Recently I suggested that someday it might be illegal for untrained citizens to invest in stocks of individual companies because it is too risky. As regular readers know, I sometimes throw out provocative ideas just for the fun of it. I didn’t think much about that idea until after I wrote it. But the more I mulled it over, the more it started to make sense. So I’m going to develop that argument here.
I remind you that I lean libertarian (without the crazy stuff) so all of my impulses are to allow people the freedom to hurt themselves any way they choose, so long as their corpses don’t block my driveway or cost me anything. So the argument I am about to make offends even my own sensibility. The troubling part is that it makes sense.
Let’s begin by noting there are already plenty of restrictions on personal freedoms when the consensus is that these restrictions somehow protect people from themselves, or they protect society as a whole. For example, where I live you can’t legally…
- – Drive without a seatbelt
- – Ride a motorcycle without a helmet
- – Commit suicide
- – Practice law, medicine, or other professions without a license
- – Operate a motor vehicle while under the influence
- – Gamble in most places
- – Carry an Uzi down the street
- – Buy dynamite
The list goes on, and that doesn’t even include the many restrictions on underage activities. So there is nothing unusual or unprecedented about legal restrictions on freedom when an argument can be made that it protects lives or property.
My argument against allowing individuals to invest in stocks is that unless you have insider knowledge, which is already illegal, your odds of beating the index averages are slim. It is nothing more than gambling.
The myth of stock investing is that a person who does more research has better results. But there is no science to support that view. Indeed, the person who understands the most about individual stock investing avoids them completely and invests in ETFs or index funds.
The problem with doing your own research on stocks is that you must rely on the information coming from the management of a company, and managers are generally misinformed or lying. Even the most seasoned investment professionals running mutual funds perform worse than the indexes on average. Brains and research can’t overcome the fact that much of your data is deliberately tainted at the source.
When people go to Vegas to gamble, they usually set some sort of limit for their losses. And they go with the full knowledge that winning is unlikely. It makes sense for that sort of activity to be legal, within limits, because it is viewed as entertainment and not investment. But if it were common for people to bet their retirement savings on Blackjack, you can be sure it would be illegal.
We don’t allow unlicensed people to practice law or medicine, sell real estate, or even build a house. It is entirely consistent to restrict the untrained from making risky stock investments.
I reiterate that this runs against my own libertarian philosophy. I would feel I had lost something important if I couldn’t invest in individual stocks. But it is also true that my net worth would be larger if I had never done it. And it would be larger still if I hadn’t allowed professionals to do it on my behalf.
If anyone comments to this post by saying, “I do my own research and I made money in the stock market,” it is proving my point. And if you don’t see why that proves my point that further proves my point.