New York Magazine had
about an SEC study that, long story short, concluded that stock
picking should mostly be left to professionals. The article was
mostly about financial literacy, there was a little about the
disadvantages that retail investors face and it concluded rather
it's basically impossible for the retail crowd to beat the
market on any consistent basis.
I think the framing of the argument as spelled out in the
article is incorrect. If the context is the entire U.S. population,
then yes stock picking will be a bad idea as only a very small
portion of the entire population will have the inclination to spend
the time needed to own individual stocks. Most of the U.S.
population's attachment to the stock market is through a 401K,
where picking stocks isn't an option anyway.
From there, the conversation then needs to gravitate to the
narrower subset of the population that participate in markets,
pick individual stocks? I think this is the wrong question too.
Individual stocks take more time than narrow-based ETFs, which take
more time than broad-based ETFs.
For people interested enough to spend the time, the realistic
answer is some combination of funds and individual stocks
consistent with their level of interest and their perception of
their own ability to analyze individual stocks. Portfolio size also
matters. Someone who is very young might be very interested in
markets but not begun to really accumulate enough to put into
Despite what some would have you believe, there is nothing
insanely risky or ruinous about owning a handful of dividend or
large stocks in moderate weightings as part of a diversified fund
portfolio. Take the following example of an investor who 10 years
ago put 5% each into Chevron (
), Microsoft (
), Johnson & Johnson (
) and Bank of America (
) and then put the rest into some combo of the S&P 500 (
), the EAFE Index (EFA) and emerging markets (EEM).
This seems plausible - even if not ideal - due to the overlap
with SPY. The names were and still are widely held and widely
known. According to Google Finance, for the last 10 years, SPY is
up 59%, EFA is up 57%, EEM is up 255%, CVX is up 192%, MSFT is up
25%, JNJ is up 24% and BAC is down 77%. The four stocks made for
good sector diversification but obviously three of them lagged
badly. But if you do the math, you can see there was nothing
ruinous with the strategy and again the stock picking turned out to
have been poor.
Depending on the weight to EEM that someone might have chosen 10
years ago, the portfolio could have come out way ahead of the
S&P 500 despite the general poor performance of the individual
stocks. The above numbers do no include dividends and JNJ is a
client holding and a name we own in RRGR.
Now, 10 years later, the funds available offer a much wider
selection for anyone so inclined to build a simple, mostly fund
portfolio with a handful of individual stocks. Someone starting out
today building a similar 10-year portfolio as outlined above might
use a low volatility fund instead of SPY, maybe a couple of country
funds for developed foreign and of course there are now many more
fund choices for emerging market exposure.
In thinking about picking four stocks, one way to reduce the
likelihood of choosing something that goes to zero would be to
avoid a fad. The first thing that comes to mind here is solar. It
is an immature industry and it makes sense to expect the landscape
as we now know it will change. Given that many investors know more
about foreign stocks than they did 10 years ago, maybe one or two
of the four individual stocks could be foreign. It is very unlikely
that the long standing big phone company or big energy company from
a foreign country will go bust. The big oil company in Finland
might go on to lag meaningfully for the next 10 years like JNJ, but
is very unlikely to go bust.
I believe Neste Oil (NTOIF.PK) is the big oil company in
Finland, it trades at 14.7 times 2011 earnings and yields 3.8%; but
we do not own the name, it is just an example.
The example from 2002 forward may or may not have beaten the
market depending on the weightings of the funds, but it would not
have ruined anybody either. The important thing from the standpoint
of a do-it-yourselfer is that the funds covered a lot of ground and
the stocks were not weighted where they could have been
I would submit that not making potentially ruinous decisions,
like 40% in BAC 10 years ago, is more important than beating the
market. Also more important than beating the market is not doing
anything truly stupid at the worst possible time, like panic
selling in March 2009. I'm sure many would say now that of course
that was the low and a time to buy, but obviously there were a lot
of people selling stock or else the market wouldn't have been
cascading lower. A third thing that is more important than beating
the market is having an adequate savings rate during the
So while the excerpt quoted above may or may not be true, it
does not have to matter for investors who understand that their
real goal is simply to have enough money when they need it.
Global QE Possible On Declining Inflation,