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Thread: The dying business of picking stocks

  1. #1

    Default The dying business of picking stocks

    Investors are giving up on stock picking.

    Pension funds, endowments, 401(k) retirement plans and retail investors are flooding into passive investment funds, which run on autopilot by tracking an index. Stock pickers, archetypes of 20th century Wall Street, are being pushed to the margins.

    Over the three years ended Aug. 31, investors added nearly $1.3 trillion to passive mutual funds and their brethren—passive exchange-traded funds—while draining more than a quarter trillion from active funds, according to Morningstar Inc.

    Advocates of passive funds have long cited their superior performance over time, lower fees and simplicity. Today, that credo has been effectively institutionalized, with government regulators, plaintiffs' lawyers and performance data pushing investors away from active stock picking.


    The internal index fund “is kind of like Pac-Man,” he said. “If it outperforms over time, eventually a capable administrative assistant might be able to run the entire investment department, and we’d be OK with that.”

    “What’s going on is a generational shift,” said John D. Skjervem, 54 years old, chief investment officer of the Oregon State Treasury, which oversees $90 billion in public assets and trust funds. “Guys like me are moving in, and we had education that was empirically more rigorous than the prior generation’s.”

    In times of low investment returns, it doesn't make much sense to gamble on an fund management fees, when most funds perform worse than the index. An interesting aspect is that even large state and public sector pensions are moving into index. I think there are still opportunities for private equity and large funds to beat the market through direct investing in projects, but just picking stocks seems a fools game today.

    An interesting implication is there really isn't much difference between a defined benefit or defined contribution plan anymore. I have a defined benefit plan, but I calculated that if the money I and my employer put into it each year, was instead invested in an index fund, I could easily buy an annuity paying out the benefit that is promised at the end. I guess defined benefit just takes a bit of hassle out.
    Last edited by moahunter; 17-10-2016 at 10:16 AM.

  2. #2
    C2E Hard Core Contributor
    Join Date
    Nov 2008


    Dow Jones breaks 21,000 today.

    First time that's ever happened to Top_Dawg's knowledge.

    Many happy returns !

  3. #3


    I first read Malkiel's book in the 1980s so Ive long been a fan of index funds. However, people need to know of and prepare for any downside risk whenever there is a massive rush into any product, sector or instrument.
    Murray Stahl among others are pointing out some of the risks they see with the growth of indexation. These are well worth reading.
    "And here’s another way. Just the five largest index managers have a total of $6.1 trillion of equity AUM. Although the market capitalization of the S&P 500 is $18.9 trillion, Siblis Research states that the float of the S&P 500 – that is, excluding shares held by insiders and which are unavailable for trading – is $18.377 trillion, which means that the top 5 indexers alone equal 33% of the S&P 500 float. And obviously there are many more indexers, both with publicly available data and those without; every large institution and pension plan has an index division. Viewed through this window, it is clear why a few observers believe that the present direction of investing is unsustainable and that there is a supply/demand issue even with an index as large as the S&P 500. That’s a new phenomenon."

    This is not an argument against index-based investing. In normal circumstances, these are instruments that belong in a portfolio. We’ll even review some later that would benefit a portfolio now. We’re simply at an extreme at which indexation has interfered with, even overwhelmed, market efficiency, the efficiency that comes about from the contest between different active investors over the proper valuation of securities.

    Yet, Is the Public Trapped Inside the Indexation Box With No Exit Door?

    A thought challenge for the future. For the future, because the public has yet to confront it. Historically, how did investors know they should..."
    [b]Under the Hood Index Series[b]

    Under the Hood: The Indexation That Is, Versus The Indexation That Should Be
    April 3, 2017
    Most modern investors cannot beat an index consistently. This much is apparent. Most people cannot find a good manager and, even if they do, they will eventually dismiss that manager at the first sign of material underperformance. Therefore, it follows that, if possible, most people should be invested in a broadly diversified index like the S&P 500, or perhaps the Wilshire 5000.
    Unfortunately, indexation as presented and advised at the current time is not to buy and hold broadly based indexes. It is asset-gathering, marketing, and fee enhancement at its finest. It bears much more similarity to consumer marketing than to investing. In fact, it is more or less what the active managers were doing when they had the upper hand.
    The studies of managers proceed from the incorrect assumption that the active manager of the past was a well-intentioned **** Economicus trying to find the best investment. Rather, though, **** Economicus was trying to raise the maximum amount of assets and, ultimately, this impacted the stock selection decision. That led to the underperformance. The index manager of today is behaving precisely like the active manager of the past, and will soon exhibit the same outcome.
    Read More >


    Under the Hood: What’s in Your Index? The Value of Cash

    September 27, 2016
    For the first time since the late 1940s, stock and bond yields have essentially converged. Once upon a time – say for the prior 80 years – investors demanded higher yields from stocks since the risk was greater. So what does this mean? If nothing else, caution is in order, and investors should be very thoughtful, perhaps more than at any other time in their careers, about where capital is being put at risk and why.
    Which brings us to cash and public companies. Cash earns effectively no income, and can lower various valuation metrics, which are surely also important to executive compensation and performance benchmarking. As a result, many investors wish for the cash on the balance sheet to be deployed — a nice word for “spent” – through share repurchases, dividends, or acquisitions. But this is only a productive use of cash if the transactions are done at attractive valuations, and without taking on more leverage than appropriate. As is usually the case, well, take a look.
    Read More >

    Under the Hood: 5000 Years of Interest Rates (Part II)

    September 2, 2016
    We’ve heard a lot about the historically low interest rates. But what does this mean? First, by historic, we mean in recorded history, so we’re already, in a sense, footnotes in a future economics textbook. Second, we really don’t want to be footnotes in a future financial markets textbook, as casualties of the greatest interest rate risk in history. But it appears that the potential impact from rising rates is underappreciated. The search for yield in all the ordinary places – long-term bond funds, REIT and utility funds, the ‘dividend aristocrats’ – is not diversification and it’s not safe. They’re at historic high valuations and it all hinges on interest rates. One must escape them, which means to step outside the indexation/ETF vortex.
    Read More >
    Under the Hood: 5000 Years of Interest Rates (Part I)
    August 9, 2016

    Last edited by KC; 25-04-2017 at 02:00 PM.

