[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.00,0:00:03.00,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:24.70,0:00:30.43,Default,,0000,0000,0000,,[Alex] The world of investment advice\Nis a crowded and noisy place.
Dialogue: 0,0:00:30.43,0:00:32.69,Default,,0000,0000,0000,,The good news is,\Nyou can turn down the shouting.
Dialogue: 0,0:00:32.69,0:00:35.69,Default,,0000,0000,0000,,And you also don't have\Nto follow stock quotes
Dialogue: 0,0:00:35.69,0:00:40.64,Default,,0000,0000,0000,,minute-by-minute in order\Nto be a smart investor.
Dialogue: 0,0:00:40.64,0:00:41.72,Default,,0000,0000,0000,,In the next few videos,\Nwe're going to lay out some rules
Dialogue: 0,0:00:41.72,0:00:42.72,Default,,0000,0000,0000,,for smart investing.
Dialogue: 0,0:00:42.72,0:00:44.72,Default,,0000,0000,0000,,No, we're not going to tell you\Nhow to get rich quick,
Dialogue: 0,0:00:44.72,0:00:50.13,Default,,0000,0000,0000,,but we will give you\Nsome good advice
Dialogue: 0,0:00:50.13,0:00:54.41,Default,,0000,0000,0000,,for getting richer\Nslowly and steadily.
Dialogue: 0,0:00:54.41,0:00:57.41,Default,,0000,0000,0000,,Now let's start\Nwith Investment Rule #1,
Dialogue: 0,0:00:57.41,0:01:00.70,Default,,0000,0000,0000,,"Ignore the expert stock pickers."
Dialogue: 0,0:01:00.70,0:01:03.70,Default,,0000,0000,0000,,What if I told you that\Na blindfolded monkey throwing darts
Dialogue: 0,0:01:03.70,0:01:04.92,Default,,0000,0000,0000,,at the financial pages\Ncould select a basket of stocks
Dialogue: 0,0:01:04.92,0:01:07.92,Default,,0000,0000,0000,,that would do just as well\Nas one chosen by the experts?
Dialogue: 0,0:01:07.92,0:01:12.30,Default,,0000,0000,0000,,That was the controversial claim\Nmade in 1973
Dialogue: 0,0:01:12.30,0:01:17.08,Default,,0000,0000,0000,,by economist Burton Malkiel,\Nin his book,
Dialogue: 0,0:01:17.08,0:01:20.08,Default,,0000,0000,0000,,A Random Walk Down Wall Street.
Dialogue: 0,0:01:20.08,0:01:21.25,Default,,0000,0000,0000,,Years later,
Dialogue: 0,0:01:21.25,0:01:24.25,Default,,0000,0000,0000,,one of his undergraduate students\Nturned out to be
Dialogue: 0,0:01:24.25,0:01:26.70,Default,,0000,0000,0000,,journalist John Stossel.
Dialogue: 0,0:01:26.70,0:01:29.70,Default,,0000,0000,0000,,And Stossel,\Nhe set out to test this claim.
Dialogue: 0,0:01:29.70,0:01:30.91,Default,,0000,0000,0000,,Now, blindfolded,\Ndart-throwing monkeys,
Dialogue: 0,0:01:30.91,0:01:31.91,Default,,0000,0000,0000,,they're not easy to come by
Dialogue: 0,0:01:31.91,0:01:33.91,Default,,0000,0000,0000,,and the lawyer's\Na little bit worried,
Dialogue: 0,0:01:33.91,0:01:38.75,Default,,0000,0000,0000,,so Stossel threw the darts himself.
Dialogue: 0,0:01:38.75,0:01:41.19,Default,,0000,0000,0000,,[John] My darts landed\Non 30 companies.
Dialogue: 0,0:01:41.19,0:01:44.19,Default,,0000,0000,0000,,How would they do\Ncompared to the stocks
Dialogue: 0,0:01:44.19,0:01:47.30,Default,,0000,0000,0000,,recommended\Nby managed mutual funds?
Dialogue: 0,0:01:47.30,0:01:50.30,Default,,0000,0000,0000,,Oops! Better!
