Advice for New Investors

Or old. My previous reference and link to Amazon’s historic stock run up was a disservice to all of the esteemed readers of the humble blog. Same with my occasional references to Apple. Please strike all my references to individual stocks from the record.

Jeff Sommer restores order with “How Stocks Can Make You Rich. But They Probably Won’t“.

Heart of the matter:

How can those two sets of facts — the underperformance of the typical stock and the outperformance of the overall stock market — both be correct?

It is because a relative handful of stocks tend to outperform all others by tremendous amounts.

The conclusion:

“. . . most people picking stocks are unlikely to do well for very long.”

In related news, during the evening commute I enjoy listening to Seattle radio’s “Ron and Don”. They care about their community, they’re funny, and they have a beautiful rapport. However, their good work is seriously undermined by their pimping of an on-line trading school. They’re smart enough to know that 99% of day traders get their asses handed to them, despite that, they promote the shit out it.

I wrote them and asked why. No reply. Yet.

What’s Your SSQ?

Social science quotient.

Probably not as high as it could or should be because we’re shaped by Ron and Don.

The “Ron and Don Show”  is a popular Seattle-area radio program on 97.3 FM that I occasionally tune into during NPR fundraising campaigns and sports talk commercial breaks.

Their success isn’t accidental, it rests on great names, radio voices, personalities, energy, chemistry, and pacing, all topped off with a laser-like programming focus on whichever individual is deemed most interesting each particular day: the barefoot bandit from Whidbey Island, the Bellevue City Council person who got mauled by a black bear, the police officer charged with deadly force, the college student that committed suicide.

Ron and Don hammer away at each individual’s story for hours on end and we eat it up because we always have been and always will be suckers for detailed stories well told. Even better when the stories are somewhat sordid and make us feel better about our lives.

But we’re out of touch with the effect of the Ron and Don-like media shining its spotlight so continuously and narrowly on individuals.

The cumulative effect is we’re utterly unable to think sociologically about pervasive patterns and themes among groups. Put differently, we can’t take stories of individuals and extrapolate about what they do and don’t represent in terms of larger social scientific trends.

We’re intellectual weaklings.

Here’s two non-Ron and Don stories from last week that I offer as a social science quotient quiz. Determine your “SSQ” by using a scale of 1 to 10. Assign yourself a “1” if these findings completely surprise you, a “10” if you were already familiar with the studies and the findings, and “2’s” through “9’s” for points in between.

Story one is available here. An excerpt:

Harvard and Duke Biz school professors Michael Norton and Dan Ariely asked over 5,000 Americans about US wealth distribution and how it should look if things could be changed.

“Respondents vastly underestimated the actual level of wealth inequality in the United States, believing that the wealthiest quintile (20 percent) held about 59 percent of the wealth when the actual number is closer to 84 percent.” Studies show current US wealth inequality is near record highs, with the top one percent of Americans estimated to hold around 50 percent of the nation’s wealth.

Story two—available at Slate.com.

The U.S. imprisons more people in absolute numbers and per capita than any other country on earth. With 5 percent of the world population, the U.S. hosts upward of 20 percent of its prisoners. The country’s incarceration rate has roughly quintupled since the early 1970s. In 1980, one in 10 black high-school dropouts were incarcerated. By 2008, that number was 37 percent.

For extra credit, submit your score via the comment section.

If our scores are low, as I presume they will be, it’s not Ron’s and Don’s fault. They don’t have a dog in the “individual versus collective thinking” fight I’m outlining. All they care about is that more listeners tune into them than NPR and sports talk. And their winning formula elevates the individual at the expense of social scientific understanding because we tune in and don’t demand any more from them.