As it turns out stock picking is a process that proves Max Ma’s Law:
“That’s not a problem; that’s impossible.”
Impossible means what in the context of stock picking?
Jason Zweig did an interesting piece recently for the Wall Street Journal. His conclusion based on research by finance professor Hendrik Bessembinder of Arizona State points out some less than obvious details.
- Amazon stock sells for 49,000% more than it did at issue 20 years before.
- From 1926 to the end of 2015, 30 stocks out of 25,782 accounted for a third of the gain on the exchange.
- If you selected stocks by return and kept one in three hundred of those available, you picked up half the gains.
- If you took the best one in ninety, You got three quarters of the profit.
- The top one thousand, less than 4% of what was available, made all the money.
- You could have matched the returns on the other 96% by putting your money in 30-day t-bills.
- You have no reasonable expectation of finding a “super stock” if you own 25 securities. You would need to own hundreds or even thousands to cast a big enough net. And that exposes you to far more of the 96% that make nothing.
- Holding a total market index fund may the only cost effective way to do that.
- The only thing harder than finding a super stock may be holding on to it during the immense volatility that follows.
The future is always different.
The future unfolds differently than we expect because we base our expectations on the past. Daniel Khanamen has pointed out that the past is without risk. Everything is obvious and makes sense. The future is not like that.
Amazon looks easy to see now. It was not in 1996 and even less so later.
Zweig’s Key Observation.
“The average return of the stock market, and the return of the average stock in the market, are nothing alike.”
Give up unrealistic expectations
If the average return is good enough to meet your objectives, why risk losing everything by chasing the vastly improbable.
The best performer over the entire 90 year period was Altria. 2,000,000 times your money. Who of us would have predicted that in 1926? Who among us would have held it through the ’30s.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772