This is why stock picking is so darned trickyOct 20, 2019
Have you ever wondered why it’s so challenging for fund managers and stock pickers to beat the market…even for market professionals?
There are a number of reasons.
For one thing, to a certain extent institutions are the market these days, so there’s an awful lot of jostling over a limited number of good ideas.
In aggregate all of this buying and selling generates an awful lot of fees, transaction costs and taxes, but not too much else of use.
Another part of the equation relates to the distribution of returns.
A handful of stocks can account for a surprisingly large chunk of gains in the index; so if you miss these winners then it’s tough to beat the market overall in any given year.
And the odds of consistently picking those few winners year in and year out are accordingly remote.
You can achieve better than average returns through the cycle, but being an outstanding stock picker isn’t necessarily the easiest route to doing so.
The way you can get better than average returns is through increasing exposure when markets are cheap, and vice-versa.
I discussed this a little further in the short video here
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