For those of you who do not know, the title refers to a book which exposes the folly and hypocrisy of Wall Street. The title refers to a story about a visitor to New York who admired the yachts of the bankers and brokers. Naively, he asked where all the customers’ yachts were? Of course, none of the customers could afford yachts, even though they follow the advice of their bankers and brokers.
Although the book is not recent, history does repeat itself, especially in the stock market community. And in these days, when more and more people are tempted to invest, it is more important to take a hard look and ask for yourself “Where are the customers’ yachts?”.
I like to call brokers and financial analysts fortune tellers. I think most rational people don’t take investment decisions according to a fortune teller’s advice. The question that arises though is, why would you listen to a broker or a financial analyst when it seems they are making most of the money and not you? The answer I think lies in the fact that they hide behind their technical jargon. People think that because they speak with such high words they don’t understand, it means they know what they are doing. Nothing could be further from the truth though.
In all recent studies, when analysts recommendation is compared with actual historical prices, they always fall short. Always. The fact that you should alway keep in mind is that you can’t predict the future. There are so many variables to consider which makes predicting the future movement of a stock impossible. Especially if the time line is very big. This doesn’t mean you can’t predict relatively short term movements, but that is another story. And probably if you can, most people can and therefore you would not make any money out of it anyway.
What do I recommend then? I always tell people it’s best to bet on the market index. Just put the money on an index fund. An index fund, for those who do not know, is a fund which mimics a well known index. This means you could put your money on an index fund which mimics the movement of the S&P500. If the S&P500 rises by 2%, so is the index fund and vice versa.
The good thing about buying an index fund, is the low commission cost. That is because the simple fact that there is no predicting involved and no need to hire financial analysts since this is passive investment. Before index funds, you needed to buy the S&P 500 and change it dynamically which was not that practical for the public. Index funds solved that problem.
Another point to remember is that over the long run, investing in the S&P500 was more profitable than any other investment. So for you, the long run investor, it is better to just buy the index and wait and not try to time the market by getting in and out and lose money by trying to predict the future.
Wall Street’s reputation was built by stories of fast riches. The problem is that the ones who got rich were the broker and investment companies usually, not the investor. So next time ask yourself, “Where are the customers’ yachts?”
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