Page 80


Problems Stock Pickers Fail Stock prices are quickly moved by news that is available to all market participants at the same time. Because news is unpredictable and random by nature, we come to the unavoidable conclusion that movements of stock prices are also unpredictable and random. Therefore, the current stock price is always the best estimate of the stock’s fair price. This means those celebrity stock pickers appearing on television and the silver screen are no different than a team captain calling a coin toss before a big game. It’s a blind guess as to whether the stock will go up or down in the short term because these events will occur based on news that is unknowable in advance. This means your portfolio, if based on a few hand-picked stocks, will rise or fall on the whims of the daily news. Ever since the first stock market trade, which took place in 1602 at the Amsterdam Stock Exchange (“Vereniging voor de Effectenhandel”), traders have been looking for ways to predict future stock market movements. They have studied reams of data in search of patterns in securities prices. In 2000, a Nova television special, “The Trillion Dollar Bet,” 47 reported that a group of academics in the 1930s decided to find out if traders really could predict how prices moved. Since they could not find any scientific basis for the belief, they decided to run a series of experiments. In one of them, they created a random portfolio of stocks by throwing darts at The Wall Street Journal while blindfolded. After one

Index Funds: The 12-Step Recovery Program for Active Investors  

This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...

Read more
Read more
Similar to
Popular now
Just for you