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can load up on stocks that will trounce the market average. But those supposed “hot stocks” are merely the Lincoln Park brownstone in different clothing. Here’s why:

Let’s start with a stunningly simple but often overlooked point: Every time you buy a stock (or any other asset), someone has to sell it to you. The guy who sells you this “hot stock” has decided that he would rather have cash. He has looked at the current “bargain price” and he wants out—right when you are getting in. Sure, he may need the money for something else, but he is still going to demand a fair market price, just as we would expect someone who has to move out of Lincoln Park to ask $500,000 for a brownstone, not $250,000. The stock market, as the name would suggest, is a market. The price of a stock at any given time is the price at which the number of buyers equals the number of sellers. Half of the investors trading your “hot stock” are trying to get rid of it.

Or maybe you know something that the sellers don’t. Perhaps all the people unloading XYZ Corp. missed the Wall Street Journal article about XYZ’s new blockbuster drug for male-pattern baldness. Okay, that might happen. But where are the world’s other sophisticated buyers? This stock is a sure thing at $45, yet for some reason Warren Buffett, the traders at Goldman Sachs, and the top Fidelity portfolio managers are not snapping it up. (If they were, the stock would be bid up to a much higher price, just like the Lincoln Park brownstone.) Do you know something that no one else on Wall Street knows (bearing in mind that trading on any information not available to the public is against the law)?

Or maybe someone on Wall Street is pitching you this stock idea. America’s brokerage houses employ a cadre of analysts who spend their days kicking the tires of corporate America. Is all that information wrong? No—though there are plenty of cases of incompetence and conflict of interest. Analysts provide all kinds of legitimate information, just like your real estate agent. When you are shopping for a home, your agent can tell you about neighborhoods, schools, taxes, crime—the kinds of things that matter. Wall Street analysts do the same things for companies; they report on management, future products, the industry, the competition. But that does nothing to guarantee that you are going to earn an above-average return on the stock.

The problem is that everyone else has access to the same information. This is the essence of the efficient markets theory. The main premise of the theory is that asset prices already reflect all available information. Thus it is difficult, if not impossible, to choose stocks that will outperform the market with any degree of consistency. Why can’t you buy a brownstone in Lincoln Park for $250,000? Because buyers and sellers recognize that such a home is worth much more. A share of XYZ Corp. is no different. Stock prices settle at a fair price given everything that we know or can reasonably predict; prices will rise or fall in the future only in response to unanticipated events—things that we cannot know in the present.

Picking stocks is a lot like trying to pick the shortest checkout line at the grocery store. Do some lines move faster than others? Absolutely, just as some stocks outperform others. Are there things that you can look for that signal how fast one line will move relative to another? Yes. You don’t want to be behind the guy with two full shopping carts or the old woman clutching a fistful of coupons. So why is it that we seldom end up in the shortest line at the grocery store (and most professional stock pickers don’t beat the market average)? Because everyone else is looking at the same things we are and acting accordingly. They can see the guy with two shopping carts, the cashier in training at register three, the coupon queen lined up at register six. Everybody at the checkout tries to pick the fastest line. Sometimes you will be right; sometimes you will be wrong. Over time they will average out, so that if you go to the grocery store often enough, you’ll probably spend about the same amount of time waiting in line as everyone else.

Indeed, we can take the analogy one step further. Suppose that somewhere near the produce aisle you saw an old woman stuffing wads of coupons in her pockets. When you arrive at the checkout and see her in line, you wisely steer your cart somewhere else. As she gets out her coin purse and begins slowly handing coupons to the cashier, you smugly congratulate yourself. Moments later, however, you realize the guy ahead of you forgot to weigh his avocados. “Price check on avocados at register three!” your cashier barks repeatedly as you watch the coupon lady push her groceries out of the store. Who could have predicted that? No one, just as no one would have predicted that MicroStrategy, a high-flying software company, would restate its income on March 19, 2000, essentially wiping millions of dollars of earnings off its books. The stock fell $140 in one day, a 62 percent plunge. Did the investors and portfolio managers who bought MicroStrategy shares think this was going to happen? Of course not. It’s the things you can’t predict that matter. Indeed, the next time you are tempted to invest a large sum of money in a single stock, even that of a large and well-established firm, repeat these magic words: Enron, Enron, Enron. Or Lehman, Lehman, Lehman.

Proponents of the efficient markets theory have advice for investors: Just pick a line and stand in it. If assets are priced efficiently, then a monkey throwing darts at the stock pages should choose a porfolio that will perform as well, on average, as the portfolios picked by the Wall Street stars. (Burton Malkiel has pointed out

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