A Recovering Stock Picker.

The siren of individual stocks has drawn me in for decades ever since I entered the brokerage business some thirty years ago.  I had visions of becoming the next Warren Buffett, Peter Lynch or Jesse Livermore. 

I’ve read numerous books on investing, charting and trading.  The information has been priceless. I also garnered a tremendous amount of investment knowledge by talking to clients about their stock positions.

In the early ‘90s, I answered incoming calls for clients of my firm’s office who wanted stock quotes.  I shared a Bunker-Ramo terminal with another broker and I was limited to 12 stock symbols on my side of the monitor.  Giving quotes was a tedious affair especially if a client had a large portfolio.  If he wanted more information, he’d have to wait until the following day to read the newspaper or review his month end brokerage statement.   

Pre-internet, information available on common stocks was dominated by a handful of big brokerage firms such as Merrill Lynch, Smith Barney, Paine Weber and Dean Witter.  Their voluminous research reports were coveted by individual investors.  These firms controlled the information and, therefore, held most of the power to move a stock.

Today almost anybody can move a stock’s price as we recently witnessed by Kylie Jenner’s tweet about Snap Chat.  Its market capitalization dropped by $1.3 billion because of her tweet.[1]

The internet is the ultimate equalizer.  Investors can receive real time quotes delivered via several devices.  It’s impossible to act on company news because of how fast information travels.  In addition, Regulation Fair Disclosure (Reg FD) was initiated by The Securities and Exchange Commission.  They ruled that all publicly traded companies must release material information to all investors at the same time.[2]  The playing field for all investors has been leveled.

The buy and hold strategy for stock owners appears to be fading as investors look to capitalize on news delivered through CNBC, Twitter and other media outlets.  Investors trade by stock symbol not knowing, or caring, what a company does.  For example, Herzfeld Caribbean Basin Fund Inc, ticker symbol CUBA stock price rose sharply after the death of Fidel Castro despite having no connection to Castro or the country.  It appears the only reason investors bid up the price of this fund was because of the ticker symbol.[3] 

The past few years I’ve been converting individual stocks to low-cost index funds and exchange traded funds.  The reduction in costs and reach of these funds is too compelling to ignore.  Furthermore, a portfolio of five or six funds will give me instant access to thousands of companies from around the world. 

The data also supports a move to index funds away from stock picking and actively traded mutual funds.  In a recent S&P SPIVA® study they found that over a 15-year period 93% of large-cap money managers failed to beat their benchmark.  These results are similar for small, mid and international money managers.[4]  This underperformance also occurs on a 1, 3, 5 and 10-year basis.

The Vanguard S&P 500 Index fund has generated a ten-year average annual return of 9.64%. However, investors in the fund only made 5.38% per year because they traded in and out of the fund.[5]  If they had held on they would’ve more than doubled their money.  A buy and hold strategy is difficult to beat.

Warren Buffett, the definitive stock picker, recently won a bet against hedge fund manager Protégé Partners.  He bet them that the passive S&P 500 Index would outperform a basket of five actively managed hedge funds over a ten-year period. How did it turn out?  The S&P 500 trounced the hedge funds by 89%!  The S&P 500 returned 125%; the hedge funds, 36%.[6]

It’s been hard to wean myself off stocks and move the money to a diversified portfolio of index funds, but it’s been for the better.  I’ve been able to spend more time helping clients crystallize their goals through financial planning since I’m no longer tethered to a monitor watching stocks rise and fall.  A similar move may benefit you, especially if you’re looking for financial peace and freedom.

An intelligent heart acquires knowledge, and the ear of the wise seeks knowledge. ~ Proverbs 18:15.

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

2/27/2018

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed. 

[1] http://www.foxnews.com/opinion/2018/02/24/kylie-jenner-breaks-up-with-sn..., by Karol Markowicz, 2/24/2018

[2] https://www.sec.gov/fast-answers/answers-regfdhtm.html

[3] https://www.marketwatch.com/story/mutual-fund-with-cuba-ticker-soars-aft..., Tomi Kilgore, 11/28/2016

[4] https://us.spindices.com/documents/spiva/spiva-us-mid-year-2017.pdf, Aye M. Soe, CFA Managing Director Global Research & Design and Ryan Poirier, FRM Senior Analyst Global Research & Design, report accessed 2/26/2018.

[5] Morningstar Office Hypothetical Tool, Fund symbol VFINX, 1/01/2008 to 01/31/2018.

[6] http://money.cnn.com/2018/02/24/investing/warren-buffett-annual-letter-h..., by Jackie Wattles, 2/24/2018.