If there is one really important thing that I’ve learned in more than 25 years of Wall Street and business reporting it’s what I don’t know.
I haven’t got a clue where the stock market is going next. And despite all the outrageous claims made by investment professionals neither has anyone else.
Now I’ve got heavyweight support for this argument from no less than the winners of this year’s Nobel Prize for Economics. Eugene Fama, Robert Shiller and Robert Hansen “laid the foundation for the current understanding of asset prices,” said the Royal Swedish Academy of Sciences in its announcement.
And what did these 3 economists conclude? Um, that it’s nearly impossible to figure out where markets are heading in the short run, and that therefore stock picking is a fool’s game.
Their research studied the psychology of bubbles and how many of us behave in times of financial stress. In her fine piece of reporting this week explaining the Nobel award, Heidi Moore of The Guardian wrote that these 3 guys are “men who care what happens in the real world.”
“Economics has a reputation as wonky, nerdy discipline that loves theories that are pure and distant from humanity,” said Moore. “This year’s Nobel prize in economics is finally, a victory for the study of human nature.”
And human nature can be pretty whacky. Financial forecasting is at best a dismal science.
But that hasn’t stopped “experts” from trying. Some make confident sweeping predictions about what will happen to your money in the next few months, while other far-fetched forecasts go for broke, playing on the well embedded human propensity for fear and dread.
Ignore them all.
While it is true that over the long term the stock market has consistently out-performed bonds and money market investments, the overwhelming majority of highly paid mutual fund managers do not beat the market most of the time. Their failure predict the end of the tech stocks bubble in 2000 and the 2008 financial crash were proof of that.
Often I’m asked by friends and colleagues what’s the next hot stock?
Sorry, I haven’t got a clue.
And if you really want to know the sorry truth, the worst performing part of my 401k savings plan is the stock portfolio that I picked myself. Despite a considerable investment of time and emotion returns have been pathetic.
The index funds that I put money in and forgot about are doing just fine.
Here Hear! 
Excellent!
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Thank! But wait… there’s more! Economist Raj Chetty has a nice piece in today’s Times where he argues, yes, economics is a science. With so much emotion and irrational behavior in the markets, I’m not sure I agree but his thoughts are worth reading. http://www.nytimes.com/2013/10/21/opinion/yes-economics-is-a-science.html?hp&_r=0
I would disagree with your article in one point.
As Benjamin Graham, the father of all value investors, used to say: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
In other words, if you do your analysis of the fundamentals of a company correctly, you can outperform the market in the long run. That is what value investing is about.
Peter Lynch brought this to a point: “In the long run, a portfolio of well chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.
Thanks for this. I take your point about Benjamin Graham and Peter Lynch. The problem is that there are very few investors who consistently outperform the market over a long period of time. How do you know that you have chosen stocks that outperform?