2: The Greatest Show on Earth

What is as challenging as chess and as thrilling as poker?  What is played twenty-four hours a day, seven days a week?  What is so difficult that only a fraction of professionals do it well but so deceptively simple that even dabblers feel skilled?  What offers the celebrity glitz of Hollywood, the dynastic wealth of dictators and kings, and the soap opera plots of daytime television?  What is legal and encouraged in fifty states but resembles an activity banned in forty-nine?  What other than sex, love, and death provides grist for so many storytelling mills? 

The greatest show on earth, that's what.  The financial markets are fascinating, entertaining, and fun.  In fact, for certain personality types, they are more fascinating, entertaining, and fun than most forms of actual "entertainment," many of which are seen as perfectly legitimate ways to spend hard-earned money and time.   

What's more, the financial markets can make you money.  The odds on Wall Street are (usually) better than the odds in Las Vegas, and even reasonable people can't get enough of Vegas.  You can play the markets without leaving home, from New York to the North Pole.  You can play anytime.  In the financial markets, there's always something to watch, think, and talk about.

But now hear this: If you're serious about investing intelligently, you need to draw a distinction between investing for your future (hereafter: investing) and investing for fun, challenge, and entertainment (hereafter: speculating).  We will return to this distinction, but for now, let's define "speculating" as any move not made as part of a carefully developed investment plan or any move designed to pay off in less than five years. 

There's nothing wrong with speculating.  If golf, poker, rock-climbing, and other expensive and/or risky pastimes are okay, then so is speculating.  Speculators provide liquidity to markets and fund the development of industries, both of which are positive.  But many speculators mistake themselves for investors, so you should be aware of what you are doing.  You should know that the long-term return on your speculating will likely be lower than the long-term return on your investing, probably much lower.  You should know that the difference between the two returns is entertainment cost and that this cost will likely amount to more than, say, dinner and a movie.  You should know, in fact, that this cost could mean the difference between a comfortable retirement and an uncomfortable one.

Easy, you say?  You just won't speculate?  Well, here's the bad news: Compared to speculating, investing is boring.  Once you get the basics right, you won't have much to watch, do, or talk about.  You won't be able to endlessly compare your performance to Warren Buffett's.  You won't be able to brag about your brilliant picks.  You won't be a font of opinions and prophecies.  You won't be able to justify watching CNBC all day, gabbing with your broker, or obsessively checking Yahoo! Finance.  In fact, to paraphrase oven designer Ron Popeil, you won't be able to do much more than set it and forget it. 

Investing, furthermore--at least investing well--will mean ignoring almost everything you see and hear about the markets.  It will mean tuning out friends, neighbors, co-workers, gurus, and advisors who are alternately panicking or making money hand over fist (and urging you to do the same).  It will mean committing to a strategy and sticking with it for decades.  It will mean saying no to almost everything that seems exciting, challenging, and interesting about the markets, including the chance to get rich quick.  It will mean playing a different investing game than almost everyone you know, and continuing to play it even when doing so seems stupid, scary, and wrong. 

Investing intelligently, in other words, will be hard.  Not because it's technically difficult--it isn't--but because the most powerful force in the markets is human nature, and we're all human.  No matter how much you learn, you will always be led astray by boredom, distraction, peer pressure, overconfidence, inertia, envy, fear, and greed.

But don't worry.  Investing intelligently does not mean you have to abandon speculating forever.  In fact, there is a simple way to have your cake and eat (a slice of) it, too--and still do better than most investors.  I'll describe this strategy in detail at the end of the book.  For now, as a first lesson in Wall Street self-defense, just know that most of what passes for "investing" is really just an expensive parlor game, one that costs most players a lot of money, one that you don't have to play.

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