Wednesday, April 9, 2008

Superior Investors

In a previous post I explained how it is possible for superior investors to beat market averages by focusing on long-term value instead of short-term stock prices. This is the exception to efficient market theory.

This can make it tempting to become a stock picker. Confidence can be dangerous. Before you jump in believing that you can beat the stock market average, understand that most people who try to do this will fail. It’s not possible for most people to be above average. Add to this the trading costs and volatility that come with individual stock picking, and most stock pickers will make less than the stock market index.

Another problem is that it takes a very long time to tell if you have a talent for judging to true value of companies. An investor could just be lucky for 10 years and then suffer disastrous losses because he really doesn’t know what he is doing. By the time you have invested long enough to know whether you are a good stock picker, much of your investing life may be over.

If you have any doubts about your investing abilities, you should consider an indexing strategy rather than picking your own stocks.

1 comment:

  1. But then there's another class of stock pickers, like myself, who invest for income & income growth, rather than to beat a benchmark.