I have been advised not to buy specific stocks, but rather funds, leaving the specifics to the professionals.
I strongly advise reading Bogle and Malkiel. After that perhaps Damadoran's
Investment Fables, where he tackles a lot of these myths/ideas, looks at the actual data, and shows them to be largely useless. As DrKitten has pointed out, everyone has a computer, and can run simple screens in seconds. Round trip trading time is on the order of microseconds these days (not milliseconds), and wall street computers are now reading news items and trading on them. The idea that you are going to think 'hmm, looks like oil is going to go up', do your research over the next few weeks, wander over to the computer, find some funds, mail your check in, get the check to clear and the account set up (which will determine your buy date and price), and somehow have bought in before the rest of the world had that same thought and bid up prices to where returns will be average, is, well, naive. I don't mean that meanly. But sector based funds do not beat the market as a whole, and you are the last person thinking of the idea. If you want to buy and make above average returns, you have to be one of the few and first thinking of the idea.
As for not picking stocks, but picking funds, how on earth do you do that? At least the SEC requires detailed financial disclosure for companies, which gives you a reasonable chance to at least try to access it (I know, you are not American, and thus not bound by the SEC unless buying American stocks. I'm giving what I know about my market - I'm sure you have similar rules in yours). But a fund? Ya, they are required to report what they have in their portfolio, but that is about it. I can think of a very few fund managers that actually disclose enough that I would feel comfortable trusting my future with them - and one of them isn't taking money (Buffett).
There was perhaps a confusion I introduced above, that stevea bristled over. When I talked about 'pros' - that was in the sense of "professionals" - paid to do this full time. It was not in the sense of "proficient".
With that in mind, let's look at how funds are formed. It's nice to think of a MF company executives sitting around, saying "how can we best make money for our clients? Joe, any ideas?
joe: well, gold is overpriced, so let's not open a gold fund now. OTOH, ball bearings are dead, dead, dead, and due for a massive rebound. Let's start a ball bearing fund!
Make it so!"
Err, no. This is how the conversation goes:
"Cash flow is tight. How can we get a lot of new money flowing. Your job is on the line if you don't meet this nearly impossible target of 20% growth. Btw, we are firing 25% of staff this year.
joe: oh, **** me. Every idiot in the world is throwing their money at gold, and prices are insane. Let's get a piece of that action while the fools still have money left and before it all collapses.
Excellent.
joe: and let's close down our precious metal fund, which is very underpriced right now, and tell all of those customers we are automatically transferring their funds into this new gold fund.
I think you have a future in this company, Joe."
Okay, probably those last few sentences are not legal (however, my ****** 401k fund does that to me all the time - sells the funds poised to take advantage of low prices in the market, and transfers the money to some fund priced at its 52 week high) , but you get the idea. Mutual fund companies create specialized funds not because they think they are a great investment for the client, but because clients are asking for specialized funds, and why let a competitor take that money. If it's a crap idea, they throw some junior member on to manage it. If you get lucky they might throw a rising star on it, but you shouldn't be investing on the basis of getting lucky.
In any case the prospectus of these companies are necessarily narrow, and it ties the hands of the manager - they can't decide "hmm, best to get out of gold and go into silver" if it is a gold fund. If money comes in or goes out, they have to buy or sell at prices they don't consider good, creating all kinds of tax events for you (again, American bias here). You are at their mercy, and the mercy of your fellow investors. A lot of people sell the fund at what they perceive as a high? You pay tons of taxes this year. A lot of people get skittish and bail at a low point? The fund sells low, you have some taxes to pay, and what you really wanted to have happen is the fund to be
buying gold when it was cheap, not selling it. Etc.
So, the underlying assumption of "I'll just buy a fund to manage it" assumes
1) you are unable to judge if a company is competent, despite it reporting tons of details
2) you are able to judge if a fund manager is competent, despite essentially no reporting or visibility.
3) you are unable to judge if a company's future is bright.
4) you are able to judge if a fund's future is bright, AND the behavior of all of your fellow investors (since their behavior influences the performance of the fund).
Those don't strike me as reasonable assumptions. Data backs me up - if you look at the performance of individuals purchasing mutual funds they tend to underperform. We could give you some rules to help avoid that - people tend to buy into highly performing funds, and sell underperforming ones, which is just the opposite of buy low, sell high, etc. But you are coming in at such a disadvantage, no visibility, an assumption that you are unable to make financial decisions wrt stocks, yet somehow also able to make financial decisions wrt funds.
Bogle-Malkiel-Damadoran. If, after that, you decide you can still beat the game, we can point you to appropriate reading (but Bogle/Malkiel/Damadoran will point you to the good reading as well).
