Tips on the Stock Market Game
- Few investors have better-than-average investment results.barbie street image by Roques Jean Chris from Fotolia.com
An influential 2008 book by Malcolm Gladwell, "The Outliers," repeatedly mentions "the 10,000-hour rule," which proposes that it takes about 10,000 hours to master any significant skill, from playing the saxophone to hitting .300 in the majors. Stock-picking may be more difficult. After 20 years of trying, almost all stock-fund managers underperform the market average (what you would get if you just bought a huge basket of all available stocks and held them). Clearly, you will need more than a few tips to win at this game. - While only a minority of fund managers actually do better than average, you could do worse than achieving average results. From 1975 through 2009 the Dow Jones Industrial Average (DJIA), a basket of stocks representing the 30 largest U.S. industrial corporations, had an average annual return of 9.5 percent. If you invested $5,000 in 1975, at the end of 2009 you would have about $140,000. Better still, if you invested $5,000 per year beginning in 1975, by the end of 2009 you would have about $1.64 million. Invest regularly and do not try to beat the market. You will still win.
- Read the classic book on value investing, "The Intelligent Investor: The Definitive Book on Value Investing," by Benjamin Graham. The revised edition, 2003, has a forward by Warren Buffett, who became a billionaire many times over following Graham's uncomplicated advice. The book explains in as much detail as you need the theory and practice of value investing: invest in companies whose products you know and like; look for undervalued stocks; never try to make a killing (another way of saying "aim for average results") and sell your winners--another way of saying "don't be greedy."
- Beginning investors, and many who should know better, will find some hot stock or trend and will invest all their money in it. In the early 2000s every self-styled expert advocated the unprecedented opportunity of internet investment. The market for high-tech crashed in 2002. Many investors suffered losses of almost 100 percent. In 2005 the whole country fell in love with the real estate boom and real estate investing. By the end of 2008, the real estate crash had thrown the world into a major recession and swept away huge financial institutions, hundreds of regional banks, and many thousands of investors who had put all their eggs in the real estate basket. Stock investing has many important rules, but none more important than keeping your money diversified.
