Where to begin??? I'm afraid it's useless to debate the issues. I think stockpickers and strategic asset allocators approach this whole idea of investment from different presuppositions.

In answer to a few of fatboy's questions: Where would I recommend to invest? Index funds, a group of non-correlated asset classes, ETF's, extremely low-cost mutual funds.

Stockpicking as a hobby? Knock yourself out... I prefer not to play with my financial future, but that's just me.

Efficient markets? Yes, I'm on board with that. Markets are MOSTLY efficient. But the real issue is that there's no way to systematically and profitably exploit those inefficiencies that remain.

Lousy stockpickers just as good as expert fund managers? Yes. Exactly. They're both terrible and lag index funds in the long run.

By the way, Buffet and Munger are NOT stockpickers. They're astute businessmen who take over the companies they invest in and actively participate in the management. You and I can't replicate that because we're not billionaires.

Daytrading is bad. Buying and holding individual stocks is not nearly as bad. But the risk is just not worth it. Bill Schultheis has a little game at his Coffeehouse Investor website called "Outfoxing the Box". It illustrates the concept perfectly. http://www.coffeehouseinvestor.com/bx/boxintro.htm

Indeed fatboy your views on diversification are twisted. I heartily agree ;^) William Bernstein can help you with that. His book is called "The Intelligent Asset Allocator". (You can't say I didn't try...)

You said that at this point you didn't know if you would succeed or fail at this stockpicking game. If we define failure as underperforming a well diversified portfolio over the long term, then most likely you will fail. But there's always that chance you could hit it big. As a stockpicker, that must be your motivation. More power to ya. Just realize that's the same motivation that keeps people buying lottery tickets.

Please understand, I don't presume to have the optimal portfolio on the efficient frontier either. But I can say without a doubt that my money is very widely diversified and I make good money and sleep well at night. When people ask about "the market", I have to ask "which market"? I'm invested in domestic stocks, foreign stocks, both large and small, both market and value, both developed and emerging. I invest in real estate, commodities, US & foreign debt, inflation protected securities... The whole gamut. The returns are nice and the volatility is fairly low. It's a good mix for me. But perhaps not enough "action" for your typical stock player.

I'm not a professional either, so take it for what it's worth.

I appreciate the interaction,

Cheers,

JC

There is quite a bit of truth and useful information to both sides of this argument. That's right, BOTH.

Some quick background: I have an Econ & Business degree, and I will readily admit that I was 100% in JC's camp on this debate up to about 2 years ago. In my first few years of learning about the market(s) and then working in them, I readily agreed with the strong form of the Efficient Markets Theory and went with a straight indexing/asset allocation approach to investing.

However, as I have learned more and more about the market(s) and market(s) history, my personal theories have changed and I now only believe in the weak form of the Efficient Markets Theory--which states that an investor cannot deduce anything about the future price movements of a given stock from a study of its' past price performance. So basically, what the weak form of the EMT does is completely debunk chartists as a bunch of mumbo-jumbo spewing quacks (I do appologize if you're a chart monkey, because I fear I've just opened another Great Debate here!).

In any event, continuing along with my line of reasoning, the semi-strong theory of the EMT states that fundamental analysis of a stock also CANNOT help you out-perform the market. Although a number of academic studies have shown that MOST professional stock analysts have relatively average results, I have come to the conclusion that fundamental stock analysis DOES work. I think that if there were NOT a legion of analysts and individual investors performing fundamental analysis on the universe of stocks in the market(s) then said market(s) would have no hope of being remotely efficient. Furthermore, all of these academic studies have been restriced to fundamental analysis done by professional analysts, and in my humble opinion "professional" Wall Street "analysis" is inherrently corrupt due to the fact that analysts have a vested interest in having a bullish tilt due to the majority of their firms having investment banking relationships with the same companies they are "analyzing"! Many of us who follow the market(s) closely and/or work in and around it see many examples of stocks being miss-priced, i.e. the stock that is unduly punished for missing analysts earnings estimates, over-reaction to bad press, etc. These are examples of investors performing irrationally and emotionally in the short term (not 100% efficiently). These miss-pricing always revert to the mean in the long-run, but in the short run I have seen many examples of market inefficiencies. Not to mention the whole phenomenon of Speculative Bubbles which recur in market throughout history and are indisputable examples of markets coming unglued from their fundamentals. In short, I believe it is the legion of participants in the market(s) who are constantly struggling to find and exploit miss-pricings and arbitrage opportunities that make the market itself relatively efficent, hence my belief in only the weak form of the EMT.

So finaly, how have I acted on this line of thinking? 60% of my portfolio remains in an allocation of index funds, ETF's, and several cheap mutual funds. And I pick individual stocks with the remaining 40% of my portfolio. This approach has indeed helped me to beat the market (no, not crush it!) inclusive of all fees and commissions despite the fact that roughly 40% of my portfolio remains in an S&P 500 index fund. My picks that have done well have "juiced" my returns above the market average thus far, although my performance will most likely be doomed to revert to the mean at some point as it does for the majority of participants in the market(s).

I agree with Deep Quant. I'm on board with a "weak" form of efficient markets. The problem is that the inefficiencies that remain cannot be profitably exploited systematically. So what's the point? Just index.

I regret to hear that Quant has been seduced by the dark side. Indeed, he may outperform in the short term. But then again, he also realizes that his returns are likely to revert to the mean eventually. So again, the question is what's the point? Just index.

Fundamental analysis as the key to outperformance? Consider the comments of the king of fundamental analysis...

Benjamin Graham, a mentor to Warren Buffet, relinquished the concept of beating the market as a viable endeavor. Before he died in 1976, he said, "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, forty years ago when [Security Analysis by] Graham and Dodd was first published; but the situation has changed... [Today] I doubt whether such extensive efforts will generate sufficiently superior selections to justify their cost... I'm on the side of the 'efficient' market school of thought."

Also, didn't Warren Buffet himself state in a February 1997 letter to shareholders, "Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals."

There you have it from Graham and Buffet. Stockpicking is the losers game. Indexing is the superior strategy for above average investment returns.

Cheers,

JC

Well I have a method that compliments both ways of doing things. My two prong approach is very simple:
First Prong - Get rich slow. I invest maximum into 401k every year (14k) and invest in low cost index funds.

Second Prong - Get rich quick. I invest my DISPOSABLE income into three categories:
1. Stock Picking - I pick stocks after doing a little research. Not really day trading but don't buy and hold long term (years) either.
2. Currency Trading - Highly volitile. You can make and lose thousands in minutes. It's quite a roller coaster ride.
3. Gambling - In my free time, I play almost every type of gambling game online and at casinos.

Which one has made me more money so far? The get rich quick route of course but it's not always sustainable so you have to rely on a fall back (get rich slow).

End Result: Get rich.