Sunday, May 13, 2012

No simple way to pick winners

I recently finished reading "The Halo Effect" by Phil Rosenzweig, a book which focuses on the delusions that business managers tend to suffer. Those who have read "The Black Swan" will find similarities in the book, such as their attack on the use of faulty statistics.

For instance in Halo, the author pointed out that studying and identifying the characteristics of successful companies at a point in time, without looking at the not so successful companies, will only introduce a bias in the analysis.

While we might try to identify the commonalities amongst the winners, replicating their methods may not bring about the same results, due to the flaws in our identification process as well as execution. Luck also plays a part. Bringing the logic in Halo over to stock picking, there cannot be a sure win method for picking winning companies. Having said that, there are ways to increase your probability of success, such as by reducing your costs of investing and by having diversification.

Does this mean that stock picking is dead?

Quick update of things I have not done:
I have not sold Stratech or ChinaAnimal yet, since the market as a whole has been week. I am trying to find my DBS token (which generates a number) as I cannot recall whether I left it in the office or at home.

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