1. Suppose that Apple's profits are expected to grow twice as fast as Microsoft's. Which firm's stock should be the better investment? Briefly explain.
2. Henry Blodget worked for Merrill Lynch during the dot-com boom. The New York attorney general accused Blodget of having praised Internet stocks in public and criticized the same stocks in private.
In a negotiated settlement, Blodget declined to admit wrongdoing but accepted a ban from the securities industry for life. He has gone on to write extensively on financial matters, including the following advice:
The problem for investors is that even though stock-picking usually hurts returns, it's extremely interesting and fun.
If you are ever to wean yourself of this bad habit, therefore, the first step is to understand why it's so rarely successful. What is "stock-picking"? Why does it usually hurt returns earned by investors? Why is it so rarely successful?