Reasons Not to Buy Stocks

Yahoo has an interview with investor James Altucher who believes "the Dow will hit 20,000 and the S&P will eclipse 2000 before the current rally runs its course" (leading to, what he says will be a bubble-level valuation in 2013-14).

Let me just say that if his prediction is true and the Dow does increase more than 50% in the next few years, I'm outta here! Based on my current net worth, this sort of increase would give me way more than the minimum amount I need to retire -- I'd almost hit my full-on retirement number with that sort of growth (not to mention my added savings.) I think it would be time to cash out (at least in part) and take early semi-retirement.

But I digress. I don't want to focus on Altucher's market predictions (who really knows what the market will do anyway?), but rather the four reasons not to buy stocks that he lists at the end of the piece (the actual piece on his blog lists 10 reasons). They are:

It's really hard and very few people are successful at it. The very best investors in the world can only consistently produce 10% to 15% annual returns, so what hope is there for the rest of us?

The competition is ruthless, relentless and better connected (literally and figuratively) than the rest of us.

It's mostly a scam. In addition to insider trading and other outright frauds, "I would never ever trust any number that comes out on a 10Q, no matter how GAAP compliant it is," he writes. "Enron was GAAP compliant."

Ownership has its privileges. Citing legendary investors like Bill Gates and Warren Buffett, Altucher notes "the guys who make real stock market wealth never diversify and never sell" — and they also have 100s of millions of shares in the companies they run and/or founded. "Then there's the other 100 million people who own stocks."

So if you're not supposed to buy stocks, what should you do instead? Altucher's advice:

The best way to take advantage of a booming stock market is to start a company. Because everything goes up. If you have an extra $50,000 don’t put it into stocks. Put it into yourself. You’ll make 10,000% on that instead of 5% per year.

And if you're not the entrepreneurial type? Here's what he suggests:

Buy index funds or closed-end funds or "wait for another 2008 and buy a large basket of stocks and really ride them -- and you have to really ride them through all the volatility.

I rode the stock market through 2008 (investing all the way down, at the bottom, and all the way back up again) and have to admit it was a bumpy and nerve-racking time. Am I glad I did it? Sure, those investments have done quite well so far. But was it easy? No way.

What do you think about Altucher's advice to forget stocks and instead start a company/business?

Comments

[texashaze]

His statement that "It's mostly a scam" and that "I would never ever trust any number that comes out on a 10Q, no matter how GAAP compliant it is," is ridiculous. I've worked for 2 NYSE public companies since Enron and will have to say that companies are now so paranoid of getting in trouble that they get too conservative to meet GAAP standards. SOX auditing is now very rigorous and thorough. As one who has been scared to death by these guys (like my peers) I don't think many people would fib. With that being said I fully trust most companies on their 10Qs.

[tom]

What's the statistic... roughly 75% of business fail in their 1st year?

His first piece of advice is kind of absurd.

His second... much better. Index fund investing is, by far the best type, as long as you have an appropriate asset allocation that suits your needs. Stocks, individually, are always risky. I would only invest "play money" in individual stocks, never a retirement account.

[Squirrelers]

I don't buy his thoughts, for the everyday investor anyway. Not everyone needs to be a Buffet or Gates, and many average folks have helped build their personal wealth through allocating a decent amount of their investments to stocks.

[Old Limey]

I have never believed in following the crowd so my approach has been very different.
1) I have no crystal ball to tell me what the future has in store for the stock and bond markets so making predictions would be extremely egotistical.
2) I use a very disciplined and mathematical approach.
3) I find the mutual funds that currently have the best Risk/Reward ratio for several periods ranging from several months to several years. Obviously the funds I select will be in uptrends.
4) When the method I am using (and my own eyes) tell me that they have started to roll over and head downwards they are sold as soon as the method I am using indicates. Methods vary according to the volatility and type of the fund.

As my wealth has grown over the years I take less risk because I no longer need high returns. Since the end of 2007 I have been in investments where some have No risk and others have Low risks.
Eighteen years ago the universe of funds that I considered was very large, both domestic and international funds of every type available. Now I primarily use fixed income investments which are a whole lot easier to manage.

Once your capital reaches a critical mass that is large enough to sustain your lifestyle indefinitely the only reason to take greater risks than you need is if you enjoy taking risks, if it is important to you that you leave a great deal of money to your heirs or to create a charitable foundation. In our case, being very comfortable but not super wealthy, we don't feel it's important.

