Stock Picking is a Losing Game
Excellent, timely advice by Dan Solin-
Stock Picking is a Loser’s Game
Let’s start with day trading. The SEC published an informative article on the perils of day trading. I suggest you read it carefully. It notes that day trading can be “highly risky” and that day-traders should be prepared to suffer “severe financial losses.” According to the SEC, many day traders “never graduate to profit-making status.” One study found that 70 percent of the day trading accounts analyzed not only lost money “but will almost certainly lose everything they invest.”
It’s tempting for nearly all of us to believe we have the ability to pick outperforming stocks, but Wall Street is littered with the bodies of very well-trained stock pickers who thought they had a special skill and found they didn’t. Merton Miller, Ph.D, a Nobel Laureate, observed that stock picking is a “game of chance operation” and that “people think they are doing something purposeful… but they’re really not.”
According to Standard & Poor’s mid-year 2012 Scorecard, almost 90 percent of all actively managed domestic stock funds failed to equal the performance of their benchmark for the one-year period ending June 30, 2012. Many of these fund managers are superbly trained, with advanced degrees in finance and economics at top-notch business schools. Some have years of experience. They are supported by a cadre of skilled analysts, proprietary software and high-speed computers. Yet they had this dismal record of underperforming their benchmark index. Is it realistic to expect you are more skilled than these full-time professionals?
Think about it this way: I understand you get up at 6:30 a.m. to study the markets. What do you learn that is not already in the public domain and has been analyzed by millions of other investors all over the world? They have incorporated this information in the price of publicly traded stocks. As such, it’s unlikely these stocks are mispriced. To be successful trader, you would have to know tomorrow’s news, because that’s what drives prices. Nothing in your “gut instinct,” “technicals,” and “stock charts” can tell you what tomorrow’s news will be.
One final point: Why do you assume the party on the other side of the trade is dumber than you? When you are buying, someone is selling. That party believes the stock is overpriced. How confident are you they are wrong? Would it make a difference if the other party was a large institution like Goldman Sachs?
A Better Way
In my view, you are gambling, not investing, with your hard-earned acting income. Finance is taught at every major business school in this country. I am unaware of any that tout the merits of day trading or stock picking. If you really want to learn how to invest, work with an Investor Coach that uses research all supported by reams of academic data.
Free Market US Fund 7.86%
Free Market International Fund 3.18%
Free Market Fixed Income Fund 0.10%
Dow Jones Industrial Avg. (14,090) 8.04%
S&P 500 (1518) 6.86%
NASDAQ 100 (2748) 3.51%
S&P 500 Growth 5.67%
S&P 500 Value 8.13%
S&P SmallCap 600 Growth 7.81%
S&P SmallCap 600 Value 7.57%
MSCI EAFE 3.44%
MSCI World (ex US) 2.33%
MSCI World 5.01%
MSCI Emerging Markets -0.03%
6-mo CD 0.39%
1-yr CD 0.59%
5-yr CD 1.26%
MLCD (Market-linked FDIC CD) -call for details. MLCD’s are paying around 4 times higher interest than traditional bank CD’s