TKer.co editor Sam Ro examines the myth of random coin-toss stock selection and reveals why the “monkey throwing darts” analogy doesn’t apply to the real world of investing. He also explains how the odds are stacked against stock pickers and why index funds are the best option for most investors looking to build long-term wealth.
Ro shares his insights with Yahoo Finance’s Jared Blikre and Sydnee Fried on “Stocks in Translation.” Listen to the full episode here or wherever you get your podcasts.
This post was written by Jimi Corpuz
Video Transcript
This episode is brought to you by Number 24.
You might also be surprised to learn that only 24% of stocks in the S&P 500 Index have outperformed or achieved returns greater than the index itself.
That’s the S&P 500 up 390% in that period.
That’s 22 years.
However, Sam says that only one in four stocks outperformed, meaning 75% of stocks did not perform well.
If you’re invested in the S&P 500, you’re fine.
But if there’s a chance you could lose money by picking stocks, don’t take the chance.
Well, so, if you’re trying to pick winners in the stock market, or more specifically, if you’re trying to find stocks that will outperform the average, outperform the index, the odds are against you.
That’s not what I want to hear.
I’d like to hear there is a choice.
Yeah.
So I think the simple answer is that there used to be this myth that you could predict stock prices by flipping a coin or getting a monkey to throw darts.
And, you know, it’s like a 5050, so there’s a pretty good chance that you can find stocks that will beat the market and end up wealthier than someone who’s just invested in the S&P, but, um, there’s been a lot of really good research that’s come out in the last few years.
The one you’re talking about is actually the S&P Dow Jones one.
And what they did was they looked at the returns of the S&P 500 and the individual constituents of the S&P, and they found that only a small handful of stocks in the index, maybe a quarter or 20%, were actually outperforming.
One reason this happens is that returns are asymmetric.
Or is it asymmetrical performance?
All that can happen is that a particular company will fall by 100%.
But on the way up, it could go up to 100, 203, 104, 100, and so on and so forth, ad infinitum.
Well, there was a great Bloomberg article published last week, I talked about how NVIDIA is up 350,000% since the Nvidia I.P.O.
These are almost astronomical numbers.
So think of it as having five, 10 baggers buried in there.
So you’ve experienced five 1000% returns in a relatively short period of time, right?
So unless you’re actually smart or lucky enough to pick the right stocks — if you don’t have the right stocks in your portfolio — then no matter how good an investor or stock picker you are, you’re going to end up underperforming.
So ultimately, what I’m saying is, unless you’re really confident that you can gain some kind of edge in this market, you’re going to buy the entire index because it will also give you exposure to the winners that will drive the overall market up.
