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Sep 18, 2015

Stock Picking Simply Does Not Work


(Click the teal text above for the full blog)                   

-       What is active investing? Why doesn’t it work?

-       Passive Investing Alternative

-       Proponents of passive investing

-       Youtube videos

 

Why doesn’t it work?

Stocking picking, also known as active investing is a financial strategy of continuous buying and selling of investments in an effort to outperform the market. There are many active strategies but all of them revolve around regularly buying and selling investments strategically for investment returns. The major obstacles and reasons active investing strategies do not work are:

      Markets are unpredictable                          Investment prices are unpredictable

      Risk and return are correlated                    Its hard to measure the performance

      Its expensive                                            It underperforms markets

      Human Error

*This list is not definitive and I will expand upon these in future blogs

 

Passive Investing Alternative

Passive investing is a financial strategy of buying and holding investments for long periods of time. The Main form of passive investing is called Indexing. An investor following a passive index investing strategy could invest in investments that mimic indexes. Indexes, or benchmarks, are baskets of stocks or bonds that represent markets or market segments.  Here are a few examples of indexes:

        S&P500 - 500 largest US companies

        S&P/TSX Composite Index - 234 largest Canadian companies

        DEX Universe Bond Index - benchmark for Canadian bonds

        FTSE 100 - 100 largest UK companies

The major benefits of passive investing strategies are:

        Low Cost (0.30% Versus 2.65% Active Funds)        

        Better performance that active management

        Easier to track performance                                            

        Easier to measure performance (using benchmarks)

        Peace of Mind                                                              

        More control

 

Proponents of Passive Investing

-      Economists from notable universities: Burton Malkiel, Charles Ellis

-      Other distinquished investors/professionals: Warren Buffet

-       Privately funded research centers

-       Media

-       Consumer advocate groups

Those against: Wall street firms, banks, insurance companies, active managers

 

Videos:

 Charles Ellis (Yale)

                                 

Burton Malkiel (Princeton)

 

Warren Buffet                                             

 

Sensibleinvesting.tv - Documentary