Hot Stock Tip

Buy now--you can't lose.  Well, except if you do.  But, then I'll have another deal for you.

I get asked for stock tips all the time.  My advice: read Burton Malkiel's A Random Walk Down Wall Street.  Said book demonstrates what economists think:  you can't predict the stock market.  Nobody can predict the stock market.  So, don't even try.  Buy a diversified portfolio and wait.  It's boring, but you can't do any better.

"Ah," but the skeptic says, "you can do better.  I know someone who did better.  So it is possible.  So, really, what is the way to do better?  I know you know.  And now you know I know you know.  So, you might as well tell me."

OK.  Here it is: the secret to making a fortune.

Get a really large mailing list.  Write to everyone on the mailing list explaining that you have a great method for predicting short term movements in stocks.  Explain that you know the reader is skeptical, so you will demonstrate the method.  Pick a stock--any stock, it makes no difference.  To half the list, write that your secret method predicts the stock will rise in the next month.  To the other half, say that the stock will fall in the next month.  Wait one month.  The stock either went up or down.  So drop the half of the list that got the wrong prediction.  Write to the half that got the right prediction and say, "See, I was right.  But, you are surely thinking that maybe I was just lucky.  So, to show you that it works, I'll give you another prediction."  Pick another stock--again it doesn't matter which.  To half of your new list, write that the stock will go up, to the other half that it will go down.  Wait one month.  Repeat process.  After 4 months, you are down to 1/16 of your original list.  Write them.  Say, "See my method works.  I have been right for 4 consecutive months.  Sign up with me and I will give you my expert advice.  My fee is $X.  [Make X as large as you want.]"  Collect money from the Fools who send it to you.  Laugh the whole time on your vacation in the Bahamas.

Interestingly, this is akin the process used by stock predictors as a group.  You usually never hear from the ones who were wrong.  You only hear from the ones who are right--or at least the ones who can convince you that they were right (curiously, in the real world, being wrong doesn't always matter; some people can convince others they were right even when they were not.)  But in a large enough world (like the one in which you live) there will always be people who have been right for several time periods in a row.  That doesn't mean they knew more. If some people predict rising prices and some predict falling prices, somebody has to be right.  Even if it is random.

And, that is the great thing--it is random. Stocks drift up over time as the economy gets more productive.  But there is no way to know in advance which stocks will rise faster than trend and which will rise slower than trend over short periods of time. 

Malkiel has been updating this book for decades.  The message never changes.  The evidence never changes.  It is a random walk down Wall Street.

I assigned this book to a class this semester--I've never assigned it before.  I am curious to find out if the students believe the argument or not.

And, by the way, if after reading all of the above, you want my Super-Duper Secret Stock Tip, I'll tell you for $100.