Tuesday, May 9, 2017

Stock Picking and Reality

I am currently gathering my thoughts on the current hot issue of passive investing via index funds. I have written quite a lengthy article which is not quite ready for publication yet.

This short blog post will appear to be another nail in the coffin for active investing.

It is not intended to be.

The main purpose of this post is to point out that the truth, as usual, is rather more nuanced than the black and white propositions presented daily in the press.

If you are a stock-picker or aspiring to be one, then it is imperative to understand the monstrous task required. Stock returns over the long term are extremely skewed. Crazily so. Studies of the US market appear to indicate that only 4% of stocks accounted for the entire market gain over the period starting from 1926 to 2015.

The relevant blog post with the article link is here.

These means that a randomly generated portfolio (the monkey dart theory) will fail to beat the market 99% of the time. It is now also easier to understand why active management, in aggregate, cannot beat the market. In fact, it is a logical inference that when the active management industry, in aggregate, gets larger and larger, it is doomed to fail in its collective quest to beat the market. That is likely to hold true even if we disregard fees.

It does make the case for passive indexing even stronger.

But that is not the entire story. Stay tuned.

Yours One-Legged

p/s astute readers will get a hint from the above. Just as nature abhors a vacuum, the market appears to abhor a crowded trade.

No comments: