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Buy On The Upside
Chapter 2: Little Red Riding Hood
The Wall Street Buy Machine plays the Big Bad Wolf to the beginning investor’s
Little Red Riding Hood by seeming benign and even helpful, while having
a concealed desire to eat the contents of your basket.
According to the National Association of Securities Dealers (NASD), July
2003,4 there are 660,904 registered securities representatives working
in 94,204 offices for 5,331 brokerage firms in the United States. By comparison,
the Bureau of Labor Statistics5 estimated that dentists numbered 152,000,
or about one quarter the number of securities professionals. Everyone
has (or has had) teeth, but only about half of us invest in stocks. Why
are there so many brokers? The answer is simple: to entice you to buy
stocks, bonds, mutual funds, and other investments.
You see the “Wall Street Buy Machine” everywhere. For instance,
financial programs on TV and radio routinely tout stocks. Brokerage houses
promote their lists of favorite stocks to buy. Popular financial magazines
publish article after article about hot stocks and what you should buy.
Seductive brochures accompany your monthly or quarterly mutual fund or
brokerage account statements, espousing the merits of owning stocks. Brokers,
trying to earn a living from sales commissions, routinely call you to
hawk the latest “great stock” or fund. After you pay for a
subscription, a newsletter writer provides lists of stocks you must own
now. Stock mutual funds ads tell you how much money you can make in the
long run. The federal government gives you tax breaks to maintain a retirement
account that presumably contains stocks. And your employer sets up plans
so you can buy stocks for your retirement account. The Machine tells us
to buy stocks at anytime at any price. We retail investors are confronted
by a withering campaign of buy, buy, buy.
Making Money Is Not Easy
Near the peak of the 1990s bull market, investors, with lots of encouragement
from Wall Street, threw money at stocks and many made large profits. People
became accustomed to large gains and expected them to continue. They didn’t
realize that stocks can’t go up forever because at some point everyone
who wanted to buy at a higher price has done so. In the absence of new
buyers and any bad or unexpected news, the sellers step in and the prices
begin to drop. The mantra of investing in the late 1990s was that is was
easy to make money in stocks: just about anybody with half a brain and
a few thousand dollars to invest could hit the jackpot. The prolonged
bull market let investors think that making money was easy. Ever-increasing
prices masked basic investing mistakes like paying too much, buying a
company that has no viable business plan (many Internet stocks), failure
to sell a stock after making a handsome profit, loading up on the stocks
in the same hot sector, and believing all the media and Wall Street hype
saying “it’s different this time.” Remember the “New
Economy”?
The bursting of the NASDAQ bubble in 2000 changed these views of investing.
The illusion that investing in the stock market is a trivial pursuit ended
in March 2000.
| More
in this chapter:
Mutual Fund Lessons
What Is the Long-term?
Beware of Professional Buy-and-sell Recommendations
Choosing and Managing Your Broker
Are You a Committed Investor?
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TOC
Chapter 1 Chapter
3 Chapter 4 Chapter
5 Chapter 6 Chapter
7
Posted May 16, 2008.
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