A few months ago I had a conversation through text with a friend. It went something like this:
Friend: Hey, Jared! I’ve got some extra money lying around and I’m trying to decide what I want to do with it. I’m thinking about investing it and I’ve been reading about stock trading. Do you have any recommendations for books or other resources?
Me: STOP WHAT YOU ARE DOING AND CAREFULLY FOLLOW THESE INSTRUCTIONS:
Jared’s 5-step process for learning about stock-trading:
1 – Put the books about stock trading in the garbage.
2 – Pour lighter fluid on them.
3 – Strike a match.
4 – Throw match into garbage.
5 – Watch books burn and know you made the correct decision.
Please let me know if any part of this is unclear!
Ok, so maybe it wasn’t exactly that, but I think you get my point! haha
My actual response was that I could give her some great suggestions for where she could learn more about the fundamentals of investing, but that she should not get sucked into the world of stock-trading. It’s a crap-shoot, and it’s designed to entice would-be investors to buy products that promise them riches, but do little to actually help grow wealth.
If she was truly interested in growing wealth, there are better ways!
A SAD STORY ABOUT STOCK TRADING
The moment I read my friend’s text I immediately had a flashback to an experience with the negative affects stock-trading can have on people.
(For reasons that will be obvious after you read this, the details of this story will be vague, and no actual person’s names will be used…)
A few years ago, I was at a BBQ with friends, and I was meeting a lot of the people there for the first time.
At one point, I noticed two individuals over in the corner by a computer having what looked like a pretty in-depth conversation.
One of my friends told me that it was a father and son. The father was teaching the son how to trade stocks online.
When I heard this I immediately thought to myself, “That doesn’t sound like a good idea.”
I had already read a vast number of books about investing from some of the great minds in the space; Warren Buffet, Peter Lynch, Robert Kiyosaki, Nassim Taleb, and many more. Not one of them ever recommended that I should take up stock-trading as a way to have success in investing and growing wealth.
Seeing as this was my first time meeting everyone, I didn’t feel it was my place to cast doubt on what they were doing. So, I kept my mouth shut and proceeded to enjoy the BBQ.
Flashforward a year and a half – my friend gets an emotional call from her friend detailing the previous week.
The family had found a suicide note from the father explaining how he had lost all of the family’s assets trying to trade stocks online. He had taken out a mortgage on the house (that they had previously paid off) in order to earn back the money he had already lost, but lost that as well, and now they were going to lose the house. He wrote that he was sorry for what he had done, but couldn’t bear to live with himself.
When I heard this, my heart skipped a beat.
I was hit with a twinge of guilt for not having said something, even though it probably wouldn’t have done much (I hope).
But now that my friend was texting me, asking me about advice on trading stocks, I wouldn’t make the same mistake of keeping silent.
WHY INVESTING IS AN UPHILL BATTLE
This story is obviously an extreme example, but it’s more common than you might think.
Too many people are getting lured into the siren’s song of investing, hoping that it can make up for their inability to rein in their poor spending/saving habits.
The big secret that most of the advertisements about stock-trading are hiding from you is that even the “experts” get it wrong most of the time.
In study after study, the numbers show that the vast majority of the very best investment companies continue to underperform expectations.
A Few Stats:
-In a study by S&P Dow Jones Indices, they found that 98.9% of US Equity Mutual Funds underperformed over the past 10 years (end of 2015).
-The same study by S&P Dow Jones Indices found that 97% of emerging market funds and 97.8% of global equity funds underperformed.
-In a study by the Wall Street Journal, they found that only 10% of active Mutual Funds rated 5-stars by Morningstar maintained their high rating over the subsequent 5 years. So, even the highly rated funds have a low chance of staying highly rated!
Even for the best and brightest, investing is an uphill battle!
INVESTING IS JUST GLORIFIED GAMBLING (most of the time)
Also, let’s tear down the façade of investing being an elite endeavor. After all, when you really think about it, investing is just a glorified way to gamble with your money.
Yes, for the very top minds, there is a ton of research that goes into it that helps them increase their odds of success. But at the end of the day, there are so many variables and factors that you can’t account for, and chance plays a role.
What’s interesting is that the very best investors have typically implemented a long-term approach to investing.
If you look to none other than Warren Buffett, famed investor and chairman and CEO of Berkshire Hathaway, he has said the following about their investment process:
“The hallmark of our investment process is benign neglect, bordering on sloth.” – Warren Buffett
He isn’t saying neglect in the sense that they haven’t done enormous amounts of research before investing in something, or that they don’t pay attention after having invested. What he is saying is that they have the patience to let their investments play out over time.
When people are day-trading stocks, there is less and less research that goes into the lead-up to their investing. This makes what they are doing even more like gambling!
And to make matters worse, when you’re engaging in activities like this, you get the same adrenaline rush you do when playing a hand of Blackjack at a casino. It becomes addicting, and, well, you read earlier where it can lead…
WHY YOU SHOULD KNOW YOUR “WHY” BEFORE INVESTING
A while back I wrote a piece titled “The Most Important Thing To Know Before You Invest” where I laid out the importance understanding the purpose of your investments, and why you are investing, before you even beginning.
The reason for this is if you get involved with something without understanding why, you can easily be led off-course. After all, you don’t even have a course; you never planned it out!
For the father in the story, what was the purpose of getting into stock trading?
It couldn’t have been because they needed to amass more money – they were already retired. So, we have to assume they had enough to retire in the first place.
Most likely, he got into it out of boredom, as so many do.
BETTER WAYS TO AMASS WEALTH
If you are someone like my friend who texted me about investing, then you are probably looking to grow some wealth.
I’ll tell you the same thing I told her. There are much better ways to do this than to trade stocks on a daily basis.
Ways To Build Wealth:
I’m a big advocate of investing in real estate to build wealth. It is an industry that has a proven track record, and it is one where you can have much more control over the outcome.
To learn more about this area of wealth-generation, read these articles:
Start A Business
Easier said than done, I know – believe me. But the statistics don’t lie, and being a small business owner is one of the best ways to amass wealth.
In fact, in the famous personal finance book The Millionaire Next Door, they found that “self-employed people make up less than 20 percent of the workers in America but account for two-thirds of the millionaires.”
Something to consider.
This is a rapidly growing industry with low barriers to entry.
Behemoths like Amazon.com are the clear leaders, but even as ubiquitous as it already seems, E-commerce makes up less than 10% of all sales.
There is A LOT of growth ahead!
Garage Sale Hunting, And Other Online Marketplaces
Those who have taken his advice have seen amazing results, with story after story pouring in about people earning over $1,000/week in extra money by simply going to garage sales, buying stuff, and immediately flipping it online for a profit.
Some outlier stories have come in about people earning over $500,000/year using some of his strategies.
FILL YOUR TIME WITH THE RIGHT WEALTH-BUILDING STRATEGIES
There are many ways to grow wealth, and many things to do to fill your time.
For me, stock trading is VERY LOW in the rankings (probably at the bottom) of things I’d recommend for either.
If you are serious about growing wealth, explore one of the areas I listed before, or one of the many industries I didn’t.
But if you are just bored and trying to fill time, do yourself and your loved ones a favor: Either go find a better hobby, donate your time to a good cause, or just go buy a dog to play with and take care of.