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Unformatted text preview: a rather informal study
done by editors at Forbes magazine.
They would pin the stock market
page of the newspaper to the back
of an office door and throw darts at
it. Then they would invest “play
money” in each of the stocks the
dart hit. At the same time, they
would invest the same amount of
“play money” in the stock picks of
some of the best-known stock pickers on Wall Street. At the end of the
year, they would check to see which
group of stocks (dart-picked or
expert-picked) did better. Over the
years, few highly trained professionals did as well as the darts.
To understand why throwing
darts will often beat the experts,
consider the stocks of two companies, IBM and Ford. Suppose that on
a given day each stock sells for
$100 a share. Then one day IBM
announces a major breakthrough in
computer technology. On the same
day, Ford has to recall one of its
best-selling cars. In other words, the
IBM news is good and the Ford
news is bad.
What will happen to each company’s stock? No doubt IBM stock
will be bid up in price and Ford
stock will be bid down in price. At
the end of the day, IBM will sell for
more than $100 and Ford will be
selling for less than $100.
The prices of the two stocks will
keep adjusting until it is no better to
buy IBM stock than Ford stock. In
the end it will be no better to buy Ford at the lower price than IBM at
the higher price.
As long as stock prices adjust
quickly—and evidence indicates that
they do—then no stock will be better than or worse than any other
stock. If all stocks are alike once
their prices have adjusted to good
and bad news, then even a monkey
throwing darts can pick stocks as
well as Wall Street experts.
You can test this yourself. Pick
10 stocks using the dart method.
Invest $100 play money in each
stock. Next, go online and search for
“top stock picks.” Invest $100 play
money in the same number of top
picks as dart-picked stocks.
Compare the results.
ABOUT IT If stock pickers can do
no better (and sometimes worse) than throwing da...
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This document was uploaded on 01/16/2014.
- Winter '14