Stock Pickers

As we learned in Step One, courtesy of The Wolf of Wall Street, no one can predict with certainty the direction of a stock. Think about it from a purely logical perspective: is it realistic to presume that an individual investor or a stock broker can know more than the combined knowledge of ten million traders? I estimate that approximately five million sellers and five million buyers place trades each day. With each trade, a buyer and a seller both agree upon a price which represents the best estimate of a fair price.

Rex Sinquefield describes the market as a vast processing machine that compiles all knowable information, much like a “collective brain.” This concept is represented in the painting to the right and articulated by Sinquefield back in 1995, at a debate on active vs. passive investing, Sinquefield put it this way: “So you can have one individual who can be very, very smart and actually know a little bit more than everyone else. But does he know more than six billion people combined? No. He knows a tiny, tiny fraction of what is knowable and what is built into prices. That’s sort of the intuition why no one’s ever going to get an edge over the market.”1

Step 3stock picking