Dialogue: 0,0:01:50.30,0:01:52.57,Default,,0000,0000,0000,,[Alex] Sure, Stossel\Ngot lucky on his throws
Dialogue: 0,0:01:52.57,0:01:55.57,Default,,0000,0000,0000,,and he reaped high returns.
Dialogue: 0,0:01:55.57,0:01:57.65,Default,,0000,0000,0000,,But the lesson here\Nturns out to be correct.
Dialogue: 0,0:01:57.65,0:02:00.65,Default,,0000,0000,0000,,Random picking does just as well\Nas the professionals.
Dialogue: 0,0:02:00.65,0:02:05.04,Default,,0000,0000,0000,,Let's take a closer look.
Dialogue: 0,0:02:05.04,0:02:06.57,Default,,0000,0000,0000,,Most people invest\Nin the stock market
Dialogue: 0,0:02:06.57,0:02:09.57,Default,,0000,0000,0000,,by buying a mutual fund,
Dialogue: 0,0:02:09.57,0:02:10.57,Default,,0000,0000,0000,,a portfolio of assets\Nlike stocks and bonds
Dialogue: 0,0:02:10.57,0:02:12.63,Default,,0000,0000,0000,,managed by professionals.
Dialogue: 0,0:02:12.63,0:02:15.63,Default,,0000,0000,0000,,There's thousands of mutual funds.
Dialogue: 0,0:02:15.63,0:02:19.76,Default,,0000,0000,0000,,Some of them are actively managed.
Dialogue: 0,0:02:19.76,0:02:22.76,Default,,0000,0000,0000,,They have experts picking stocks\Nand charging fees.
Dialogue: 0,0:02:22.76,0:02:28.26,Default,,0000,0000,0000,,The other type of mutual fund\Nis called a passive mutual fund.
Dialogue: 0,0:02:28.26,0:02:30.79,Default,,0000,0000,0000,,Passive funds don't try\Nto pick winners or avoid losers.
Dialogue: 0,0:02:30.79,0:02:33.79,Default,,0000,0000,0000,,They simply invest\Nin a big basket of stocks
Dialogue: 0,0:02:33.79,0:02:36.37,Default,,0000,0000,0000,,such as the S&P 500.
Dialogue: 0,0:02:36.37,0:02:39.37,Default,,0000,0000,0000,,Now this chart shows\Nthe percent of mutual funds
Dialogue: 0,0:02:39.37,0:02:43.45,Default,,0000,0000,0000,,that were outperformed\Nby the S&P 500.
Dialogue: 0,0:02:43.45,0:02:46.45,Default,,0000,0000,0000,,You can see that in most years,\Nthe S&P 500 beat a majority
Dialogue: 0,0:02:46.45,0:02:53.97,Default,,0000,0000,0000,,of the actively managed\Nmutual funds.
Dialogue: 0,0:02:53.97,0:02:56.09,Default,,0000,0000,0000,,Okay, so perhaps\Nyou're thinking, "I got it.
Dialogue: 0,0:02:56.09,0:02:59.09,Default,,0000,0000,0000,,Most mutual funds\Ndon't beat the market,
Dialogue: 0,0:02:59.09,0:03:02.12,Default,,0000,0000,0000,,but what if I invest in the ones \Nthat do beat the market?”
Dialogue: 0,0:03:02.12,0:03:07.11,Default,,0000,0000,0000,,The problem with this strategy is\Nthat the funds that beat the market
Dialogue: 0,0:03:07.11,0:03:09.77,Default,,0000,0000,0000,,are different every year.
Dialogue: 0,0:03:09.77,0:03:12.77,Default,,0000,0000,0000,,In other words, past performance\Ndoes not predict future performance.
Dialogue: 0,0:03:12.77,0:03:14.27,Default,,0000,0000,0000,,The funds that\Nbeat the market this year -
Dialogue: 0,0:03:14.27,0:03:17.27,Default,,0000,0000,0000,,they probably got lucky.
Dialogue: 0,0:03:17.27,0:03:20.60,Default,,0000,0000,0000,,And they're unlikely\Nto beat the market next year.
Dialogue: 0,0:03:20.60,0:03:23.60,Default,,0000,0000,0000,,In fact, one study looked\Nat the 25% best-performing funds.
