Finding Great Stock Pickers

In the December issue of Conde Nast Portfolio, Michael Lewis drops in on Dimensional Fund Advisors, a money management firm whose strategy is grounded in Eugene Fama's efficient market hypothesis, the idea that no amount of information about past stock movements can help predict future prices.

But as Lewis slyly points out, even D.F.A. has somehow managed to beat the unbeatable market. And that makes sense, because, for all intents and purposes, the "market" is just an average. Some stocks fall below it and some rise above.

To see if there are people with stock-picking acumen, we just have to look at the group who consistently picks stocks that land above the average. And there is a small slice of research that shows that those people do exist. But D.F.A. has an explanation for this phenomenon:

"If you put a thousand people in barrels and push them over Niagara Falls," one of them says, "some of them will survive. And if you take those guys and push them over again, some of them will survive. And they'll write books about how to survive being pushed over Niagara Falls in a barrel."

This sounds very plausible, but what if something else is going on?

To use a crude analogy, just because the vast majority of us don't have the ability to be professional athletes doesn't mean that those of us who are got there by pure luck.

The problem for the investment community could very well be that there just isn't a great mechanism for weeding out under-performers. And as the central character in Lewis' piece argues, a lot of people end up on Wall St. not because they're great stock pickers, but for their ability to persuade others to take risks. More huckster than guru.

Efficient markets do exist, but, for the foreseeable future, they only happen to reside in the minds of brilliant economists.

Bonus: Michael Lewis at Google -