Ken Garner

Darts and the Dow

UPDATE: December 17, 2010 video:

FBN's Sandra Smith and 'Random Walk Down Wall Street' author Burton Malkiel on how well-managed funds do compared with picking stocks randomly.

The hit-and-miss history of active investing is no secret, a point well made by ABC News 

Correspondent John Stossel in an on-target 20/20 segment in 1992,
“Who Needs Experts?”

 Early in the record-setting bull market of the 1990s, investors were turning to investment advisors and stockbrokers to cash in on Wall Street’s rush to staggering heights. In turn, the advisors and brokers were hiring expert analysts to help them pick the next big stock winner.

 But how good are the experts? Not very, according to a short-term experiment for the report.

 The Wall Street Journal pays Zack’s Investment Research of Chicago to gather recommendations from 10 of the biggest brokerage firms and calculate how they did compared to the Standard and Poor’s 500.

  For his report, Stossel picked 20 stocks at random – by throwing darts at the stock tables – and ABC News asked Zack’s Investment Research of Chicago to track 20/20’s picks for three months and 12 months.

 Index fund fans can guess the result. Over 12 months, Stossel’s stocks were up 17 percent, better than nine of the 10 brokerage firms.

 Princeton University Professor Burton Malkiel tells Stossel to turn a deaf ear to analysts and advisors, instead recommending that investors buy and hold a diversified group of securities – an index fund.

 “Historically, the stock market is like a gambling casino with the odds in your favor,” Malkiel said in the 1992 interview. “Over the long pull, stocks are giving something like nine-and-a-half to 10 percent compounded per year. The banks are probably giving you something on the order of 4 to 5.”

 Don’t fall for brokers offering stock tips, Malkiel said. They’re probably more interested in making money for themselves than for investors.

 “Most of this is just absolute nonsense. Most of it is really designed to get people to trade more than they should,” he said.

 The brokerage firms refused to talk to Stossel about their market analysts, but Robert Stovall, a money manager who ran research departments for E.F. Hutton and Dean Witter-Reynolds, defended the experts.

 “One third of the money managers tends to beat the market every year,” he told Stossel, he quickly pointed out that two thirds do worse.

 “Two thirds do worse, but it’s different ones each time.”

 Stovall said the analysts stay in business because their reports give the brokerage firms documentation for their decisions. It protects them when their picks don’t perform – “Hey, I got a big file on this stock. All these analysts say it was a good one. Something went wrong.”

 “That’s known as prudence,” Stovall said.

 Stossel concluded that investors should hold diversified portfolios, and don’t give in to temptations to play the market.

 As is often the case, co-anchor Barbara Walters had the last word.

 “Or learn how to play darts,” she said.

  About the author: Ken Garner is a newspaper reporter and freelance writer and editor. He lives in Albany, Georgia.