A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

© George Price / The New Yorker
Collection /
www.cartoonbank.com. All rights

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Reserved.
Another popular instrument these days is the commodities
futures contract. You can buy not only gold but also
contracts for the delivery of a variety of commodities, from
grains to metals as well as foreign exchange. It’s a fast market
where professionals can benefit greatly, but individuals who
don’t know what they are doing can easily get clobbered. My
advice to the nonprofessional investor: Don’t go against the
grain.
I would also steer clear of hedge-fund and private-equity
and venture-capital funds. These can be great moneymakers
for the fund managers who pocket large management fees and
20 percent of the profits, but individual investors are unlikely
to benefit. The average performance of these funds is deeply
disappointing. True, the best funds do quite well, but unless
you are an institutional investor who has established a clearly
preferential position, your chance of investing with the best
is realistically zero. Ignore these exotics—they are not for
you.
EXERCISE 9: REMEMBER THAT

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COMMISSION COSTS ARE NOT
RANDOM; SOME ARE LOWER
THAN OTHERS
Many brokers today will execute your stock orders at
substantial discounts off standard commission rates. The
discount broker usually provides a plain-pipe-rack service. If
you want your hand held, if you want general portfolio
advice and investment suggestions, the discount broker may
not be for you. If, however, you know exactly what you
want to buy, the discount broker can get it for you at much
lower commission rates than the standard full-service house,
especially if you are willing to trade online.
If you are truly ready to make all your decisions yourself,
you can make security trades electronically with your own
personal computer. Electronic trading enables you to buy and
sell hundreds of shares of stocks for less than $10 per trade.
Trading stocks online is easy and cheap. But let me warn
you, few investors who try to trade in and out of stocks each
day make profits. Don’t let low commission rates seduce you
into becoming one of the legion of unsuccessful former day
traders.

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While we are on the subject of commission costs, you
should be aware of a Wall Street innovation called the “wrap
account.” For a single fee, your broker obtains the services of
a professional money manager, who then selects for you a
portfolio of stocks, bonds, and perhaps real estate. Brokerage
commissions and advisory fees are “wrapped” into the
overall fee. The costs involved in wrap accounts are
extremely high. Annual fees can be up to 3 percent per year,
and there may be additional execution fees and fund expenses
if the manager uses mutual funds or REITs. With those kinds
of expenses, it will be virtually impossible for you to beat the
market. My advice here is: Avoid taking the wrap.
Remember also that costs matter when buying mutual
funds. There is a strong tendency for those funds that charge
the lowest fees to the investor to produce the best net
returns. The mutual-fund industry is one where you actually
get what you don’t pay for.