“If consumers have a less-than-fully-rational belief, firms often have more incentive to cater to that belief than to eradicate it.” –Thaler and Sunstein in Nudge
They really hit the proverbial nail on the head with that one. The examples in the investment industry are almost endless.
“It’s not hard to pick stocks!”
As far as I can tell, the circumstances that would provide a stock picker with the greatest probability of beating actively managed funds are circumstances in which the entire stock picking game is pure luck.
- If it’s not luck, then actively managed funds, pension funds, and other institutional investors have got you beat on intelligence, time, and money. I don’t care how smart you are. It’s still true.
- Alternatively, if stock picking success is based entirely upon luck, then I can’t imagine what anybody is doing using anything other than an index fund, as minimizing costs would be literally the only way to reliably improve returns on stock investments.
Note that neither scenario leads to the conclusion that stock picking is a wise move. And yet, countless books, magazines, newsletters, blogs, and other websites make money by telling people precisely the opposite: “Sure, you can pick stocks and beat the market. It’s easy!” All you have to do is buy their product. 
“Timing the market isn’t that hard.”
Again, we’re presented with a scenario in which the evidence indicates that something is impossible. Further, the most successful long-term investors have stated time and again that timing the market is a worse-than-worthless endeavor.
Yet, since people want to believe it’s possible, businesses can make a fortune by selling products based on false hopes.
[Related side note: Taking your money out of the market and "waiting until things settle down" is just a euphemism for timing the market.]
How to protect yourself:
Of course, the real question is how we can protect ourselves from such unscrupulous marketers. Admittedly, it’s rather tricky. What makes such pitches dangerous is the fact that data can be found that makes each of them sound believable.
My suggestion is to do your own research. Look for your own data, rather than considering only the facts that the marketer has presented to you.
For example, try reading something from each side of the argument: Read a book explaining why index funds are the best investment strategy, and read a book explaining why picking stocks is the way to go. Then, having read both sides, you can determine for yourself who has the more persuasive argument.
What about you?
In what ways have you seen businesses try to take advantage of investors’ misconceptions? And how do you protect yourself from being sold a lie?
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{ 2 comments… read them below or add one }
This reminds me of a post recently on the “20 something finance” blog, where the author indicates that “buy and hold is dead”, and expresses his plan on beating the market. All it shows is how naive the author is.
Your write-up is spot on. Anyone who claims to consistently beat the market is delusional. If someone really could beat the market, wouldn’t they shut their trap about it and make billions? I would.
I agree with Mike. Also, INVESTOR hit it on the head.
What I find truly amazing is that people still fall for it – if not, those jerks would be out of business.
Why is this? Because many “investors” behave like children. They want what they want when they want it. As a result, if Mr. “Promise Them The Sky” offers some candy, they’ll take it…..and follow him anywhere he leads.