Dialogue: 0,0:03:23.60,0:03:31.17,Default,,0000,0000,0000,,How many of these funds\Nwere still top performers
Dialogue: 0,0:03:31.17,0:03:35.99,Default,,0000,0000,0000,,just two years later?\NLess than 4%.
Dialogue: 0,0:03:35.99,0:03:38.99,Default,,0000,0000,0000,,And after five years, only 1%\Nof the initial top performers
Dialogue: 0,0:03:38.99,0:03:45.26,Default,,0000,0000,0000,,remained in the top quarter.
Dialogue: 0,0:03:45.26,0:03:46.26,Default,,0000,0000,0000,,So funds which are great this year -
Dialogue: 0,0:03:46.26,0:03:48.89,Default,,0000,0000,0000,,they're probably not going\Nto be so great in the future.
Dialogue: 0,0:03:48.89,0:03:51.38,Default,,0000,0000,0000,,They probably just got lucky.
Dialogue: 0,0:03:51.38,0:03:54.38,Default,,0000,0000,0000,,Okay, what about\Nthose very, very few funds
Dialogue: 0,0:03:54.38,0:03:56.09,Default,,0000,0000,0000,,that do beat the market\Nover many years?
Dialogue: 0,0:03:56.09,0:03:57.09,Default,,0000,0000,0000,,Hasn't Warren Buffett, for example,
Dialogue: 0,0:03:57.09,0:03:59.09,Default,,0000,0000,0000,,the world's\Nmost successful investor.
Dialogue: 0,0:03:59.09,0:04:05.07,Default,,0000,0000,0000,,Hasn't he shown that\Nyou can beat the market? Maybe.
Dialogue: 0,0:04:05.07,0:04:07.88,Default,,0000,0000,0000,,There's no denying -\NBuffett's a very smart guy;
Dialogue: 0,0:04:07.88,0:04:10.88,Default,,0000,0000,0000,,he's made some very good choices.
Dialogue: 0,0:04:10.88,0:04:12.91,Default,,0000,0000,0000,,But it's actually harder\Nto distinguish luck from skill
Dialogue: 0,0:04:12.91,0:04:15.91,Default,,0000,0000,0000,,than you might imagine.
Dialogue: 0,0:04:15.91,0:04:18.88,Default,,0000,0000,0000,,Let me explain.
Dialogue: 0,0:04:18.88,0:04:21.88,Default,,0000,0000,0000,,Imagine that we started\Nwith a thousand so-called experts,
Dialogue: 0,0:04:21.88,0:04:24.37,Default,,0000,0000,0000,,except all the experts do\Nis flip a coin.
Dialogue: 0,0:04:24.37,0:04:27.37,Default,,0000,0000,0000,,Those who flip heads say the market\Nis going to go up this year.
Dialogue: 0,0:04:27.37,0:04:33.23,Default,,0000,0000,0000,,Those who flip tails, say the market\Nis going to go down this year.
Dialogue: 0,0:04:33.23,0:04:36.04,Default,,0000,0000,0000,,At the end of the year,\N500 are going to be right,
Dialogue: 0,0:04:36.04,0:04:39.04,Default,,0000,0000,0000,,purely by chance.
Dialogue: 0,0:04:39.04,0:04:41.57,Default,,0000,0000,0000,,Now suppose that those 500\Nthen flip the coin again,
Dialogue: 0,0:04:41.57,0:04:44.57,Default,,0000,0000,0000,,and they make a new predication.
Dialogue: 0,0:04:44.57,0:04:46.79,Default,,0000,0000,0000,,At the end of the second year,\N250 of these so-called experts,
Dialogue: 0,0:04:46.79,0:04:49.79,Default,,0000,0000,0000,,they'll have been right\Ntwo years in a row.
Dialogue: 0,0:04:49.79,0:04:56.53,Default,,0000,0000,0000,,Again, purely by chance.\NNow keep going with this logic.
Dialogue: 0,0:04:56.53,0:05:00.95,Default,,0000,0000,0000,,At the end of 5 years,\Njust 32 of the original 1000,
Dialogue: 0,0:05:00.95,0:05:03.95,Default,,0000,0000,0000,,they will have been right\Nabout the market 5 years in a row.
