I love stocks, but they don’t always love me

By Slow Dad - October 20, 2016

Read why I've come to accept Bogle and Buffet were right, over the long term low cost index tracker funds will perform better than stock picking.

I'm a stock picking genius!

My year 11 Accounting teacher taught us the basics of stock market investing and oversaw a shadow trading competition.

Shadow trading taught me how to read the stock price tables in the newspaper. The Economics course I was also studying at the time taught us to consider the political and economic events of the days, and apply those to the likely fortunes of the various companies listed on the stock market.

I was thrilled to eventually win this competition, though I must concede this was down to good luck picking “penny dreadful” stocks rather than any great skill at investing.

Shadow trading.

I was hooked.

I was arrogant.

I was convinced I was smarter than the majority of people in the market, and would have little trouble making a fortune by picking stocks on the rise.

I devoured all the stock investing books at the local library, determined to learn all I could about stock market investing. I religiously read the financial section of the daily newspapers.

I worked my way through a technical investment course. I suspected that trying to pick winners without giving any thought to the actual company itself, its products, markets, and competitors was simply guessing. By the end of the course I concluded attempting to divine patterns in stock price charts was bullshit, as the patterns could only be assessed in hindsight.

I made my first foray into the stock market just after I had turned 18, and was now legally allowed to own shares.

You win some...

Over my investing career I have backed some big winners: Amazon, Apple, Berkshire Hathaway, CSL, and Google.

Amazon logo Apple logo Berkshire Hathaway logo CSL Logo Google logo
The majority of my investments have done ok without being spectacularly successful.

... you lose some more

I also backed some disasters: ABC Learning, Babcock & Brown, Enron, and Worldcom.

ABC Learning Logo
Babcock & Brown logo Enron logoWorldcom logo
From these failures I learned a valuable lesson: if a company is frequently written up in investment publications, don't invest in it!

if a company is frequently written up in investment publications, don't invest in it!

Bankers are crooks! Who knew?!?

Some years after making my first investment I spent a year working in the research analysis division of a large investment bank. It was an eye opening experience.

I learned that large institutions make their own markets. Research analysts herd punters in one direction, while their colleagues make money trading against the herd.

I learned newspapers contain yesterday’s news, already priced into the market long before amateur investors hear the news.

I came to suspect that stock market investing isn’t played on a level playing field.

A couple of years later a former year 11 Economics class mate established a high frequency trading firm that made a fortune opening and closing trading positions faster than humans could react.

My suspicions were confirmed.

If the benefits of the crime outweigh the punishment, wouldn't you commit?

More recently I worked with a financial regulator client. There I learned about creative accounting, market manipulation, and “risk based compliance” where firms weigh the likely penalties of noncompliance against the likely profits and then decide to just pay the fine should they get caught.

I've come to accept Bogle and Buffet’s were right, and buying low cost index tracker funds is more likely to prove successful over the long term than stock picking.

So what?

I am still fairly sure I am smarter than the majority of people in the market.

I know for certain I can’t make a fortune picking stocks.

The video below shows a speech Warren Buffet gave about the benefits of passive index investing, watch from 2:42:20 for 7 minutes.

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