Why Indexing Beats Stock-Picking

Probability in Investing –


Professional equity managers — of mutual funds, pension funds or hedge funds — use a number of methods to try to beat their benchmark index. These broadly fall into one of two camps, “active” and “passive,” and a debate over which gets better results has raged since at least the late 1960s.

Passive managers have been able to claim the upper hand by pointing to the well-known tendency of active equity managers to underperform their benchmark index.

J.B. Heaton, Nicholas G. Polson, Jan Hendrik Witte, BloombergView, November 11, 2015

Would you let a mystic manage your investment portfolio?

Probability in Investing –

It’s that time of year again when the mystics peer deep into their tea leaves, entrails and crystal balls to divine what’s ahead.

Which means it’s also time for my annual reminder: These folks cannot tell the future. Ignore them.

Barry Ritholtz, Washington Post, November 28, 2015

How you, the amateur investor, can beat the pros

Probability in Investing –

People who are not professional investors — those Mom and Pop investors I refer to all the time — have enormous advantages of their own.

Today’s column will help you recognize what you don’t have to do, deal with, pay for or worry about. Add all of these things together and you not only neutralize the disadvantages, but you can jiujitsu them to your favor. Let’s see if we can help you beat the pros by looking at five key areas: benchmarks, costs and fees, time, size, and career risk:

Barry Ritholtz, Washington Post, November 6, 2015

Part of the Problem: Stocks Are Expensive

Probability in Investing –

The smart advice during a falling stock market is not to panic. Selling out of panic often leads investors to miss out on the market recoveries that typically follow a drop, because it’s all but impossible to predict when such a recovery will begin.

On the hunt for the financial free lunch? Don’t.

Probability in Economics, Investing –

The concept of “no free lunch” was popularized by two disparate characters: One was sci-fi writer Robert Heinlein, who offered it up in his Hugo award-winning 1966 book, “The Moon Is a Harsh Mistress.” The other was economist Milton Friedman, who actually wrote a book called, “There’s No Such Thing as a Free Lunch.”

As a matter of fact, last year, Americans spent more than $70 billion on state-run lotteries. To put that into context, that’s more money than Americans spent on sports tickets, books, video games, movie tickets and music plus all of the apps, games and programs bought from Apple’s iTunes App Store — combined. That is a whole lot of money, poorly spent.

Barry Ritholtz, Washington Post, October 24, 2015

Worried About The Stock Market? Whatever You Do, Don’t Sell.

Probability in Investing, Psychology –


How Emotion Hurts Stock Returns

Probability in Investing, Psychology –

As investors watched global stock markets tumble, the behavioral economist Richard Thaler, who is also an occasional contributor to The New York Times, offered the following advice: “Inhale, exhale. Repeat. Then watch ESPN.”

Wise words, even if they remain widely ignored.

Mr. Thaler’s advice flows from knowing that people are loss averse. It’s an insight he owes to the Nobel Prize-winning psychologist Daniel Kahneman, who has found that a loss yields roughly twice the psychological effect of an equivalent-size gain.

Justin Wolfers, New York Times, August 24, 2015


Your money: Why risk-free investments are not entirely ‘safe’

Probability in Investing –

Risk, while unwelcome, is an integral part of any investment choice we make. Investment risk is the probability of loss on investment. If this probability is higher, the investment is high-risk; if low, it is low-risk. Investment in equities, commodities, equity mutual funds of various types and market indices fall under the high-risk category, while those in high-grade corporate bonds and bond funds come under the low-risk category.

It may sound counter-intuitive, but risk-free investments, too, carry some risk. The risk, in this case, is not probability of losing money or of government or institutions defaulting on their payments. Rather, such risks are related to interest rate variations, inflation and macroeconomic failure.

Adhill Shetty, FinancialExpress.com, May 12, 2015