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You don't know more than the market knows
David Laibson
Professor of economics, Harvard University

Back in the early 1980s, at the beginning of the bull market, I had a high school teacher who was a stock picker, and he was very bullish on a housing stock, Kaufman & Broad. I was an impressionable teenager, and I invested my very limited wealth in this stock. It went through the roof. I concluded as a consequence of this experience - during a bull market, of course - that I was a brilliant investor. I start buying and selling stocks, going long, going short, going nuts.

This went on until I was in college. I made some money, and then I lost a lot of it. The real cure was the 1987 crash. It's easy to trick yourself into thinking you can outplay the market. In watching my confident investments go sour, I learned that I don't know more than the market and, thankfully, I learned that with only a few thousand dollars. Now I buy diversified portfolios through mutual funds and ETF s.

NEXT: The less you pay, the more you keep

Last updated July 22 2008: 11:27 AM ET
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