The first of Jason Hartman’s “Next” Ten Commandments of successful investing is that “Thou Shalt Not Be a Sucker.” There are many dimensions of meaning behind this commandment that apply to us as investors.
The first thing to understand about “not being a sucker” is that many people will try to sell us on schemes that seem too good to be true. The reason for this is frequently because of some catch that is not immediately apparent. Con men are very adept at playing to people’s greed and fear to convince them to part with their money by selling the hope of easy gains. The truth is that there is nothing “easy” about making money as an investor. Some people manage to make money by being lucky, but luck is not a strategy. Long-term success requires that you do the work, and resist the temptation of easy answers and shortcuts.
Another important iteration of this principal is that many people can also be pulled astray by following “conventional wisdom” when making their financial decisions. The danger of this is because conventional methods of investing create a “herd” mentality where multiple people all do the same things. The standard problem that is created by this situation is exemplified by the millions upon millions of people who have been suckered into the notion of investing for retirement through the mutual funds in their 401k.
This strategy frequently looks great while the market is in an expansion cycle, but fails dramatically during market corrections and recessions. Being an astute investor means that you need to do the work, follow the market, make informed decisions, and continually assess the decisions you have made to see if changes need to be made. Most people find this unappealing, because they would like to believe that they can invest their money, forget about it, and have it grow automatically. Unfortunately, the world doesn’t work that way.
Also consider that the government is very well versed in what the majority of people do. This information is used to design tax structures that ensure investors will pay a considerable percentage of any gains they make to the federal, state, and local governments. For example, consider the many people who have taken to investing in metals like gold or silver instead of stocks. One thing that these people frequently neglect is that the government taxes capital gains on “collectibles” like metals or art at 28% vs. the 15% long-term capital gain rate that is assessed against equities and real estate. Also consider the mutual fund industry that assesses management fees that erode investor returns during the “good times” and pulls them into a “buy and hold” strategy that virtually guarantees that the next recession will decimate the balance of their retirement account.
To side-step these traps of “conventional wisdom” means that we must act and invest in an un-conventional way.
