Dan Smolin writes some persuasive posts [1]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. [2]
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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