Dan Smolin asks whether you are a victim of investment pornography.

April 1, 2008 | By | 4 Replies More

Dan Smolin writes some persuasive posts on the topic of investing.   I’m categorizing this post under “snake oil” because of a point that Smolin repeatedly makes:  that virtually every investment professional’s claim that he/she can help you beat the market is false.  Dan often does a Q&A.  Here’s a recent example:

Question: Can I beat the markets by buying low and selling high?

Answer: It would be great if you could. One study showed that someone with the ability to be in Treasury Bills during bad times in the market and in stocks during good times over a 52-year period would have seen her $1000 investment increase to a whopping $5.36 billion!  Do you know anyone who achieved these returns? Have you even read about any one who did?

Here is the bottom line: There is no evidence that anyone has the ability to predict highs and lows in the market. If they did, there would be a lot of billionaires out there who made their money market timing. They don’t exist.

Smolin doesn’t just look at the results.  He gives good analyses of why no one can consistently beat the market.  Yet there are huge numbers of intellectually sophisticated investors who want to believe, beyond all evidence, that there are special gurus out there who can work magic on their investments.  Smolin’s advice suggests that people avoid “stock-picking” (even by “professionals”) and that they buy broadbased index funds that have low maintanence fees. Don’t let any investment “expert” tell you otherwise.

One study looked at the performance of 71 mutual funds whose investment styles roughly paralleled the S & P 500 over a 10 year period. Only two of these funds beat the index.

In another study, Vanguard founder John Bogle found that only nine out of 355 equity funds beat their benchmark over a period of 30 years.

There are many similar studies.

Stock picking is a loser’s game for most investors.


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Category: Economy, snake oil

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

Comments (4)

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  1. Dan Klarmann says:

    You don't have to tell me. I have a special talent for killing companies. I follow the old fashioned advice to pick a stock and hold it for the long run. I did this with TWA, with Delta, with K-Mart (they shafted their creditors and kept going), and more recently with New Century Financial.

    I don't throw my money away on fast-obsolescent consumer goods, just on quickly worthless stocks.

    Once upon a time, stock was a share in a company, a claim on their assets. With the new bankruptcy rules, stocks are just trading cards with the name of a company on them. They cease having any real value after the IPO.

    Yet, I still casually play the market.

  2. Ebonmuse says:

    Jane Bryant Quinn had a good column recently on these kinds of investors' fallacies:

    We find patterns fast. Two accurate calls will make you expect — and bet on — a third. Three is a “trend.'' Studies show that people seeking new money managers tend to hire a firm after a three-year hot streak and fire one after a three-year cold streak (even though both of these streaks are probably about to change).

    The advice I've come to believe is that trying to beat the market in the short term, by picking "winning" stocks, is a fool's game. It's really no different, substantively, from going into a casino in Vegas or Atlantic City and betting on roulette or slots. Over the long term, with a well-balanced portfolio, you can make money on the market, because the basic trend in capitalism is toward increased wealth and economic growth. Anything else is no more rational than betting in any other game where the odds are against you.

  3. Erich Vieth says:

    A new post by Dan Smolin demonstrating, again, that "smart" people can be highly irrational:

    Investors are confronted with two choices: They can capture market returns (minus low transaction costs) with 100% certainty, or they can pursue the quest for higher returns, with the probability that they will underperform the markets.

    You would think that the choice would be clear. Yet the majority of investors opt to ignore the data and try to "beat the markets."


    This week, I deal with several methods frequently used by investors to try to accomplish this elusive goal. None of them work.

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