A Lesson on the Perils of Stock Picking

Lehman Brothers Rockefeller centre
Lehman Brothers Rockefeller centre (Photo credit: Wikipedia)

There is no reliable method for anyone to choose stocks which will outperform the market. The Wall Street bullies have a marketing machine to convince investors that very thing. The vast majority of active fund managers under perform the market. You will outperform most investors by capturing market returns. By following the academic research of the Nobel prize winning economists you can build wealth without the anxiety.

I find it remarkable that 84 percent of fund managers who were over-weighted in Apple stock suffered massive losses. The funds who didn’t see the plunge included some big fund families, like the T. Rowe Price Growth Stock fund and the JPMorgan Large Cap Growth Select fund, both of which added shares of Apple stock as its price was declining.The debate about whether to buy or sell Apple stock misses the point. Trying to pick a stock that will outperform is little more than a crap shoot. Concentrating your portfolio in any one stock adds unacceptable risk. Wall Street is littered with worthless stock certificates of companies that were once considered “sure things,” like Polaroid, Bethlehem Steel, Bear Stearns and Lehman Brothers.

Picking a fund manager who believes in stock picking is little better. According to a report issued by Standard & Poors, very few funds that perform well are able to maintain their high level of performance. The report found only 10 percent of 707 domestic stock funds that were in the top quartile as of September 2010 remained there at the end of September 2012.

Instead of being attracted to those funds that dumped Apple, you would be better advised to attribute their decision more to luck than to skill. Your confidence should be shaken by the overwhelming majority of funds that got clobbered when Apple shares dropped in price.

The irrefutable data makes a persuasive case that active management is a loser’s game. You play that game at your peril. That’s the real lesson of the Apple saga.

The Wall Street bullies need you to believe that there is some manager who can tell you when to buy and sell any stock. This is far from the truth. Fire your broker and hire an investor coach.

Please comment or call to discuss how this affects you.

Posted via email from Curated 401k Plan Content

Enhanced by Zemanta

Leave a Reply

Your email address will not be published.