<p>In general, stock picking does not work. </p>

<p>For more information, see this keynote address by Daniel Kahneman, who found that stock-pickers perform worse than chance when they change stocks: <a href="https://forum.amundi.com/the-psychology-of-investors-the-cost-of-ideas/" rel="noreferrer">https://forum.amundi.com/the-psychology-of-investors-the-cost-of-ideas/</a></p>

<p>Here is another reference on the subject:</p>

<blockquote>
  <p><strong>Abstract</strong></p>
  
  <p>Is expertise portable across closely related domains? We investigate this question empirically using a unique dataset of market
  experts---institutional investors with portfolios averaging $573
  million. A striking finding emerges: while there is clear evidence of
  skill in buying, the investors' selling decisions underperform
  substantially--even relative to random selling strategies. This holds
  despite the similarity between the two decisions in frequency,
  substance and consequences for portfolio performance. We present
  evidence that an asymmetric allocation of cognitive resources such as
  attention can explain the discrepancy: investors are prone to a
  systematic, costly heuristic process when selling but not when
  buying.</p>
  
  <p><em>Akepanidtaworn, Klakow and Di Mascio, Rick and Imas, Alex and Schmidt, Lawrence, Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors (May 8, 2019). <a href="http://dx.doi.org/10.2139/ssrn.3301277" rel="noreferrer">http://dx.doi.org/10.2139/ssrn.3301277</a></em>  </p>
</blockquote>

CC BY-SA 4.0
2019-07-30T05:14:13.777Z
2019-07-30T05:14:13.777Z
Angela Pretorius
<p>This question probably needs the obligatory <a href="https://en.wikipedia.org/wiki/Efficient-market_hypothesis" rel="noreferrer">Efficient Market Hypothesis</a> answer to complement the great answer by Angela Richardson. Broadly, speaking, the EMH reasoning goes like this:</p>

<p>Suppose that there was a way—any way—for you to figure out that a stock's price is too low and that the price will be higher tomorrow. They you could make a profit by buying the stock today and waiting until tomorrow to sell.</p>

<p>But whatever data and method you used to figure that out is also available to everyone else, so they will figure it out too. After all, they've got billions of dollars at stake! And because they also know the price will increase, they too will go out and buy the stock right now. But all of their buying activity creates extra demand for the stock which, by the normal principles of supply and demand, causes the price to increase <em>today</em>—earlier than forecast. You can replace "today" and "tomorrow" in this example with "now" and "one millisecond from now" if you want. So any method to predict the future price movement of a stock is self-defeating because all of the publicly available information is immediately incorporated into the stock's price as soon as people try to act on that information. </p>

<p>The theory is obviously quite stylized and shouldn't be take too literally. But the basic idea is helpful: there are people with lots of money at stake, which gives them an incentive to react quickly to any new information, closing the window of opportunity to profit from that information. You can see this work in practice by looking at what happens to a stock price when a news story breaks about a firm. Usually, if the news wasn't previously anticipated, you can see the stock price react to the news in seconds or fractions of second. For example, if we look at Twitter's stock price we can pinpoint the exact second that the news of Dick Costello's resignation as CEO hit the wires:</p>

<p><a href="https://i.sstatic.net/okhU1.jpg" rel="noreferrer"><img src="https://i.sstatic.net/okhU1.jpg" alt="enter image description here"></a></p>

<p>There are companies that invest billions of dollars relocating their servers one or two feet closer to the exchange's master server because the shorter cable run shaves a nanosecond off of their trading time. So unless you have truly private information (which would probably make it illegal for you to trade the stock—so-called insider dealing), it's going to be difficult or impossible for you or anyone else to systematically "beat the market" by picking stocks.</p>

CC BY-SA 4.0
2019-07-30T08:28:57.643Z
2019-07-30T13:42:15.013Z
2019-07-30T13:42:15.013Z
Ubiquitous
<p>I think this <a href="https://www.quora.com/What-do-mutual-fund-managers-think-of-Daniel-Kahnemans-claim-in-Thinking-Fast-and-Slow-that-their-so-called-investment-skills-are-mostly-luck" rel="nofollow noreferrer">Quora discussion on the fund manager illusion of validity</a> told most of the story.  As one commenter has pointed out the flaw of typical fund manager attempt to use Berhshire Hathaway to cover them, however, as pointed out: </p>

