by Dan Burrows | March 19, 2014 8:42 am
Some people say there’s no such thing as a stupid question. Others say there are no stupid questions, only stupid people.
The latter is straight-up arrogant — if you don’t ask questions, how are you supposed to learn anything? — and the first one is flat-out untrue. Stupid questions do exist, and we in the media ask them all the time.
Sometimes it’s for the audience, sometimes it’s for our own egos, but the questions are stupid nonetheless because they’ve already been answered. Many times.
Stupid questions are also stupid because they indicate that the person asking them doesn’t really know what he or she is talking about. They either reveal a dangerous ignorance or a failure to grasp the most basic concepts of investing, like diversification and risk vs. return.
There are plenty of stupid questions, and they pop up depending on what the market or economy is doing. Indeed, there are too many to count. But, for the sake of brevity, here are five stupid questions you’ve probably heard recently, and that you should just ignore.
Asking about the Dow Jones Industrial Average is doubly stupid.
First — and most importantly — unless you’re a professional, watching the market on a day-to-day basis is a stupid idea. It only increases the risk that you’ll do something emotional with your money or rack up fees by trading too much.
Secondly, the Dow Jones serves as a shorthand for U.S. stock performance only for amateurs who don’t really know what they’re talking about. When pros talk about “the market,” they’re talking about the S&P 500.
The Dow Jones is comprised of only 30 companies, so it’s too constrained to represent the massive U.S. stock market. Even worse, it’s price-weighted rather than market cap-weighted, so it doesn’t reflect accurately the size of the companies it contains. A smaller company with a high share price is more important than a giant company with a lower share price.
The Dow Jones might be venerable, but it’s also close to useless.
Of course the market is going to crash. The market has crashed many, many times. Stocks have nosedived nine times since 1929.
When you see this question, what’s really being asked is, “When is the market going to crash?” And the answer to that is nobody knows.
Even a prognosticator who gets it right once won’t be able to replicate the call enough to make for reliable market-timing. Legions of technical analysts have spent the last century trying to divine upcoming market crashes. Not one of them has come up with something accurate enough to bet on. Fundamental investors, newsletter peddlers, economists and algorithms have likewise failed.
It’s impossible to time the market because no one can predict the future. That’s why you need an investing plan that you stick with in good times and bad.
Periodically, some investors and the media clamor for Berkshire Hathaway (BRK.B) to start paying a dividend. In fact, a Berkshire Hathaway dividend will be put to a vote in a couple months.
This is stupid. You buy BRB.B to have Warren Buffett allocate some of your capital for you, because he is a much better investor than you.
Warren Buffett has given long, complicated reasons for why Berkshire doesn’t pay a dividend, but from the point of view of the holder of BRK.B, the answer is simple. Sure, Berkshire could take some of its excess cash and give it to shareholders, but Warren Buffett can generate a better return on that same cash by doing something else with it.
Ultimately, it’s even simpler than that. No, Warren Buffett isn’t perfect. He’s the first one to admit it. But he knows what he’s doing. That’s why you gave him your capital.
Telling Warren Buffett how to invest money is like a drunk armchair quarterback telling Tom Brady how to throw a football.
As the great financial crisis proved repeatedly, it’s incredibly stupid to invest in something complicated that you don’t understand. If you don’t understand what Bitcoins are and where they come from, just stop right there.
And even if you do understand what Bitcoins are, it’s stupid to bet on them because it’s stupid to speculate with your hard-earned money. That goes double for an asset as volatile as Bitcoin. Anything that jumps around so much only increases the risk that you’ll buy high and sell low.
True, speculation is a big part of various markets, especially in things like futures and currencies. But it is best left to the professionals, who are going to eat you alive if you try to gamble against them. Pros are pros because they make money on their trades, and there’s no easier mark than an amateur and his “play” money.
You might get lucky in the casino, but you can’t routinely beat the house.
As with market crashes, no one can predict the future. Of course you want a piece of the next big thing to make you rich. But it’s probably not going to happen.
Promising companies fail, stocks crash. That’s why it’s critically important to have a diversified portfolio. Part of it might tumble, but everything is unlikely to go down all at once.
Finally, there’s this Wall Street saying: “How do you make a great fortune? Invest a little one.” You have to make a huge bet on a single stock to get rich. If you invested a million dollars in Facebook (FB), you’d have $2 million by now. But it’s more likely that you only were able to invest something like 10 grand in FB stock. So now you have $20,000.
That’s nice, but as you can see, even “the next Facebook” hardly brings you life-changing money.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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