Don't confuse luck with skill

I really believe you would be better off ignoring much of the financial media.  It’s filled with misinformation that harms you.

In last week’s newsletter, I mentioned that I had been interviewed by a major financial publication.  The reporter was sourcing a story on bad investment advice in the media.  She read an article which I wrote for The Huffington Post on August 16, 2016, in which I took issue with those who profess the ability to pick outperforming stocks.

The points I made in the blog are still valid today.

The myth of stock picking expertise

I can find no evidence that stock picking “experts” have any expertise. There’s ample evidence indicating their “hit” rate is no more (and often less) than you would expect from random chance.

Pay heed to this quote from Merton Miller, Ph.D, Nobel Laureate in Economics:

If there’s 10,000 people looking at the stocks and trying to pick winners, one in 10,000 is going to score, by chance alone, a great coup, and that’s all that’s going on.

Don’t confuse luck with skill.  If a stock picking “guru” recommends a sufficient number of individual stocks, some of them will be “winners.”

The myth of individual stock ownership

It makes no sense to own individual stocks.  Of course, you could score big by finding the next Apple, but it’s far more likely you will take a bath with a loser.

As financial journalist, Larry Swedroe noted, the odds of picking a stock that outperforms the index to which it belongs is just one-in-three.

You have a choice:  You can earn the returns of the index (minus the low cost of an index fund) with 100% certainty.  Or, you can gamble and buy a single stock in the index, hoping your pick will beat the odds and outperform the index.

Resource of the Week

This blog I wrote for The Huffington Post is worthy of another look.

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