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

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Headline Risk Is a Lame Excuse for Active Managers

Active vs Passive
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Active managers need to convince you that they will beat the market going forward because they cannot prove they beat it in the past.

Active managers were quick to explain their underperformance. Mark Lamkin, the CEO and “chief investment strategist” at Lamkin Wealth Management, blamed his underperformance on “headline risk,” noting: “Nine of the last 11 years my active strategies have beaten the market, and I’m underperforming this market. It’s all headline risk.””Headline risk” is the possibility that a negative news story will adversely affect the price of a stock.

I tried to verify Mr. Lamkin’s claim that his active strategies have “beaten the market” in nine of the last eleven years and was unable to do so. His firm does not publish the results of its portfolios on its web page. I called his office and asked for additional information but received no response.

Analyzing the significance of claims that a fund manager or advisor “beat the markets” is not uncomplicated. You need to understand how much risk the manager took and whether the benchmark used for comparison is an appropriate benchmark, comprised of a proportionately weighted mix of stocks and bonds.

Mr. Lamkin’s lament about “headline risk” is troublesome. Unexpected news is a reason for under performance by active managers, but it is not an excuse that active managers should use to explain their inability to “beat the markets.” Tomorrow’s news drives stock prices. Active managers don’t know tomorrow’s news. They can’t anticipate what they don’t know. “Headline risk” is one of many reasons why active managers historically have underperformed the markets and are likely to continue to do so in the future.

According to a mid-year 2011 study by Standard and Poors, Over the past three years, 63.96% of actively managed large-cap funds were outperformed by the S&P 500, 75.07% of mid-cap funds were outperformed by the S&P MidCap 400 and 63.08% of the small-cap funds were outperformed by the S&P SmallCap 600. Passive management trumped actively managed in nearly all major domestic and international stock categories.

Finding an active manager who beats the market is a matter of luck. You have no idea if the active manager presented will beat the market going forward.

Please comment or call to discuss.

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Their Confidence Is Killing Your Returns II

Carnegie Mellon University Take II
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The marketing machine of the financial institutions over shadow thr the truth of investing. Dan Solin articulates what true investing is.

I often wonder why so many investors ignore the overwhelming data indicating that capturing market returns in a globally diversified portfolio of low management fee index funds in a suitable asset allocation is likely to outperform stock picking, manager picking and market timing — the daily grist of many brokers and advisors. If you have limited time for research on this subject, take a look at the “Standard & Poor‘s Indices Versus Active” reports, which you can find here.The answer to this riddle may have nothing to do with a battle over data, and everything to do with the perception of confidence. Don Moore, of Carnegie Mellon University, conducted research showing that we are inclined to accept advice from a confident source, even if the track record of that source is unworthy of our trust. Another study is even more troublesome. It found those receiving “expert” advice essentially “switched off” their brains (as measured by an MRI). The subjects would have been better off ignoring the advice of the “experts” and making their own decisions, but their brains went “dormant” when confronted with “expert” advice.

Keep this research in mind the next time you are exposed to the oh-so-confident opinions of financial experts. You would likely be better off independently looking at the data and making your own decision.

Be careful who you take your advice from.

Comments are welcome.

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