John Rogers of Chicago-based Ariel Investments offers a useful illustration of the challenge in distinguishing skillful money managers from lucky stock pickers. Citing work by author and money manager Michael Mauboussin, Rogers suggests that the appropriate test of an activity where skill is rewarded is the extent to which a participant can lose on purpose. A chess grandmaster, for example, will beat a novice almost every time, but could choose to play badly enough to lose to anyone. In contrast, it would be impossible to lose consistently to a slot machine on purpose since the outcome is determined by chance alone.

Rogers decided to have some fun with this insight and asked 71 staff members of his investment firm to pick ten stocks that would underperform the market for the second quarter of 2009. Only 19 succeeded, meaning that 73% tried to lose on purpose but failed. The average return of the “loser” picks was 30%, compared to a total return of 15.93% for the S&P 500® index.

Like most professional stock pickers, Rogers is confident of his abilities and concludes from this experiment that “in companies and in portfolios, luck matters in the short term, but skill matters in the long term.” He cites no evidence to support the latter claim, and an alternative interpretation strikes us as more compelling: the difficulty experienced by Ariel employees in picking losers is just what we would expect to see if security prices, on average, are fair. And over any time period, it’s much easier to identify a grandmaster at chess than a skillful money manager.

The fear mongers (uh em…television personalities) will have you believe that the world is collapsing and that inflation has run amok. As a result, the only real currency out there is gold. Given that gold is in finite supply, it should be bought and hoarded…or so the theory goes. Gold is the only thing that you can count on. I mean, since gold it’s at it’s all time high, wouldn’t be a great time to jump in?

What hogwash! There is no place for gold on the global financial stage. Here are my reasons why you should NOT invest in gold:

1. Gold Prices Are Easily Manipulated

One thing I am very afraid of with gold is manipulation.

Unlike paper currency that is impossible to manipulate in any way, gold can be accumulated by a group of connected buyers for the sole purpose of eliminating supply from the market. A successful cornering of the market can result in volatile swings in price. Unsuspecting buyers acquire bullion at higher prices only to see a flood of supply hit the market resulting in damaging price collapse.

2. Gold Is in Limited Supply

Related to manipulation, the simple fact is that there is a limited supply of gold. Those who want to return to the gold standard fail to appreciate that at some point a lack of supply could have disastrous consequences in a gold-based system. Wars are fought over commodities in short supply. In addition to fighting inflation, the Federal Reserve is also charged with promoting a stable currency. With gold, prices can be far from stable.

3. Gold Was Dead for 20 Years

For more than 20 years, the price of gold did nothing. If you invested in gold, you wasted your time. That all changed with fears of inflation and hedge fund speculation several years ago. Today, the church of gold is full of believers. What changed?

Nothing really except we have experienced an unprecedented upheaval in the global economy and financial markets. No wonder there has been a flight to gold. The trouble is that the gold rush is not likely to last. Do you really want to buy at the top? I don’t think so.

4. Gold Is NOT The Best Inflation Hedge.

There are FAR BETTER inflation hedges, that pay you interest. Gold does not pay interest, in fact it costs money to insure and store. The same goes true for other Precious Metals (PMEs) – these are less preferred investments because they are stores of value, not income-generating investments.

I guess you get how I feel. Don’t get involved in the hype!

Truth #8 of 101: Information is Toxic

The nightly news, daily stock market television programs, and cable news focus on variability to get your attention. (Just turn on Fox, CBS, NBC, ABC and they are all vying for your eyes.) They bombard you with the equivalent of “noise,” short-run data, and statistics that are useless. Paying attention to the short-term market fluctuations and newspaper headlines will completely disintegrate your peace of mind and ultimately your portfolio.

No one said it’s bad to watch the news and keep your “thumb on the pulse” of what’s going on. I recommend that you don’t use their “news” to make your investing decisions. The media makes money off of information – and they package it so it’s exciting to watch.

Psychologist Paul Andreassen of Harvard studied the link between the news media and investing. Andreassen found that the group of investors that had access to the news earned less than half as much per share traded as the group that received no news. (Andreassen, Paul. 1990. “Judgmental Extrapolation and Market Overreaction: On the Use and Disuse of News.” Journal of Behavioral Decision Making 3: 153-174.)

To learn more…

Download your FREE Investor Awareness Guide here →
to find out more…

Here my predictions I posted on Finance30.com

Since everyone else is predicting, I mind as well throw my hat in the ring. My prediction is that investors will fundamentally change the way they invest in 2010. They’ll close their retail brokerage accounts because they can’t stand all the predictions (most of them turn out wrong anyway). They’ll understand that they can control only a few things: They can keep their fees low by choosing the right funds; they can focus on their asset allocation; and they can use low-cost institutional funds to put together a globally diversified portfolio of stocks and bonds (unfortunately, this is what most investors don’t do). These 2010 investors are likely to achieve superior returns over the long term if they just follow the rules, not the predictions.