I recently had the opportunity to read an excellent book by Spencer Jakab, now Deputy Editor of Heard on the Street at The Wall Street Journal. Mr. Jakab's former experience and insight as a top-rated stock analyst with Credit Suisse offer investors a rare and interesting look inside Wall Street and the lessons he's willing to share with investors. These are excerpts:
Thank you, Mr. Jakab!We're handicapped by an industry with multimillion-dollar marketing budgets and an eye on its own bottom line, not yours.
Unless you are very handy, you probably don't know how to fix your own car or refrigerator--but most Americans are expected to be part-time fund managers.
Fear, greed, naivete, bad advice and even the cost of sound advice combine to whittle away the pot of money we should earn after a lifetime of saving relative to what we could have amassed.
Most people think they can (beat the market), but few can.
The more passive your approach to investing, the greater the likelihood your results will match the market return.
John Bogle, the father of index funds, says, "Don't just do something , stand there." It can't be repeated enough and is the first, easiest, and most productive step out of Lake Moneybegone.
Markets are a little like a rubber band -- the more stretched they get, the likelier they are to snap back in the other direction.
I would say that there's only a fine line between market timing and astrology.
As for the majority of downturns, the time to sell is never.
The most interesting and hopeful statistic about downturns, particularly sharp ones, is how strong the rebound can be.
The simplest remedy for sleeping well at night, and a prudent step on its own, is to have a mix of lower-risk assets like bonds alongside stocks.
The typical lottery winner blows through his or her winnings within seven years.
For most people reading this, a low-cost target date fund may be the best bet.
Stocks are the only market where people run away when there's a sale and line up at the door when prices have just doubled or tripled.
The amount of money Americans spend on forecasting has been estimated to be as high as $300 billion annually, much of it for choosing investments.
I used to be in the fortune-telling business myself and made a nice living out of it.
Zacks Investment Research looked at recommendations for stocks in the S&P 500 in late 2000, and found that of eight thousand recommendations, only twenty-nine were sells (Vanguard 500 Index Fund plunged -51% in the 2008-2009 bear market).
Performance data take only the average of surviving funds. While it isn't a conspiracy, studies have shown that published industry returns would be over a percentage point lower if vanished funds were included.
Numerous studies have come to the same conclusion: You get what you don't pay for. Costs are an almost perfect predictor of performance.
It's nearly impossible to pick consistently superior managers.
Most investors, probably including you, should be tickled pink to earn an average return.
Seven habits of ineffective investors:
1. Get in on that hot new deal
2. Combine your morals and your money
3. Buy what's fashionable
4. Reach for yield
5. Use exotic product to enhance your returns
6. Trade frequently
7. Use a "system"
The obvious reason for avoiding the temptation to peek is that you're likely to do more than just look, and activity is costly.
Pay as little as possible and do as little as possible to make sure your nest egg grows. My recommended vehicle for doing that has been low-cost index funds -- the cheaper the better.
There have been periods exceeding ten years when, even with dividends, U.S. stocks showed paper losses.
Fear and greed trump theory and logic.
Someone who tries to sell you a complicated annuity, non-term life insurance policy, or unsuitable investments such as an unlisted real estate investment trust or pooled commodity account should throw up red flags.
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