Thoughts for beginners part 4: Read everything, formulate your own opinion
I am more of a macro investor than individual stocks...not the best with those. I remember there were a bunch of questions that I had that confused me when I was brand new. A handful of CAPS players got me to where I am today, so I am offering my opinion on a few misconceptions. There will probably be about 10 of these blogs over the course of a few weeks.
For part four I want to focus on why it is important to do a lot of reading, and why it is very important to formulate your own opinion.
If everybody had the same opinion on stocks, the market would not move...everybody would agree on the same price. There are bears on TV at all times, bulls on TVs at all times, and analysts covering thousands of stocks with both buy and sell ratings.
How can these guys manage so much money and seem so educated and make it on TV, yet 80% of them underperform the market? It is simple math. Everybody has an opinion, but not everybody can outperform. How could people as a whole outperform themselves? It is logically impossible. So if you know 80% of fund managers underperform, and it is only that 20% that you should listen to, you should already see why it is important to formulate your own opinion when if you read a random article it is 80% of the time going to do worse than the S&P 500.
Readon number 2: You don't know the intentions. Sometimes a fund manager will be short the market as it is rising. He is then underwater. He needs to get on CNBC and spook people into selling so that he isn't losing. Or, conversely, a fund manager may also have not bought stocks as they were rising, and is missing out on all the gains, and tries to scare the market back down so he can get in at a cheaper level. This is very important and yet another reason to formulate your own opinion. Or an analyst may issue a buy ranking because that cimpany gives a lot of business to its investment banking side. Its illegal, but it happens.
Reason 3: An analyst may tell you when to buy, but they may not ocme on TV and tell you when to sell until a few weeks after you should have sold. If you dont know why you bought, you wont know when to sell.
Those are my main reasonings why I think it is so important to have your own opinion. If you don't have an opinion, buy MDY or SPY instead of paying a mutual fund a 3% load just to underperform those two.
I also think it is very important to read as miuch as you can. If you read history of business cycles and ecomomics it is easier to see something unfolding that many others might not see. If you read many fundamental and techncial books you can learn new methods. If you read a lot of analysis or blogs you might find a flaw in your existing thinking that needs change. Don't just read investing literature though, read everything...history, math, science, psychology, etc. It keeps you sharp and you never know when you will uncover something that has a striking similarity to the stock market. Reading psychology books has taught me more about investing patterns than anything I have read from Ben Graham.
More to come in a few days, I hope some of this is helpful.