A professional baseball player knows more about baseball strategy than does a little leaguer.  A nutritionist is more likely to be able to figure out why you have been feeling run-down lately than is your next-door neighbor.   The buyer in a woman’s fashion store is better informed about what colors are trendy today than you are.

Most of us assume that it works that way in investing too. Most of us are worried about what is going to happen to our money. So we put our faith in the experts. Surely they have a better grasp of the realties.


It doesn’t work that way.

InvestoWorld is suffering from a big problem. The model that is used to understand how stock investing works is something called the Efficient Market Theory. It was viewed as a promising model in its time and all the investing advice that the experts pass on to us has its origins in this model. You’ve heard that stocks are always best for the long run? That buy-and-hold is the way to go? That timing never works? That’s the Efficient Market Theory reduced to practical everyday investing wisdom.

It’s all wrong.

You see, the Efficient Market Theory has been discredited in recent decades. There was a time when lots of smart people really did believe that this model described reality. For the past 28 years, however, evidence has been accumulating that its not so. There is a mountain of evidence today showing that stocks are sometimes the worst place to put your money for the long run, that some forms of timing not only work but are required for those who want to have a realistic hope of long-term success, that it’s not your stock allocation you want to hold to but your risk level and that doing that requires that you change your stock allocation in response to big price changes.

You were overinvested in stocks from 1995 through the first part of 2008. Pretty much all of us were. We were overinvested because we listened to the experts. The experts steered us wrong. Terribly, terribly wrong.

How could such a thing happen? Aren’t the experts smart people? Don’t they know what they are talking about?

They’re smart people. The trouble is, all that they have learned about stock investing in the course of becoming experts is wrong. When the model used to develop all the ideas published in the textbooks is in error, all the textbooks are in error. The sad reality today is that the more a person studies the conventional wisdom on stock investing, the less he understands what really works.

Mark Twain once commented that it’s not what you don’t know that hurts you most, it’s what you think you know for certain that just isn’t so. That’s today’s investing expert. He thinks he knows it all because he’s memorized all the textbook answers. In reality, the average middle-class worker possessing a little bit of common sense is miles ahead of 90 percent of today’s “experts.”

That’s my secret. I’ve never taken any courses in investing. I’ve never managed a big mutual fund. I have no experience putting together financial plans for clients. I’m an investing genius!

In all seriousness, I really do believe that I know more about what works in the real world than 90 percent of the big names in the field. Common sense tells us that stocks cannot offer a strong long-term value proposition when they are selling at the prices that applied prior to the big price crash. The Efficient Market Theory tells us that prices don’t matter. I was never “smart” enough to fall for that one. I stuck with common sense. I lost nothing in the crash and have a lot more to invest in stocks today (when prices are again reasonable) as a result.

The experts can learn new things faster than I can. They have all sorts of tools available to them to keep up with developments in the field. They’re driving 90 miles per hour while I’m poking along at 25. Still, I possess an edge. I’m driving at a far slower speed but in the right direction. It makes a difference!

I hope you’ll consider opening yourself up to learning about some investing ideas not approved by the big names. My strong sense is that many of the experts would like to drop their reliance on the Efficient Market Theory and start giving advice rooted in common sense too. They need to see that there are lots of middle-class investors who will not look at them funny if they begin giving advice that is the opposite of what they have been putting forward for the past three decades.

We need to clear the decks and start over. This time, we need to put common sense at the center of the investing model we build. The experts need a little push to get started. Help them feel comfortable doing so and in the long term you will end up helping yourself too.

This is a Guest Post by Rob Bennett who writes the “A Rich Life” blog. He has recorded over 80 podcasts describing how to make the shift from Passive Investing to the new Rational Investing model for understanding how stocks work.