How to Pick 'Your Next Great Stock'

You're probably the best stock picker you know. I'm not just kissing up. Let's look at some of the alternatives.

Fund managers: Mutual fund managers , on the whole, produce lousy returns . And they're getting worse. The average actively managed mutual fund lagged the broad market by 1.7 percentage points a year during the two decades ended 1965 and by 2.7 percentage points during the two decades ended 2003, according to a 2005 Journal of Finance study.

Your mutual fund manager might seem different. You might have been convinced to buy shares of the fund only after reading that it had soundly beaten the market over the past one, three and five years. But I've got news for you, and you're not going to like it.

Imagine you call 800 people. You tell half of them the stock market will rise tomorrow, and half that it will fall. Come tomorrow, you'll have given great advice to 400 people. You call them and repeat the process. You keep going until you've been right four times in a row with 50 people. Then you offer these amazed folks and the next day's forecast for a fee. Sounds shady, I know. But the mutual fund industry was all but founded on that practice. Fund companies "incubate" far more funds than they need, placing different investments in each. Some win, some lose. Winners get marketed. Losers are quietly closed. ...