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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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The virtues of being stupid

MARKET SHOCK 2007. Those are the words and number on the cover of Fortune magazine’s Sept. 3 edition.

The magazine issue comes amidst a turbulent time when the stock market slipped by 10 percent in less than a month. Fortune assembled an all-star lineup of economists and investors to predict what will come next.

The list includes some of the best financial minds in the U.S.–including Warren Buffett, Robert Shiller, Jim Rogers, Bill Miller and Hank Paulson.

Yet it was the advice of Ben Stein–an actor, lawyer, writer and economist most famous for his roles in “Ferris Bueller’s Day Off” and “Win Ben Stein’s Money”–that resonates most strongly for individual investors.

Stein’s column divides the investing universe into the “smart” investors and the “stupid” ones.

The “smart” investor closely follows the financial news and watches CNBC in an attempt to outwit the market. They bail out of stocks as they read about the subprime crisis, the drying up of mergers and acquisitions and the looming recession.

“He even has bald people on TV telling him he’s right to worry,” Stein writes.

On the other side of the equation is the “stupid” investor. This person doesn’t quite understand what the big deal is all about. He knows that over the long run, the major stock indices thrash supposedly risk-free treasury bonds.

So the “stupid” investor buys index funds and annuities. He or she knows that the market has seen this kind of environment before, and it’s always bounced back.

“The subprime and private equity and hedge fund dogs may bark, but the stock market caravan moves on,” Stein writes.

Stein writes that it’s entirely possible that a recession may hit, driving down market returns in the short-term. But in the long-run, as the “stupid” investor knows, market returns are likely to be quite satisfactory.

“No one is too stupid to make money in the stock market,” Stein writes. “But there are many who are too smart to make money.”

Stein’s column emphasizes a point that Warren Buffett makes frequently. That is, you don’t have to be a genius to be a good investor.

More important is one’s emotional intelligence. The investor who ignores the crowds and headlines when times get tough, and has faith in his investments, is likely to win out over time.

Turns out that the stupid investor is actually pretty smart.

Permalink: http://news.fredericksburg.com/businessbrowser/2007/10/22/the-virtues-of-being-stupid/