OUR PERSPECTIVES


Harnessing the Wisdom of Crowds

Have you ever gone out on a limb and bought a stock on the share market based on a friend or colleague’s advice? Or maybe you heard something and followed up with some homework of your own prior to parting with your hard-earned cash in exchange for some shares in that “next best thing”.

If you’ve done this, you’re not alone. Around one in four adult Australians have had a crack at buying shares themselves (rather than using a professional to do it for them). Unfortunately, the experience for most hasn’t been great.

Data from one academic study suggests that picking a stock at random gives you a 40% chance of losing money and a 64% chance of underperforming the market index.

This seems at odds with track record of the Australian stock market which has produced an annualised return since January 1970 of around 9.8% (or 9.7% in the case of the US market).

While many will struggle to admit it, the reality is that most of the energy DIY investors pour into researching and picking stocks adds little value above the return they would get if they simply invested in the overall market (ie an index fund or ETF).

To understand why ‘beating the market’ is so hard, it’s important to understand how the market prices stocks, and why stock prices are generally the best indication we have available of a stock’s value.

 

Take five minutes to look at this BBC video from Professor Marcus du Sautoy, it’s a good refresher – even for the most seasoned investor.