Debunking the Myths of Stock-market Investing Part 3
People do stupid things in the stock market because of fear and greed. If you approach stock-market investing from a business perspective, you will be more prone to avoid risky behavior.
Myth#7: Investing in stocks is too risky
In anything that we do in this world, we take a certain kind of risk. Well, admittedly, there is a certain risk involved when investing in the stock market. However, the risk I am talking about is not the same kind of risk that most people think. If you view the stock market from a business perspective, the only risk that you have to take is the one that comes from being in business. Besides, as I have stressed before, stocks are merely fractional ownership of businesses.
All business ventures have a certain kind of acceptable and calculable risks involved. Since stocks are merely fractional ownership of business, they come with the risk that comes with operating a business. The “risk” that most people fear in stock market investing is the volatility in the stock-market. The manic-depressive behavior of the market caused by fear and greed is what makes the stock market seem risky, since no one can absolutely predict the market’s movement. The risk that most people fear in the stock market is not caused by the underlying fundamentals of the business; it is the “risky” behavior that people bring to the market.
People do stupid things in the stock market because of fear and greed. If you approach stock-market investing from a business perspective, you will be more prone to avoid risky behavior. This way, the risk you take is only the risk that comes with operating a normal business. Also, take note that the “risky” behavior taken by other people because of fear and greed can be utilized to the advantage of those who approach the stock market from a business perspective. When asked the question on how to get rich in the stock market, Warren Buffett simply replied, “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
Myth#8: Investing in the stock market is best left to the professionals
Now before I am accused of bashing professional fund managers, in general, and before I make an enemy out of those who are in professional money management, let me just categorically say this, there are professional money managers who are very good at what they do. They give you a higher rate of return and have been successful at beating the market for a long period of time.
However, there are only a handful of them. Unfortunately, it will take the ordinary layman-investor some digging in to find out who the best professional money managers are, and I tell you, this is not an easy job.
So, is stock- market investing really best left to the professionals?
Is it really true that to get a higher rate of return in the market, you will have to let the professionals take care of your investments?
Is it possible for the ordinary investor to get a higher rate of return in the stock market than the professionals?
Take note of this interesting quote by Buffett: “An irresistible footnote: in 1971, pension fund managers invested a record 122 percent of net funds available in equities — at full prices they couldn’t buy enough of them. In 1974, after the bottom had fallen out, they committed a then record low of 21 percent to stocks.”
It is of no wonder that instead of entrusting your money to some “professionals,” Buffett gives this advice to the ordinary layman instead, “By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.” With that quote, the master investor himself proved that stock-market investing isn’t just for professionals. In fact, professionals get beaten a lot of times by ordinary investors.
Now, I want to emphasize that the point of this post is not to bash professional money managers. The point here is that investing in stocks can be done by the ordinary investor. True, some professional managers are very good in giving you the best value for your money, but there is also truth in the fact that ordinary layman-investor can beat the professional money managers and the statement that “the stock market is best left to the professionals” is simply a myth.
To be continued…
Zigfred Diaz is a registered financial planner of RFP Philippines from Cebu City.
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