The Stock Picking Folly
Even with the benefit of hindsight, most can’t pick the right stocks
Every year lots of people make big bets in the stock market, believing they can predict which companies will perform well over the next 12 months. It’s hard enough to predict the future. But even the past is difficult to understand. To demonstrate, consider these five pairs of stocks...
Choose the one in each pair that performed best in 2009:
If you thought Nordstrom (a luxury retailer) suffered in 2009, you’re wrong. The company’s stock was among the 25 best-performing stocks of the year, rising 182% in 2009. Kodak, meanwhile, was among the worst 25 stocks, falling 36%.
We all know of the problems that plagued the automobile industry last year and that banks paid spectacular bonuses. Despite this, Ford’s stock rose 337% while Citigroup’s stock fell 51%.
CB Richard Ellis
Who would have thought that a company immersed in the commercial real estate business would have had a great year? Yet that's the outcome for CB Richard Ellis. Its stock jumped 214%; shares of the world's largest oil company fell 15%.
In a year when consumer spending was down, you probably guessed that a company often jokingly called “Whole Paycheck” may not have had a good year. But Whole Foods skyrocketed 191%, while mass-market grocer Kroger fell 22%.
Finally, tire company Goodyear lived up to its name with a stock gain of 136%, while Allegheny Energy fell 31%.
So how’d you do? If you found that you had more wrong answers than right ones, don’t feel bad about it. Most people get these answers wrong — even though they, like you, have the benefit of hindsight.
And that’s the important lesson. Even though we know how the economy performed in 2009, most of us are nonetheless unable to say which stocks did best. Yet many of these same people will insist they are able to predict which stocks will be the winners in 2010!
Buying shares of an individual company is equivalent to placing a bet in a casino. Don’t play that game — unless you have money you don’t mind losing.