Anyone who reads the financial news knows that you don't have to look far for dumb investment ideas -- they're everywhere. Some are obvious, like making long-term investing decisions based on the two-second analysis offered up every night by certain televised shouting heads. Others aren't so obvious, or at least aren't so obviously dumb. Some even have piles of academic papers and heavy financial industry support behind them. As we say at The Motley Fool, they're not just smart, they're Wise. Check out these Wise ideas and you'll see what I mean.
The market is always efficient. This one, perennially popular among Really Wise People, is a doozy. The idea -- properly called the Efficient Market Theory -- states that all known information is always instantly priced into every security in the market. According to this line of thinking, no stocks are ever "on sale," stock picking is a fool's (not Fool's) game, index funds are the only sensible investment, and Warren Buffett isn't a brilliant investor -- he's just lucky. Eminent academics have built enviable careers on this idea, but out here in the real world, it just doesn't hold up. The truth is that the market is mostly efficient. As every reader of Benjamin Graham knows, most stocks do find their way to their intrinsic value over the long run. But from moment to moment, Mr. Market prices some stocks too high and some too low -- and buying low and selling high is a reliable, time-tested wealth-building strategy.
More diversification is always better. There's no doubt that diversification is a good thing -- having all of your eggs in one basket just isn't a good idea, even if that basket is a stalwart like Altria
(NYSE:MO)or General Electric (NYSE:GE). Even stalwarts go through rough times -- once mighty Pfizer (NYSE:PFE)has been slumping ever since the seemingly unrelated tech bubble burst. But as you start to add too many stocks to your portfolio, a couple of problems show up. First, it's hard to really understand and follow developments on 40 or 50 companies unless you're doing it full time. (Sure, Peter Lynch famously held more than 1,000 stocks when he ran Fidelity Magellan, but he worked a zillion hours a week at it, and had a world-class team of analysts and traders helping him out. How much time do you really want to put into this?) And if you're holding a lot of stocks without doing enough research and tracking, your performance is going to start to look a lot like the market average, at which point you might as well buy an index fund and spend your spare time playing golf instead.
Trading is the key to wealth. Here's another one that has its own industry (and those shouting heads) supporting it. Despite study after study showing that about 90% of people who try day trading give up after a few months (and heavy losses), people still think that there's easy money to be made just by taking a class and watching CNBC all day. It doesn't work, folks. In fact, it's not uncommon for novice day traders to lose more than they invest, thanks to not fully grasping the risk of short positions. And thanks to a new Dow Jones product called the "Elementized News Feed," day traders will always be a step behind the investment banks and hedge funds. But don't just take my word for it -- read what the SEC says about day trading and see for yourself.
- Individuals shouldn't own stocks directly. I hear this one a lot from investment advisors all the time, and I can never decide whether they're just trying to protect their franchise or whether they really believe that working in an investment firm gives them some magic stock-picking powers that mortals can't match. It's true that you shouldn't buy stocks unless you know what you're doing and you've done some research, but it's hardly rocket science, and the Internet makes research easier than it has ever been. The world-famous Fool's School can help anyone get started with stocks, and it's free and painless. And if you need help coming up with great picks, check out the also-world-famous Motley Fool Hidden Gems newsletter service. Every month, Tom Gardner, Bill Mann, and the rest of the Hidden Gems team serve up great investment ideas, backed by careful research, extensive explanation, and one of the best track records in the business. You can check it out free for 30 days, with absolutely no obligation.
Fool contributor John Rosevear, who once spent a full day sitting in the doorway of Peter Lynch's office (long story, but yes, Lynch was there at the time), does not own any of the stocks mentioned in this article. Pfizer is an Inside Value recommendation. The Motley Fool disclosure policy's mama didn't raise no dummy, and it knows a Wiseguy when it sees one.