“Thoughtful chartists admit that continued success is dependent upon keeping the successful method known to only a few people.” -Benjamin Graham in Security Analysis
In other words, if somebody knew a surefire way to beat the market, he wouldn’t tell you. The reasoning is simple: The more people there are following a given strategy, the less profitable it becomes.
Example: If you knew of a way to systematically identify undervalued stocks, would you tell anyone? I wouldn’t. As soon as word of the method got out, it would no longer work because enough people would be buying these stocks that they would no longer be undervalued.
The very fact that somebody is sharing their “market beating strategy” tells us one of two things:
First possibility:
They’re consciously manipulating you into doing something that will benefit them rather than you. For example, they might already own the “hot stock” they’re recommending and are just looking for others to buy it to bump up the price.
Of course, given the dubious legal standing of such a strategy, this probably isn’t too common.
Second (more likely) possibility:
They recognize that there’s more money to be made in selling the advice than in actually following it.
Example: Let’s say you attempt a particularly high-risk options strategy, and–luckily enough–it works out well for you. You make a ton of money (though not enough to retire on). What do you do next?
Of course, you could try and repeat that success. But you know that, in reality, you just got lucky. And there’s no guarantee you could do it again.
So what can you do to capitalize on your success without having to risk your money? Easy: Write a book about it! Just be sure not to mention that luck played a role in your success. 
My Investment Suggestion:
In investing–as in many fields– a healthy dose of skepticism goes a long way. Better to stick with time-tested investment strategies that you know and understand rather than take the word of somebody promising an easy way to beat the market.
MoneyNing’s Thoughts on People Offering Financial Advice
While I totally agree with Mike (the author) that many people offer investment advice because of financial reasons, I don’t see the world quite so dark. In reality, there are many people who is willing to go on TV and talk about investment because:
Fame – How many people would say no if CNBC or CNN offered us to go on National TV to talk about what we do on a daily basis? If you live and breath stocks, get on live TV and the commentator asks what you for stock recommendations, wouldn’t you want to be remembered as someone who got an investment right?
Boredom – Most people lose money in the stock market, but there are many others who made a fortune by investing. Whether it’s by luck or not, the success eventually become numbs. Offering advice is just another way to add variety.
Genuinely Believe He/She can Help – These might be the minority but there are people who really want to help, just like there are philanthropists in the world who just want to donate.
I’m not saying that there are no crooks out there. In fact, I believe there are more of them out there than most do but on the other hand, there are good people out there too. Whether you see it or not, the sun exists every second of every day.
This is a guest post from Mike along with my thoughts. If you like this article, please consider signing up to get free daily updates from his site, The Oblivious Investor.
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{ 7 comments… read them below or add one }
Ah, fame… Great point there! Hehe.
And yeah, I’m sure I come off as a bit cynical at times. I’m honestly not as cynical as my writing might seem. I just feel that the “Sure! Beating the market is easy!” and “Here’s how to get rich quick!” side of the argument gets overplayed, and people need to be reminded that:
a) It’s not as easy as it looks, and
b) You don’t have to beat the market to be a successful investor.
Oblivious Investor: I don’t feel that you are a cynical person at all. From my interactions with you, I actually feel a sense of happiness and optimism (which is great btw).
You are doing great in promoting index funds, since I truly believe it’s the best solution for most of us. Picking stocks is not for 99% of people since it requires too much research and time as well as discipline. If anything, ETFs are almost as far as most people should go.
I went and visited his site and left a long comment. I don’t want to type it all over again, so ya’ll have to go over there and read it.
I also subscribed. A friend of David, is a friend of mine.
Happy Friday.
cd :O)
I think the obvious comparison is to the recent controversy raised by Jon Stewart on the Daily Show regarding CNBC and Jim Cramer fueling the bull market sentiment leading up to the collapse of the housing and financial industry markets. The interview is particularly scathing. Stewart seems to side more with the “First Possibility” of giving bad advice to help their own interests. I’ve also heard of people creating hyperinflation fears in order to raise the price of gold, they themselves holding substantial gold investments.
My advice is not to take any financial advice at face value, and constantly search out the contrarians’ perspectives.
Actually, there is a sure fire method of beating the market. Believe me, or no, I consistently do it. Check out Rule #1 Investing by Phil Town. The real problem is most people lack the required discipline to stick to their methodology consistently enough to be successful. Not that I think you should take my word for it – check it out. I found the book in my local library. He also has a blog online. Successful people like to tell you how they became successful. Proprietary mumble jumble is for people whose methods won’t stand the test of scrutiny. As for the financial services industry, they need us to buy and hold so they can collect their fees and commissions! Not that my prediction is based on Town’s work, but based on what I have learned over the last twenty years, or so, just beware, this market still stands a better than even chance of another bigger correction in the next year or so. I hope I am wrong, but if not, be careful!
I agree with the point made by ObliviousInvestor that ‘You don’t have to beat the market to be a successful investor’. I think that is quite well said, since the market may not be returning 20% yearly, but prudent investing over a long horizon, especially for young people, can definitely help in building that retirement nest. Why risk your entirement retirement fund to a so-called hot tip or chasing that latest investment strategy? So many people have ended up with nothing doing that.
I have never hired a financial planner. I have taught myself a lot of what I knowabout investing. If/when that times come you can bet I will ask for references. I want an advisor who is knowledgeable and willing to teach about investment choices. I have no doubt there are some bad ones out there.