Billionaires like Mark Cuban are different than the rest of us.  It is therefore surprising when people pay so much attention to their pronouncements on how the rest of us should invest.  Mark Cuban was recently on “The Big Interview” with Alan Murray of the Wall Street Journal.  You can see the video below.  Murray probed Cuban for his views on the markets and investing.  Unfortunately there is a logical flaw in Cuban’s advice to individual investors.

First Cuban says:  “Unless you have a commitment to something keep your money in cash.”*

By this he means you should like Peter Lynch advises “invest in what you know.”  For Cuban this puts portfolio diversification off-limits because that would mean investing in asset classes about which you are not intimately familiar.  He says:  “Diversification is for idiots.  You can’t diversify enough to know what you are doing.”

Second Cuban says:  “Today there is so much money in these huge hedge funds and they have such professional research, they really aren’t any advantages for individual traders.” and “Don’t try and fight the John Paulson’s of the world and these guys who have hundreds of analysts who are working for them.  Why would you try and do better than them?  You can’t win.”

Then Cuban says:  “I put it in cash…Having that dry powder, if you will, when weeks like this week hit.  When you see an opportunity.  Then you are ready to take it.”

If you parse Cuban’s statement he is saying that the markets are on a micro-scale efficient.  Hedge fund analysts know everything there is to know about individual companies.  However on a macro-scale the markets can get out of whack.  Individual investors should be able to recognize when markets are seemingly undervalued.  This statement presupposes you know when to get out as well, in short, market timing.

Unfortunately all the evidence shows that individual investors are awful market timers.  They buy high and sell low.  So from a practical perspective it isn’t clear that Mark Cuban’s advice is of much use for individual investors.  In a certain sense Mark Cuban did get rich by market timing.  He sold his company to Yahoo! at the height of the Internet bubble and he had the foresight to hedge his position in Yahoo! stock at the earliest possible moment.

Mark Cuban doesn’t need to worry about the return on his investment portfolio these days.  He does not need to live off the paltry returns to his cash holdings.  However the rest of us are not so lucky.  We have goals like paying for college and retirement that require some measure of investment returns.  While Cuban’s advice may make sense to him, you had better think it through before putting it to work for yourself, because whether you like it or billionaires are very different than the rest of us.

*All quotes are approximate.  No transcript available yet.

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