Do We Get Taken When We Buy Stocks?

Beyond Buy-and-Hold #37

I recently bought a 2008 Subaru Forester with 42,000 miles on it for $14,500. During the search I was told by a salesman that he ?didn?t need? my money and that he was going to give me a special deal because we are ?neighbors? (the dealership at which he is employed is 15 miles away from my home). It is because we have all heard claims like these from used-car salesmen that it is considered an insult to politicians to compare them to used-car salesmen.

Still, the process by which we buy used cars is slanted far more in favor of the middle-class worker than the process by which we learn how to invest in stocks.

I?m not crazy about the games that one needs to work around to buy a car. The full truth, though, is that once you accept that you need to educate yourself about the fair price for a car before heading off to a dealer, the car-buying process can be fun. There is a wealth of information available on the internet that the smart buyer can use to arm himself in his battle with the dealers. Spend a bit of time educating yourself and you can buy a car with confidence that you obtained good value for your money.

The same SHOULD be true for stocks

In theory, the same is true with stocks. At no earlier time in history has the average investor had the opportunities available to him that he has available to him today to invest with confidence that he is obtaining good value for his investing dollar. These should be the best of times. The painful reality, however, is that they very much are not.

The biggest difference is that, when it comes to cars, people know to be skeptical of salesman claims. No one takes the word of a car salesman as gospel. If only this were so when it comes to the people who sell us stocks!

John Bogle is the slickest salesman alive today. I don?t mean that as a dig. It?s his job to sell stocks and he does his job exceedingly well. And Bogle has done a lot of good for middle-class investors. We need good salesmen in this world of ours! I am a big-time fan.

My point is that it is horrifying to hear people refer to Bogle as a ?saint.? He?s a salesman, not a saint. Bogle is not in a position to offer you balanced and objective and research-backed advice on how to invest. Start thinking of a salesman as a saint and you are asking for trouble.

In the end, the people we by stocks from are sales people!

We need to be more skeptical of the claims made by people who make a living persuading us to buy stocks. We also need to learn how to work the numbers for ourselves.

When I was researching my car purchase, I visited a discussion board where people shared stories of deals they were offered on Foresters and asked for input from others in the community as to whether they should accept the deals or not. In every conversation of this sort, you could count on there being one or two very smart people coming forward and offering helpful insights.

You don?t see that in discussions of stocks. When it comes to stocks, people want so much to justify their purchases that they turn off their brains and lose the ability to work the numbers and even the desire to want to know what the numbers really say.

I first challenged the numbers in the Old School safe withdrawal rate studies in May 2002. A discussion-board community at which I used to participate talked about these studies on a daily basis. I remember being stunned when I came to realize that only a tiny percentage of community members understood the assumptions that governed the numbers generated by the studies.

Critical analysis?or mere affirmation

People did not want to know whether the studies got the numbers right or not. They wanted affirmations of their decisions to invest heavily in stocks. The true purpose of the studies was not to inform decisions but to rationalize choices made for emotional reasons.

This sort of thing goes on in car buying too. Forester owners will overlook benefits that similar models offer because they want to believe that they made the best possible choice. The difference is that car buyers remain at least partially objective up to the point at which they make a purchase. Rationalizations don?t do as much harm at that point. Once you have bought a car, a case can be made that it really is best to stop worrying about the deal and just try to make yourself feel as good as possible about your decision.

With stocks, though, there is no particular day after which you can afford to turn off your reasoning power and become emotional. Put your confidence in ?studies? that make you feel good by spinning the numbers and you not only rationalize past choices that cannot be changed but also current-day and future choices that could be greatly improved with the application of a bit of objective analysis.

There?s a great book about the car-buying process titled Don?t Get Taken Every Time, by Remar Sutton. I have hopes of becoming the Remar Sutton of the stock-buying process. I believe that after the next crash there are going to be millions of middle-class people becoming interested in the idea of protecting themselves from the tricks of The Stock-Selling Industry for the purpose of helping their stock-buying dollar go a lot farther than it ever has gone before.

Rob Bennett argues that the widespread promotion of Buy-and-Hold Investing is the true cause of the current financial crisis. Rob?s bio is here.

( Photo from Flickr by Vagawi )

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