If This Isn't Gambling, I Don't Know What Is

04.07.08 | Online Investing | 1 Comment | by junger

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Trent at the Simple Dollar posited to his readers last week that investing in individual stocks is basically gambling.

Individual stock investing is something like playing blackjack at a casino where, on every hand, the dealer is wagering just a little tiny bit more than you, but there are thousands of people around you shouting out suggestions.

He argues that you might have a slight advantage (his italics), but being profitable is "far from a guarantee and the work needed to get those earnings is tremendous."

Obviously, the fools at The Motley Fool feel otherwise. In their story on how to get 50% annual returns, here's what they suggest:

Lesson 1: Sell your index fund
There is no surer way to not beat the index than by investing in the index itself. Not exactly a revelation, right? Investing in index funds leads to nearly certain long-run underperformance, because of transaction costs and management fees.

Putting aside the preposterous proposition of actually getting 50% returns (which they admit), are they actually arguing that transaction costs and management fees are the downfall of index funds?

That doesn't make any sense. Index funds are great because, in addition to owning an entire index, they're passively managed and have some of the lowest fees in the market.

I actually met Tim Hanson, one of the authors of the article, when I interviewed at the Motley Fool (full disclosure: they didn't offer me the job because they were "going to give priority to candidates with more experience in investing." — aka stock picking).

I told him index funds were my investments of choice, and while he agreed they are the right way to go for 80% of investors, the Fool recommends an "index-plus" approach … meaning, invest in an index fund and buy the stocks they are hocking in their newsletters (because that's what they're really selling you).

Not only are they suggesting ways to get almost impossible 50% returns, but they're spreading disinformation in the process.

Please remember to think about who benefits from the "advice" you get.

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