Big Wall Street Myth: The Self Investor Can’t Be Successful

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 1

The following is a portion of an email sent to me from someone looking to get into the stock market and wondering how to proceed.  I have had a few discussions with her getting her started down the right path and she sent me the following over the weekend:

"Last night I had dinner in a wine bar, and next to us (my girlfriend and myself) sat a couple, and for some reason they wanted to talk to us.  Turns out the guy is a partner in a Hedge Fund …well anyway, I mentioned I have an interest in stocks and he suggested to me to stay away from the stock market, it will take all my money!  Find a nice mutual fund!  Ha!

To that I replied (ranted is probably a better description):

"Let me first say that I absolutely don’t recommend that the beginner start with forex and/or options.  Both are highly leveraged and can get fairly complicated.  If not careful you can wipe away your cash quickly.
 
I would master trading individual stocks on the long side first, then develop a short strategy (for profiting when the market falls), then move to options and forex once you’ve had a couple years of success.  That’s my opinion.
 
Regarding your dinner discussion I wish I was there!  This hedge fund manager has the view point of most "professionals" on Wall St.  "You can’t do it successfully on your own that’s why you need a professional such as ourselves to lose.. er I mean invest your money."

To that I say.. and let me be frank – bullshit!  You should have asked him what the 5 year track record of his fund was.  I’m willing to bet it was sub par at best.  Wall Street wants the potential self investor to believe that it’s not possible to make money without their help.  If the truth got out they would be out of business.  Just as they want you to believe that mutual and hedge funds are the way to go, they want you to believe that the buy and hold strategy is the far superior strategy.  Keep your money with us, dollar cost average over many years and we’ll make you rich.  Again, BS.  All it means is more management fees for them.  If you want to go the well diversified approach and dollar cost average just use index funds with a few good exchange traded funds.  Why pay management fees for a fund that is highly likely to under perform or at best match the return of the S&P500 over the long haul?.  It’s nonsense!
 
Just look at all the so called professionals who run mutual funds and under perform the market year after year.  How about all those hedge funds that are blowing up left and right because they forgot about "the hedge" part of equation and took on too much leveraged risk.
 
You ABSOLUTELY can make money in the market on your own.  Not only that but you can blow away the performance of mutual and hedge funds.  Why?  For one, the tools available to the self investor are increasingly on par with what’s available to the big fellas and much if it is free or affordable.
 
Perhaps the biggest reason that self investors can greatly outperform is due to the fact that you can be nimble and trade quickly in and out of small growth stocks.  Big funds take on such large positions that they must build them and liquidate them over several days to several weeks.  Furthermore, many of the high growth opportunities (in stocks below $15/share) are off limits to these funds because they simply aren’t liquid enough.
 
The self investor has major advantages and armed with the right knowledge and a few tools can kill that "nice mutual fund"!
 

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Comments on Big Wall Street Myth: The Self Investor Can’t Be Successful »

October 23, 2007

Aaron @ 9:32 pm

Agree with this point completely. There are far too many people out there who think that stocks are too complicated for them and they simply cannot do it. I think this is far from the truth.