Imagine that you are a new investor and you get this advice: Buy
businesses that you don't understand, which don't have a track record
that you can make any kind of coherent prediction from, and which big
institutions are buying but you don't know why. Oh, and don't even
consider what the business is worth or whether the numbers make any
sense at all. Just buy it. It could go up fast and you don't want to
miss the boat.
This was the advice many people were hearing from brokers and
investment gurus in 1999-2000. This advice cost so many people so much
money that it is truly amazing to see it in print so soon after the
2000-2003 market melt-down. But there it is, in black and white, at
IBD's Investor's Corner on Friday.
The article starts off with about as stupid a statement as an
investor could ever make regarding your research into a business that
you plan on buying: "Ignorance is bliss."
Actually, the author may be right given that what he is proposing isn't investing at all - it's pure speculation. Speculators, by definition, are working the greater fool theory of investing -- buying with the hope that an even bigger and even more blissfully ignorant fool will come along to buy this thing from them for more than they paid. For a born-to-lose speculator, ignorance is, indeed, bliss because knowing that they are about to get nailed for their money would be all too painful. Better to just stay stupid and hope everything just goes up.
Actually, the author may be right given that what he is proposing isn't investing at all - it's pure speculation. Speculators, by definition, are working the greater fool theory of investing -- buying with the hope that an even bigger and even more blissfully ignorant fool will come along to buy this thing from them for more than they paid. For a born-to-lose speculator, ignorance is, indeed, bliss because knowing that they are about to get nailed for their money would be all too painful. Better to just stay stupid and hope everything just goes up.
Don't hold your breath while you're waiting for this market to launch. It could be another 15 years of nowhere.
The investing strategy that has compounded money at 20% plus for
the last 80 years and will continue to do so for the next 80
years takes the view that the market might not just go up. Therefore
you must buy a stock as a business, know the value of the business you
are buying, wait for the inevitable market flucuation, and a buy it at a
big discount to value.
Ignorance is bliss? Not with my money it isn't.
