If you’re confused about where to invest your money, then my advice is to take a look at the facts – and make up your own mind on the evidence of what you know and not what somebody tells you.
Of course, most people listen to expert advice. But an article in the Public Library of Science reveals just how dangerous this can be. It describes an experiment…
Professor Gregory Berns got twenty four college students together, hooked them up to brain scanners and then asked them to choose between two alternatives. The first was a small, but certain, sum of money. The other was to play a lottery that could deliver a much larger sum, but of course with a limited prospect of success.
Some of these students made up their own minds. Others listened first to expert advice offered by one Charles Noussair, an economic advisor to the US Federal Reserve. What Professor Berns found was that the brains of those students left to make their own choice exhibited activity in those regions associated with making decisions and calculating probabilities. But for those that were offered expert advice there was no such activity. In other words they did not bother to think for themselves.
Why we listen to experts
I guess this comes as no great surprise. After all, why bother to hear the experts if you do not do what they say? We go to doctors and lawyers to benefit from their very specialist knowledge and are hardly likely to dispute what they say. It seems only common sense to take advice from people who know much more about a subject than we do.
Most of us take this attitude about money. Some people, like me, enjoy the challenge of managing our finances. I enjoy doing the straightforward mathematical calculations and weighing up the various probabilities. But others have better things to do with their lives and would happily never make a financial decision in their lives if they could find someone else to do so for them…
But the problem with finance, or at least with investment, is that there is no definitive body of knowledge that tells you whether one course of action is better than another. So much depends upon what happens in the future and so inevitably financial advice is largely a matter of opinion.
And this opinion, whether it is the opinion of a professional or of an amateur, springs from three sources. It springs from personal experience, because we are all biased by experience and especially by recent experience. It springs from that person’s field of vision, because nobody is going to invest in things that they know nothing about. And it springs from what we hear from others. The latter represents the ‘consensus view’, that cosy hideaway in which we can all feel comfortable because we know that others are feeling the same as we are, and so if we are wrong then plenty more will be in the same boat.
Now is a great time to be buying good quality small company shares
What do these three factors tell us today? Recent experience tells us to beware of the stock market, and of small companies in particular. Our field of vision does not cover such subjects as super-computing, genetics and nanotechnology although it is in such exciting areas that fortunes will be made in the future. And, judging by the samples of expert advice offered to those considering an ISA subscription before the end of the latest tax year, the consensus view is still highly cautious favouring low return bonds and cash deposits and wary of the stock market.
It is very hard to go against all this. You need to be a little bit brave to go against the consensus, but I do not think that this is the main obstacle. The real problem is that, offered the chance to either use our own brains to compute the facts or listen to a self-styled expert, we lazily choose the latter. But this long week-end gives us a chance to try the former.
Here are a few facts to get you started. Savings rates are pitiful. There are plenty of signs that the economy is starting to stabilise…
Shares are cheaper than they have been for a decade. The stock market is now creeping up and is higher than it was six months ago. And small companies are beginning to outperform large companies. This is the time to start buying good quality small company shares. Click here to read about three shares that could bounce back sharply as the market starts to recover,
Happy Easter.
Tom Bulford
For The Penny SleuthP.S. I hope you received the special report I sent you earlier. If not, I urge you to take a look now. It’s about what I call the “mattress syndrome” and how it could bank you 86% gains by April 2010. Click here to read it now.
P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.