<blockquote>
  <p>Berkshire is very far from a traditional fund. Look back on how they made their returns through the years. They’ve scooped up
  companies at rock-bottom prices and guided operators in turning them
  around, and they’ve used leverage and reinvested the float they’ve
  accumulated from their insurance businesses to multiply their returns.
  <strong>These are not typical strategies available to, or used by, the typical</strong>
  <strong>mutual fund manager.</strong></p>
</blockquote>

<p>Watch this video : <a href="https://youtu.be/hOm6rD4m4V0" rel="nofollow noreferrer">Daniel Kahneman: Think 'Fast And Slow' About Index Funds</a>, Daniel Kahneman simply confirmed that: Berkshire Hathaway doesn't trade stock, it just buy the company. </p>

<p>This is why veteran investor recommended <a href="https://en.wikipedia.org/wiki/Index_fund" rel="nofollow noreferrer">index fund / ETF </a>, which is resilient to speculation volatility. The catch is, stock like Bershire hathaway, or index fund/index ETF usually seems quite expensive to retail investors. </p>

CC BY-SA 4.0
2019-07-30T15:49:19.467Z
2019-08-01T11:05:21.477Z
2019-08-01T11:05:21.477Z
mootmoot
<blockquote>
<p>We find that funds hold stocks that outperform the market by 1.3 percent per year, but their net returns underperform by one percent.</p>
</blockquote>
<p><a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/0022-1082.00263" rel="nofollow noreferrer">Source.</a>
Seems they don't work very well.</p>

CC BY-SA 4.0
2021-05-08T14:19:42.390Z
2021-05-08T14:19:42.390Z
danuker
<p>Does stock picking work? Why/why not? What does the research say about it?</p>

<p>(I was expecting that this should already have been asked and looked quite extensively for such a question but couldn't find anything)</p>

CC BY-SA 4.0
2019-08-01T19:17:11.107Z
FYI: Richard Thayler talks about this in his book "Misbehaving"
EconJohn
CC BY-SA 4.0
2019-08-03T18:34:24.320Z
Does hgh jumping work?  Is the answer "Yes, almost anyone can jump"?  Or is it  "Yes, some people can be jump well enough to be Olympic champions"?  Or is it  "No, nobody can be an Olympic champion without a great deal of training, effort and discipline"?.  The answer depends on what "work" means.  Since you haven't told us what "work" means in this question, the question is impossible to answer.
Steven Landsburg
<stock-market><investment>
Does stock picking work?
d-b
# Does stock picking work?

(Asked by: username_0 on 2019-07-29)

Does stock picking work? Why/why not? What does the research say about it?

(I was expecting that this should already have been asked and looked quite extensively for such a question but couldn't find anything)

**Tags:** stock-market, investment

> **Comments:**
> **username_1**: FYI: Richard Thayler talks about this in his book "Misbehaving"  
> **username_2**: Does hgh jumping work?  Is the answer "Yes, almost anyone can jump"?  Or is it  "Yes, some people can be jump well enough to be Olympic champions"?  Or is it  "No, nobody can be an Olympic champion without a great deal of training, effort and discipline"?.  The answer depends on what "work" means.  Since you haven't told us what "work" means in this question, the question is impossible to answer.  

---

## 4 answers

### Answer by username_3 on 2019-07-30. Score: 8

In general, stock picking does not work.