Dialogue: 0,0:05:03.95,0:05:07.90,Default,,0000,0000,0000,,Now these 32 - they'll probably\Nbe labeled market geniuses.
Dialogue: 0,0:05:07.90,0:05:11.70,Default,,0000,0000,0000,,They'll show up on television.
Dialogue: 0,0:05:11.70,0:05:12.73,Default,,0000,0000,0000,,Their services will be\Nin high demand.
Dialogue: 0,0:05:12.73,0:05:15.73,Default,,0000,0000,0000,,Perhaps some of them\Nwill write books about -
Dialogue: 0,0:05:15.73,0:05:18.71,Default,,0000,0000,0000,,how to predict the stock market\Nand get rich quick.
Dialogue: 0,0:05:18.71,0:05:21.71,Default,,0000,0000,0000,,But the laws of probability\Ntell us, however,
Dialogue: 0,0:05:21.71,0:05:25.68,Default,,0000,0000,0000,,is that out of the initial\N1000 experts,
Dialogue: 0,0:05:25.68,0:05:28.68,Default,,0000,0000,0000,,about 32 were going\Nto predict the market correctly
Dialogue: 0,0:05:28.68,0:05:32.26,Default,,0000,0000,0000,,no matter what the market did.
Dialogue: 0,0:05:32.26,0:05:35.26,Default,,0000,0000,0000,,So are some market geniuses\Ntruly skillful? Sure.
Dialogue: 0,0:05:35.26,0:05:39.01,Default,,0000,0000,0000,,But it also helps to be lucky.
Dialogue: 0,0:05:39.01,0:05:42.01,Default,,0000,0000,0000,,And it's sometimes not obvious\Nwhich is more important.
Dialogue: 0,0:05:42.01,0:05:43.26,Default,,0000,0000,0000,,In recent years, in fact,
Dialogue: 0,0:05:43.26,0:05:46.26,Default,,0000,0000,0000,,Buffett's investments\Nhaven't done all that well.
Dialogue: 0,0:05:46.26,0:05:49.70,Default,,0000,0000,0000,,So lesson number one is\Nignore the people
Dialogue: 0,0:05:49.70,0:05:52.70,Default,,0000,0000,0000,,who shout stock tips at you.
Dialogue: 0,0:05:52.70,0:05:56.74,Default,,0000,0000,0000,,[Man] Dividends funded by debt\Nand not excess free cash flow
Dialogue: 0,0:05:56.74,0:05:57.96,Default,,0000,0000,0000,,are just too risky\Nto own from now on!
Dialogue: 0,0:05:57.96,0:05:59.60,Default,,0000,0000,0000,,[Alex] And definitely\Ndon't pay big bucks
Dialogue: 0,0:05:59.60,0:06:02.60,Default,,0000,0000,0000,,for professional money managers.
Dialogue: 0,0:06:02.60,0:06:03.81,Default,,0000,0000,0000,,But what if you have\Nsome information
Dialogue: 0,0:06:03.81,0:06:04.81,Default,,0000,0000,0000,,about what looks\Nlike a great investment?
Dialogue: 0,0:06:04.81,0:06:06.81,Default,,0000,0000,0000,,Can you beat the market?
Dialogue: 0,0:06:06.81,0:06:11.24,Default,,0000,0000,0000,,Well we're going to cover that \Nand the Efficient Market Hypothesis
Dialogue: 0,0:06:11.24,0:06:12.28,Default,,0000,0000,0000,,in the next video.
Dialogue: 0,0:06:12.28,0:06:14.34,Default,,0000,0000,0000,,[Narrator] Check out\Nour practice questions
Dialogue: 0,0:06:14.34,0:06:17.34,Default,,0000,0000,0000,,to test your money skills.
Dialogue: 0,0:06:17.34,0:06:20.98,Default,,0000,0000,0000,,Next up, Tyler will show you\Nhow a tragic space shuttle explosion
Dialogue: 0,0:06:20.98,0:06:23.71,Default,,0000,0000,0000,,can teach us about investing.\NClick to learn more.
Dialogue: 0,0:06:23.71,0:06:25.71,Default,,0000,0000,0000,,♪ [music] ♪