The Dirty Secrets of Stock Market Investing
I am not going to draw this out, the bottom line is: if you don’t have a large amount of money already, investing in the stock market can be devastating. Brokers will tell you that the average returns in the market are around 12%. I was told this lie when I was encouraged to sell stock backed investment products. If you are thinking of pursuing stocks as an investment, here’s what you need to consider:
Finding a safe investment:
Blue chip investments are companies that are well established, and considered financially secure. They are supposed to be able to withstand economic conditions with continual stability and growth. These blue chip companies might sound like the way to go, but the truth is these companies give you a much lower return than 12%. It is the high-risk startup stocks that end up with the most growth. The challenge is how do you identify that one company that is going to turn into the next Google, Amazon, or Tesla, and which companies are going to struggle to stay alive and maybe eek out a 1-2% return? As an investment, Amazon and Tesla have been amazing, but they still have not shown a profit.
It’s always a gamble
This next lesson I learned the hard way. In the middle of a 2-year consulting project for a major bank, I became good friends with the portfolio manager. He would feed me information from his whole team of stock researchers and one trade he suggested made me 400% within 2 months. When he gave me advice again, I bought tons of stock as fast as I could because of the success of my previous experience. His information ended up being correct, the FDA approved further trials of a revolutionary medical technology. This news should have sent the stock skyrocketing.
To my shock and horror this great news prompted a sell off that caused a free fall in the stock price. I have blotted out of my mind how much I lost that day but that was a great lesson to me. The stock market is no more than legalized gambling. You can lose even with the best research team available. No one predicted that something good for the company’s growth would end up causing a sell off.
Beware of “get rich” scams
I have tried several trading platforms that all claimed to read the market signs and get you in and out at the right time. There are often a lot of claims that these platforms are making people money, and that they have some secret for success. If the system were good, why would they want to share it? If everyone knows a stock trading secret it’s no longer a secret, and the advantage is gone.
After a stock trading seminar or a training, you get to practice as long as you want for free. Of course it seems that everyone makes money when they are practicing. This way their confidence is high and they are primed to invest larger amounts. Unfortunately, this usually leads to losing money hand over foot.
The likelihood of an individual out trading the hundred billion dollar companies, that have hired the most brilliant minds available, is very slim. The chances that any trading system can out think a billion dollar software program running on a super computer is not likely either.
The game is rigged
I was in a meeting with the GM of the largest gambling conglomerate in Vegas and a friend asked him if he ever gambled. His reply has stayed with me for decades, “Never. I know the odds. People win enough to keep them coming back, but the house always wins in the end.” The game is always rigged against the individual investor. You will never get a fair share against the billion dollar giants. Even if your trading platform recognized a trading single at the same exit time as the big boy-their trades are processed first. By the time your trade is processed, they have sucked all the profits out and driven the price down. Or conversely, they avoid the losses and get out of the stock by selling millions of share leaving you holding the bag.
Stocks are a zero-sum game. For you to make money someone is going to lose. You are actually bidding on the value of the company. It’s no surprise: you are not going to win against the big boys.
If you sill want to try the stock market as a strategy, study the institutional investors and put you money in a good mutual fund or an indexed fund that gives you some risk protection and leave it there until you retire. If you get nervous and pull it out and put it back in you will always lose in the stock market game.