A Sucker Born... A Fool and His Money... etc...
There is an ad running on television that drives me nuts because a man describes his profits from investing in gold and urges you to buy gold, too.
I'm sure that man is telling the truth if he did buy gold five or ten years ago. Anyone who bought gold five or ten years ago when prices were low would now, thanks to the recession, be making a big profit (on paper). However, the truth is that it is probably too late for you to make the same profit buying gold now. Gold always goes up in value when people are panicking about the economy, but it also drops like a rock as soon as the general economy recovers. Anyone who buys gold now, with the price of gold already inflated, is more likely to lose almost every penny of his or her investment (assuming the economy improves) than to make any profit at all. Even if the economy continues to worsen, the price of gold may well have reached its limits.
Every word the man on television says may be the truth yet the conclusion he would have you draw remains more appropriate to a Ponzi scheme than to investment advice. The man on television can only continue to make additional profit if you buy into the idea of buying gold, but you are probably going to be left with a loss.
I used to feel the same irritation when "financial advisors" went on television and talked about the stock market giving an average of ten percent earnings per year over ten years. It might be absolutely true over the entire market that the earnings per year averaged ten percent. That in no way means that any stock or fund you bought would average ten percent earnings to you. Short of insider trading, your earnings will be way less than ten percent a year even in good times and with good luck.
In general, Americans tend to buy high and sell low. That makes earning anything very difficult.
Another important rule that Americans generally violate is don't run with the herd.
In Chicago we have a famous story of the Eastland Disaster. Western Electric hired several boats to take its employees for its annual company picnic. One of those boats, the Eastland, was said to have been listing to port before it left the dock. Then too many of the people on board the Eastland rushed to the same side of the boat to see something so the boat capsized and sank. Among the 844 people who drowned were more than 20 whole families.
Again and again, Boomers have invested as if they'd been trained to follow an Eastland Rule of investment. Everyone rushes into the same investment convinced that they will strike it rich and every investment capsizes, producing one disaster after another.
The lesson is clear. Even a legitimate and conservative investment can be turned worthless if everyone is rushing to buy the same thing--inflating prices without regard to whether or not the item's economic value is increasing. Some Ponzi schemes are created by crooks who intend to defraud us while others we create for ourselves with our own excess exuberance, but hardly anyone loses money who didn't enter the world of investment as part of a herd coming through a door marked greed.
Housing would be a good example of that principle. The foundation of the crash of the housing market was the dramatic profits that had been made from houses for no particular reason. The price of houses had been driven up well above the buying power of the average salary and well above any objective assessment of the value of each house.
[The mortgage market, I believe, is actually a separate issue with separate origins. I suspect we would have had a housing market crash even if everyone could pay their current mortgages without difficulty. And, on the other hand, I believe we might well have had a mortgage crash even if housing values had remained stable. And then those credit default swaps were a third problem entirely.... The one connection the three factors have, other than real estate, is greed-induced stupidity. ]
Boomers have been raised to be optimistic people, of course, but they are also well educated. How strange that they, as a group, would insist on believing that a get-rich-quick scheme might work. Even stranger that they believe they could all jump into the same get-rich-quick scheme and it would still work.
The less money you have to invest, the more important that you be a sophisticated investor and realize that the stock market is always a gamble. The less spare money you have, the more important that you invest and hold for the long term and not speculate. The less discretionary income you have to invest, the more important that you understand your own tolerance for risk.
A given stock that can give you giant gains can also give you magnificent losses over the years. If you can't live with loss or if you are not prepared to wait patiently for the market to turn back around, then you can not afford to buy stocks...or gold... or a house you can't afford to heat...
But most important of all, if you are as smart as most Boomers are, you have to remember that old platitudes become old platitudes because they carry truth. There is a sucker born every minute and a fool and his money are soon parted. And if it sounds too good to be true, it is too good to be true!
I'm sure that man is telling the truth if he did buy gold five or ten years ago. Anyone who bought gold five or ten years ago when prices were low would now, thanks to the recession, be making a big profit (on paper). However, the truth is that it is probably too late for you to make the same profit buying gold now. Gold always goes up in value when people are panicking about the economy, but it also drops like a rock as soon as the general economy recovers. Anyone who buys gold now, with the price of gold already inflated, is more likely to lose almost every penny of his or her investment (assuming the economy improves) than to make any profit at all. Even if the economy continues to worsen, the price of gold may well have reached its limits.
Every word the man on television says may be the truth yet the conclusion he would have you draw remains more appropriate to a Ponzi scheme than to investment advice. The man on television can only continue to make additional profit if you buy into the idea of buying gold, but you are probably going to be left with a loss.
I used to feel the same irritation when "financial advisors" went on television and talked about the stock market giving an average of ten percent earnings per year over ten years. It might be absolutely true over the entire market that the earnings per year averaged ten percent. That in no way means that any stock or fund you bought would average ten percent earnings to you. Short of insider trading, your earnings will be way less than ten percent a year even in good times and with good luck.
In general, Americans tend to buy high and sell low. That makes earning anything very difficult.
Another important rule that Americans generally violate is don't run with the herd.
In Chicago we have a famous story of the Eastland Disaster. Western Electric hired several boats to take its employees for its annual company picnic. One of those boats, the Eastland, was said to have been listing to port before it left the dock. Then too many of the people on board the Eastland rushed to the same side of the boat to see something so the boat capsized and sank. Among the 844 people who drowned were more than 20 whole families.
Again and again, Boomers have invested as if they'd been trained to follow an Eastland Rule of investment. Everyone rushes into the same investment convinced that they will strike it rich and every investment capsizes, producing one disaster after another.
The lesson is clear. Even a legitimate and conservative investment can be turned worthless if everyone is rushing to buy the same thing--inflating prices without regard to whether or not the item's economic value is increasing. Some Ponzi schemes are created by crooks who intend to defraud us while others we create for ourselves with our own excess exuberance, but hardly anyone loses money who didn't enter the world of investment as part of a herd coming through a door marked greed.
Housing would be a good example of that principle. The foundation of the crash of the housing market was the dramatic profits that had been made from houses for no particular reason. The price of houses had been driven up well above the buying power of the average salary and well above any objective assessment of the value of each house.
[The mortgage market, I believe, is actually a separate issue with separate origins. I suspect we would have had a housing market crash even if everyone could pay their current mortgages without difficulty. And, on the other hand, I believe we might well have had a mortgage crash even if housing values had remained stable. And then those credit default swaps were a third problem entirely.... The one connection the three factors have, other than real estate, is greed-induced stupidity. ]
Boomers have been raised to be optimistic people, of course, but they are also well educated. How strange that they, as a group, would insist on believing that a get-rich-quick scheme might work. Even stranger that they believe they could all jump into the same get-rich-quick scheme and it would still work.
The less money you have to invest, the more important that you be a sophisticated investor and realize that the stock market is always a gamble. The less spare money you have, the more important that you invest and hold for the long term and not speculate. The less discretionary income you have to invest, the more important that you understand your own tolerance for risk.
A given stock that can give you giant gains can also give you magnificent losses over the years. If you can't live with loss or if you are not prepared to wait patiently for the market to turn back around, then you can not afford to buy stocks...or gold... or a house you can't afford to heat...
But most important of all, if you are as smart as most Boomers are, you have to remember that old platitudes become old platitudes because they carry truth. There is a sucker born every minute and a fool and his money are soon parted. And if it sounds too good to be true, it is too good to be true!
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