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Stock
pickers are exactly what their name implies - active investors who pick
stocks or even mutual funds based on perceived mismatches between the
current market prices and their supposed true values. This is a major
problem. In this random and efficient market, there are no mismatches
between the current market prices and their true value. Stock pickers
listen to their feelings and instincts when choosing which stocks
to pick. This Step reveals a study that determined the chances of an active manager
beating the appropriate index are just one in thirty-six, the same long shot
as throwing snake eyes at the craps table! In fact, less than three percent of
managers even beat their proper benchmark. Unlike index investors,
active investors who try to pick winning stocks are little more than gamblers who
rely on raw emotion and their imagined ability to predict tomorrow's news.
As Nobel Laureate Bill Sharpe asks, "why pay people to gamble with
your money?" When investors pay high loads, commissions or fees to
stock pickers, it may be more appropriate to refer to them as pocket pickers.
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"
it turns out for all practical purposes there is no such thing
as stock picking skill. It's human nature to find patterns where
there are none and to find skill where luck is a more likely
explanation (particularly if you're the lucky [mutual fund]
manager)." Mutual fund manager performance does not persist
and the return of stock picking is zero." We are looking
at the proverbial bunch of chimpanzees throwing darts at the
stock page. Their "success" or "failure"
is a purely random affair
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William
Bernstein, The Intelligent Asset Allocator |
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"
If there's 10,000 people looking at the stocks and trying to
pick winners, one in 10,000 is going to score, by chance alone,
a great coup, and that's all that's going on. It's a game, it's
a chance operation, and people think they are doing something
purposeful... but they're really not. " |
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Merton
Miller, Nobel Laureate and Professor of Economics, Univ.
of Chicago, Transcript of the PBS Nova Special,"The Trillion
Dollar Bet" |
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