As featured in The Wall Street Journal, Money Magazine, and more!
     

Your Money Is Dumb

This article was written by in Investing. 6 comments.


(It’s all right, mine is, too.)

Here’s a lovely article from Slate, You and Your Dumb Money. The author succinctly explains the difference between smart investors and dumb:

Smart money (big-time hedge-fund managers, private-equity honchos, leveraged buyout kings) reliably outperforms the market. Dumb money (individual investors, the sort of people who casually watch CNBC for stock tips) generally fares poorly.

Basically, investors plow money into those mutual funds that have performed well recently, playing along with hype. Those same funds demonstrably perform poorly once they become overloaded with capital.

The recognition of this state of existence is based on a report for the National Bureau of Economic Research by two economists/professors from their respective universities.

Expanding on the article, are you tying your money up in investments that have had an incredible amount of inflow and hype lately? (Hmmm… housing, maybe?)

Updated February 6, 2012 and originally published August 11, 2005. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

Email Email Print Print
avatar
Points: ♦127,505
Rank: Platinum
About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 3 comments }

avatar savvy saver

Before the bit dot-com bust, I remember reading an article that basically said (I’m paraphrasing here) “when you are buying ::insert dot-com company here::, a company that hasn’t made a profit yet, at $100/share, you are basically betting that someone else will be even dumber than you and pay $120/share.”

We were considering buying an investment property recently, but I’m really wary of the real estate market right now. I’m sure there are still good investments out there, but it is a lot of work to sort through the garbage. Since we aren’t in a hurry, we decided to wait to see how it all shakes out.

erin
Savvy Saver

avatar Jonathan

I think the official name for that is the Greater Fool Theory.

avatar mbhunter

I refinanced recently and man, they were pushing me hard to take money out! Way too many people are “withdrawing” way too much from the First Bank of Home Sweet Home. Besides the temptation to pull out equity because of home appreciation, it’s also equally tempting to fantasize about how much I could be making if I just took on a lot of debt and purchased a couple of being-built homes. There are too many people chasing too few deals to make that a reasonable outcome, though.

Previous post:

Next post: