Market delusions explained for the complete dummy

Hardly discreet. It must put off a lot of dummies from buying them. Indeed, I wonder if books such as Navigation for Dummies and Mortgages for Dummies had been an inconspicuous grey the Titanic would still be afloat and the global financial crisis avoided.

I have scoured their 1700 titles and think I have identified a gap, and have begun to make notes for No. 1701 Popular Stockmarket Delusions for Dummies. Here's what I've got so far:

Chapter One The Warren Buffett Way. What's the difference between a rank beginner and a sophisticated investor? Answer a few Warren Buffett quotes.

The truth is that the closest anyone who relies on a few Warren Buffett quotes is ever likely to come to the Warren Buffett Way is wearing a cardigan and living in the same crappy house for the rest of your life.

Chapter Two Future returns can be projected forward from historic returns. No, they can't. Historic average returns are a statistic, not an expectation. I can prove it. History is history. The future is a blank canvas.

Chapter Three Set and forget. Sorry, but this only works in hindsight on stocks that have performed extremely well. Yes, you can quote me BHP and Woolworths, but I remember one of my colleagues telling clients when Babcock & Brown first listed that it was a set and forget stock and that you just had to shut your eyes to the huge price rise on listing and buy. He'd certainly like to forget that. If you forget anything you have money invested in, you are a fool. Set and forget is a great excuse for doing nick all and trusting to luck.

Chapter Four The average stockmarket return is about 9 per cent plus dividends. No, it's not. The average annual real return from the stockmarket after inflation, tax, management fees, trails, commissions and the index fudge is close to zero before dividends. Not 9 per cent. Another reason you cannot set and forget. You have to do better than that.

Chapter Five You can't time the market. Sorry, but you can, and thanks to Chapter Four you'd better learn because without timing you won't make money. You have to do it, or find someone to do it for you.

Chapter Six Transformation. Every industry sells transformation. My garage with its weights, punch bag and boxes of protein shakes is a monument to my belief in transformation.

But it's never going to happen by Visa alone. It takes effort, and there are no short cuts. Anyone in the finance industry selling anything other than transformation through long-term dedication, sacrifice, education, attrition, error and experience is lying. Sorry, but you can't be a Forex trader or an options trader, and no, you won't be able to give up work and live the lifestyle you always dreamed of by entering your credit card number. It's rubbish.

Chapter Seven Certainty. If you knew BHP was definitely going to go up 10? tomorrow you would borrow every dollar you possibly could to exploit that definite gain. If I told you it might, you wouldn't bother.

Basically all investment products sell certainty and the more certainty we are sold the more we buy. I once dissected a major investment bank's capital guaranteed leveraged equity fund. A product for nervous investors that needed certainty. Capital guaranteed was the perfect product. Seemingly. But we worked out that if you put in $30,000 and borrowed $70,000, your total fees (at the time) were $16,000 a year.

Yes, your $100,000 worth of shares was fully hedged and you'd never lose money on the capital in the shares, but the annual cost of all the options needed to achieve that, plus the interest, plus a management fee, plus an "it's so complicated you'd never notice" fee meant that servicing the product structure would cost you more than half your original capital every year.

But that's OK, they said, the costs will be offset by the dividends from the shares. In other words, they kept those as well. Certainty sells and the salesman who says "definitely" earns more than one who says "maybe".

And I've only just started.

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