Editing 2270: Picking Bad Stocks
Warning: You are not logged in. Your IP address will be publicly visible if you make any edits. If you log in or create an account, your edits will be attributed to your username, along with other benefits.
The edit can be undone.
Please check the comparison below to verify that this is what you want to do, and then save the changes below to finish undoing the edit.
| Latest revision | Your text | ||
| Line 13: | Line 13: | ||
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. | 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. | ||
| β | 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 | + | 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 be 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. | 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. | ||
