Soothsayers see sagging stocks Can anybody predict the stock market? Apparently some people can. For example, we recall a Woody Allen character explaining proudly: I'm a stockbroker. [Pause]. I invest other people's money [longer pause] until it's gone. There are other professionals who claim they can invest your money and earn big bucks rather than losing your nest egg. That would be handy in a time when Wall Street has dropped 10 percent from its high, wouldn't it?

Now there's evidence that some stock analysts -- in some years -- can select stocks better than morons (technically, journalists) who pick stocks by throwing darts at a newspaper stock table. (Believe it or not, that's a popular activity in places where they ought to know better.) If you're too young to remember the Summer of Love, you're too young to remember Nobel Prize-winning economist Paul Samuelson's 1967 declaration to a Senate Committee: "A typical mutual fund is providing nothing for the mutual fund owner that they could not get by throwing a dart at a dartboard."

According to Allen Atkins, a finance professor at the University of Arizona, that challenge spurred a mini-industry in dartboard analysis. Shortly thereafter, Forbes Magazine ran a dartboard investment portfolio. And since 1988, the Wall Street Journal has run a monthly column pitting investment pros against -- darts. Logically enough, they call it the Investment Dartboard. The darts haven't won the race, but they have done respectably, Atkins says. In fact, in 79 contests between human stock analysts and human dart throwers, stock analysts have won 45 times, and darts 34 times. To evaluate the dart hypothesis, Atkins and a colleague (see "Expertise in Investment Analysis... " in the bibliography) compared the results from the Investment Dartboard to the Dow Jones average. One month after the professional or the dart chose a stock, the experts had beaten the Dow by 1.41 percent. Darts, unfortunately for Samuelson, were 1.75 percent below the Dow. Not so great for the dart-throwers. But before you actually put away your darts and go out to pay for investment advice, consider:

			Darts are cheap.
			Darts are fun.
			Darts don't make cold calls during dinner.

On a slightly more serious note, Atkins notes that the results might have been skewed by the fact that after the Wall Street Journal published the Investment Dartboard, investors may have bought the expert-selected stocks, artificially inflating their prices. The study was also a readable way to test a popular economic theory called the "efficient market hypothesis." What that means, to those who don't speak economeze, Atkins explains, is that "there are so many people investing in the stock market that all information becomes impounded in the stock price." In other words, supply and demand produce a realistic price, and the price will not changes until underlying economic conditions affect the supply and/or the demand. Why Files sells script to Hollywood! Still, this focus on expectations can lead to peculiar behavior. For example, if The Why Files sold a script to Dreamworks (dream on, Why Filers), it would be expected to announce a big dividend. Since everybody would learn about the sale simultaneously, the stock price would rise accordingly to meet those expectations. Then, if The Why Files indeed announced a big dividend, there would be no dramatic change in price, because the price is already reflected in the dividend. But if The Why Files announces a smaller -- but still substantial -- dividend, then the stock price will fall. Even if the firm is doing well, it is not meeting expectations. It's odd that the stock market responds to expectations, not to reality. Changes in prices are not driven by what's really happening, but by the difference between actual events and expected events. If you bought The Why Files after hearing of the sale to Dreamworks, the price you were willing to pay was shaped by your expectation of that sale. So if the sale is not as profitable as you hoped, you'll be disappointed and may figure the stock is worth less, even though it's still making money. Another irony: If the market truly is efficient, Atkins says, "Nobody should necessarily be able to beat the market... All this buying and selling creates a weight of supply and demand that puts stock prices where they should be." That's where the dart board comes in. If all stocks are rationally priced, then it doesn't matter which ones you buy, and you might as well buy them at random. The dartboard is one way of creating a random portfolio; another is to buy "index funds" that track the S&P 500 defined). Oddly enough, these "index funds" 500 have been good -- albeit brain-dead -- investments, since they track the market as a whole. According to the Wall Street Journal, since the beginning of 1997, the S&P beat 87 percent of mutual funds that pick stocks (as opposed to S&P index funds, which just buy and sell the stocks held in the S&P 500). "So the index funds would have beaten almost any non-index fund" during that period, Atkins says. Index funds would have beaten any competition. And while the average individual cannot do the information gathering and analysis that a stock analyst does, anyone with the bucks can buy and hold an index fund. "For the individual investor, buying index funds is probably as good as anything," Atkins says. Along with most investors, Atkins generally prefers a "buy-and-hold" strategy, whether the investment is in an index fund or something else. He also argues that the U.S. stock markets are a good place to stash money, and that "You can make a fair return for the risk you are willing to take." During the past decades, the S&P 500 has increased at about 12 percent per year. "It's been a relatively stable thing, and far better than bonds, Treasury bills, or almost anything else." When is a buck worth two bucks?

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