Anonymous, where are you? OR How I Pick Stocks, Redux

The last two days have been big days for the blog. Plenty of people have come by to see the controversy. I'm kind of sad really. No one else has left any inflammatory remarks today.

This is a good opportunity however to add on to my previous post about picking stocks. In that post, I know that some people felt that I was incorrect in my assumptions, or in some way, was misleading poor sheep to the metaphorical slaughter that is trading.

However, this is not what I am doing. I just wanted to clarify a few myths about stocks, about how I approach stocks, and hopefully clear up any issues from my previous post.

1. In general, the stock market is rational, over the long run. Day to day, people tend to over react to bad news, and under react to good news. Plenty of studies have been done about that. I say this, because a lot of people believe the stock market is irrational, and have a belief that as the only rational investor/trader, they can make money off of that.
   
   
2. People do make money, but we have to separate "excess returns" from "normal returns". An excess return is getting back more than what everyone else is getting on average (normal returns). Say for instance, the Nasdaq went up 5% today. If your portfolio went up 6%, you've produced only 1% in excess returns. A lot of people like to point to their portfolio on big days, and say, "Look, 5%", but really what they are saying is "I'm average!"
   
   
3. There is no such thing as a "good" or "bad" stock. There is only stock that fit your risk profile and portfolio allocations, and those that don't.
   
   
4. Without knowing something extra, that the public doesn't know, about the market or stock, you can't obtain excess returns. Essentially, this is called semi-strong form market efficiency. Consider that 50% of the market is filled with people who are professional investors/traders. If there was such wild (irrational or irresponsible) pricing of stocks, why are any of these people still in there jobs?
   
   
5. That something "extra" is any comparative advantage you have versus other people in the market. Are you very versed in a certain industry? Are you great at reading financial statements and teasing out hidden issues? Maybe you know of a deal going down. All these are examples of an advantage that can lead to excess returns.

Finally, what I do provide is that "extra" edge in technology stocks. My undergraduate degree was in Computer Science and Economics, and I have always been interested in technology. Therefore, I have a comparative advantage in understanding technology trends, products, and research in development. It is with this knowledge, that I will recommend certain technology stocks.

For a more fundamental breakdown of the company, you have to consult readily available analyst reports. This is because (a) analyst reports rarely get fundamental breakdowns wrong, (b) there are plenty of analyst paid to do this, and (c) creating an analyst report is very time-consuming, and is counter to the purpose of my blog.