I agree that amateur investors can do just as well as professionals. However, my original point is not about amateur investors – but about financial journalists. By the time that a magazine publishes a “best stock ideas” article, both institutional and retail investors have already seized on any opportunities. My point is that no one can do well if they solely follow the advice of mainstream magazines.

“There are MANY situations where the small investor has a massive information advantage over the Wall Street analysts and institutions.”

It may be true that now, more than ever, the amateur investor has access to vast amounts of information. But when you have an army of research analysts, you’re going to come out ahead. Institutions do have armies of research analysts; amateur investors don’t. Mainstream financial magazines certainly don’t.

Moreover, besides just finding information, professionals (the good ones, anyway) know what to do with information. Pick 10 amateur investors at random – how many do you think will know how to run a DCF analysis? How many would even know what “DCF” stands for without resorting to Google?

“Wall Street and institutions only pay attention when something big happens. It generally takes them months if not years to catch on to many of the smaller companies, during which time the amateur can make a killing.”

It may be true that Wall Street only covers a slice of the market. But there are a lot of smaller companies, and not all of them are winners. Amateurs can make a killing if they make the right pick, but that, as Jim Cramer would say, requires them to Do Their Homework. The average investor is unwilling or unable to put in the time to find hidden gems.

Now, to my original point that financial magazines suck as sources of investment ideas, look at Fortune’s list. All of them are recognizable and heavily traded names. None of them are the smaller companies with which amateurs can make a killing.

“And when it comes to the mega-caps, everybody has the same information. Institutions have no advantage.”

Not true at all. Institutions have relationships with mega-caps. They get to ask questions during earnings calls and have lunch with CFOs. Amateur investors must rely on transcripts, SEC filings, and other public information.

This advantage does not mean that professionals will always outperform amateurs, and they certainly don’t always outperform. But professionals do have an edge.

I prescribe to the school of thought that most amateur investors should just stick to broadly diversified index funds. I do know a couple of amateur investors who are fantastic short- and long-term stockpickers. But they’re rare – and they certainly don’t rely on Fortune Magazine to make their picks.

Besides, 10 stocks does not have enough diversification. If these magazines want to do a proper job, at least recommend 30 or more stocks. And tell us when to sell, not just what to buy in the January issue.

barry

When the market is down, nobody can pick good stocks. Those who can are simply lucky.