[Matt]

I have bought individual stock through DRIP plans and have done well. Could I have done better? Yes. I lost the time to keep track of them all and having DRIPS is a pain. I have liquidated all my DRIPS and I am trying mutual funds. It is a lot less stress.

[Mark]

I mostly agree with Altucher. Most of us are not as smart or disciplined as Old Limey! That's why I went a step further than
Altucher and recommended in my reader profile that people should invest in balanced funds. Most of us can't handle the volatility of a pure stock portfolio. The better balanced funds have come close to or have beaten the S&P 500 over longer periods of time and if you buy extra shares of these funds when they're down, you'll do better than their published returns. This is still difficult but something that most people can do because the volatility for balanced funds isn't as crazy. Just to name a few good ones:

Dodge & Cox Balanced (DODBX)
Vanguard Wellington (VWELX)
Vanguard Balanced Index (VBINX)
T. Rowe Price Capital Appreciation (PRWCX)

[Derek Clark]

So far I've done quite a bit of index fund and individual stock investing. I personally enjoy picking my own stocks better than letting someone else do it for me. I am mostly investing for dividends, as the income created is more important to me than the potential total return. As for the business, I think that is also a great idea. I quit my job 2 weeks ago to do just that. It won't need anywhere near 50k invested in it though.

[JM]

As an auditor of financial statements, I find his comments on the 10-Q ridiculously offensive. There are bad auditors and bad companies, just like there are bad investors, bad police officers, bad people in general. Doesn't mean that everyone is untruthful. I take a lot of pride in my work and so do nearly all of my colleagues. Please don't talk about things you obviously have no idea about, Mr. Altucher. Enron was one of how many thousands of companies on the stock exchange???

[seer]

Be very wary of so-called experts who predict things like "Dow 20000". Where's the guy who said "Dow 36000" now? When these guys come out of the woodwork predicting big gains in the stock market, it is actually better to be contrarian and expect a correction or drop in the market.

[Josh Mayes]

I sold my modest stock portfolio ($25,000) in 2007 and "invested in myself" by starting a business. The key element that this writer is missing is the fundamental difference between investing in stock and starting a business.

Investing in stocks is only a two-part transaction. You make your purchase and then you wait to see if the value rises or falls. At some point you decide to sell the stock, hopefully for more money than you paid for it. When you're starting a business, the initial invest is your money. The second, and much larger investment is your time. A business doesn't run itself.

I'd never suggest that investing in yourself by starting a business is a bad idea. Building a company from the ground up can be an incredibly rewarding experience, personally, and financially. I'd only caution anyone considering it that it is a significantly larger investment, and greater risk than buying stock.

[texashaze]

@JM - per your comment and mine, I can conclude that you are one of the guys I'm scared of? :)

[jim]

Starting a business makes some sense for business minded entrepreneurs but probably not a good idea for most people. But expecting 10,000% returns is absurd.

Buying index funds instead of trying to pick individual stocks makes good sense for most people if not virtually everyone. I don't agree with his reasons in total but the advice to buy index funds is fine.

[JM]

@ texashaze - Haha, I worked a little on public companies in the past but I have mostly worked on NFPs and private companies lately. So, not currently. :) I'm not sure why company staff is so scared of us though. Are a lot of auditors I'm not aware of just jerks? Because I try to be very easy to work with (without giving a free pass, of course). I find that if you treat people with respect and courtesy, they'll do the same with you. 99% of the time, of course; there's always that one jerk of a client. :)

[Largebill]

All these ideas of what is a good or bad investment strategy come out as though they are right for all. As Jim stated, most people are not good candidates to start a business. Bill Gates did not just start a business and miraculously wake up a billionaire. He had good ideas and while he didn't finish college at Harvard he was well-educated and had good business managers who advised him as he started his company. Beyond that, he had superb instincts. In his business' growth years he was confronted with thousands of this or that decisions and more often than not he steered the company in the right direction. As far as stocks go, stocks are not a good or bad investment. Some stocks may be awful, bad fair okay, good or fantastic at a particular time. For some people stocks may not be right. For others managing a checking account and credit cards are beyond their capability.

[No Debt MBA]

I think starting a business is a crucial move to make on top of doing all the basic personal finance stuff like contributing to retirement etc. Entrepreneurship is one of the few endeavors you can undertake where you have the potential to significantly increase your income. Of course so many businesses fail so it's important to stick with low start up costs, learn from your mistakes and repeat. There is no guarantee not to loose all the money you invest in your business and you're certainly not guaranteed a 10,000% return. However, you are doing some crucial diversification and giving yourself a shot at some big money.