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Myth: Investing in shares is a matter of buying cheaply and selling expensively

Myth: Investing in shares is a matter of buying cheaply and selling expensively

Photographer:Fotograaf: Joey Roberts

Myth busters

At parties, people often ask professor Jean-Jacques Herings for investment advice. One tip that Herings will not give them is: you have to buy cheaply and sell expensively. In theory, this is the best strategy, but in practice it is impossible to execute, he says. “It is an illusion to think that you can predict share prices. It is worthless advice, comparable to the recommendation to throw a six when playing a game of ludo.”

 “Experiments have proven that professional investors are no better at making predictions than a monkey throwing darts randomly at ‘rise’ or ‘drop’.” Still, there are a lot of people, including professionals, who think that they do know what high or low is, and keep trying. “Pure self-overestimation. You see this, for example, also when people are asked if they think they are better than average drivers. Almost everyone thinks they are, of course statistically that is not possible.”

Nevertheless, there are professional parties that take advantage of the illusion that stock markets can be predicted and make money from that. There are actively managed investment funds that charge their clients high fees, “without being actually able to beat the market”.

According to Herings, there are clever strategies, but these are not for your “ordinary everyday investor”. As an example, he mentions a number of investors in New York and Chicago who were able to buy and sell very rapidly. “They traded in one specific share at these two locations. The price of this share was never exactly the same; there were milliseconds between them. They invested in the top floors of high buildings in order to maximise the signal between the two cities. Even more, “in 2010, telecommunication provider Spread Networks put in an optic cable between the financial markets in New York and Chicago in order to decrease data transfer times for their customers - mostly businesses involved in high-frequency trading – from sixteen to thirteen milliseconds. Cost: 300 million dollars.

The “most disastrous” thing that you can do, is invest all your money in a single share. “You should never put all your eggs in one basket.” Herings’ own strategy is to spread investments in various sectors and regions. “In addition, it is wise not to deal too much. Buying and selling cause high transaction costs. Herings advises students, who generally don't have much to spend, not to invest. “Only if you have ‘extra’ money and are not afraid of losing it, you could invest in a tracker - a passive fund that just follows the index - or an active investment fund with low fees. They invest in multiple industries and countries for you.

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



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