At this point, if you still think there really are people who are experts at picking stocks, I’ve got a bridge to sell you in Brooklyn.
But I’m going to pile it on with even more irrefutable evidence that stock picking experts don’t exist, and if you’re paying someone to actively manage your investments, you’re losing out.
Enter: college students flipping coins.
As described by Index Funds Advisors:
In a study by Walter Good and Roy Hermansen, a hypothetical coin flipping experiment was compared to mutual fund manager performance. Three-hundred college students were asked to guess the outcome of 10 coin tosses. Their guesses were tabulated and charted. The performances of 300 mutual fund managers were then tabulated for 10 years (1987 to 1996) from Morningstar Principia.
So basically, here’s what happened:
- 300 college students guessed whether heads or tails would come up in 10 coin flips
- 300 mutual fund managers had their performance tracked over a 10 year period
- the students’ correct guesses were charted against the number of years the managers were in the top 50% of all managers
And not surprisingly, here are the results:
They’re nearly identical.
So in this case, it’s a tie. And when the guy who’s managing your investments can’t beat a college kid guessing heads/tails, it’s not good news.
About the author: Jason is the author of Automatic Finances: 17 Days to Your Financial Freedom, a guide to automated money management. He started investing thanks to a free lunch, and after finding out how he was getting the short end of the stick, he sought out how to do it right. More »