Is the stock market really +e.v.

[felson]

[ QUOTE ]
if someone pick stocks at random and sold them at random would they show a profit over 50 years? Does someone have to lose for you to show a profit?

[/ QUOTE ]

Almost everyone says yes, and this is the idea behind index funds. You don't buy a handful of stocks at random; instead you pretty much buy the entire stock market.

[OrangeCat]

[ QUOTE ]
I don't see any reason that random sells should be any worse than random buys. Every transaction is a simultaneous buy/sell anyway. And I'm pretty sure that in the WSJ dartboard analysis, they sell the prior holdings at the same time that they purchase the new ones.

[/ QUOTE ]

That’s right, the hold time was fixed at six months. My point was that the WSJ dartboard did not use random sells. IOW, it was not a randomly managed portfolio, which is what I thought the initial post was about.

It seems to me that a pro would be smart enough to sell the stinkers and keep the winners while a randomly managed portfolio might do the opposite making the random sell portfolio even worse by comparison. But a true believer in the efficient market theory might argue otherwise.

What I said above about the dartboard usually beating the experts was incorrect. The pros beat the dartboard and INDU. Here is the summary from WSJ online:

“But in the end, after 142 six-month contests, the pros came out ahead, racking up an average 10.2% investment gain. The darts managed just a 3.5% six-month gain, on average, over the same period, while the Dow industrials posted an average rise of 5.6%.”

Link to complete article

[goodedesign]

[mosta]

yes someone will show a profit: your brokerage house, and you will be the big loser--to them. (I know, you mean to suppose zero commissions, and I agree random selection will approximate an index with a positive return, etc etc. But I think it's important to keep in mind with all this talk about privatizing all retirement investment just how incredibily gigantic a windfall that would be for Wall Street firms, and how bad for the non-savvy (ie 99%) investor. (And don't take that to mean that I would necessarily be against it!))

[BadBoyBenny]

It would depend on how fast they were buying and selling them at random. She might be better off buying stocks at random and ignoring them for 50 years.

[BadBoyBenny]

Lots of people think they are investing like Warren Buffet. Most of them aren't getting his returns, or even a return that equals the market averages. For the random person off the street, buying an index and holding is a better option. (and then using the time he would spend reading books and 10-k's to make a wage)

[mosta]

[ QUOTE ]
Isnt the market a zero sum game

To quote poster one word answer:

[ QUOTE ]
NO

[/ QUOTE ]

[/ QUOTE ]

unless you're in derivatives.

[GeorgeF]

1) If you keep buying/selling the bid/ask spread and commisions will eat into your capital.

2) If you chose a large number of US stocks randomly you would acheive market returns similar to vanguard total market index, good or bad.

3) In practice you buy when you have the money and sell when you need the money. Randomness might not be achievable.

[college_boy]

“But in the end, after 142 six-month contests, the pros came out ahead, racking up an average 10.2% investment gain. The darts managed just a 3.5% six-month gain, on average, over the same period, while the Dow industrials posted an average rise of 5.6%.”

Link to complete article

[/ QUOTE ]

Actually the dartboards won when fees were calculated. The publicity from the experts is what caused their picks to go up over the short term, not their stock picking strategies. Adjusted for longer time periods the dartboards performed slightly better and with fees the experts' were never ahead at any point.

[gvibes]

[ QUOTE ]
[ QUOTE ]
but thing is whether it would show a greater profit than say bonds or gold or real estate. in the past it did mostly beat the competition. but not likely over the next 50 years.imo.

[/ QUOTE ]

I'm surprised nobody asked you about this comment. And why might that be?

[/ QUOTE ]

There are a lot of people speculating that historical (i.e. since 1928 or so) equity returns (I think roughly 6% over the risk-free rate) aren't maintainable long term. My guess is that Ray is referring to this phenomenon.

On second thought, Ray may be saying that that equities are SO overvalued right now, that equities will not even outearn the risk-free rate.

I personally will spread my investments among foreign and domestic equities, foreign and domestic bonds, real estate, and commodities, with semiannual rebalancing. My returns may not be incredible, but variance is more of a pain in the ass in investing than in poker.