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[Regards to Ariella for inspiring this article thanks to her comment on my guest post at BudgetsAreSexy.com.]
How many times have you heard someone say that stocks are risky? That starting your own business is risky? That the markets are risky? That driving a station wagon without a helmet is risky?
Safety First!
How many times have you said these things yourself?
Because I have heard these very same phrases used more than Martha Stewart’s vacuum cleaner and I, to be completely honest, am sick and tired of hearing these made-up assumptions be passed around as fact faster than a toke at a college party.
I, being the amazing maverick of all things finance that I am, have decided to abdicate the bad name associated with investments once and for all.
No investment is inherently risky. It is the investor that makes the investment risky.
No doubt most of you reading this will agree with the phrase “guns don’t kill people, people kill people.” Well, the exact same story applies to investments.
On its lonesome, a gun is just a concoction of iron and springs with some fancy doo-hickeys that make loud sounds. In the hands of a maniac (see: myself) or a careless, irresponsible person (see: myself) a gun suddenly becomes a very dangerous object which has the power to cause mass destruction. On the other hand, if in the hands of someone that is responsible (see: not me) and in a sound mental state (see: definitely not me) then the gun suddenly becomes a tool which has the power to either save lives or to feed a family (at the expense of a poor deer, moose and/or racoon).
On its lonesome, an investment, let’s use stock as an example, simply represents a piece of ownership of a company. In the hands of an irrational and careless person, an investment in a stock suddenly becomes a breeding ground for poverty, despair and extreme bouts of anger resulting in keyboards snapped in half, computer monitors forever embedded in walls and mouse cords wrapped around the necks of former family members. On the other hand, if in the hands of a rational person who researches his/her investments diligently and follows a logical stock-picking system developed through research, experience and a bit of clever thinking, an investment in a stock suddenly gains the potential to make you enough money to afford an army of albino chimpanzees (if that’s your thing).
Of course investing in the stock market is slightly more complicated than simply pulling a trigger but the concept remains the same – risk comes from not knowing what you are doing!
The main reason people lose all their money in investments is due to the sole reason that they don’t know what they are doing. Before you use the example of tough economic times, I must remind you that there are always opportunities to make big fat moneybags no matter how dire the situation may seem – you’d be surprised as to how much money you can make off of people by making them feel safe in a “disastrous” economic climate or by utilizing options, shorts or just by cleverly managing your stocks if you go through the route of the stock market.
So, why does being ignorant create risk? Well, there are a few reasons.
Ignorance = Uncertainty = Fear = Irrationality = Risk
- If you don’t know what you are doing then you are uncertain. Uncertainty creates fear and fear creates irrationality. That’s the reason you see people buying yachts with their credit cards when the markets are going up and why they start to build fallout shelters when the markets drop a few points. Acting like this will get you closer to a soup kitchen than anywhere else.
- Not knowing what you are doing means you make stupid investment decisions without understanding they are stupid in the first place…such as all the people who invested into Enron, AIG, General Motors and/or their brother’s ostrich farm among a gazillion other examples.
- Ignorance creates ridiculous expectations. For instance, when people ask me what I can turn their pathetic wad of cash into if they invest their money into The BAG Fund, I state my rate of return (151% as of this writing)…only to be returned with huffing and puffing and calling the stock market stupid and a waste of time because of its tiny potential. Did they care to consider my returns are beating 99% of my competition? Not really. A perfect example of ridiculous expectations.
On the other hand if you know what you are doing, then you will never find yourself panicking or losing money – unless of course it turns out that you didn’t really know what you were doing after all. For instance, if you know a stock is worth $50 and you buy it for $10, you’re not going to care if it drops all the way down to $1 because you are certain that it will rise all the way back up to its true worth (referred to as intrinsic value). In fact, instead of panicking and searching for people in need of kidney transplants to sell your kidneys to in order to hedge your stock market losses, you will simply buy more of that stock – now that’s thinking like a true investor!
Don't let this be you...or do...then I can laugh at you
If you find yourself having a hard time understanding all of this stock market stuff, I would highly recommend you hobble on over to this page here and download my free eBook introducing the stock market.
So, how do you combat ignorance-induced risk (a.k.a. all risk)? Invest only in what you know and understand.
