Investing 101: Stock Picking and Active Trading Don't Work

NEW YORK (TheStreet) – If you're, like me, a number cruncher, analyzing the six-month performance of some of the most closely followed equities and industries in the stock market can be a fun exercise.

Breaking down company report cards of names that were overhyped or unloved at the beginning of 2014 has yielded some interesting results. BlackBerry  (BBRY) year-to-date gains of 53% certainly stands out. On the overhyped side, Twitter's  (TWTR) 40% year-to-date decline qualifies.

Both of these names were consensus picks for a dog or a winner when the year started. But they've gone in opposite directions. Don't discount for a second that the second half of 2014 will be any different. There will be plenty of loved/hated names that will emerge as strong surprises while some will wallow in disappointment.

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In this article, we're going to look at the often fruitless exercise called stock picking, which often fails because investors forget that the market is inefficient. Not everyone thinks the same. Nor do they share the same values principles.

In fact, for the same reason that some predicted BlackBerry stock would tank based on fundamental analysis, there were others using technical data to argue against it. Same goes for Twitter.

Human factors such as fear, greed, emotional attachments and rumor mills can drive stock prices in either direction. And we haven't even mentioned the law of supply and demand. Still, over the past decade, so-called “genius stock pickers” believe they have a fail-proof system. Yet, their results have not fared any better than the broader market.

Stock picking brings to light another strongly debated topic between “active vs. passive” investing.

Some investors believe that unless they are churning their own portfolios they're missing out on all of the excitement. But this only matters if an investor believes she/he has exploitable information that may not be yet priced into a stock. Even then it would require the perfect timing and the right reaction to profit when that information is made known to the market.

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