Monkeys, darts, and investing: The myth of 50/50 stock picks

Examining the coin-toss myth of random stock selection, Sam Ro, editor of TKer.co, reveals why the "monkeys throwing darts" analogy falls short in real-world investing. He goes on to explain how the odds are stacked against stock pickers and why index funds may be the best choice for most investors looking to build long-term wealth.

Ro discusses his insights with Yahoo Finance’s Jared Blikre and Sydnee Fried on "Stocks in Translation." Listen to the full episode here, or wherever you get your podcasts.

This post was written by Jimi Corpuz

Transcripción del vídeo

This episode is brought to you by the number 24.

And you might be surprised to learn that only 24% of the stocks in the S and P 500 outperformed or had a higher return than the index itself.

That's the S and P 500 which was up 390% over this period.

That's 22 years.

But Sam only one in four stocks outperformed, that means 75% of them did not.

If you're investing in the S and P 500 you're, you're ok.

But if you're stock picking seems like you might lose, miss the boat there.

Yeah, I mean, you know, the odds are stacked against you if you're trying to pick winners in the stock market or, or I guess more specifically trying to find the stocks that are going to outperform the averages, outperform the index.

And that's not what I want to hear.

I want to hear that I can pick.

Yeah.

You know, I mean, the, I guess the easy sort of like, I guess there, there used to be this myth out there that you could flip a coin or, you know, you can have monkeys throwing darts at a, at a stock sheet.

And, you know, because it's kind of 5050 there was a decent chance you can find the stocks that are going to beat the market and help you become more rich than someone who's just invested in S AND P. But, um, there's been a lot of really great studies that have been published in the last couple of years.

The one you're talking about comes from S and P Dow Jones actually.

And, and what they did was they, they did a study of um uh the S and P 500 return as well as the individual components of the S and P and yeah, it turns out that it's a small handful of, of, of, you know, a quarter or maybe 20% of the stocks um in the index actually outperform.

And one of the reasons why um this happens is because of asymmetrical returns, right?

Or asymmetrical performance, right?

A a specific company can only fall by 100%.

But on the way up, you can go up 100 203 104 100 it can go up for infinity.

Um You know, there was just a great Bloomberg article last week that was published, I was talking about since Nvidia's IP O, NVIDIA is up 350,000%.

Like these are astronomical numbers.

So think about 5, 10 baggers are embedded in there.

That means five times, it has experienced 1000% returns over a relatively short period of time, right?

So like unless you're smart enough or lucky enough to actually pick that those right stocks, um if you don't have those in your portfolio, then you're going to underperform no matter how great of an investor or stock picker you are.

So, you know, the takeaway ends up being that, you know, unless you're convinced that you can have some kind of advantage in this market, the move ends up becoming, you know, buying the entire index because you're also going to get exposure to those winners that are going to drive the entire market higher.