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Smart Advice for the HuffPost Investor: A Reader Discovers the "Magic Bullet" To Achieve High Returns In Any Market

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I devote my entire column this week to breaking news.

A reader has discovered a system so simple that anyone can do it (even your broker or financial advisor!). Using this system, he says he has achieved remarkable returns over a ten-year period. These returns are so outstanding that no mutual fund manager out of the 12,000+ funds and indexes tracked by Morningstar has equaled them over this period.

As an added benefit, his system is free. Anyone can access the same recommendations that he follows at the same time he gets them.

Too good to be true?

You tell me.

Please add your questions as comments to this blog. I will try to answer some of the ones I couldn't get to from last week as well as new ones.

Question From Rule Of Law:

Geez, Dan--I pretty much followed the Motley Fool recommendations for the past ten years and have made over 32% each and every year. Is that stock picking?

Rule of Law,

I am not sure you appreciate how impressive an achievement that is.

There are 12,672 mutual funds and indexes tracked by Morningstar that have a 10 year track record through December 2007. The managers of these funds have the support of thousands of analysts who are trying to beat the markets. In addition, they receive information daily from all of the major brokerage firms who are hungry for their business.

The financial incentives for these fund managers are huge. Seven figure incomes can be paid to those who can beat their benchmarks.

These funds cover all sectors. As you know, some sectors are "hot" for a period of time and generate very high returns.

So, how many of these funds were able to achieve an annualized return of 32% over the past ten years?

None!

And all you had to do to beat the returns of these 12,672 professionals was "pretty much" follow the Motley Fool recommendations.

I am wondering how you determined which of these recommendations to follow and which ones to avoid.

For example, in January, 2006, the Motley Fool made four stock predictions for 2006. It predicted that (i) Google shares would fall, (ii) both XM and Sirius shares would rise in value, (iii) Tivo would rise in value and (iv) Six Flags would be one of the "top stocks" in 2006.

How many of these stock predictions were right?

None.

You were really wise not to buy Six Flags that year. It's shares decreased in value by 33%.

A recent study by Kenneth R. French, a Professor of Finance at the Tuck School of Business, Dartmouth College, showed that investors collectively spend over $100 billion in what the author termed the "negative sum game" of trying to beat the markets.

If you are correct, investors could save this money and just click on to the Motley Fool every day.

Professor French's views are supported by hundreds of studies showing the folly of stock picking. Among those who agree with him are:
  • Merton Miller, Nobel Laureate and formerly Professor of Economics, University of Chicago;
  • William Bernstein, author of The Intelligent Asset Allocator;
  • Zvi Bodie, Alex Kane, Alan J. Marcus, Co-authors, Investments.
  • Professor Burton Malkiel, author of A Random Walk Down Wall Street.

All of these outstanding academics have published extensively, with comprehensive data that supports their view.

In stark contrast, investors who believe in stock picking have no supporting data. Instead, they ask us to take their anecdotal experiences at face value.

You could easily demonstrate that you are the exception. All you would have to do is publish something in a peer reviewed journal so that your methodology (simply following some of the recommendations of a popular web site) can be subject to the same rigorous academic scrutiny. We are talking about something that would have Nobel Prize written all over it!

Think about how many investors would benefit if you are correct. That should be more than enough incentive.

And, to answer your question, yes, you are engaging in stock picking.

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