Safe investment? Beware of experts!

The power of the financial markets should be daunting but many people are not deterred.

I have friends in Monaco who are amateur currency traders. They don't have the same experience, resources, or the skill, of George Soros.

Nor do they follow a disciplined approach to trading. It's completely crazy that they think they can win. Why do people underestimate the difficulty of making money in the financial markets? I believe there are two main reasons.

The first, which I will discuss here, is the 'experts' in the media...

Beware of 'experts'

The experts in the media promote the idea that markets are easier than they really are. A guy on TV or in the newspaper says that the price is going to do this and do that, and it sounds easy.

The market can be beaten. The message is that the market's behaviour can be forecasted. It's a persistent and seductive message, and people think, 'Ah, I can have a go at that, I can make money out of that'.

You can't blame the average person for following what they read in the newspaper and what they're being told on TV.

However, many so-called experts are just commentators or analysts who often don't have any track record and who often, to my ear, don't even make much sense.

Follow my advice and listen critically, rather than just accept what you're hearing or reading. You may be surprised to find that they're not really experts.

Most professionals are not outguessing the market

You may heed my early warnings that the markets are difficult and that the media underplays the difficulties, but you may also wonder about all the money made by the people working on Wall Street or in the City of London. Surely they know something about markets that you don't?

Let me put you straight on this. The truth is that very few are successfully backing their views on markets. Most of them wouldn't have a clue what the market was going to do. They make money in other ways, such as commission and management fees, in other words by getting a cut on the money you invest!

It's not that people working in finance don't know anything - they are usually very good, very smart people. I respect a lot of them and many are my friends - but the fact is they're making money out of sales, client relationships and by doing transactions, i.e. facilitating the whole process.

Equally, don't be too impressed with your stockbroker just because they sound confident and know a lot of stories and figures.

More information does not necessarily make the market more predictable. The extra information is probably useless as the price has already adjusted for it - it has been 'priced in'.

It's about as useful as playing roulette and knowing whether the roulette wheel was made in Taiwan or Korea.

The critical test is: does the broker make a living out of picking stocks? Probably not. They are sitting in their seat because they're getting the fees you pay them to buy and sell on your behalf.

It's very easy for someone to have a view when it's with someone else's money.

They're not actually making money out of successfully predicting what's going to go up and down. There are, therefore, not a reason for you to take up punting cotton futures in your spare time.

Listen and read very critically

If you are trading or investing, the media probably plays a large role in forming your views, but it always surprises me how often they present faulty logic. So it is vital to learn to be critical of what you read and hear.

Try to spot mistakes such as those in the following real examples.

"Experts say the market is overvalued."

This is a subject I have already touched on. 'Experts' is the most overused word in finance. I see it all the time and wonder who these experts are! The only expert who interests me is someone with a proven track record of predicting the market.