The Smart Penny #2:  Coins that Predict the Future

By the end of this post, if you aren’t convinced, I’ll sell you my “smart penny” which correctly predicted whether a stock would go up or down for ten days straight.  If you buy the penny, which I will try very hard to persuade you not to do, I’ll get a new batch of pennies and start flipping, If I have about a thousand pennies, one of them is likely to “predict” ten stock results, just by the law of averages.

Does the idea of buying a smart penny sound silly to you?  I hope so, but many of you already bought one, you just don’t call it that.  How much is it worth to have an expert mutual fund manager make stock picks for you?  Presumably the manager should do better than if he chose at random.  Unfortunately active mutual fund managers aren’t as good as random on the average.  Does this mean the guys who get it right are the smart ones?  No, because 1) there are fewer successes than coin flipping would produce, so whatever the schemes are, they don’t tend to be very good, and 2) this year’s “smart guy” is more than likely going to be next year’s dolt.  See On Persistence in Mutual Fund Performance by Carhart.