“Good stock picking is controlled by good luck; bad stock picking is controlled by bad luck. Luck determines your stock picking ability.”
There is no evidence proving anyone can consistently pick stocks and outperform the market’s return over time. We all get lucky and we all get unlucky, too. Picking individual stocks is a coin flip, you will be right 50% of the time and you will be wrong 50% of the time.
I don’t like those odds. Some people will get lucky a few years in a row; these people attract the press and get labeled stock pickers or great mutual fund managers. But the truth is these people inevitably underperform the market average over any given length of time – history has proven this. The general consensus is that a stock picker or a fund manager needs at least 20 years of performance to remove luck and chance from their return track record before any conclusions can be drawn.
WHAT CONTROLS STOCK PRICE MOVEMENT?
“The only stock price pattern is randomness; you cannot predict the future price movement of a stock (and no one else can either)”
Stock prices are determined by supply and demand; because prices reflect all known information a mispriced security cannot be known in advance. Take every single investor in the stock market universe; they are all doing technical analysis, fundamental analysis, following the advice of a broker, listening to a friend with a hot stock tip, throwing darts at board with ticker symbols on it, etc. – they are doing anything and everything to form an opinion about a stock.
All of those opinions get priced into each and every stock. So when you pick a stock because you think it is underpriced and it will go up in value more so than the entire market you are wrong and you are fighting an uphill battle. You have to understand you do not know any more than anyone else; you do not know more than the stock picker doing the same analysis or opposite analysis as you. The most accurate price of a stock is what that stock is trading at right now; know that market prices are the best estimates of value, price changes follow random patterns and future news and stock prices are unpredictable.
WHY DO WE INVEST?
We invest to make money. We buy stocks because we want to see the stock price go up. Have you ever met anyone who buys a stock hoping it will go down in price? But we also invest because we want to see our stocks go up more than the stocks we didn’t pick or all of the stocks out there (known as the market).
So we look for something that predicts the future and tells us our stocks will go up more than the stocks we didn’t pick or more than the market itself. No one can predict when a stock will outperform other stocks or the entire market; nothing and no one will ever tell us the future direction of a stock price’s movement. Stock price movement is random and picking stocks is all controlled by luck. However, if we all agree that our goal is to make money then the method that has proven to make us the most money over time becomes The Right Way to Invest.
Q2, 2020 MARKET SUMMARY REPORT
Here you can view DFA's Q2, 2020 Market Summary Report. And check out this video where we take a deeper look into it, and explain what it means to you.
THE ELECTION AND YOUR RETIREMENT
Have you found yourself saying, “Ugh, I hope that guy doesn’t win!?!” What if “that guy” does win? How does his victory impact your retirement portfolio? Notice I didn’t specify “that guy” is Trump or Biden…because – when it comes to your retirement portfolio – it doesn’t really matter who wins.
“It’s natural for investors to look for a connection between who wins the White House and which way stocks will go. But as nearly a century of returns shows, stocks have trended upward across administrations from both parties.” Taken from DFA's article here, and referencing the below graphic, regardless of the party in the charge, stocks go up when given enough time, therefore your retirement portfolio will go up when given enough time, as well. Come November 3rd, you’re welcome to be elated or livid for other reasons, but don’t be for stock market reasons.
