Wednesday, September 06, 2006  Do I Feel Lucky?  Always
important to keep the importance of "luck" in mind. Yes it is
true (in my opinion) that stocks are not priced perfectly at all
times. I think TLBTBTM shows that. But it is also true that over
the short term (which my six+ months at this), the movements of
individual stock prices are essentially random.  JG tells us
that a portfolio of 25 to 30 stocks will underperform market
averages 5 out of 12 months. Given that fact, what is the
probability of underperforming market averages after 6 months?
Hard to get an exact answer without more data as you'd need to
know the distribution of severity (meaning if you underperform
the market in a given month, what is the probability of
underperforming by various amounts). Well, JG says in his study
that MFI underperformed market averages once every 4 years. So
I'd have to estimate that 30 to 35% of the time you would do
worse after six months. And if you have a smaller portfolio,
perhaps even a greater probability.  W