Mad About You

Alex Tabarrok directs us to Business Week, where we learn that "Mad Money" host Jim Cramer no longer supports stock-picking for most investors, instead encouraging people to buy index funds:

Most people actually won't get rich by buying individual stocks, Cramer says. Unless you do your homework, namely spending an hour a week researching for each stock you own, "You won't beat the market, and you'll probably lose money," he writes.

For Cramerites willing to do the research, the book helps construct a long-term, diversified portfolio. For most people, however, he advises low-fee stock index funds.

What Cramer doesn't mention is that even if you do your research, you are still as likely to under-perform the market as to beat it. Seasoned finance professionals, including Ph.D.s, fail to beat the market (on average) when they pick stocks. There is no good reason for most individuals to pick stocks unless they enjoy gambling and there isn't a casino nearby.

This interview with Eugene Fama, one of the founders of the Efficient Markets Hypothesis, is instructive (ht: Megan McArdle).