How to invest your money and beat the stock market

When people find out that I’m a business journalist, they invariably ask me for stock tips.

After all, I’m probably sitting on tons of juicy corporate insider dope that my editors won’t print so as not to offend advertisers, right?

First of all, not true. Any inside dope I’ve got, has been printed. I’ve been lucky with editors all my life — in 15 years as a journalist, I’ve never had a story pulled due to advertiser influence. It’s true. I’ve had stories pulled because they sucked, but that’s a different matter.

Secondly, I’m not allowed to give stock tips. There are regulations out there about insider trading. If I do find something out, I either have to tell everybody, or nobody at all.

Finally, if even the employees at Enron didn’t know that their company was going down the tubes, how would a journalist who spends a few minutes on the phone with an exec and some analysts know anything at all? Those employees pretty much lived at that company. They knew what was going on. They heard all the gossip. But they still lost their shirts.

But, despite all this, I still know the secret of how to beat the stock market. It’s the only strategy that works.

We journalists don’t write about it much because it conflicts with the news cycle.

Here’s the problem: there’s only one good way to invest your money. Everybody knows what it is. But you can’t run the same story every day. You need to say something different, something interesting, something new. So we write about what various sectors are doing, how the economy is shaping up, give advice on what company to put your money in. Most of this advice is no more useful than the latest Britney Spears gossip.

But people want it, so we write it.

Take, for example, this month’s cover story in Fortune: “What Warren Thinks…” It’s not online yet, or I’d give a link to it.

Here’s Buffett’s advice on investing:

…they should just stay with index funds. Any low-cost index fund. And they should buy it over time… It’s a positive-sum game, long term. And the only way an investor can get killed is by high fees or by trying to outsmart the market.

Then, if you turn the page, the very next article is titled “Where to Put Your Money Now” — advice to investors on how to outsmart the market.

Journalists are not evil. But sometimes it does look that way, doesn’t it?

So here’s the best strategy. Only one guaranteed to beat the stock market:

1. Index Funds

Index funds sound boring. Basically, they’re a fund that includes every company of a certain type. Your best bet is the biggest fund that there is. You want to bet on the whole US economy, not just on one company. Or on the whole world. Over time, the whole world is getting more efficient, more productive, and richer. Index funds reflect this. And the best thing with index funds is that you’re not paying multi-million-dollar salaries for fund managers who do no better than monkeys throwing darts. Sure, by chance, some managers do well some of the time. But they’re no more likely to do well the following year than anyone else. In fact, the more clever the story behind some manager’s strategy — whether it’s a mutual fund, hedge fund, or some crazy new plan — the more likely it is to lose you money.

Stick with index funds. Go for the cheapest ones. If you don’t like saying “cheap” because it sounds… well … cheap, then say “no load index fund.” Now you’re no longer cheap, you’re a savvy investor.

2. Invest Over Time

If you want to sound fancy, you can call it “dollar cost averaging.” For example, you might want to take $100 out of each paycheck and invest it in your index fund.

The key here is not to look at the news. Don’t put in more when the market is hot. Don’t put in less when it’s down. Just set up the investment strategy and then don’t look at it again… oh, for the next thirty years.

At the end of the thirty years, you’ll find that you’ve beaten the market. Why? Because when the market is down, that $100 bought you more stock. When the market was up, that $100 bought you less stock. In other words, you were automatically investing more during the best times to invest – when the stocks were less expensive.

If you try to do this deliberately, chances are you will fail. People have a hard time guessing what the market will do, and even the best fund managers get caught up by investment fads and bubbles — and by panic, as well.

By not looking at your investment, you take the emotions out of the equation.

There is one big drawback to the “index fund-invest over time” strategy. You have nothing to talk about with your buddies. Some guy will say, “I bet everything on big oil and war profiteers, and now I’m up $10 million!” and what have you got? “I’m in index funds.” That sounds so lame. (Now you see the problem that journalists have.)

If you’re desperate to play the market, then take some of your entertainment budget and play with it. Think of it as going to Las Vegas — you’ll lose everything, but you’ll have fun doing it and you’ll have some stories to tell. Except to your spouse. He or she won’t want to hear these stories.

Then, when you tell your friends that you lost your shirt betting on pork bellies you will have literally lost just the price of your shirt.

Still in Shanghai,

Maria