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This chapter is from the book


The evidence shows that expert opinion is not so expert after all. In most cases, recommendations of the professionals discussed here did not lead to stocks with superior returns. Indeed, randomly thrown darts can lead to portfolios with similar performance to the picks of the pros. In cases where recommended stocks do beat the market, on average, the required frequency of trading to achieve those large returns is high. The transaction costs associated with this kind of trading are high enough to eliminate any benefits from the recommendations. Therefore, using the picks of the prophets for trading strategies becomes a loser's game.

We can benefit from these recommendations, however. When buying stocks for the long term, it might be useful to check analysts' recommendations and the trades of insiders. However, keep in mind the problems and biases illustrated in this chapter and don't take their recommendations too seriously.

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