In Part 1 of this series on investment myths I exposed 5 commonly held beliefs about investing that are preventing many people from making as much money as they could with their investments. They are:
The stock market must go up to make money.
Stock market investing is risky.
Over 20 years the stock market always goes up.
The best way to make money in stocks is to buy and hold.
News and research groups have the hot stock picks.
I dispelled each of these myths and explained that they are the result of miseducation. The problem with miseducation is it leads to false understanding of the truth, and as many people have learned over the last year in the world of investing, not knowing the truth can be financially devastating.
In this article I am going to expose 5 more myths about the world of stocks and investing and share with you how you can not only correct your mistaken understandings but also profit from your new knowledge.
Myth #1: Investing in Stocks is Like Gambling
The myth that investing in stocks is like gambling is one of the oldest, most pervasive myths surrounding the stock market. In fact many people do not even realize they hold this belief. Yet unknowingly it appears in their words when they say things like, "You're betting the stock will go down" or "You're betting the stock will go up."
The idea that a smart investor is betting is ludicrous. Yet it has crept into an uneducated public to the point that many religious groups and social networks opposed to gambling have led their followers to believe the stock market is so riddled with gambling one would be better off playing the lottery. In fact nothing could be further from the truth.
The real fallacy here is the assumption that the investor is betting. As one who spends his life in the investment community, let me assure you no smart investor would ever bet. Betting is the exact opposite of what investors do. Investors spend their life learning and educating themselves about the investment they are about to make. Then they proceed to invest, trusting that their education was correct. If the investment goes against the investor, the honest investor still will not say, "I bet wrong." The honest investor will say, "What can I learn from this?"
Anyone who proceeds into any area of life without being properly educated could be seen as a gambler. But the more appropriate term would be foolish. To illustrate this point, let's take a person learning to drive a car. If the person has never ever driven a vehicle before, they may assert, "Since lots of people do it, so can I." But the foolishness comes when the person gets behind the wheel of a car and attempts to drive without first learning anything about driving a car. We could easily say that this person was gambling with his life, but the truth is it's simply foolishness.
Investing in the stock market is the same way. Millions of people hear how large amounts of money are made in the market. They see ads on television for cheap stock brokers, and one day think, "I can do that too." Truth is they CAN do it too-but only after they learn HOW to do it. For the educated investor, putting money into the stock market is an educated, analytical, thoughtful decision. And yet for the uneducated investor doing the same action is... well, foolish. Becoming educated first is the best way to successfully invest in the stock market. Myth: BUSTED
Myth #2: "Predicting" the Stock Market Is Impossible
On the heels of the assumption that investing in the stock market is gambling comes a follow-up myth: "Predicting the stock market is impossible." Again this fallacy comes down to the lack of education. For YOU to predict the stock market may be impossible, but not specifically for every person. In fact since the beginning of the stock market many investors around the world have successfully "predicted" the next moves. The author of this article is one of them (that would be me!). Predicting the stock market is not nearly as mystical as one might think. In fact the market moves in very predictable, repeating patterns, over and over again. And once a person is trained to watch and recognize those patterns, that person can also predict the next move with reasonable certainty. Myth: BUSTED
Myth #3: Mutual Funds Are the Safest Way to Make Money in the Stock Market
I suppose to dispel this next myth one must define what "safe" is. My definition of "safe" in regards to investing is an investment that has the ability to be profitable, not because of market conditions but in spite of market conditions. In other words, if the market goes up, I want an investment that can make money. If the market goes down, I want an investment that can make money. Yet mutual funds are not one of those investments. It boggles my mind as to why financial advisors continue to sell these investment vehicles to unknowing would-be retirees. It's an investment that can ONLY make money if the market moves higher. And to cover the weakness of the investment the sales pitch goes like this, "Over 20 years the market always goes higher..." Well what if I need to retire in 19 years and that's not an up year?
To me the most foolish investment a person can make is one that is confined to profit by the direction of the market. As such I believe mutual funds to not only be a poor choice for a safe investment, but I consider a mutual fund a very risky investment. If you do not believe me, just ask the majority of Americans who have lost about 50% of their retirement recently how things are working out for them and if they feel mutual funds are a safe, secure choice for investing. Myth: BUSTED
Myth #4: A 24% Annual Growth Is an Outstanding Return
Okay... I'll give you this one. Twenty-four percent annual rate of return is exceptional-if you're used to putting your money in a bank savings account. But a smart investor would never tie his/her money up for an entire year just to make a 24% return! Can you imagine any investor who would be willing to put up venture capital for a business that only promises 24% on the money? Of course you can't! And the stock market should be no different. In fact that's kind of what you're doing when you invest in the market. You're lending investment capital to the company while they continue to do business. But I guarantee you their business is bringing in more than 24% profit each year. The odds are that business is bringing in close to 100-200% profit EACH MONTH! And if you're fronting capital, you certainly deserve your fair share of that profit.
Mutual funds and investment services are loaded down with fees, transaction costs, and sales bonuses for the people who get you to give up your money for them to invest. And they get paid even if they do lose money-and YOU are the one who pays for all of it. By the end of the year, you're lucky if you have 24% left over. And those sales people who are getting paid from you? Well their job is to sell you the idea that 24% is a great return.
I myself would never make such an investment. When I place trades in the market I look for steady monthly cash flows that amount to a return that would stagger your mind if I told you. And ALL smart investors look for the same type of return. How much? Hmmm, let's just say investors think in terms of monthly returns, not annual returns, and we'll leave it at that. Myth: BUSTED
Myth #5: Learning to Make Money in the Stock Market Takes Years of Education
Of all the myths I dispel, this is probably the saddest. It's sad because people truly believe they are unable to learn how to make great monthly income in the market. They ask questions like, "Well, if it's so simple why isn't everyone doing it?" This is probably the most logical and natural question. The only answer I have is, "They don't know how." But I have seen hundreds of my own students learn to make consistent money in the stock market after only 2-3 months of focused training. How much training? Generally 4-8 hours a week. That's less time than the average American spends trying to build a network marketing business that seems to go nowhere.
The truth about investing is this: successful investing comes down to nothing more and nothing less than education. For the person who takes the time and spends the energy to learn, becoming a successful investor is not that far out of sight. In fact I believe pretty much anybody can learn how to successfully invest in the stock market in a year or less.
Just think-one year! That's less time than it has taken for most Americans to watch their stock portfolios fall while trusting the "all-knowing" financial advisors. One year-that's less time than it takes to earn a master's degree. One year-that's all it would take for a person like you to learn how to invest successfully as well. Myth: BUSTED
I hope you have seen how these 10 myths may have helped form your ideas of the stock market as a risky place to invest. I hope next time you hear your favorite Uncle Jimmy, or some announcer on TV, perpetuate these myths you will be quick to dismiss them as such and say to yourself, "I know better!"
How to Learn More
If what you have just read makes sense to you and you'd like to learn more, the best place to start is Trade Smart University's free workshop called the Foundations of Stocks and Options http://tradesmartu.com/site/index-foso.html You don't want to miss this free online workshop!
Jeremy Whaley is co-founder of Trade Smart University, an education company dedicated to helping everyday people learn to trade the stock market for consistent profits. If you would like to learn how to trade your own money for steady profits, visit http://www.TradeSmartU.com and experience affordable, accessible stock market education.
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