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> Point two is double edged, it also picks all losers. Yes, but picking losers is a lot easier and winners a lot harder: > We study long-run shareholder outco

> Point two is double edged, it also picks all losers. Yes, but picking losers is a lot easier and winners a lot harder: > We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation. * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251 > Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages. * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447 Over ten years, most individual stocks under perform a market index (even more so if stock was initially a top performer): > […] Since 1926, the median ten-year return on individual U.S. stocks relative to the broad equity market is –7.9%, underperforming by 0.82% per year. For stocks that have been among the top 20% performers over the previous five years, the median ten-year market-adjusted return falls to –17.8%, underperforming by 1.94 per year. Since the end of World War II, the median ten-year market-adjusted return of recent winners has been negative for 93% of the time. The case for diversifying concentrated positions in individual stocks, particularly in recent market winners, is even stronger than most investors realize. * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122 Most stocks suck, and chances are generally low that you'll pick the non-sucky ones. Further, you have to buy when a non-sucky stock is or becomes not-sucky and then know when it does become sucky and sell before it drags down your returns. And not only do you have to be "good", you really should be better than just going for market returns (via a low-cost index fund). > But, what about stock picking? How long would it take to determine if someone is a good stock picker? > An hour? A week? A year? > Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years. […] > This is the existential crisis that I am talking about. Why would you want to play a game (or make a career) out of something that you can’t prove that you are good at? If you are doing it for fun, that’s fine. Take a small portion of your money and have at it. But, for those that aren’t doing it for fun, why spend so much time on something where your skill is so hard to measure? * https://ofdollarsanddata.com/why-you-shouldnt-pick-individual-stocks/ https://ofdollarsanddata.com/why-you-shouldnt-pick-individua...

eru 3y ago
If (deliberately) picking losers is easy, you should buy an index fund and do some careful shorting on the side. Instead of saying 'most stocks suck', you should probably say that probability distribution of future prices of stocks is highly skewed, but current prices reflect the expected future price. Logically, the median stock (and thus most stocks) will trade above its future potential. Suppose you had a lottery where 90% of tickets pay one hundred dollar next week. You wouldn't say those tickets suck. You'd be happy to own lots of them. Now suppose I tell you that the other 10% of tickets pay one million dollars next week. That makes the tickets even more desirable. But in an efficient market, all tickets will trade at approximately 100,000 dollars today. That will make it look like 90% of tickets suck. But both in lottery tickets and in stocks, suck-age is relative to prices paid. If 60% of tickets paid X, and 40% paid 0, then tickets would trade for about 0.6 * X, and most tickets will look like they don't suck: most tickets almost double in value.
- ac29 3y ago
  > If (deliberately) picking losers is easy, you should buy an index fund and do some careful shorting on the side. This doesnt make sense. The "losers" in this case don't necessarily go down in price, they just go up in price less than the overall market. Shorting these losers would still lose you money. Its easy to pick a stock that goes up less than the market, its hard to pick a stock that goes down (at least one that goes down by more than the cost to borrow and short it).
  - eru 3y ago
    Buy the index fund to get the market return, then pick out and short the 'losers' that either don't grow or grow slower than the index. Either way, you will have increased your returns.
- throw0101d 3y ago
  > If (deliberately) picking losers is easy, you should buy an index fund and do some careful shorting on the side. "Lose" also includes stalling such that as the rest of the market goes up, your portfolio does not do anything. It can even mean when the market goes up 5% your portfolio only goes up 3%. Now compound this lack of performance over a few decades, both pre-retirement when accumulating, and post-retirement during decumulation.

eru 3y ago

If (deliberately) picking losers is easy, you should buy an index fund and do some careful shorting on the side. Instead of saying 'most stocks suck', you should probably say that probability distribution of future prices of stocks is highly skewed, but current prices reflect the expected future price. Logically, the median stock (and thus most stocks) will trade above its future potential. Suppose you had a lottery where 90% of tickets pay one hundred dollar next week. You wouldn't say those tickets suck. You'd be happy to own lots of them. Now suppose I tell you that the other 10% of tickets pay one million dollars next week. That makes the tickets even more desirable. But in an efficient market, all tickets will trade at approximately 100,000 dollars today. That will make it look like 90% of tickets suck. But both in lottery tickets and in stocks, suck-age is relative to prices paid. If 60% of tickets paid X, and 40% paid 0, then tickets would trade for about 0.6 * X, and most tickets will look like they don't suck: most tickets almost double in value.

ac29 3y ago
> If (deliberately) picking losers is easy, you should buy an index fund and do some careful shorting on the side. This doesnt make sense. The "losers" in this case don't necessarily go down in price, they just go up in price less than the overall market. Shorting these losers would still lose you money. Its easy to pick a stock that goes up less than the market, its hard to pick a stock that goes down (at least one that goes down by more than the cost to borrow and short it).
- eru 3y ago
  Buy the index fund to get the market return, then pick out and short the 'losers' that either don't grow or grow slower than the index. Either way, you will have increased your returns.
throw0101d 3y ago
> If (deliberately) picking losers is easy, you should buy an index fund and do some careful shorting on the side. "Lose" also includes stalling such that as the rest of the market goes up, your portfolio does not do anything. It can even mean when the market goes up 5% your portfolio only goes up 3%. Now compound this lack of performance over a few decades, both pre-retirement when accumulating, and post-retirement during decumulation.