Apprenticed Investor: There Are No Shortcuts

Learn the Magic Formula!
Become a Stock Market Genius!
Get Inside the Millionaire Mind!
Become a One Minute Millionaire!

That's the message of several new books that, for lack of a better phrase, purport to have discovered the magic formula for investing.

Umm, I don't think so.

Sorry to be such a party pooper, but there is, of course, no such elixir. It takes some smarts, lots of hard work and a little bit of luck to be a successful investor.

But you probably knew that already, didn't you? If you have been following the Apprenticed Investor series, you know that we believe there is no such magic bullet. Successful investing requires effort and intelligence. We know it needs an ongoing self-evaluation process, one that requires constant adaptation and improvement. It demands a well-thought-out plan that is meticulously executed, with good record-keeping and data-mining.

The best investors aren't looking for a big miracle. Instead, they seek small ways to improve their performance, such as a capital preservation strategy that ensures minor losses do not become portfolio-wreckers. To outperform the markets requires attention to hundreds of small details such as knowing when to be a more aggressive and when to throttle back; when to do nothing; using risk management.

The best investors know their own weaknesses, and know how to keep their emotions in check.

Lastly, it never hurts to have the fair winds of chance blow your way. But magic formula? If it were that easy, then everyone would be rich.

Beat the Market

It seems that every year, a whole new crop of books comes out to advise you how to beat the markets. Over the years, there have been too many investment-advice books published to even mention. There's a related group of books that care less about stocks and more about saving money. A recent batch has titles like Secrets of the Millionaire Mind, The Automatic Millionaire and Cracking the Millionaire Code.

These collections tend to be filled with folksy advice on how to save a few shekels here and there. They range from the practical to the absurd: Buy used cars, bring lunches to work, and use a barber college to save on haircutting expense.

As The New York Times noted: "It is no accident that the authors of many of these books come from the stage of motivational seminars and late-night infomercials."

But it's hardly the stuff that makes for great investing.

To be fair, some investing books are worth exploring and considering on their own merits. Take, for example, The Little Book That Beats the Market, which has gotten some favorable press of late.

I have no problem with the book's main plan: "Invest in good companies when they are cheap." That's certainly one way to pick stocks, and it sure has worked for Warren Buffett. Of course, you also can use a technical method of stock selection. Or you can screen with quantitative data. Or you can rely on fundamentals to make your stock selections.

It really doesn't matter how stocks enter your portfolio. As we have shown time and again, stock selection is not where investors run into trouble. Managing the positions after they become part of the portfolio is where people typically discover their investing shortcomings. And that's before we get to a wealth of other important issues, including how and when to make purchases, how much of a given stock to buy (position-sizing), when to add to existing holdings, how to handle bad markets, when to use leverage, how to use options, how to hedge, when to use stop-losses, etc.

Here's a challenge I make to you, or Joel Greenblatt, the author of The Little Book That Beats the Market: You pick your best stocks, the ones you have done all the research on and know inside and out. Then give me a portfolio of randomly selected names.

I bet that over the course of a year, I can outperform most people's favorites by 20% by using only techniques discussed in the Apprenticed Investor series, such as stop-losses, money management, position-sizing, etc.

The point of this exercise is to demonstrate that stock selection is far less important to performance than a host of other factors. The overemphasis on stock-picking permeates the financial media. It's easy to see why. It has a good story line, an inherent dramatic conflict. It lends itself to the horse-race-type coverage that's so easily done. Plus, it's easy for readers to comprehend: Buy this, don't buy that. You can understand why the media and investors overemphasize it.

But the fact remains that regardless of the importance put on stock selection, most investors have underperformed the market, despite, I may add, recently going through the greatest bull market in history. That should raise serious questions to those whose sole emphasis is stock selection.

Consider how many fantastic stocks people owned in the late 1990s: Cisco ( CSCO), EMC ( EMC), Dell ( DELL), Yahoo! ( YHOO), ( AMZN), Intel ( INTC), Microsoft ( MSFT), Qualcomm ( QCOM), Juniper ( JNPR), AOL, Iomega ( IOM) -- the list goes on and on.

Yet despite these marvelous stock selections, many people, probably most, did not do all that well. I would even hazard to guess that many holders of these terrific stocks ultimately lost money on them.

Where's your stock selection, now?

Better Investing Through Reading

Next week, we will discuss several investment-related books you should be reading. I will put together what amounts to a full course offering. It should take you several years of study to complete.

That's right, years. While some people would like to convince you that they have uncovered a shortcut, the overwhelming evidence -- painstakingly acquired through decades of investing and trading -- is this: Forget the magic formulas and the "get rich quick" come-ons: Investing is hard work.

If the market teaches us anything, it is that there is no free lunch. You don't get something for nothing. Be wary of any book that suggests otherwise.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Iomega to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices. has a revenue-sharing relationship with Traders' Library under which it receives a portion of the revenue from Traders' Library purchases by customers directed there from

Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback; click here to send him an email.

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