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Wisdom Sold Separately

With the exception of the global capitalist revolution itself, the most important development of the last ten years is the internet. As the internal combustion engine was the defining technology at the beginning of this century, surely the web defines the start of the next.

In few areas of human endeavor has the net intervened so quickly and dramatically as investing. The staggering quantity of instantly available financial information, and the speed with which the investor can act on it, has captivated whole new generations of internet trading devotees.

That these people do not see that trading is speculating rather than investing, and that they do not know that portfolio turnover correlates negatively with return over time, are subjects for another day. Of much greater and far more terrible consequence will be the fact that its advocates don’t seem to realize that the web does not think, nor exercises any judgement. It limitlessly provides all available good information – and bad information - without distinction. It will tell you facts which, properly employed, may lead you to wealth, and which, used badly, will help to destroy your wealth. When the stars of internet trading information include people who call themselves motley fools, we may safely take them at their word. Garbage in, garbage out.

We don’t forbid the sale of cigarettes. We do, however, blazon on each pack, and on all advertising, the inarguable fact that smoking causes cancer. We don’t proscribe the sale of alcoholic beverages, but we post signs in bars and liquor stores warning that pregnant women who drink risk deforming their babies. Just so, I know that we can’t – and shouldn’t forbid investors the internet, nor the personal computer and modem which give them access to it. But there should, I believe, be a cautionary label on each piece of hardware, and the same warning should flash on the screen when you’re online. It should say, WARNING: WISDOM SOLD SEPARATELY.

Successful investing is not at all about information, which, since it’s universally available on the web must already be in the price anyway. It’s about the behaviour of people: the wisdom (or folly) with which one responds to shocking market events which one didn’t anticipate. All the web access in the world doesn’t seem to have prepared anyone for the mini-crash of August ’98, with Russia’s default, the Asian meltdown, and Latin America’s fiscal crisis last year.

If anything, all that information may have given people a false sense of security. (“If I have all this up-to-date information, am I not totally on top of the markets, and prepared for anything?” Well, as it turns out, no.) The result is to magnify the shock of getting surprised and increase the odds of a panicky “sell” decision. And of course your internet broker will never try to talk you our of that (or any other) bad decision. It will do the only thing it can; give you an instant and limitless outlet for all your very worst instincts.

“Electronic Wisdom” is an oxymoron. Fortunately, therefore, wisdom is the stock and trade of all successful long term Investors or their Advisors. No matter how much information comes out of a machine, wisdom never will.

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