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You Need Financial Education to Make Money from Stocks. Lie, Lie, Lie!

If you have been made to believe that you need to be financially educated to make money from stock markets, see this…

If financial education was what was required to make money from stocks, the stock market experts would’ve become rich by investing their own money and not selling worthless stock advice to gullible small investors.

But it doesn’t happen that way.

Take a look at one of the worst disasters ever to take place in the financial markets’ history.

I’m not taking about the 2008 crash. That was a banking plus economic plus financial crisis.

What I am talking about is the rise and fall of LTCM, or Long Term Capital Management, a speculative hedge fund that operated in the US in the late 1990s.

This is how Wikipedia describes the fund:

”LTCM was founded in 1994 by John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Board of directors members included Myron Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences.

Initially successful with annualized returns of over 40% (after fees) in its first years, in 1998 it lost $4.6 billion in less than four months following the Russian financial crisis and the fund closed in early 2000.”

So this was a fund set up and operated by some of the brightest minds in finance (include Nobel Prize winning economists)! See what happened to it.

The fall of LTCM was so bad that it was feared that it would cause a catastrophic collapse of the entire US financial system. The mess was so deep that the US central bank, the Federal Reserve, had to organize a bailout.

Behind this failure was rampant overconfidence. “The young geniuses from academe felt they could do no wrong,” wrote Roger Lowenstein in the book When Genius Failed.

The problem with financial education
One problem with financial education is that it leads you to one overall inaccurate belief – You start to think that you’re smarter than you are.

There have been several studies conducted in the past that have found that people who fall for investment scams are better-educated than the average person but don’t seek advice.

This is simply because the former – the better-educated people – think they’re immune to making mistakes in investing.

For instance, one study suggested that 94% of college professors think their work is superior to their colleagues’. What these people fail to realize that intelligence doesn’t always translate to real-world ability, and thus they tend to overestimate the quality of their work.

In short, financial education appears to increase our confidence without improving our abilities, thus leading to worse financial decisions.

“But then, isn’t some knowledge about finance important before investing in the stock markets?” you may ask.

Of course, it is! But financial education alone won’t be of any help to you.

What you also need is emotional intelligence, which is so much lacking within the financial community.

Emotional intelligence is simply the ability to identify, assess, and control the emotions of oneself.

We’ll study more about the importance of emotional intelligence in investing in the next post. But for now, it is very important for you to remember that if someone were to advise you to hand over your money to the ‘highly educated’ fund managers and financial advisors out there, just be very-very careful (and share with them the chart shown above).

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

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