Dumb Money

Many people have, at one time or another, taken some of their hard-earned funds, and decided to put them in the stock market. These well-meaning individuals either acted on a tip they saw on CNBC, or actually believed one of those crazy faxes/emails that said XBXB @ $0.17/share was the next Microsoft. These people thought they were being smart, but they probably just ended up lining the pockets of brokers and mutual funds when they lost money on their 'investment'. I know, because I've done it, too.

Part of the problem we face is that we are big underdogs in the investment channel. We, as individuals, have access to hordes of information. Yet, we don't even scratch the surface of our knowledge potential. We invest without carefully reading financial statements and company reports, looking instead to message boards and TV stock 'experts' for guidance. If you own mutual funds, do you know what companies those funds are holding? Most people have no clue.

Investors can be lumped into two categories: smart money and dumb money. Most individuals are 'dumb money'. Smart money regularly beats the market, and includes many mutual funds. Dumb money generally loses. Dumb money often over-reacts to market pressure.

There are a few ways to avoid becoming 'dumb money'...

First, forget about short-term investing. If you plan to rapidly buy & sell stocks, statistics show that, on average, you will lose, and maybe lose big. Long-term investors don't easily get scared off by market fluctations, 10% price swings, or a bad earnings report. Plus, they don't have to pay the transaction fees over and over like the day traders do. The best way to ensure that you will make money investing is to find your initial investment vehicle, and leave your money alone.

Second, don't go along with the crowd. Example: Walmart's stock has been a great investment over the last 5 years, right? Wrong! It's actually lost about 5% during that time. Yet, if you watched CNBC, you'd swear that Walmart was the best thing since sliced bread. Find a strategy that makes fundamental good-sense, and don't throw your money into a stock or fund because it's a big name.Finally, diversify! If you're in it for the long-haul, you need to make sure that some really bad news doesn't keep the kids from going to college.

That's it for now. Check out

Scott is the inventory control manager for a large winery, and maintains and publishes stockmarketplus.com, his own financial blog.