Has anyone ever heard of a grapefruit and ice cream diet? Well years ago many people foolishly fell for this yummy alternative to losing weight; this idea has always interested me for the most obvious reasons. Why would anyone think that grapefruit and ice cream would somehow sculpt your body into a god or goddess? As an economics major many people feel free to talk about investment and opening share their personal strategies, hoping that I can shed light in some form. Most people feel that they have found the Holy Grail in predicting how stocks fluctuate, varying from “playing the earnings report” to “researching what top stock brokers suggest.” In doing so almost every person feels that their return will be fairly quick and profitable. What most people forget is the basic and essential rule to investing, patience and patience. No that is not a typo, in reality people need to understand that patience through long term investing is the only rational way to win in financial markets. But the thought of giving up consumption now forces us to embrace quick and dirty methods to investing, and are shocked when they do not pan out, just like magical grapefruit and ice cream diet.

When looking at financial markets it can be remarkably overwhelming. Stocks and bonds, the flashier of the markets are one thing but the fun really starts when you pour on options, futures, interest rate swaps, and etc. You can head down to the Chicago Mercantile Exchange where it is possible to exchange future contracts on the price of gasoline or coffee beans (like Starbucks). After that feel free to go to the Chicago Board of Trade and exchange the right to emit Carbon (pollution). Basically markets are vast and confusing so you have to develop some disciple.

Watch out for Speculation and remember to Diversify! Thinking of buying some shares before Bernanke lowers the interest rate at 10:00 am then selling it at noon in hopes of some type of profit, bad idea. Financial products are to speculation what sports are to gambling. People that say financial markets are the rich man casino are really wrong. Las Vegas is what we call a zero sum game, stay inside long enough you will lose, casinos are there to provide entertainment not provide a free lottery. Side note stay away from slot machines, odds are lopsided, better go with black jack instead. Anyway, Wall Street is just the opposite because buildings will be constructed and companies will expand. This expansion will lead to growth thus a positive gain for your investment.

Another great example is reading Business Week and picking the stock that the financial experts suggest. First, someone has to sell the stock, thus thinking that the stock has reached its full potential, just so you can purchase it. Second, everyone is reading Business Week just like you, thus everyone is getting on the bandwagon. Lastly, high power financials have already seen this report before it got printed so you are already behind the ball. In conclusion, everyone has access to the same exact information you have, there is no upper hand or better phrased you have not beat the speculation wave.

Picking stocks is a lot like picking the shortest line at the grocery store. Some lines move faster, and some stocks outperform others. Can you look at information to pick a better option? Yes, I am not getting behind the guy with three full carts and a baby sitting in each one. As soon as the new cashier says I can take someone in checkout four, everyone rushes to the checkout four. Sometimes you will be right and sometime you will be wrong, and sometime you will hop in that newly opened line and there will be a price check on apples. So do yourself a favor diversify and avoid speculation, and when you think about putting a large clunk of money in one stock, strong company or not, repeat the words Enron, Enron, Enron.

Many educated economists say go with the efficient market theory, just pick a line and stay in it. Since stocks reflect their true value because everyone has the same information, you should take your local newspaper and throw darts at the stock page. Or better yet, get a monkey to actually throw a wet towel at the stock pages, pointed out by Burton Malkiel. If you do not have a monkey or darts go with an index fund, like S&P 500. This will save you on paying for a financial manager and avoiding all the trading fees. In 2002, Morningstar actually researched and found that only half of the actively managed firms beat the S&P 500 in a year, only 30% beat the S&P over the past five years, and only 15% of such funds beat the S&P over the past twenty years. In plain terms, 85% of managed mutual funds which state they have special stock picking ability did worse over the past twenty years. My suggestion, go with the monkey, the darts, or an index. If you invested $10,000 in the average equity fund in 1973, it would be worth $171,950 in 2002 but if it was invested in the S&P you would have $311,000 plus bragging rights.

Invest for the long haul! Investing is a lot like running your own casino, you have to bear the occasional loss but the odds are in your favor that you will come out ahead. So remember this, when a financial advisor promises you 30% or more return in a short period of time it can only mean a few things. Must be a risky investment to warrant such a high return, your advisor has found an undiscovered secret and somehow has the heart to share it with you rather keep it to himself, or your advisor is just incompetent or plain deceitful. I do not know the secrets to investing, and funny thing is nobody does. To sum it up, do I know where the market will be tomorrow? No. Do I know where the market will be in a year? Nope. But I am pretty certain that the market will be up in twenty or so years, and in a big way. And I also know that it is virtually impossible that anyone can lose weight eating just grapefruit and ice cream.