While investing theories introduced decades ago have been repeatedly validated and have stood the test of time, our understanding of the financial markets has made huge advances in recent years. To benefit from these advances, however, most investors will need to unlearn much of what they think they know about investing. They will also need to learn to ignore most of the ""wisdom"" that spews from the hallowed halls of Wall Street, its salesmen posing as ""advisors"", and its agents in the media. Contrary to popular ""wisdom,"" investing isn't about P/E ratios, or technical patterns, or momentum plays, or ""5 star ratings,"" or the latest conflict in the Middle East. Investing is about probabilities and statistics: It's about maximizing the probability of meeting the goals you have set for the only life you have to live on this planet; it's about avoiding the (many) risks that have negative expected payoffs; and it's about exposing yourself only to those risks that have positive expected payoffs and then, only to the extent that taking those risks buys you something of value (like a secure retirement, or a cabin in the woods).
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November 05, 2012
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