THE BOOK--Playing The Percentages In Baseball

MGL, some of your recent comments in threads about this issue, plus some past comments, lead me to ask you for a recommendation.  Do you know of any good books (or sites or...) that explain for a layman a skeptical / debunking / clear-eyed overview of the stock market / mutual funds / etc.?  I would value your recommendation.  With a modest amount of money (I’m a teacher), I have such investments, but I don’t know much other than competing chunks of conventional wisdom, mostly passed along by older-generation relatives.

Wow, I don’t know of ANY way to beat the market, other than simply investing in individual stocks or no-load and low managment (.5% or less) fee mututal funds (all of the Vanguards are good, Fidelity is good).  And of course, stocks with high dividends may be favorable, tax-wise, although they are often overvalued for that reason and the fact that people like to get short-term money out of their long-term investments.

Warren Buffet has some good ideas in his book(s).  And of course, the “Motley Fool” investment web site is a good one.

There are some people that believe that the public acting irrationally and with “mob mentality” create situations where stock prices do not reflect the present/future value of a company, such as during the “tech stock boom” of the 90’s, and consequently a savvy investor has an opportunity to beat the market mean (which is positive and around +10% of course) by short or long investing.

Sorry, but I am by no means knowledgeable about the stock market.  I have several friends and acquaintences, most of them ex-blackjack players, who made many tens of millions trading commodities ("computer trading” they call it), mostly with “trend following” type methodologies.  Most of these people think that the stock market though is not particularly beatable.

I am agnostic though.  I AM pretty sure that listening to the talking heads in the media won’t help you at all.  In fact, I remember some study I read where the researcher looked at the movement of the market as compared to the concensus of several “experts” on whether there will be a bull or bear market, and of course they found no predictive value to these experts’ opinions.

Thanks for the thoughts!
I didn’t especially mean how to beat it (though that’d certainly be a bonus).  I am first curious about how to tell good advice/wisdom from unfounded.  How to avoid _receiving_ a beating, maybe.  I.e., are there worthy writers out there who are say a Bill James equivalent, debunking myths and pointing out clothesless emperors (and maybe pointing out sensible approaches to the challenge)?  Along the lines of the quick critiques you’ve been tossing out there.
I’ve heard of both Buffet and Motley Fool, and I’ll have a look.

I really don’t know about the stock market, although I would venture a guess that 95% of the books and other writings on the market (how to “beat” it at least) are worthless.

John Stossel (of ABC News) actually has a couple of nice books critically looking at CW.

To me, when I read or hear something, my filters are generally whether the opinions proferred are garnered through the scientific process and whether the facts presented are attributed to reliable (and/or easily verified) sources.  Even then (when something appears to be “science") I take it with a grain of salt until if and when I can read/hear the opposing point of view.  The credentials of the purveyor is often a key factor as well.  If Ann Coulter starts opining about science, say evolution, or Bill O’Reilley tells us what is (or should be) Constitutional or not, well…

Generally when there are two opposing points of view, only one is grounded in “good” science, or any science at all.  Occasionally both appear to be (say, global warming, or the efficacy of grain fuel), and then one really needs to dig deeper, become an expert in the field, or simply be resigned that we either don’t know the answer yet, or there is no clear-cut answer.

These guys are the Consumer Reports of Investing:
http://www.aaii.com/

They track dozens of portfolios/newsletters.  I was a member once (costs as much as Baseball America), and it was interesting, especially if you have the time.

These guys (IBD) are also good:
http://www.investors.com/thirdparty/rbm002.asp?lid=g0099&src=ABPYLDI

The above link points to a free trial.  One of the systems that AAII tracks is IBD, and they come out very well.  The guy who started the company (William J O’Neill) has several books out, with “How to MAke Money In Stocks” probably the most prominent one.

What you want is “A Random Walk Down Wall Street” by Burton Malkiel.  Probably the best book on investing.  What he shows, very convincingly, is that virtually no one beats the market.  Once you read it, it’s hard to put a serious portion of your money into anything other than index funds (unless you’re rich enough that you can afford to lose some, in which case, knock yourself out).

Even Consumer Reports—which I rely on a lot as a consumer, and which should know better—gives more credit to recent past performance of managed stock funds than you should.

