- Picking winning stocks
- Picking superior managers
- Timing markets
- Financial press
Picking Winning Stocks
Everyone gets lucky when it comes to investing. You pick a stock that doubles in price. Congratulations. Unfortunately, sooner or later, you are going to pick a loser. It’s inevitable. You cannot consistently pick winners all the time. No one can. Not even fund managers. Since no one consistently beats the market, you are better off picking a passive mutual fund that tracks the market. Focus on the long term.
Picking Superior Managers
This ties into the point above. You can’t pick winners all the time. Sadly, neither can the professionals. Some have had great runs, but eventually the run ends and they lose. Don’t get caught up in the managers past record. He cannot predict the future and pick the winners. This is why over 80% of actively managed funds don’t beat the market.
The best example of this is with Bill Miller of Legg Mason. From 1991 through 2005 his fund beat the market. Mr. Miller said “As for the so-called streak, that’s an accident of the calendar. If the year ended on different months it wouldn’t be there and at some point the mathematics will hit us. We’ve been lucky.”
It was determined that the odds of beating the market each year during this period was 1 in 2.3 million. And you think you can pick a mutual fund that will consistently beat the market? You can’t.
Mr. Miller’s fund ended up performing worse than the market for 2006-2008 until beating it again in 2009.
Again, you are better off investing in a passive fund tracking the market.
No one knows when the market will rise or fall. No one. Look at the past summer as an example. Huge loses one day, then huge gains the next. You just don’t know. It seemed as though we were out of the woods after a few days of less volatile trading, but then the market dropped another 400 points. Because of this, there is no point in trying to jump in and out. You need to ride it out. Think of the market like a thunderstorm. It’s bad out there, but you ride it out knowing the storm will pass and the sun will come back out. The stock market is the same way. The sun always comes back out in the long run. You just have to ride out the short term. Do your best to tune out the short term hype or doom and gloom.
This ties into timing the markets. If you listen to the news or read the headlines, you would think the world is coming to an end. I think the newspapers and magazines have stock photographs of traders showing anguish on their faces. Do your best to ignore the media. They make money preaching doom or exuberance. They work your emotions. If you can tune them out and stay focused and committed to your long term goals – staying invested – you will come out OK in the end.
Tomorrow I’ll post on the things you can control when investing.