Sunday, May 24, 2009

Let's Not Do the Numbers

If you listen to NPR's Marketplace, or most news shows for that matter, then you've probably heard them ramble off the day's stock market price changes. Marketplace even plays positive or negative music based on the up or down direction of the prices. Not only is this a waste of time for its listeners, it distracts the public from real measures of economic health. The direction of the stock market on any given day is not based on overall economic health, but is instead the result of countless decisions based on even more countless information. The daily change means nothing to the average American, what really matters is the long run trend.

The long run trend is up; that's what matters. The average person doesn't invest in the stock market to get rich quickly, they do it to get rich slowly. But here's the kicker, not only does the daily direction meaningless to regular Joes like us, it is borderline worthless to the "experts" as well. The Wall Street Journal has been running a contest since 1988 based on Burton Malkiel’s book A Random Walk Down Wall Street. In the book he proposes that "a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts." Here are the results:
The pros won 61 of the 100 contests versus the darts. That’s better than the 50% that would be expected in an efficient market. On the other hand, the pros losing 39% of the time to a bunch of darts certainly could be viewed as somewhat of an embarrassment for the pros. Additionally, the performance of the pros versus the Dow Jones Industrial Average was less impressive. The pros barely edged the DJIA by a margin of 51 to 49 contests.
So stop telling me "I'm in the Money" or that there's "Stormy Weather".


  1. I believe that's the point of the music, is to display how funny it is that people swing back and forth day to day. Marketplace has a long history of pushing a diversification low cost strategy towards investing.

  2. I not so sure they are in on the joke.


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