For more information, see this keynote address by Daniel Kahneman, who found that stock-pickers perform worse than chance when they change stocks: <https://forum.amundi.com/the-psychology-of-investors-the-cost-of-ideas/>

Here is another reference on the subject:

> **Abstract**
>
> Is expertise portable across closely related domains? We investigate this question empirically using a unique dataset of market
> experts---institutional investors with portfolios averaging $573
> million. A striking finding emerges: while there is clear evidence of
> skill in buying, the investors' selling decisions underperform
> substantially--even relative to random selling strategies. This holds
> despite the similarity between the two decisions in frequency,
> substance and consequences for portfolio performance. We present
> evidence that an asymmetric allocation of cognitive resources such as
> attention can explain the discrepancy: investors are prone to a
> systematic, costly heuristic process when selling but not when
> buying.
>
> *Akepanidtaworn, Klakow and Di Mascio, Rick and Imas, Alex and Schmidt, Lawrence, Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors (May 8, 2019). <http://dx.doi.org/10.2139/ssrn.3301277>*


---

### Answer by username_4 on 2019-07-30. Score: 6

This question probably needs the obligatory [Efficient Market Hypothesis](https://en.wikipedia.org/wiki/Efficient-market_hypothesis) answer to complement the great answer by username_3 Richardson. Broadly, speaking, the EMH reasoning goes like this:

Suppose that there was a way—any way—for you to figure out that a stock's price is too low and that the price will be higher tomorrow. They you could make a profit by buying the stock today and waiting until tomorrow to sell.

But whatever data and method you used to figure that out is also available to everyone else, so they will figure it out too. After all, they've got billions of dollars at stake! And because they also know the price will increase, they too will go out and buy the stock right now. But all of their buying activity creates extra demand for the stock which, by the normal principles of supply and demand, causes the price to increase *today*—earlier than forecast. You can replace "today" and "tomorrow" in this example with "now" and "one millisecond from now" if you want. So any method to predict the future price movement of a stock is self-defeating because all of the publicly available information is immediately incorporated into the stock's price as soon as people try to act on that information.

The theory is obviously quite stylized and shouldn't be take too literally. But the basic idea is helpful: there are people with lots of money at stake, which gives them an incentive to react quickly to any new information, closing the window of opportunity to profit from that information. You can see this work in practice by looking at what happens to a stock price when a news story breaks about a firm. Usually, if the news wasn't previously anticipated, you can see the stock price react to the news in seconds or fractions of second. For example, if we look at Twitter's stock price we can pinpoint the exact second that the news of Dick Costello's resignation as CEO hit the wires:

[![enter image description here](https://i.sstatic.net/okhU1.jpg)](https://i.sstatic.net/okhU1.jpg)

There are companies that invest billions of dollars relocating their servers one or two feet closer to the exchange's master server because the shorter cable run shaves a nanosecond off of their trading time. So unless you have truly private information (which would probably make it illegal for you to trade the stock—so-called insider dealing), it's going to be difficult or impossible for you or anyone else to systematically "beat the market" by picking stocks.


---

### Answer by username_5 on 2019-07-30. Score: 3

I think this [Quora discussion on the fund manager illusion of validity](https://www.quora.com/What-do-mutual-fund-managers-think-of-Daniel-Kahnemans-claim-in-Thinking-Fast-and-Slow-that-their-so-called-investment-skills-are-mostly-luck) told most of the story. As one commenter has pointed out the flaw of typical fund manager attempt to use Berhshire Hathaway to cover them, however, as pointed out:

> Berkshire is very far from a traditional fund. Look back on how they made their returns through the years. They’ve scooped up
> companies at rock-bottom prices and guided operators in turning them
> around, and they’ve used leverage and reinvested the float they’ve
> accumulated from their insurance businesses to multiply their returns.
> **These are not typical strategies available to, or used by, the typical**
> **mutual fund manager.**

Watch this video : [Daniel Kahneman: Think 'Fast And Slow' About Index Funds](https://youtu.be/hOm6rD4m4V0), Daniel Kahneman simply confirmed that: Berkshire Hathaway doesn't trade stock, it just buy the company.

This is why veteran investor recommended [index fund / ETF](https://en.wikipedia.org/wiki/Index_fund) , which is resilient to speculation volatility. The catch is, stock like Bershire hathaway, or index fund/index ETF usually seems quite expensive to retail investors.


---

### Answer by username_6 on 2021-05-08. Score: 0

> We find that funds hold stocks that outperform the market by 1.3 percent per year, but their net returns underperform by one percent.

[Source.](https://onlinelibrary.wiley.com/doi/abs/10.1111/0022-1082.00263)
Seems they don't work very well.


---

