- Now, can we as individual investors use our ability
to analyze financial data and economic trends
to identify winning and losing stocks?
No, the market's just too fast.
The market reacts to new information
very quickly, in minutes.
For example, there are smart people in New York
whose job it is to identify
all new share-relevant information,
load it into supercomputers, and do the data analysis
to find mispriced publicly traded stocks.
No academic research in accounting
or finance has found any reliable evidence
for profitable, implementable trading strategies
based on publicly available financial statement numbers.
By the time you have used your analysis
to pick an undervalued stock,
it is a week, two weeks, or two months too late.
Yes, there are people
who are making money buying and selling stocks.
Part of this is luck.
Even in Las Vegas, some people win.
Part of this is business contacts.
Experienced analysts are privy to all sorts of industry data
that regular people don't see.
Well, I often hear people say
that Warren Buffett seems to have a pretty good track record
of picking winning stocks.
Why can't I do the same?
Well, you can, if you develop the same business contacts
that Warren Buffett has
and if you get access to the information
from business, government, and media figures
that Warren Buffett gets.
He sees dozens of potential deals cross his desk every day,
and he learns from every one of them and ends up investing
in just a handful of big deals each year.
To repeat, the market reacts to information just too fast,
so that if you don't have some sort
of special industry expertise, you aren't going to be able
to use your valuation skills fast enough.
Let me share with you a stock-picking experience
featuring my dear brother.
When he was young and foolish, starting in the mid-1990s,
he and his wife Ramona conducted
a seven-year stock-picking experiment.
They started with $2,000 that they had
in addition to their regular savings.
They rode the internet bubble up to almost $9,000
in their little Stice Speculation Fund
and then finally crawled away
after the bursting of the bubble with $1,342.
So in total, they lost $658,
the 1,342 they had at the end
minus the 2,000 starting amount.
People who are currently doing well in the market
boast at parties about their stock-picking prowess.
They typically don't tell about all of their picks.
Half of them are probably going down.
And when they are losing money overall in the market,
they don't say anything.
When my brother and his wife were riding the market up,
they were boasting at parties.
Now I realize that any talk I hear
about how easy it is to make money in the stock market
is coming from a biased sample of people
who are currently experiencing a run of luck.
They aren't geniuses.
They don't have a foolproof system.
They're just lucky, for now.
To repeat, can we as individual investors use our ability
to analyze financial data and economic trends
to identify winning and losing stocks?
No, the market is just too fast.