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Myth: investments require knowledge

Myth: investments require knowledge

Photographer:Fotograaf: Joey Roberts/ Simone Golob

Myth busters

If you search Google for ‘myths and investments,’ you are spoilt for choice. Professor Peter Schotman turns his monitor 90 degrees and makes a selection from the first hits: five myths about sustainable investments; the myth about small shares; the myth of perfect timing of investments; the myth about active management; four myths about investing in silver.

Even then, the greatest myth is not among them, says Schotman. That you have to be knowledgeable about investments. That you have to investigate the company in question. That you must know the market concerned.

In his younger years, Schotman was an active investor. He did PhD research and therefore knew what he was talking about, but that didn't yield him any extra money, he says. “You simply cannot predict what share prices will do. If one thing is certain in my field, then it is that. Proven time and time again, since the nineteen-thirties.”

This doesn't mean that Schotman is advising people not to invest. On the contrary, he says, and refers to the poor interest rates on savings. His point is: don't waste time with all kinds of investigations, but choose an investment fund that has a broad investment index. Don't fool yourself that you would do better by yourself. Schotman himself doesn't do so anymore either, these days he invests through a fund. "Take advice from a professional, depending on your age and income, about how much money to invest.

Which fund? All banks have their own investment funds and they all say that your money is best off with them. Schotman randomly chose one. The service costs may vary, but as far as performance is concerned, they hardly differ from each other, he says. “The difference is so small, that you need to look at the performance over the last ten years to see the differences.”

The attraction nevertheless remains great – both for scientists and investors - to discover patterns in share prices, to make predictions. It is the Holy Grail, Schotman agrees. “Economists have discovered more than three hundred patterns in the enormous mountain of data on share prices, profits and other business data, but in the end, you can't make anything from it. The problem is that when you start to delve, you will always find something in that ‘big data’, an area where financial economists have been working for years.”

What keeps reviving the search, are the anomalies and mysteries that show up from time to time. “That is why we still cannot explain why shares that have risen most over the past year, also do well in the first months of the new year. And vice versa: why those that lost in the previous year, keep struggling along. This is, by the way, not information that you can use to your advantage easily. To do so, you would have to trade a lot of shares.”

The power of attraction remains also because of the romantic stories surrounding stock exchange gurus like George Soros and Warren Buffet. “You only hear the successful stories. They don't shout their failures from the rooftops.”

The exception proves the rule: in-depth knowledge does seem to be lucrative in the case of shares in companies that are about to merge. “Then you are better able to predict whether the merger will be successful or not. But this is extremely specialist knowledge. It is not something you pick up easily as a private investor.”


Mythbusters is a series in which academics shoot down popular myths on complex topics



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