  4. #4
    C2E SME
    Join Date
    Dec 2009
    Downtown Edmonton


    Oh look, another active investment advisor trying to justify their higher fees.

  5. #5


    Quote Originally Posted by Marcel Petrin View Post
    Oh look, another active investment advisor trying to justify their higher fees.
    I'm a fan of indexing myself and bought the TSE's TIPs ("index participation units" - the very first or among the very first index units available anywhere in the world) back in the late 1980s or early 1990s. So I've long been a fan. (Sold them to buy Buffett's company back in the early 1990s however.) Additionally, in a prior career I even looked into index creation and even minutiae like analyzing differences between pool performance and indexes performance based on differences driven by sourcing price feeds from different exchanges. So, all I want to say is that you shouldn't blow off such commentary so quickly. (Like Buffett's warnings of derivatives as WMDs because Buffett also bought them himself and so Buffett's words were quickly blown off by even derivatives traders that had simplistic generalized views.)

    Horizon Kinetics: The Largest 15 Companies In The S&P Index Have An Aggregate Market Cap Of US$4.7Tn
    By VW Staff on January 11, 2016

    In 2015, Horizon Kinetics continued to observe evidence of the impact of indexation as the primary investment modality. At the risk of sounding like a broken record, we can’t help but share yet another data point illustrating the valuation dichotomy created by the ETF divide, which to our knowledge is unprecedented, at least in our three-plus decades of investing experience. The largest 15 companies in the S&P 500 Index have an aggregate market capitalization of $4.7 trillion dollars. That is also the total market capitalization of the smallest 346 companies in the S&P 500. Looked at in another way, the 15 highest-contributing stocks, with an average aggregate weight of 13%, produced about 280% of the S&P’s return1. That’s the extent of bifurcation which investors face. Mind-boggling as it is, this is reality.

    Of course, our ongoing study on the subject of indexation begs the question: how does it all end? Fee competition continues to trend toward a dead end: the iShares Total Market ETF (ITOT), which purports to include every possible subset that is buyable in the stock market, just lowered its expense ratio to three basis points, which is three 100ths of 1%. We believe that this is a seminal moment in indexation mass-investing. As the profitability is squeezed out of it, so too will be the incentive of the manufacturers and promoters to practice it. This change will have completely unpredictable consequences for equities at large, because ETF asset flows have been dominating valuations with no regard whatsoever for the fundamental properties of the underlying securities they comprise.

    History on tips

    The Canadian investment idea that busted a mutual-fund monopoly

    In 1990, a competitor emerged at last: The Toronto Stock Exchange unveiled the world's first successful exchange-traded fund, the Toronto 35 Index Participation Fund, known as TIPs, initiating a profound change in the way the world invests.
    The success of that first ETF in Canada helped spawn a global industry that now numbers thousands of funds worldwide, giving investors access to emerging market stocks, gold, corporate bonds and just about every other asset class you can think of. Global assets total $4.75-trillion, and are closing in on mutual funds.
    Last edited by KC; 28-04-2017 at 07:00 AM.

  6. #6


    Whatever You Do, Don’t Read This Column | Jason Zweig


    There’s another reason so many investors believe in magic: We can’t handle the truth.

    The efficient market hypothesis holds that stock prices fully reflect all the relevant information that is available. What if, instead, investors are so efficient at avoiding some information that it might as well not even exist?

    Psychologists call this behavior “information avoidance.” You could also call it intentional ignorance.

    “It’s a motivated decision to say ‘no’ to learning available but unwanted information,” says Jennifer Howell, a psychologist at Ohio University in Athens, Ohio, who studies the phenomenon. “People avoid information if it’s going to make them feel or behave or think in a way they don’t want to” — especially any evidence that could jeopardize their belief in their competence and autonomy or could require taking difficult or prolonged action. ..."

  7. #7

    Default The Growing Peril of Index Funds: Too Much Tech

    Nothing is perfect - an interesting article here in the WSJ. The basic premise, is that because index funds blindly invest in proportion to the market, if a given sector becomes over-valued, the portfolio also becomes over-weighted, and you get caught up in any bubble:

    Investors who loaded up on U.S. and Asian stock-index funds might be surprised to learn just what they own now: technology stocks—a lot of them.

    Led by Apple Inc., Facebook Inc. and their peers, the weighing of technology stocks in the S&P 500 index has climbed to 23.8% as of Dec....

    I guess over time in the long run, it will all even out.

  8. #8


    As an individual investor, I don't think investing in hedge funds makes makes a ton of sense to be honest. The combination of high fees, negative selection bias, and potentially long lock-ups mute their attractiveness. To major institutional investors I think they can be a valuable diversifier.


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