the Stock Market and Mutual Funds

If you own a share of stock, that means you own part of a company. If ExxonMobil has 4 billion shares of stock and you own 1 billion of those shares, that means you own 25% of the company. As for me, I own one share of ExxonMobil. That’s all I need to feel like a total badass. I take my stock certificate to environmentalist rallies, I show it to everyone, and I say, “ExxonMobil! I’m a part owner. You guys focus on saving the environment, and I’ll get rich selling gas!”

The point is, you can buy stock and own part of a company. Or as an alternative, you can buy a stock mutual fund. As in, you give your money to investment experts–and those experts use that money to buy and sell stocks. It all sounds great–doesn’t it? The thing is, the average expert will make you 8% per year, while the average stock goes up 9% per year. That means that the average expert is mathematically proven to do worse than the average alcoholic animal. In other words, you can just go up to an alcoholic animal, ask him to point to 300 stocks from a list–and his selections will earn 9% on average. You can actually go up to an investment expert and say, “Your mutual fund went up 9%? Congratulations! That means you beat the majority of experts, and you’re equal to an orangutan who just drank 18 bottles of Pabst Blue Ribbon.”

The point is, when it comes to stock market investing, you can’t make more money than average just by listening to experts. If you could, everyone would just listen to experts, and everyone would make more than average. Which is impossible–because according to a dictionary, average means average. I looked it up. The dictionary didn’t say, “Average is a noun, and the definition of average is ‘more than average.'” The concept of an average ceases to exist when the average of something is more than average.

Right now, some of you might be thinking, “OK. Forget the experts. I’m gonna get financial advice from an orangutan.” That’s not necessarily a good idea, either. Orangutans smell weird, they drink way too much, and although they earn 9% on average, their stock picking performances are not consistent. I mean, my best performing orangutan in 2005 advised me to buy Borders Bookstores and Blockbuster Video in 2006.

Here’s the real way to beat the stock market. FTSM: Follow the Smart Money.

Let’s say a stock seems like it’s worth $30, but it’s trading at just $20. It’s undervalued. No it’s not. There are a few rich guys in top hats who know what’s going on behind the scenes, and they’re the ones selling lots and lots of that $30 stock for the bargain price of $20–because they know it’s not even worth $10. You think you’re buying $30 for $20. And they know they’re getting $20 for a pile of orangutan manure.

In other words, there are lots of stocks out there that seem like bargains. Half of them are actual bargains, and half of them came out of an orangutan. “Seems like a bargain” isn’t the same thing as “is a bargain.” The smart money knows that.

What you need to do is buy what the top hats are buying, and sell what the top hats are selling. But how can you figure out where their smart money is flowing? I don’t know. If I did, I would be making millions myself instead of writing this article.

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