In another life, I hung out on a Yahoo! Groups message board chatting about financial stuff I was clueless about.
There was a small group of people on that board who were investors. Some of them were professionals and some were amateurs.
Actually, the professionals were nothing more than professional scam artists but we didn’t know that at the time.
We were being cleverly indoctrinated into the world of high yield investment schemes that promised unreal rates of return and stuff that… had I known what I know now about finance (and the financial industry) I would have immediately exited stage left.
As it happened, I learned a few valuable lessons from that group and a few other discussion groups since then.
So, without further ado, here are some valuable lessons learned the hard way:
- Even great investments rarely pan out exactly as you originally hoped.
- An abnormally high return on an asset usually means someone is running a scam of some sort or… you found an unusually valuable asset. But if you didn’t have to do a lot of research, it’s probably a scam.
- Even when you do a lot of research, “the next Microsoft” is nearly impossible to find before it becomes a runaway hit. It’s much easier to find an Apple after it releases the Apple I, the Apple II, the iMac, and iPod, and then buy that company and wait for it to release the iPhone so you can make mad gainzZz.
- Avoid scientific-sounding, but unproven, investment hypotheses like technical analysis. It’s usually just a fancy way of saying “he’s guessing”.
- Popular investing and personal finance websites tend to publish more hype than legit information. Seek out for-real professionals.
- Nothing in the financial industry is a sure thing except insurance, which is why it’s called “insurance.”
- There is no such thing as “self-insurance.” It’s called “risk retention” and means you’re taking all the risk that an insurance company normally would but at a much higher cost because you’re not operating at scale like an insurance company is.
- Trust, but verify. Many financial advisors never back up their claims about mundane things like stock market returns. Most of their unproven assertions or surface-level proof is misleading or just plain wrong.
- Savings rate always trumps investment return because, of the two, it’s the one thing you have control over.
- Don’t trust a carpenter to give you great advice about precious metals.
- Don’t trust a jeweler to give you great advice about real estate.
- Financial bloggers generally talk out their *ss and make sh*t up to attract many monies from advertisers. Many of them will say anything for meager endorsement deals and are barely paying off their student loans while giving you “rock solid” financial advice.
- Awards don’t mean anything. I once wrote an article for a financial website which bragged a lot about some award from a major independent rating firm and was named one of the “top 10 personal finance websites of xxxx” but… the website owner couldn’t afford to pay me anything for the submission and had to admit he was an underpaid consultant. We did get some traffic out of the deal so it was still a win but also a wake-up call.
- Insurance agents and financial planners don’t always believe in what they’re selling you. For example, the owner of another well-known financial firm and educational website (which shall remain nameless for now) once admitted to me in private that the advice he gives to his clients doesn’t really work. He sells marketing info on the side to financial advisors to make ends meet.
- Study what worked 100 years ago. That stuff still works today because the principles are timeless. For example, the Richest Man In Babylon remains my all-time favorite book on personal finance and yet, the original version was written in the 1920s.
Oh yes. One more thing. Avoid hucksters.
They generally follow the same pattern in finance as they do in pretty much any other industry:
First, they are usually a very charismatic speaker or writer who can grab your attention and trust.
They’re prolific and very confident in their abilities.
They use very technical-sounding names for things and a lot of “jargon” you don’t or can’t understand and… they never explain that jargon.
They expect you to either nod and follow along or get swallowed up in confusion and overwhelmed by it. The latter is preferable because then you can place even more trust in them because… they know all these big words so they must know what they’re talking about.
One more thing: they are expert wordsmiths. They use vaguely familiar-sounding buzzwords to give their advice an air of plausibility. These buzzwords actually sound legit… something that resembles English (like “momentum” or “tactical trading”) but which don’t really mean anything.
Don’t get me wrong. I don’t mean to say that a nice guy or gal who knows their sh*t and uses technical jargon is trying to scam you.
They might just be poor communicators.
Make them break it down like a fraction for you until you get to the “plain English” version of what they’re trying to tell you and then… keep building it up until you, too, understand the technical stuff.
Ask them “why” and “how” until you’re satisfied.
Don’t assume anything.
OK, lesson over.
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