Editing 2270: Picking Bad Stocks

{{comic
| number    = 2270
| date      = February 19, 2020
| title     = Picking Bad Stocks
| image     = picking_bad_stocks.png
| titletext = On the news a few days later: "Buzz is building around the so-called 'camping Roomba' after a big investment. Preorders have spiked, and..."
}}

==Explanation==

In simplest terms, the stock market is a system by which private investors (including individual) can invest in companies by purchasing shares of stock, which can pay dividends, based on the company's net profits, and which rise in value if a company is doing well or is expected to do well in the future. Like many laymen, [[Cueball]] apparently understands the concept of the stock market, but is mystified by the complex strategies and vehicles for investment. He asks [[Ponytail]] if he can just "open up a website, and a pick a company you like."  In fact, in modern times, it's quite easy for individuals to set up online brokerage accounts with relatively small investments, and buy any available stocks they like. 

Ponytail then adds that there's a lot of evidence suggesting that no investment strategy consistently outperforms the market. This is significant, because there's an entire industry of "fund management", in which (often highly paid) financial experts determine how clients' money should be invested. The notion is that such managers, being particularly educated and informed on both general economic conditions and the state of specific companies, should be able to select companies that are more likely to do well and avoid those which will do poorly. However, history shows that stock markets in most advance economies tend to rise over time, which means that most stocks are more likely to go up in value, rather than down. Simply choosing more stocks that go up in value than down is relatively trivial, in order to be valuable, a fund needs to "beat the market", meaning that it appreciates in value more than the entire body of stocks do. 

As Ponytail points out, however, there is little evidence that these funds provide much value in the long term. Many studies, such as the long-running "[https://papers.ssrn.com/sol3/papers.cfm?abstract_id=670404 Investment Dartboard Contest]" run by ''{{w|The Wall Street Journal}}'', have found that an index of stocks that represent the total market is likely to produce returns just as favorable as an expert.  This means a large enough set of randomly-selected stocks (often colloquially stated as "picked by a monkey") is likely to do the same, as it's likely to represent the entire market. The reasons for this are much debated. A lot of the value of stocks is based on perception and speculation about the future, and so exhibits a great deal of unpredictable and quasi-random behavior. And any objective information about a company's health tends to shift the prices very quickly, so the typical investor can't really take advantage of those. While a fund might have periods of significantly market-beating performance, those are generally balanced out by periods of bad luck.

Ponytail then points out an interesting corollary. If movements of the stock market are effectively random, then it's just as hard to consistently ''lose'' money by investing as it is to consistently gain money. The reason is that consistently losing money would require a person to be able to consistently identify stocks that are likely to decline in value. The ability to do that would be very valuable, because the more bad stocks you can remove from your portfolio, the higher percentage of good stocks you'll have left. 

Cueball's immediate response is that he's sure can pick money-losing stocks. The final panel suggests that he's teamed up with [[Megan]] and [[White Hat]] to do exactly that, selecting stocks based on absurd reasons, while the others watch from a distance, and cull his suggested stocks from their portfolio, rather than investing in them.

In real life, this strategy would be unlikely to work, for the exact reasons Ponytail laid out: the trends of individual stocks are too complex and random to predict, so good or bad decision making won't consistently stray from market returns. 

In this example, the disturbing news about these companies (such as their CEO exhibiting erratic behavior, or developing an apparently useless product) is already public, and will presumably have been "priced in" to the market. This means that the stock price will have already dropped as much as it's expected to by most investors. At the same time, individual pieces of bad news don't necessarily mean the company will fail. If the CEO's eccentricities start to impact earnings, they'll probably be replaced. An ill-conceived product may indicate poor management, or it may be a one-off, and other product lines can keep the company profitable. As a result, dropping such companies after bad news, when the stock price is likely to be low, is unlikely to be a winning strategy.

In the title-text, another reason why it's difficult to pick bad stocks is highlighted. Due to a big investment (very possibly, Cueball's investment), the company in question has gotten a lot of attention and a spike in pre-orders. This emphasizes the unpredictability of the markets. People often invest (and even order) based on perception as much as on actual value, and so a company that might seem in trouble might see its fortunes turn around quickly. Because such things are so difficult to predict, beating the market is nearly impossible over time.

==Transcript==

[Cueball and Ponytail are walking together.]
:Cueball: I feel like by now I should know about the stock market.
:Cueball: What ''is'' investing?  Do you just open a website and pick the companies you like?

[Cueball and Ponytail are still walking; Ponytail is holding out her hand palm-up.]
:Ponytail: Well, you totally can.
:Ponytail: But there's a lot of evidence that no investing strategy consistently picks stocks that outperform the average of the whole market.  A lot of fund management is a myth.

[Close-up on Ponytail, who has turned to Cueball.]
:Cueball (off-screen): Huh, okay.
:Ponytail: But there's a weird corollary to that idea: it implies that, ignoring fees and stuff, it's just as hard to consistently ''lose'' money by picking ''bad'' stocks from an index.

[Cueball and Ponytail are both back in frame.  They are standing still and facing each other.]
:Ponytail: If someone could consistently buy bad stocks, you could beat the average by hiring them, letting them pretend to invest, then buying every stock ''except'' the ones they pick.
:Ponytail: In a way, bad judgement is just as helpful as good judgement.

[In a frameless panel, Cueball and Ponytail are standing facing each other; Cueball is raising his hands.]
:Cueball: Oh my God.
:Cueball: I can do that!
:Ponytail: No, it's just an example--
:Cueball: This is the job I was born for.

[Cueball is either sitting in a box or being viewed on a camera screen.  He is sitting in front of a computer console, and a camera is pointed at him.  Megan and White Hat are viewing him, and White Hat is holding a tablet.]
:Cueball: Hey, this company's CEO wants revenge on the same ghost as me!  I'm buying!
:Cueball: Ooh, and this one is planning to develop a "Camping Roomba."  That's a sure bet!
:Megan: Drop companies #208 and #1434 from the index.
:White Hat: Done.

{{comic discussion}}
[[Category:Comics featuring Cueball]]
[[Category:Comics featuring Ponytail]]
[[Category:Comics featuring Megan]]
[[Category:Comics featuring White Hat]]
[[Category:Roomba]]
[[Category:Stock Market]]