Why smartness and education do nothing for your investments

by Dana on February 17, 2009

Education and smartness do not help investingIt is little exaggeration to say that many people are losing their shirts (if not worse) through the ongoing financial turmoils. A few got caught up in some truly heinous swindles, but for the most of us, the losses came through our previous-thought conservative investments.

What happened? What happened to the smart experts that put out money into hyper drive for a fee, but came back with losses? Are all these letters behind their names truly worth their weight in paper?

In all fairness, in a year where even Warren Buffet’s having a tough time, we can ask for little more than a mere preservation of capital. But for millions of ready-for-retirement boomers, this is no consolation. The S&P Index is back to 1997 lows, the bloodbath continues on Wall Street and Main Street.

Troubled started brewing by the end of 2006, as many forecasted low growth for 2007. Yet the market defied expectations, and the naked emperor marched on.

Now in retrospect, the picture is so clear. The US and a number of European countries were experiencing massive real-estate led credit bubbles. Many banks were leveraged to the hilt on their sub-prime lending. Debts were piling up (residential, commercial and credit cards). But the general consensus, or should we call it wishful thinking, was that there would be a soft landing at worst.

Instead of heeding to a minority of economists and analysts’ pleas to exit the market, more individual and institutional investors poured money in, hoping to ride the ever-rising wave to riches.

The media outlets were of no help. The 24-hour squawk box provided little insights and meaningful discussion to the issue. Eager to fill out its screen time, so-called experts and analysts were brought in, each with their own agendas. The stage was set up for them to further confuse the public and fan the flame of speculation.

At a time when the only thing left to say should have been: we’re in trouble, how do we get out, and by the way, get the hell out of the market right now; the discussion on short-term profiteering and trading opportunities raged on.

As much as on-line discussion over the true state of the economy becomes increasingly evolved, timely, and trustworthy, it pales in comparison to the media machines dominating the airwaves. Is it any surprise that on a day of epic market decline, McCain, a respected political veteran and what we would expect, an informed citizen representative, could utter that he believed that the economy was “fundamentally strong”? I’ll bet I know what show they had on TV while he was waiting backstage for his campaign rally.

On that note, let me address the titular issue of why being smart and educated does nothing for your investment portfolio. This may come across rather old-fashioned, but the basic human virtues of integrity, patience, self-awareness and self-understanding are the qualities that will make you a winner in the game of investing. And the sooner we recognize it, the sooner we start making smart and wise decisions in our investment lives.

Let me explain. Have you ever turned on MSNBC and saw Jim Cramer flapping around like a chicken on steroids? Have you followed Ben Stein’s insights on the US economy? You think these guys are dumb and uneducated? Of course not. Both have very impressive resumes that can only attest to their level of intelligence and education. But both embody everything that is WRONG with media business reporting.

I’m not sure how one can sleep at night, or expect to be taken seriously, with the knowledge that their flip-flopping market insights are recorded for eternal derision. Because what they preach are no longer rational economics or investing strategies, it’s EGO-nomics. End of the day, this is nothing short of selling integrity for media exposure. In the celebrity circle, this is called famewhoring.  Crass? True.

Unlike those media vultures, most of us, as well as our investment advisors, are well-meaning, sensible, and smart individuals. In fact, many of us who are active in managing our portfolios are educated or self-taught in the field of personal finance and financial planning. Perhaps because we are stubbornly smart, self-deception sometimes creep in, and our egos take over.

Every five-year-old can grasp the principle of buy-low and sell-high. While in reality, few investors abide by the rule, while always hoping to out-smart the system and everyone in it. Sure, the across-the-board market decline in 2008 was unprecedented in both its scope (truly global) and sectoral reach (except for gold, the dollar and a few consumer product groups). But a year ago, a large number of investors were still trying to get on the gravy train and make a few bucks before the system derailed. Calls for complete stock market withdrawal were in the minority, but they were certainly there. Yet most of us didn’t listen. Because we thought we knew better, and were smarter than the rest of “them”.

If nothing else, perhaps this bear market will be a humbling experience for everyone. Especially the smart and educated.

Creative Commons License photo credit: rednuht