a price target in X years given the current P/E ratio? While those were mouthfuls of sentences, they are actually quite basic calculations to do. Now imagine doing that for all the stocks you were considering investing in (after whatever filters you applied using stock screeners) as just a starting point to know how much to pay for a share.

Asleep yet? That’s because most people don’t care enough and if you don’t care, you can’t succeed. Most of us would rather pursue our hobbies or spend time with loved ones, so we put it into actively managed mutual funds that suck. Or we go into index funds (my choice) because then we get the benchmark. Either way, we don’t do even the most rudimentary analysis required so we shouldn’t be in the game at all.

I’d love to hear your thoughts on this as the stock market is one of those very polarizing topics. Many fortunes have been made and many retirements have been secured through the stock market, but I think people are thinking differently after the economy punched the market in the gut (or lower!) last year.

Please let me know what you think!

{ 49 comments, please add your thoughts now! }

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49 Responses to “Don’t Invest In The Stock Market”

  1. Cheap Bastard says:

    Consider this: savings accounts suck right now because interest rates suck.

    The best analog to a savings account with decent interest is a stock that pays dividends. Until interest rates improve, stock dividends are the best way to go.

    • govenar says:

      I don’t think that’s a good analogy. A savings account has no risk of losing money and is a reasonable place for money that you need in the short term. You can’t just replace that with stock dividends since the risk is so different.

      • Cheap Bastard says:

        I said the “best” analog. What investment more stable than stocks pays what savings accounts paid 3 years ago?

  2. Mike says:

    The only stocks worth holding for the long haul are dividend paying. The ones that don’t I hold for a few months at most.

  3. Christine says:

    I have written off the stock market entirely. The stock market is just legalized gambling and I lost a log of money when I tried to learn and play the game. Buy a company you know – a small cap that is well managed and good potential for return. I put most of my assets into this stock as it was shooting to the moon and expected to make a lot of money – then it came crashing down hard. Turns out when there are not a lot of investors, insiders can play “pump and dump” and manipulate the stock. Not at all like the advice you read in books. That was before the crash when the market was good. Then a close relative lost everything in the crash since they were stupid enough to borrow on margin. It’s just a gambler’s racket and I don’t have the smarts or the time to learn to play with the “big boys” and even hope to win. So I will stick with what I know, and is tangible, and can see and hold – real estate. This time last year as then market was going down another 10% each week and Armageddon was in sight, I cashed out a retirement account early and took the 10% hit for early withdrawal (just another week’s loss in the stock market) and paid off the mortgage on my house. No matter what happens next I have a roof over my head that’s paid for and no one can take that away from me! I think that all the billions of dollars in the retirement accounts in this country where we are forced into stocks or bonds is artificially propping up the market. What happens when all the baby boomers try cashing out all their retirement accounts at the same time? The next great depression? If I had my way, I’d take all my money out of my current employer retirement account if I could and buy up old historic houses, fix them up, and rent them out. Once the mortgages are paid off, then you have your own annuity income for life without having to worry about some insurance company going broke and losing your life savings that way. In my opinion, the stock market is for gamblers,and I cannot afford to gamble away my life savings. I have lost way too much already! I am through with the stock market forever!

    • Matt says:

      I agree with you 100% Christine! I have never done anything but lose in the stock market. Yet growing up, I was always taught that was the ‘right’ thing to do.

    • Levi says:

      I trade stocks often and one thing that should never be done is “chase the stock” I myself use technical analysis and other things. the point being is I have lost small amount because I have stops and adhere to a strict guideline to cut my losses before my capital is affected much. In conclusion it is possible to make it but it requires time, patience and a strict plan. As well as plenty of studying.

  4. Bob says:

    It’s absolutely true that many people go into investing and somehow forget that they stand a good chance of losing money. But by actively managing your own individual stocks, and by adhering to strict buy and sell rules, it’s definitely possible to make money in the stock market.

    Of course, this is not a long term buy and hold strategy, but unfortunately, buy and hold usually turns into “buy and forget about.” Most people get into trouble not because they buy incorrectly, but because they are reluctant to sell. If a stock’s price is tanking, pull the trigger. Either keep your gains, or keep your losses small.

    This is a strategy I’ve used successfully for the past 15 years.

  5. Matt says:

    The stock market appears to be just a fools game. The only one’s that get rich on Wall Street are the people that work there.

    I really do not know where to put my money for retirement. CD’s sound like about it.

    At least I do not lose money with that.

  6. Rex says:

    How the hell can you go broke investing in a company like Johnson and Johnson or Coca cola when you buy them at a reasonable price?

    I think J&J is trading at 11 P/E now. It’s the ones who invest in companies they don’t understand that really feel the burn.

    “When dumb money realizes its dumb money, it ceases to become dumb” – Warren Buffet

  7. Steve says:

    I don’t really understand how this article makes a case to ‘not invest’ in the stock market.

    At the end, the author says he invests in index funds as opposed to actively managed funds.

    Index funds are still the stock market.

  8. sharon says:

    Wholeheartedly agree with your comments concerning investing in stock. It either will work for you or it won’t based on the education you acquire about investing and time you are willing to spend being a watchdog over your investments and how you interpret the direction it is going. The future is anybody’s guess and that’s about all it amounts to..a guess. It’s either a hit or a miss and that’s the simple description inspite of all the convincing or confusing rhetoric of stock analayists. Timing and good luck be you a amature or expert in the financial world of investing.

  9. Alfred says:

    Stock Market sucks!!!! The big millionaires are stealing your money! Dont put your money there!!!!

    • Patrick says:

      Yeah, and THEY’RE ALL OUT TO GET YOU!
      Those big fat cats… lying around dreaming about how to steal your money out from under your mattress.

      Oh, any they’re watching you too. Be careful, they’re all out to get you.

  10. kue says:

    I was thinking about investment. but second not! thanks for the comment…

  11. name says:

    OMG. Now I know where to find the place where all the idiots conglomerate. Thanks.

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