Stock Market Investment Advice: Beware Wall Street’s “Tower of Babble”
by Alexander Green, Chairman, Investment U
Investment Director, The Oxford Club
Monday, July 14, 2008: Issue # 820
The original Tower of Babel was an enormous structure intended as the crowning achievement of the ancient city of Babylon. According to the Book of Genesis, when Yahweh discovered that it was not built for his praise and worship, he scattered the citizens of Babylon throughout the earth, confusing their languages.
Today the “Tower of Babble” is not located in Babylon but rather on Wall Street. That’s where economists and analysts put on a serious air and explain their own stock market investment advice to us plebes what is about to happen with:
- The economy
- Currencies
- Interest rates
- Commodity prices
- And the stock market
Except, as George and Ira Gershwin observed 70 years ago, “It ain’t necessarily so.”
Stock Market Investment Advice - A Perfect Correlation
In my experience, there is an almost perfect correlation between the specificity of an analyst’s forecasts and the chances that he is giving useless or, worse, dangerous stock market investment advice.
For example:
- A stock analyst may say, “The market is oversold here. We’re due for an intermediate-term rally.” Translation: Here’s my best guess.
- If he says something like, “The market has broken through its 50-day moving average and will begin testing new lows this week.”
Translation: Here’s what I get when I read my tea leaves, deal my tarot cards, and gaze into my magic 8-ball. - But if the stock analyst says, “Expect the S&P to hit 1,210 before rebounding to 1,350 and then finding support at 1,970,” run.
Translation: I should be wearing a sandwich board that says, “I haven’t the foggiest notion what I’m talking about.”
Investors Wise-Up To Foggy Stock Market Investment Advice
Investors are getting wise to this game of unclear stock market investment advice. A recent survey by the AARP found that:
- Half of Americans over 50 think Wall Street uses a lot of technical jargon to make consumers feel less confident about handling their own finances.
- 50% also believe financial-service professionals use obscure terms to distract people from the fees they will be paying.
- Nearly two-thirds believe they use them “to make a product or service seem more impressive.”
These findings may or may not be true, depending on your advisor. Any financial services representative worth his salt will take the time to explain his stock market invesment advice in plain English with his fee schedule fully disclosed. If yours won’t, find someone who will.
Understanding Basic Stock Market Investing Terminology
However, the AARP survey also found that that a lot of basic stock market investing terminology is still not understood by most Americans over the age of 50.
Sure 73% of us know what a rollover is. And 81% understand the term commission. (Who the heck are the other 19%?)
- But only 32% are familiar with the term “diversification.” I hope it’s just the term these folks don’t know and not the practice. Because if they’re not spreading their portfolio risk around, they may end up taking a serious financial hit. (Ask anyone who used to work for Enron.)
- Only 31% understand the concept of dollar-cost averaging. This refers to the wealth accumulation strategy of investing a fixed amount of money at regular intervals. Because the dollar amount remains constant, it means you’re always buying more shares when prices are low and less shares when prices are high. (Never a bad idea.)
- Only 29% of Americans understand the term “expense ratio.” This term refers to the percentage of your investment in a mutual fund that is eaten up each year by operating costs, marketing fees, commissions and other costs. It’s a good number to know. All things being equal, the lower your costs, the higher your net returns.
In short, blame your advisor if you think he’s using investment jargon to bamboozle you. But blame yourself if you haven’t familiarized yourself with basic terminology. That can lead to expensive mistakes. And the older you get, the harder it is to make up for them.
As Benjamin Franklin warned a couple of centuries ago, “Experience keeps a dear school, but fools will learn in no other.”
Good investing,
Alex
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Today’s Investment U Crib Sheet
Understanding the historical movement of the markets can help cut through the smokescreen of financial doublespeak.
- Over the past 100 years, the stock market has produced an annualized return of over 10%. Adjusting for inflation, the worst-case annual stock market return was -38.6%, while the best one-year return was 66.6%.
- The average length of a bear market is 18.5 months, while an average bull market is 45.3 months. The average downturn of a bear market is 36%. It’s still debated whether we’ve hit the definition of a bear market, but Warren Buffett believes we’re already there. Read more about this in Investment U Issue #801, Warren Buffet Investing: Welcome to the Oracle of Omaha’s “Long, Deep Recession”
- Arming yourself with as much information as possible allows you to have the best vantage point when investing. To go “back to school,” or to get a refresher on many of today’s topics, we suggest reading through the Investment U archives - your source for relevant, straight to the point stock market investment advice.
Related Articles:
- MITTS Investments: The Only “Can’t Lose” Stock Market Investment on Earth
- Stock Market Investment Advice: “The Two Most Profitable Secrets of the World’s Greatest Investors”
- The Dodge and Cox Stock Fund: Get into this Mutual Fund Before it Closes Again
