The options available to investors for money management are ever increasing. It seems that every day there are new "tools" designed to help make you rich. TechCrunch recently ran an article stating, "Software is better at investing than 99% of active investors."
For one, you could probably insert any noun at the beginning of that sentence and it would be true. But the rest of the article bothered me. The author mistook investing for trading. Software- and algorithm-based trading probably is superior to a fat guy in an Armani suit trying to do the same, because it has nothing to do with qualitative analysis. I am not a technophobe, but I firmly believe investors will forever benefit more from reading a copy of Ben Graham's The Intelligent Investor than from any gimmick they see advertised on CNBC.
Less is more
The article I mentioned above was not totally wrong. It brought up many unfortunate truths about the human investing process: We are irrational, we try to time the market, we seek confirmation biases and tend to anchor, and we love to follow the herd. The author is right on, and its something The Motley Fool has been fighting since day one. But I don't think that means technology is the solution to our investing woes. In fact, I think many investors today suffer from information overload.
Take TD Ameritrade, for example. As a response to the anti-Wall Street, you-can-do-it movement after 2008, TD rolled out a slew of new features on its e-brokerage service. You can find all sorts of charts and tools that are supposed to help you make the best investment decisions possible. The commercials for the product show people with multiple computer screens having an absolute blast looking at 1980s-style green and black charts and investing all of their money. But for real investing, these tools are fluff designed to get you in the door and start racking up commissions. You're better off with a Wall Street Journal and a cup of coffee.
Redefining the rules of investing
This one is even better. E*TRADE Financial has a fantastic three-minute video on its "Experienced Investors" landing page. The purpose of the video is to help you dispel the myths of today's investing world. Rule No. 1: Buy and hold is WRONG! Well, obviously, guys! If you buy stocks just once on E*TRADE, they will only get your commission once. What are you thinking? Are you trying to ruin their business? According to E*TRADE, buy and hold is a defunct strategy. "You don't want to suffer the losses when the price drops." That statement alone makes me want to punch that guy in the face. Myth No. 2 is some generic piece about investing in different asset classes -- innocent enough to avoid my wrath.
Oh, but then there is myth No. 3: Charts aren't just for traders, you silly investors! While graphics of a green-lined "BUY" chart appear next to a red-lined "SELL" chart, the genius on the screen explains to us morons that we can use charts to determine where the buyers and sellers trade control of a stock price. I can't make fun of that, because I don't even know what it means. It's a bad case of promotional dysentery.
What the future holds
The TechCrunch article spoke of two start-ups that automatically rebalance and manage your money for you -- because computers are smarter than you are! I wouldn't play a computer in chess -- that's suicide -- but I also wouldn't give it my money. Is software going to call the CFO of a small-cap semiconductor and ask him or her questions about the competition? I don't think so. Can current software walk down the street and determine which brands are really trending out there, and not just what the latest market study says? Perhaps, I guess, if they are using Google street view , but realistically, no.
The Internet and technology have helped the retail investor immensely. My stock research often starts with Yahoo!. It may be the only thing I've ever used Yahoo! for, but the site is damn good at it. I ignore most of the options: the order book (who cares), market pulse (what is that, anyway?), or "star analysts" (something to do with astrology and stock-picking). I use Yahoo! to take a quick glance at financial statements, see what the company-related headlines are, and maybe even take into consideration their version of a forward P/E. If I'm not there, you can find me on the SEC's website, reading 10-K footnotes or wondering why I didn't go into professional waterskiing instead of puke-green-and-white table analysis.
Keep your poker face
I know the market is frustrating. It's more than annoying to watch as the market's whimsical ups and downs take your retirement fund for the world's worst rollercoaster ride. But don't think that you are alone and need a piece of software or an online tool to save you from this -- because it won't.
The reason we, the investors, will always beat traders over the long run is that we are not gambling on market movements in one direction or another; we are part owners of a business. And good businesses will thrive, no matter what drug Mr. Market is taking.
Furthermore, your skill as an investor hasn't changed -- or it may even be better. Market irrationality and Wall Street wrongdoing have the retail investor more cautious, more analytical, and more resistant to investing groupthink than ever before. Those are qualities every investor should have, because they keep us from getting too comfortable.
Despite the negative sentiment toward equities these days, we at The Motley Fool are excited to continue finding great companies and investing for the long term. We don't care about the black-box trading, the hundred-point swings in a day, or any near-term events. And with so many people focusing on market elements that are beyond their control, we believe there are incredible opportunities out there for the patient and diligent investor.
If you're looking for an idea to help you get started, take a look at this free report. It's about one of our favorite companies, a major player in a high-growth market with a proven business model. The report has nothing to do with charts, the myths of investing, or any other concept that has no place in the long-term investor's processes. Click here to read it.