How NOT to Invest Your Money

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Take it from a business journalist: Don’t listen to stock tips from business journalists. Also, don’t invest like an average Joe (or Jane).

Mark Gimein, a columnist at The Big Money, bravely comes clean about something we all should have suspected:

Reporters make bad stock pickers, and I’m no exception. Very rarely have I had the temerity to actually recommend a specific stock. When I have a stock idea, I almost never put it in a story. There is a good reason for this: Usually I am wrong.

Journalists are storytellers. They get by excited by new ideas and innovation. But as to how an interesting back story about a CEO or how some new product translates to a company’s long-term profits or stock prices? Most writers don’t go there, and shouldn’t go there. Why? They don’t know what they’re talking about. Gimein writes:

Even harder is quantifying the effects of innovation. What will be the effect of a new product on a company’s bottom line? That most often lies beyond what reporters write. Reporters who write about technology are rarely willing to turn that into stock picking, because telling folks what’s a great idea and what will be a profitable one are quite different endeavors. The impulse of reporters who write about ideas is to talk about the value of the ideas, not guess at how much money they will bring in.

Journalists also tend to be logical—or at least sound logical in what they’re writing. But that’s not necessarily a good approach to picking stocks either.

Reporters don’t like companies whose earnings don’t justify their share price. Surely at some point logic must take hold and the share price will fall, right?

When it comes to investing in new technologies and ideas, though, the logic of value investing doesn’t hold.

If following the conventional wisdom led to wealth, then we’d all be rich—which is sorta impossible, because there have to be winners and losers. Personal Finance Ninja plainly lists a few reasons why the average Joe is a bad investor. It comes down to:

The average investor follows the crowd, buying as the market rises, selling as the market tanks, and trading frequently throughout the rise and fall. You obviously won’t make money buying high and selling low. Also, it’s extremely difficult to earn money if you’re not going to hold onto any investments for the long haul.

The average investor buys stocks of companies that make products he or she likes. The truth is that the success or failure of a product may have no lasting effect on a company’s stock. PFN quotes Warren Buffett: “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

One of the more attention-grabbing takes on investing comes in the form of a new book, The Poker Face of Wall Street, by Aaron Brown. The book explains how the abilities to weigh risk and assess your opponents—which you need to be a great poker player—can also make you a great investor.

And yes, you will lose in both of those spheres by getting too greedy, by letting emotions get in the way of sound decision making, and by just taking risks that are plain foolish. But the part of the metaphor that novice investors should really take to heart is: When it comes to gambling, the house always wins. Sometimes, a player is emboldened by early easy winnings, but that doesn’t mean there will be long-term gains. The vast majority of people will leave the tables as losers.

So where should you invest your money? Don’t ask me. I’m a journalist.

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