Why bother picking stocks?
Because it's fun. I enjoy the process of picking stocks and like the challenge of beating the market.
If you don't enjoy it, or don't want to invest the time and energy, sticking to trackers is a great idea.
About the Author
Velofellow
11 comments
Breakout Trader
Because if you develop the skill and become very good at it, you can significantly out-perform the market.
Edward Croft
Owning trackers is basically a set of investment rules that goes like this:
- Sort a universe of stocks by market cap descending.
- Buy the top N stocks in a position size relative to their market cap.
- Rebalance into the top N stocks again, with the same weighting rules on a certain schedule. (e.g. quarterly)
It's basically a form of factor investing that bets on a single factor -> large size outperforming. The clever thing about it is that it is super low cost and minimises transactions.
So trackers work well when the biggest companies in the world are doing well. But buying the UK's largest companies has been a dead trade in the last 20 years - you'd have made no money. Buying the USA's largest companies has been a good one - you'd have made lots of money.
Of course with the USA at higher valuations than at any time in decades it would be a brave man to say the S&P500 or Nasdaq will continue its radical outperformance.
And possibly a brave man to bet against it.
William K
Arguments for picking stocks:
1. It's fun
2. If you're good at it you can beat the market
Arguments against
1. Dealing costs are high
2. You can lose a lot of money very quickly
Tracker funds are cheap to deal and have low spreads. There are hundreds of tracker funds as ETFs so you don't have to stick to the S&P 500 or Nasdaq 100. You can trade anything from the emerging markets to semi-conductors at relatively low risk. If you pick the right sectors you can beat the market. I invest in a mixture of ETFs, Investment Trusts, and individual shares and and enjoy the challenge of adapting to two different mindsets. Currently my most profitable ETF is £INRG which tracks renewable energy and has outperformed most of my individual shares over the last quarter.
JonnieRed
If I just wanted to do a ‘buy and hold’ type thing, then I could see myself putting the majority of my funds into an S&P500 tracker, with the rest split between NASDAQ and FTSE250 trackers.
I would not be surprised to find that, over time, that combination would out-perform the majority of your “professional fund managers”.
However, you are not going to learn much doing that or gain any skills that would enable you to run a portfolio that (again, over time) should seriously out-perform the market.
Momoko Miyamoto
Since I sold all my tracker ETFs and starting picking individual small caps I’ve:
1) had much more fun
2) made much more profit
As Ed says you’re mostly buying the largest most expensive stocks in any given index and if they turn out to be overpriced turkeys then you’re stuffed.
I only dabble in small caps cos the “smart money” hedge funds etc don’t bother as they can’t buy or short enough to make it worth their effort.
Open ended funds tend to underperform cos their investors lose their nerve during market falls and pull their money out - forcing fund managers to sell stocks at the worst time. For the same reason the managers have to avoid smaller less liquid stocks - which tend to outperform long term. Woodford’s fatal error was not in his stock choice of early stage companies, it was putting them in an open ended fund where investors could pull their money out at any time. Many of his picks have done very well during COVID-19 but his fund had to sell them all off at fire sale prices before the pandemic hit.
Investment trusts are worth a look as their managers cannot be forced to sell during market panics and conversely can borrow to buy more at opportune times. Scottish Mortgage is a famous example but many others outperform their benchmark indices.
Gromley
Surely though the trouble with select a "well run Investment Trust" is how to find one that reliably fits the bill?
Company accounts are probably more transparent than IT performance IMV.
My view (accepting that it might be under-informed) is that buying an Investment Trust is like buying it's relevant benchmark, but with added Beta (Which I don't get how you can judge in advance).
Macro
Well I am sure that Ed knows very well that there are:
- Equal market cap weighted ETFs
- And, ETFs with caps on weightings to prevent over domination by some constituents
- And there are ETFs with 'Smart Factors' rather like Stockopedia has factors
- And there are semi-active ETFs which seek to combine the best of both worlds with quarterly re-selection of constituents by smart factor
- And there are times when not to buy an Investment Trust, such as when the Z-Score indicates that it is 'expensive' in terms of its historical premium/discount
- And there are times when you would rather not to be holding an Investment Trust with a relatively high gearing level
My view is that it would be good if private investors were supported with information sources and tools that help them to invest broadly --- across individual stocks, ETFs, Investment Trusts and Funds. They all have their place. Indeed if I was an American private investor I would probably have added Options to the list, too.
In particular I would like to see the following features from Stockopedia:
- Investment Trusts: A database of ITs that follows the AIC classification; Screening against: Premium/Discount , Z-Score, Sharpe Ratio and Sortino Ratio across multiple timeframes.
- ETFs: A database of ETFs that follows some structure (TBD?), Screening against Inflows/Outflows, Sharpe Ratio and Sortino Ratio across multiple timeframes.
The 'holy grail' is to use all of the tools at our disposal to best effect. Some years my single stock selections perform best, other years my investment trusts perform best, some years it is a mixed picture of out-performace and under-performance.
M.
jwebster
It's a good question.
It first raises the question "which tracker?". There is a vast universe of cheap ETF to choose from. But at its simplest level, the high level choice is FTSE100, FTSE250, SPX, Nasdaq, Emerging markets. Or, just buy a global stock tracker, already balanced across countries, that's really the ultimate tracker as the other options still require you to make a decision, UK, USA, tech, etc.
Another dimension is diversification, you may want some money in REITs, bonds, gold, etc. Then you get into the rebalancing task, once every six months or so.
You could give your money to a managed fund, there many to choose from. Catch is fees are higher than a tracker, so your chosen fund manager needs to be good.
The advantage of buying a global tracker is time. Spend 10 mins loading your account and you're done. That leaves you free to pursue other activities.
The advantage of trading is you can make superior returns, if you have edge, position management skills and strong emotional discipline. All this takes considerable time and practice to develop. I don't see trading working well as a dabble or a hobby. Once I made the decision to manage my own money, looking back there were some periods I would have been better off in a tracker. Since, I've developed a trading strategy and discipline on entries, exits, position sizing and my performance now soundly beats the indexes. This took considerable time and many trade reviews to develop.
Personally, I think trackers are the way to go for most people, unless they have the desire and time to develop the skills required. You could put 90% of your savings in a tracker and put 10% in a trading account and challenge yourself on that.
whitmad
Any index contains a number of stocks that are in terminal decline, badly run, loss making. Pick a random selection of ones that aren't and you will probably outperform the market. Stockranks have worked very well for me in sorting the wheat from the chaff. I've averaged 20%pa over the last five years.
Read Ed Croft's posts on stockranks, you can do very well with minimum expended effort.
