How much does the average investor in the stock market know about investing in the stock market?
I used to believe that many people I knew were absolute experts when it comes to stocks but since I have read up on the subject (watching many videos on investing, reading about 5 books about investing incl. "The Intelligent Investor" by Benjamin Graham) I notice that most people involved in the stock market seem to be absolutely clueless about stocks, even so-called experts. But at the same time I still feel like I'm a beginner, even though I can recognize supposedly very knowledgable people's mistakes.
My question is: how much do you think does the average investor know about investing? - Are you already average just by being a rational human even without knowing that much about stocks? - are you average or even above average by just reading one certain book and truly understanding it and practising what it preaches? - do you need to spend a good part of your day for years at a time learning about investing to be average? - do you actually need decades of practical experiences in the stock market to be average?
Anonymous2017-08-24T16:38:35Z
Humans are creatures of emotion and not logic, they may know ( or think they know) a lot about stocks market, but because stock market is so liquid so it creates temptation to buy or sell something, this bias phenomena calls sciance of availability, no wonder people make money in real estate and lose in stocks.
One great books won't classify as above average. Great investors have something in common, they are learning machine, what worked in one decade my not work in next one. But I agreed if you read a great book, it may establish great philosophy which may take you through your investing career, but you have to be a learning machine.
Humans may seem to be rational in day to day life, but when it comes to a stock market it's a completely different game. Just to be aware and admit that we are not rational, it can give you a huge edge in this game. No wander Joel Greenblatt's magic formula generated by programing outperforms most of hedge fund managers including the market. Don't worry about term "average" too much, it doesn't mean anything.
Im sure that you know Benjamin Graham and his book intelligent investor, and I assume that this is the book that you are talking about, I do believe that this is the greatest investment book out there. Just to refresh your memory I created an animation video The Intelligent investor, Hope you like it.
The vast majority of investors approach the markets incorrectly, and have no clue what they are doing. They follow the cliched conventional approaches, looking at irrelevant company information, because those are the "best practices" that they learn about from the financial industry and media. In reality, about 98% of the financial industry professionals are commissioned salespeople who couldn’t trade their way out of a paper bag. So by following those approaches, it is quite certain that on average, you will do somewhere around as well as the stock index performs.
If you want to be far more successful, then you need to understand the supply and demand of what you are investing in, as ultimately, this is what determines price. It's not the fundamentals that matter, but how people react to the fundamentals and news, and in relation to their expectations. You can only find this out from the trading data, which is price action, volume, trends, cycles, and sentiment.
Personally, I find that is usually a good idea to challenge conventional approaches, and look for alternatives that are outside the box.
The "average" investor knows very little. It's really not necessary to know much to get "average" returns since the proliferation of mutual funds and EFTs. Good lord, most people I know can't even tell you what the difference is between a stock and a bond. Ask them what a PE ratio is and they look at you like you have three heads. And these are people with sizeable retirement nest eggs.
With some basic effort and common sense, it's not hard for an individual investor to do better than average. I do think that experience over a lifetime does make us better investors. For example, I've always been a pretty good stock picker but I've had to learn (sometimes the hard way) when to sell.
Well, probably very little, but I'm afraid it's more complex than that. Stock markets has probably more to do with human psyhchology than anything else. How much do you know about human psychology?