When a student asks....What's a good stock to buy?
Have them read this quote from Nobel Laureate, Richard Thaler (highly recommend his book, Misbehaving):
“The biggest mistake people make in life is overconfidence…Most active managers [editor's note: professionals that are trying to beat the market] underperform, at least by their fees, or more. So if professionals with their Bloomberg terminals and access to all kinds of information can’t do better than throwing darts, why should individual investors think they can?…I think picking individual stocks for your own account is a fool’s errand. I don’t do it.”
Hat tip to Abnormal Returns blog quoting Thaler from a Barrons interview.
Our investing game, STAX, provides students with lots of excitement and investment choices to deliver this message (backed up by academic research): picking individual stocks is not likely to lead to a better outcome than just purchasing a low-cost diversified index fund and doing so consistently over time. It's a simple strategy but not an easy one as Bill Bernstein reminds us that our our cognitive biases often get in the way.
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.
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