Why Stock Tips Won’t Help Your Investing Strategy
Most of us don’t particularly like receiving unsolicited advice. Yet, when it comes to investing, we are eager to listen to what people are offering. Gatherings with friends can present the perfect opportunity to hear these unsubstantiated remarks. “Have you heard about Company X? Their price is going to the moon!” If you’re incredibly lucky, these tips may have some short-term impact, but they won’t help your investment strategy.
Two Schools of Investing Thought
This might not come as a surprise though, after all, how much weight should we give a spontaneous tip? Let’s look at the professionals and see how they do. Their livelihood is stock tips, so you would think that their strategy must be more profitable long-term. Every year the major market indexes conduct a study comparing the success of active managers (stock pickers and market timers) and passive managers (long-term investors). After 10 years, 85% of active managers underperformed the indexes, that number jumps up to 92% after 15 years. There is clearly a misconception that active managers and stock tip prognosticators think that they can capitalize on mispriced stocks.
This misconception is nothing new, however. By and large, the pricing in equity markets is fair. There is ample data to suggest that markets are adept at reflecting all publicly available pricing information. When people try to pick stocks and time the markets, they believe that their knowledge will beat the trillions of dollars and billions of shares being traded on a given day.
Passive managers have a better track record because they understand that beating the market is difficult to do once, and statistically improbable to do consistently. Generally speaking, markets go up over time and passive managers are patient enough to let this happen. A Warren Buffett quote summarizes this approach best, “if you aren’t willing to own a stock for ten years, do not even think about owning it for ten minutes.”
Get Back to Focusing on What’s Important
There are risks associated with all investments, but investing should not feel as risky as gambling. One of the most important parts of your investment strategy should be defining goals. Are you investing to achieve financial freedom? If so, how much money do you need to maintain your lifestyle during the years you won’t be working? That’s what we’re here to help with at TCI. We take the time to map out your financial journey together and build a comprehensive strategy considering your short- and long-term objectives based on a level of risk you find comfortable. This approach can help you focus on spending more quality time with your friends instead of worrying about what stock tips you might be missing.
