How to Invest: The prediction game and the money making game are in fact two different things

By: Dr Norman D - July 08, 2020 12:38pm EST
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You really have to know yourself before you start investing. Your risk, tolerance and your anxieties and prejudices
You really have to know yourself before you start investing. Your risk, tolerance and your anxieties and prejudices

So you want to make a lot of money in the stockmarket, or Forex, precious metals or futures etc? No problem. There are adverts on the internet from people who will help you do this. Wait a minute. Why do they want to help you? If they are so smart why don’t they just make money for themselves? Maybe they need your subscription and commission money.

So you start by buying gold, its going up, or stocks, they are going up. Just after you buy they go down. I don’t know why. Go and buy something and see.

Ahah! I’ll wait for it to go down first, and then buy. This may work better.

What you need is someone who can predict for you. Someone who can predict where the market is going, where gold is going, where interest rates are going. Surely a good predictor must be rich. Well. Not necessarily.

The prediction game is a nice game, it’s one of the nicest games you can play with your clothes on. The problem is, the prediction can turn out to be wrong. The prediction game and the money making game are in fact two different things.

There are people who made money from Vegas casinos. Some people made money by robbing banks. It's what can we learn from them, it's not that we want to emulate them. What we learn is that they did a lot of preparation. The bottom line is if you want to make money from financial markets you are going to have to do some preparation. Before the internet, the public library was the place to start. Now we can research from home. Have a look at some of the newspapers from 1929. It is currently believed that the newspapers and media are now particularly inept. That is not true, they were always inept!

There are two things that you really have to know before you start investing.

The first is yourself. That’s a lifelong study. You have to know your risk tolerance and your anxieties and prejudices.

If can’t master and control these then a bank deposit account or a piggy bank are best for you. If you have some character weaknesses exposure to financial markets can bring them to the fore. The markets are not there to make you rich. Maybe to make the major banks and institutions rich, but not you. You are going to have to get rich on your own in spite of them and it can be done. Remember no-one cares about your money as much as you do and the best person to manage it is you, provided you are prepared to invest a bit of your time into gaining knowledge.

The second thing you have to know is a little bit about the economy and financial markets. Not a lot but at least something. If you want to just gamble then you will probably lose. Most gamblers do and in fact they psychologically want to lose. You are going to have to read a few books which will tell you what you cannot get from newspapers or TV.

Hear are a few recommendations:
Where are the customers yachts? By Fred Schwed

The Great Crash by JK Galbraithe

A Random walk down Wall Street by Burton G Malkiel

The Only Investment Guide You'll Ever Need by Andrew Tobias‎

It is possible to get rich slowly but surely if you start when you are young. Getting rich quickly is what everyone wants but it requires taking huge risks which may all of a sudden lead to a wipe out and financial disaster. The trick is to buy investments where the risks are commensurate with the rewards. The category of investments you will want to choose will change from time to time and by reading the books you will be able to spot them. As a general rule they will not be what everyone else and your broker is recommending. Their job is to get the biggest commissions they can while pretending to have your interest at heart. If they really had the ability to make people rich where do you think they would start?

In the early 1980’s US interest rates were over 21%. You could earn 20%+ with no risk to capital. Do you think anyone would have recommended that? They did not. In 1981 a secular bull market in bonds began. Depending on the type of bonds you chose they have outperformed stocks 6 fold since then. If you bought stocks in 1974 after the markets went down 60% your profit potential was enormous and the risks relatively low. At the time most stock-brokers were too nervous to recommend them. If your stockbroker or TV commentator ever tell you not to buy them then you can be sure that would be the best time to buy stocks. In 1974 they were saying things like “It’s the end of capitalism in America”.

After the next crash, which the Fed cannot prevent, they will be saying this nonsense again. That will be the time to buy stocks, provided you haven’t lost all your money in the preceding crash trying to get rich quickly.


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