Economics_Ch16

# At the same time they would invest the same amount of

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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. THINK 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.

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