Tuesday, February 13, 2007

Mad Money: How to Lose Your Money

From Slate Magazine "How to Lose Your Money Fast":

I am not arguing that Cramer is usually wrong. I am arguing that his overall investment advice—try to out-trade the pros—is lousy. A far more intelligent strategy, one that will beat most pros, is to buy and hold a diversified portfolio of low-cost index funds. In the vast majority of cases, this will yield higher returns with less risk, time, effort, and stress than short-term speculation. The good news is, even if you pursue the smarter strategy, you can still watch Cramer's show. Just don't fool yourself into thinking that it will give you a good chance of winning the speculation game.

Remember, your competition—all other traders—are primarily full-time professionals who do nothing but research and trade all day long. Unless you have a multimillion-dollar research budget, a platoon of brilliant analysts, relationships with salespeople at all major brokerage firms, relationships with senior managers at every company, a Rolodex full of industry contacts, and a decade or two of trading experience, you will be at a serious disadvantage no matter how much research you do. Remember, too, that the vast majority of professionals, even those who possess all of the above advantages, lose the speculation game (because it is really hard to win). Then ask yourself again why, by watching a TV show and doing some part-time research, you should reasonably expect to win.

How do you think the managers of 15,000 U.S. hedge funds and mutual funds feel about competing against millions of part-time amateurs who think that watching Mad Money gives them an edge? Answer? Stoked. Finally, some easy money.

Bottom Line: Buy and hold indexed funds from Vanguard or Fidelity, and watch Mad Money for entertainment purposes only. After taxes and expenses, you'll beat 97% of all actively traded funds.... not bad.


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