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Don’t make this $5,000 mistake

By Sam Instone - July 13, 2017

[Estimated reading time: 3 minutes, 48 seconds]

  • Magic slimming pills…
  • Soul mate finding dating sites
  • Stock picking fortune tellers

Children grow up and stop believing in fairytales – but science writer Maria Konnikova says we all remain hard-wired to believe in quick, easy fixes – like the ones above.

In her book The Confidence Game: Why We Fall for It … Every Time, Konnikova says that our in-built psychological biases make us vulnerable to innumerable misjudgments like these.

Behavioural Bias

The best financial advisers for expats are as rare as hens’ teeth

When it comes to money, the most common misjudgment is believing the very many charismatic stock picking fortune tellers.

To succeed as an international investor, you just need to follow the evidence

This was summarised succinctly recently by the world’s most successful investor, Warren Buffett in an interview with CNBC:

“The record shows that the unmanaged index fund is going to do quite well over time and active investment as a group can't beat it."

He’s right…here’s the evidence:

1. Over the past ten years, the S&P 500 index beat 82.87% of actively managed U.S. funds.

2. The emerging market index beat 85.71% of actively managed emerging market funds over the ten-year period ending December 31, 2016.

3. And the S&P Eurozone BMI Index beat 90.41% of actively managed European stock market funds sold in Europe.

But surprisingly, not everyone agrees with the Nobel-prize winning evidence and mountains of academic research that supports Warren Buffett’s sage words…

Dubai based financial writer Peter Cooper says:

Investing in index or tracker funds will never make you rich…”

In an article he wrote last month for The National, Cooper claimed to have found a get rich quick, magic formula – and for $5,000, his favourite market guru would happily share it with you, me, and anyone else foolish enough to fall for what Konnikova calls the ‘grift’.

All you have to do to be successful, he wrote, is: 

cleverly select a few investment opportunities that are set to do really well whatever the financial weather, and stick with them for a long time so that the mathematical power of compounding will work in your favour.”

But how?

Well, that’s where Cooper’s market guru Chris Mayer comes in.

“…How do you spot the next Warren Buffett and his Berkshire Hathaway? That’s the service Mayer is now offering his high-paying subscribers…”

To be as successful as Warren Buffett, just pay Cooper’s friend Mr. Mayer $5,000 every year for his stock-picking newsletter…

Presumably it will deliver you untold riches quicker than you can say “Bernie Madoff…”

The trouble is, as evidenced above, Warren Buffett himself believes in index funds – not stock-picking newsletters.

“We've long felt that the only value of stock forecasters is to make fortune tellers look good.”

In 2008, Buffett bet financial company Protégé Partners a million dollars that they couldn’t find a group of hedge funds to beat the S&P 500 index over a period of ten years. 

Protégé Partners picked funds of hedge funds that had beaten the index in the past…presumably forgetting the age-old investment adage that past performance is no indicator of future outcomes!

This million dollar gamble of Buffett’s is paying off – in January 2017, with 12 months left on the clock, Buffett’s index was up more than 85%...

The hedge funds?  Up – but only by 22%!

Warren Buffett says that when he dies, he wants his $73 Billion estate invested in index funds.  

There’s no shortage of people like Peter Cooper and Chris Mayer who’ll sell you a newsletter by claiming to be market gurus with a magic formula to beat the market.

Beware of Market Gurus

Empirical evidence says they’re long on promise, short on results however.

American financial magazine Barron’s claims some even lie about past performance to collect more fees from the gullible.

A 12-year study tracked more than 15,000 of these stock market newsletters…

All claimed they had magic formulas to select index-beating stocks.  

94% of them went out of business.

If Warren Buffett thought a stock picking guru with a formula and a newsletter like Mayer could beat the index, he would be entrusting his estate to one.  

Humans love forecasts!

They make us feel we know what’s going to happen next – and so they fulfil our need to be secure and safe in an inherently uncertain world.

Carl Richards "We're all wired to avoid pain"

In financial markets, it’s easy to believe the gurus will provide a short-cut to the wealth and security we desire.

But there is no fast track to wealth.

Just do what Warren Buffett believes in…

  • Invest in a diversified portfolio of low-cost index funds;
  • Add money every month through thick and thin;
  • Ignore market noise;
  • And be $5,000 a year better off by ignoring Mr Cooper’s market gurus!