So general principle number 2 is simple- if you can’t beat them, join them.

#2 If you aren’t willing to invest the time and effort, go passive

Warren Buffett, who’s as good as a stock picker as you’d get once said that for the majority of people, their best option is to go passive. It’s not that stock picking can’t be done, it’s just that it’s terribly difficult.

As we saw in #1 costs matter, even the pros have a hard time staying ahead of the market. If indexing didn’t exist in this world, guess who the pros would be making money from? After all, for every seller, there must be a buyer. If you thought you were getting it at a good price, guess who’s selling to you? And if you thought that things were getting expensive and sold, guess who’s buying?

It still amazes me how many retail investors use price as a signal rather than a basis to form an opinion about valuation. Using price on its own is one of the worst signals I can think of EVER. Let’s do a thought experiment. Suppose a year ago, a stock was selling for $0.30. Last week, it was going for about $0.15. That’s a massive 50% discount from a year ago. Would you consider the stock cheap?

Well if you did, guess what? That’s the exact price history of Swiber which just decided to announce that it’s going to be liquidated. I don’t know what shareholders will be left with after creditors and bondholders get their share but the market doesn’t seem to be too optimistic given that it last traded at $0.11. By the way, Swiber IPO-ed at $1.50. There’s been some stock splits and what-not but baseline is, Swiber was a terrible stock.

So, for beginning investors or those unwilling to put it theirs dues, save yourself a whole lot of trouble and just go passive.

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