Date
18 January 2017
Picking a stock that outperforms the market is much harder than most people think. Photo: Investopedia
Picking a stock that outperforms the market is much harder than most people think. Photo: Investopedia

Want to beat the index? Look before you leap

The National Weather Service of the United States spends about US$1 billion a year on weather forecasting.

So how accurate has it been in predicting the weather? The answer is 66 percent of the time, two out of three.

Some may say 66 percent is a rather low accuracy rate, considering the costs. But compared with the number of active fund managers who outperform the benchmark indices, the NWS is far more successful.

So why is picking stocks that can do better than the overall market so difficult?

My answer is the number of stocks that underperform the market far exceeds those that outperform. The probability of getting it wrong is therefore high.

For those who hope to get better returns by choosing the right stocks, here are some statistics they should ponder before committing to that strategy.

According to JP Morgan, gains of the overall market come from just 25 percent of the stocks.

Also, 40 percent of the stocks that fell more than 70 percent never recover fully.

The median excess return of all sectors against S&P500 is in fact negative, meaning most sectors fail to return more than the benchmark.

Since 1980, 320 members of S&P 500 have been kicked out and replaced by newcomers.

No wonder beating the index is such a difficult task.

The full article appeared in the Hong Kong Economic Journal on Aug. 31.

Translation by Raymond Tsoi

[Chinese version 中文版]

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CG

Columnist at the Hong Kong Economic Journal

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