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Stop Picking Stocks—Immediately!
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Is Jeremiah a Traitor?
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Friday, October 19, 2001, at 6:39 PM ET
architecture
Big Box
A San Francisco museum reinvented.
By Witold Rybczynski
Friday, January 26, 2007, at 7:10 AM ET
Click here to read a slide-show essay about Herzog & de Meuron's new de Young museum in San Francisco.
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bad advice
Stop Picking Stocks—Immediately!
Why the world's greatest stock picker stopped picking stocks, and why you should, too.
By Henry Blodget
Monday, January 22, 2007, at 4:14 PM ET
The most dangerous investment advice is often that which seems most sensible, which is why the worst investing counsel you will likely ever receive is that you should try to pick "good" stocks and sell "bad" ones. You will get this advice in one form or another from innumerable sources, including (some) investment advisers, friends, colleagues, Wall Street, and the investment media. You should ignore it.
Since the dawn of investment time, great stock pickers (there are some) have been revered, and even most novices can proudly recite picks that have produced mountainous returns. ("I bought Google at $85!") Unfortunately, what is smart (or lucky) on occasion often proves dumb over time, and, in the end, most stock pickers do worse than if they had never tried to pick stocks at all. Despite snagging the occasional ten bagger, for example, even professional mutual-fund stock pickers still have depressingly poor odds of beating the market once their losers and costs are taken into account (between 1-in-4 and 1-in-40, depending on how you measure performance). If you pursue a stock-picking strategy, you are almost certain to lag the market.
The problem for investors is that even though stock-picking usually hurts returns, it's extremely interesting and fun. If you are ever to wean yourself of this bad habit, therefore, the first step is to understand why it's so rarely successful. The short answer is that the overall market provides most investment returns, not particular stock picks, so most stock pickers get credit for gains that came merely from being invested in stocks generally. Second, competition among stock pickers is so intense that it is extraordinarily difficult for any one competitor to get a consistent edge. Third, although it is relatively easy to pick stocks that beat the market before costs (all else being equal, you have about even odds of doing this), it is much harder to do so after costs. Even if you pick stocks well enough to boost your pre-cost return by a couple of points, the expenses you rack up along the way (research, trading, taxes, etc.) will usually more than offset your gain.
Most stock pickers believe that they are among the tiny minority of investors who can beat the market after costs, and, for inspiration and encouragement, they point to legends such as Warren Buffett and Benjamin Graham. What such investors often don't know is that even Buffett has said that the best strategy for most investors is to buy low-cost index funds and that the great Benjamin Graham eventually changed his mind about the wisdom of traditional stock-picking. Graham, you may remember, is considered one of the greatest stock pickers of all time, the man who, in the 1930s and 1940s wrote two classics on intelligent investing and whose security-analysis techniques are still taught in most serious investment classes. But in 1976, shortly before his death, Graham told the Journal of Finance the following:
I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when [the bible of fundamental stock analysis, Graham and Dodd's Security Analysis] was first published; but the situation has changed. I doubt whether such extensive efforts will generate sufficiently superior selections to justify their cost.
What did Graham mean when he said that "the situation has changed"? Why did he conclude—more than three decades ago—that stock-picking practices that had defined intelligent investing in the 1930s were, by the 1970s, no longer worthwhile?
First, in the seven decades since Graham wrote Security Analysis, the stock market has gone from being a playground for amateurs to a battlefield dominated by full-time professionals. One result is that pricing errors that once might have gone unnoticed for months in Graham's day are now discovered and exploited instantly. Second, the amount of information available about the most obscure stock today dwarfs what was available about even the bellwethers a half-century ago, making it harder to dig up information that other investors don't know. The moment the information is released, moreover, it is dissected, discussed, and debated by thousands of analysts, until most reasonable conclusions that can be drawn from it have been. Today's technology also allows even part-time investors to screen tens of thousands of stocks in dozens of markets in the time it would have taken a Graham-era analyst to compute the "net current assets" of a single company.
Third, inside information that used to be quite valuable is now illegal to trade on. And, finally, the establishment of research centers such as the Center for Research in Security Prices (CSRP) has allowed analysts to study markets and investing in ways that the young Benjamin Graham could only have dreamed of—and, in so doing, to assemble a body of knowledge that makes much of the "investment wisdom" of the early 20th century seem as primitive and unscientific as bloodletting.
Benjamin Graham's "deathbed" quote is occasionally taken to mean that he completely repudiated his former work by suggesting that stock analysis is worthless. In fact, he just advocated a more diversified and high-level stock selection strategy. Specifically, Graham recommended screening stocks using simple valuation and fundamental criteria and then buying large groups of them, the same way a modern "passive" fund (such as a value-oriented index fund) does. What Graham did "recant" was the idea that by studying companies in detail, one could identify a few super-promising opportunities that could safely deliver market-crushing returns.
The stock-picking mystique is so deeply entrenched in our financial culture that it feels like heresy to suggest that it is, on balance, dumb. The facts are clear, however. For the vast majority of investors—including professionals—stock-picking efforts waste both money and time.
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What are the "costs" of stock-picking? Research costs, transaction costs, taxes, opportunity costs, and, if you hire an investment adviser or fund manager, advisory fees. These sound small, but, taken together, they add up.
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When Graham and Dodd wrote Security Analysis in 1934, the lack of an Internet was the least of an analyst's worries. There were no spreadsheets, computers, or information databases. There weren't even any calculators. There were no company conference calls or quarterly earnings releases. There were few filing requirements, lax accounting rules, and little legal enforcement. There were only a handful of mutual funds, no hedge funds, and no computerized trading. There was no CNBC, no market radio, no Bloomberg, no Yahoo! Finance, no real-time quotes. There were paper tickers, for God's sake.
blogging the bible
Is Jeremiah a Traitor?
