Respect the market, not the experts

The power of the financial markets should be daunting, but many people are not deterred.


Why do people underestimate the difficulty of making money in the financial markets? Here are some main reasons:


1. The experts in the media

2. The widely held belief that many professionals are regularly able to beat the market

3. Some people like to trade the market because they are gamblers - usually with disastrous results.


Experts

The experts in the media promote the idea that markets are easier than they really are. A guy on TV or the newspaper says that the price is going to do this and do that, and it sounds easy. The market can be beaten.

If the media put out a continual broadcast that the market has processed all the information and that the price is right, people would get the message. But they rarely say that.

The experts and media message is that the behaviour of the market can be forecasted. It's a persistent and seductive message, and people think 'ah, I can have a go at that, I can make money out of that'.

You can't blame the average person for following what they read in the newspaper and what they're being told on TV. However, many so-called experts are just commentators or analysts who often don't have any track record and who often, to my ear, don't even make much sense.

Listen critically, rather than just accept what you're hearing or reading. You may be surprised to find that they're not really experts.

The fact that the media and their financial guesswork is entertaining and interesting doesn't necessarily mean that it's the truth.


Most professionals are not outguessing the market

Ever wonder about all the money made by the people working on Wall Street or in the City of London. Surely they know something about markets?

The truth is that very few are successfully backing their views on markets. Most of them wouldn't have a clue what the market was going to do. They make money in other ways, such as commission and mangement fees.

It's not that people working in finance don't know anything - they are usually very good, very smart people. The fact is they're making money out of sales, client relationships and by doing transactions, i.e. facilitating the whole process. They're not actually making money out of successfully predicting what's going to go up and down. They're, therefore, not a reason for you to take up punting cotton futures in your spare time.

Equally, don't be too impressed with your stockbroker just because they sound confident and know a lot of stories and figures. More information does not necessary make the market more predictable. The extra information is probably useless as the price has already adjusted for it - it has been 'priced in'. It's about as useful as playing roulette and knowing whether the roulette wheel was made in Taiwan or Korea.

The critical test is: does the broker make a living out of picking stocks? Probably not. He or she is sitting in their seat because they're getting the fees you pay them to buy and sell on your behalf. It's very easy for someone to have a view when it's with someone else's money.