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Unformatted text preview: to “buy the
market” instead of buying a few individual
stocks. He checks on the current price of
Spyders. He sees the current price is $120.16
per share. He decides to buy 100 shares, for a
total price of $12,016. His online broker
charges him a small commission for this
EXAMPLE: QUESTION: Is it a good idea to buy stock?
ANSWER: A lot depends on such factors as
your age (are you at the beginning of your
work career or near the end), your income,
and how much you can afford to invest in
the stock market. There is no guarantee
that stock that you buy will go up in price.
However, generally it is the case that
stock prices increase over the long run. 16 (428-459) EMC Chap 16 11/18/05 9:34 AM Page 439 Picking Stocks:
Darts or Analysts?
?????????????????? L et’s say that you just inherited
some money and decide that
you would like to buy some stock.
What’s your investment strategy?
• • You could pick and buy certain
individual stocks yourself.
You could buy shares in a mutual
fund. You would invest your
money in a fund created by the
so-called Wall Street experts.
A third option would be to buy a
stock index fund, such as the 30
stocks that make up the DJIA, or
the 500 stocks that make up the
Standard & Poor’s 500. Most people think stock mutual
funds do better than the stock index
funds because the experts pick the
stocks that make up the funds. These
experts make it their business to
study stocks day and night. Right?
Enter Burton Malkiel, a professor
of financial economics at Princeton
University. He has shown that a person who invested $10,000 in 1969
in the Standard & Poor’s 500 stock
index fund (which is not managed
by the experts) would have seen its
value increase to $310,000 by mid1984. But the person who invested
$10,000 in 1969 in the average
actively managed fund would have
seen its value increase to $170,000,
or $140,000 less than the stock
index fund. Many rigorous studies confirm
Malkiel’s results. For now, though,
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- Winter '14