Why this prophet bugs me so much.
By David Plotz
Friday, January 12, 2007, at 5:55 PM ET
From: David Plotz
Subject: Jeremiah and the Lustful She-Camel
Updated Friday, January 12, 2007, at 5:55 PM ET
I seem to be a moron times two. First, my lazy speculation that "the circle of the earth" means the Israelites thought the earth was round caught the attention of geometricians, historians, and cartographers—and not in a good way. Many, many, many of you observed that a circle is not a sphere. A circle is flat. Lots of ancient peoples believed the earth was shaped like a pancake (or, in the Hebrews' case, a latke). For a speedy tutorial on this, read Chris Johnson's e-mail.
I'm apparently soft-headed about child sacrifice, too. I pooh-poohed the idea that any civilization, including Israel's enemies, ever ritually murdered its own kids. Readers bombarded me with articles, books, and Web pages about child sacrifices around the globe. (There's practically enough for a Travel Channel special: The 10 Hottest Spots for Kid Killing!) In particular, they directed me to strong evidence that the Carthaginians offered large numbers of their children to Baal.
Let's get back to the Bible, and a new book …
The Book of Jeremiah
Like Isaiah, Jeremiah is not a kittens, rainbows, and spring flowers kind of guy. These two let-it-bleed prophets share a style (emphatic, metaphoric poetry) and a sensibility (gloom). But they're not identical twins—more like first cousins. Isaiah is bipolar, prone to wild mood swings, delightful when pleased, and a holy terror—truly, a holy terror—when angry. But he is also funny, in a vicious sort of way. You might not always like Isaiah, but he'd often be entertaining company, especially if you could get him to rip on the Babylonians.
Jeremiah, on the other hand—not the life of the party. (They don't call them "Jeremiads" for nothing.) He's plenty smart and eloquent, but he's a priggish prophet. He doesn't share Isaiah's occasional fondness for black irony.
Chapter 1 to Chapter 3
A century or so after Isaiah, God summons Jeremiah to serve Him. (When God orders Jeremiah to work, it surely marks the first use of this phrase: "Gird up your loins.")
Like Isaiah, Jeremiah's chief responsibility is to hector, nag, badger, noodge, and otherwise harass the increasingly unfaithful people of Judah to return to God's side before it's too late. Jeremiah ultimately fails, of course. He's living during the darkest of times—the final few years before Babylon conquers Jerusalem and exiles the Jews—and no one could have stopped the disaster.
What's most remarkable about Jeremiah is the depth of his rage, which can be explained by the hopelessness of his cause. His people don't share his sense of urgency, and it infuriates him. Jeremiah has the flaws that all whistle-blowers have. Almost without exception, whistle-blowers are mean, self-righteous, and resentful. When they turn out to be right—and boy, does Jeremiah turn out to be right—everyone regrets not having listened to them to begin with. But the reason no one listens to begin with is that the message is so unpleasant and angry. Put yourself in the shoes of a Jerusalemite, sixth century B.C.: Would you pay attention to the cantankerous rageaholic shouting doom in the bazaar?
In Jeremiah's first speech, he unloads on the wild, heedless idolatry of the Israelites, describing them as: "a lustful she-camel, restlessly running about." Now I personally have never seen a lustful camel—of the she or he variety—but, wow, that is one vivid image!
It's not just the lusty camel that occupies Jeremiah's thoughts. Much more than Isaiah, he has sex on the brain. Wherever he turns, he sees it. Whenever he opens his mouth, filth spews out. A few verses before the she-camel, for example, he says that Israel "recline[s] as a whore." Chapter 3 begins with him frothing about Israel's "whoring and debauchery … you had the brazenness of a street woman." In Chapter 5 he inveighs against the Israelites as "lusty stallions." (Are they camels? Are they horses?) A few chapters later, they're harlots. A few chapters later:
"I behold your adulteries,
Your lustful neighing
Your unbridled depravity, your vile acts … "
His combination of scorn and sex is very Church Lady—at once prudish and obsessed.
Chapter 4
God's disappointment with us only increases, because we are not merely unfaithful, we're also morons. "My people are stupid … They are foolish children. They are not intelligent." This may be Jeremiah's cruelest cut of all, since we know how much the Lord values intelligence. God always rewards brainy people, even when they're wicked. This is the first time He has ever wondered if His people lack smarts. His disillusionment is somehow more disturbing than His dismay over idol-worshipping. Infidelity He expects, but stupidity He can't stand.
Chapter 5 and Chapter 6
Jeremiah suggests that his readers search Jerusalem for a righteous person: "You will not find a man; There is none who acts justly." Since the city is empty of worthy people, God has no reason to spare it from conquest. This hearkens back to Genesis, doesn't it? It is essentially the same discussion that Abraham and God have about Sodom and Gomorrah back in Genesis 18. God is planning to destroy those cities, but Abraham argues with Him, eventually persuading the Lord that He can't wipe out the towns if there are even 10 innocent souls in them. (Of course it turns out there are no innocents, so God offs the cities.) Jeremiah takes on the role of God here in the retelling: Because there's not a single just person in Jerusalem, the city deserves its doom. (I wonder if the story of Diogenes and the lamp is ripped off from Jeremiah. Diogenes supposedly roamed the streets of Athens, carrying a lamp in broad daylight, searching for an honest man.)