That’s precisely why I don’t invest into banking stocks nor into commodities (such as gold and oil). I simply do not understand them well enough and would be risking my money as a result of my ignorance.
And don’t give me any of that crap about dubious companies (i.e. Enron) or scheming fund managers (i.e. Madoff). Any moron that read Enron’s annual reports could have seen that not everything was kosher and just by looking at Madoff’s spotless, incredibly steady track record of gains should have raised some eyebrows. The investors of these institutions were simply too busy counting their cash to care enough to investigate further.
Making use of all this new information
So, there’s a good chance you’re sitting there right now, scratching your head with your mouth gaping open and your shirt covered in drool. That’s a lot of information to grasp so quickly I’m sure, but how are you possibly going to make this information work for you?
That is why I, the amazing Mr. Moneybags, have concocted the ultimate machine that will lead you to financial bliss. I call it:
Mr. Moneybags’ Amazing Chart Explaining The Differences Between a Successful Investor With a Low-Risk Margin and an Idiot Investor Who Will End Up Scraping Road Kill For a Living To Make Up For Irresponsibly Investing His Or Her Money.
| The Moron Investor | The Rich Investor |
| Research consists of overhearing two homeless people on the subway discussing a hot new stock while fighting over a piece of steak | Researches his/her investments by reading annual reports, studying financial statements, analyzing competitors and following market news. |
| Buys high, sells low | Buys low, sells high |
| Panics and prepares to sell his organs to black market dealers when the markets go down a few points and jumps for joy and starts buying everything in sight when they are going up. | Doesn’t care about short-term fluctuations because the real and safe profits are made by investing with a long-term perspective |
| Over-diversifies her holdings to ridiculous extents | Knows that diversification leads to diluting the effects of your greatest winners [For those that say diversification is a vital hedge against risk: Remember what I said about risk coming from not knowing what you are doing/lack of research?] |
| Follows the advice of “professionals” | Knows that most professionals’ stock picks can’t even keep up with the flow of the markets |
| Buys hot and popular stocks that everyone else is buying despite the company’s fundamentals or intrinsic value | Buys forgotten or unpopular stocks that everyone is selling knowing that people are irrationally [over-]selling them |
| Has no clear plan of what to do with his investment | Knows when he is going to sell the investment before buying it |
| Invests emotionally (a.k.a. irrationally) | Takes advantage of the mishaps of irrational/emotional investors |
| Loses money | Makes money |
| Should re-read this chart seventeen more times | Shares this post with everyone he/she knows |
Here are some very handy articles to help you get started on your transformation from Moron Investor to the bliss of Rich Investor:
- How to Read an Income Statement
- Welcome to the Stock Market! (free eBook)
- Constructing Your Own Stock Portfolio
- Choosing an Online Brokerage
- The Ten Percent Rule
Some random posts you might enjoy:
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You are most gracious, Mr. Moneybags. I do appreciate that. Your chart name is rather long, though, don’t you think? Can we call it “The moron investor vs. the successful investor” for short?
the BUY/SELL cartoon was…wow. i was actually wondering why you don’t invest into commodity stocks, now i know! sweet article mm
Ariella, I kind of liked the long chart name, sized up what was in it quite perfectly heh. The “taking advantage of irrational people” thing is pretty harsh though, gotta make money somehow though right?
Ariella: Yes, I’m cool like that, always give credit when it’s due. Plus, having someone be forever grateful to you is a pretty sweet bargaining chip.
tttt: Too much to do with toxic assets and unknown depositories and all that other shenanigans that no one other than banking representatives or oil drillers will ever understand.
johnny: The thing is, those people dug themselves into a ditch and would have done so regardless if you had come along or not. What I may write in my writings may sound a tad more harsh than it may seem in reality, but all I am really saying is take advantage of market run-ups and downturns. Regardless of your actions or lack thereof, the markets will move and they will move irrationally – so might as well put them to good use!
Ya thats right if your hanging around people who are lazy and just bad people your going to become that. I grew up in a pretty hard family. I had to get out of that situation so i could grow. Remember dont let anything stand in your way of reaching the top.
I usually don’t post in Blogs but your blog forced me to, amazing work.. beautiful …
Your blog is so informative … keep up the good work!!!!