I have misplaced my posts, or I was too off topic and they’ve been removed.  Didn’t seem that off to me; I was following up on MGL using the example of unscientific ‘wisdom’ in investment, in #13 and elsewhere in his writing.  I’d be interested and helped by any Bill James-like work you could point me to that tackles market/fund myths and misinformation.  Similar approach, different subject (and MGL brought up the subject).
On the other hand, I can appreciate that going much in that direction would open up cans o’ worms that this site isn’t about or that have some sort of advice-liability concerns.  I was concerned when MGL opened his response with ‘wow’ when I hadn’t thought it was a ‘wow’ question.
(Of course, feel free to erase this one too, but I’d appreciate an email about the reasons.  It’scaz07nospam atbellsouthdotnet.)
I’m a long-time frequent reader, a Book buyer, and rarely a poster--an English major, I don’t have the math/stats knowledge to make very useful posts, but I always enjoy reading y’all’s critical thinking about baseball.

I agree with Guy, mostly.

The Wall Street Journal does an annual analysis of the last 5-years “top 10 recommendation” of the major brokerage houses.  The S&P 500 is usually right at the top.

I’ve got all my money in index funds (one US, one global). 

For individual stocks: if you follow the market too closely, you’re chasing, meaning you lose.  If you don’t follow the market closely enough, it means that you’ll be stuck holding something no one else wants, meaning you lose.

For my risk aversity, I’d rather go with the flow.

Silver King:  My post #6 was a response to your earlier post.  Malkiel exposes/refutes much of the bogus investment advice that’s out there.  It’s a classic and has gone through many editions, so you can probably find a used one. 

The bottom line is that in investing, even more than baseball, regression to the mean is king.  If Albert Pujols were a stock or mutual fund, even after 6 straight great years—beating the market by 70% on average—your best estimate for his 2007 performance would still be the average market rate of return.  Past performance doesn’t just have to be discounted, it essentially has no predictive power at all.  It’s hard to believe, but Malkiel will make you a believer.

There is no particular reason that a certain stock or two might not be over or undervalued based on its price and its earnings potential (the true value of a company/stock is supposed to be based on its 10-year future earnings, or something like that).  However, as with clutch hitting, good luck trying to figure out which ones are or are not.  The reason is that it is not that easy to figure out a company’s future (10-year) earnings.  If it were, then every stock would be valued perfectly or everyone would be able to see which stocks were not valued properly.  The assumption by those who do not think that the market, and any individual stock for that matter, can be “beaten,” is that the price of a stock at ANY point in time, does in fact reflect the company’s future earnings, as best as any human being can tell, despite what you or any pundit may think.  The reason they think this is so is due to a combination of collective wisdom of the all the investors and those that are “in the know” (basically insider trading, which goes on all the time, despite the fact that Martha Stewart went to jail).  Basically, a person would have to be smarter than all of this collective wisdom, which is possible, I suppose, but unlikely.  On the other hand, if it is true that the “dumb” public sometimes puts stock prices out of whack and that the “smart” investors immediately correct the price, those smart investors must be making some money, and there is no reason why you or anyone else cannot be one of those smart investors.

The reason why there is an illusion that it is easy to “beat the market” is that almost everyone does!  It has had a positive return of almost 10% for over 100 years!  Anytime you have a normal curve of results where the mean is +10%, you are going to have lots of people that have made a killing!  It is easy to be a “system seller” when a monkey can make 10%!  That is why the brokerage business is so lucrative and popular - because almost everyone makes money and they attribute it to the savvy of the pundits.

Actually, MGL, most individual investors earn a return well BELOW the market average.  That’s both because 1) they make systemic mistakes (chasing hot funds), and 2) transaction costs (broker fee or costs of managed mutual funds).  If you calculate tax consequences, it’s probably still worse.  So institutional investors, on average, do better than the overall market average. 

This is why index funds are such a good idea:  active traders will actually do worse, on average, than those using a buy-and-hold approach (and diversified portfolio).

I’m bumping this up in conjunction with a related thread:
http://www.insidethebook.com/ee/index.php/site/comments/yappin_jim_cramers_forecast_bear_stearns_is_fine/