Stock-Picking Contests Are No Way to Pick Stocks
But they could be made more useful with some simple changes.
Bloomberg, January 31, 2019
This isn’t an argument that selecting stocks is either irrelevant or futile. Identifying equities worth buying is still a substantial and important aspect of investing. If that surprises you to hear from an indexing advocate, well, it is simply a fact. The vast majority of investments are NOT held in low-cost passive index funds. Yes, passive has become a large force, but it still accounts for a relatively small portion of assets invested globally. Vanguard Group founder Jack Bogle noted late last year that U.S. index mutual funds have grown from 4.5 percent of total U.S. stock-market value in 2002 to about 17 percent in 2018. Indexing accounts for an even smaller percentage worldwide.
We have to ask whether any useful purpose is served by holding runoffs. Let’s try to address this in two ways by pointing to the two inherent defects of the entire process.
The first is the one-size-fits-all approach. A retiree looking for income, a patient 20-something with a 50-year time horizon, and a high-earning middle-age professional saving for retirement all have very different investing needs. The typical stock-picking discussion fails to address what anyone with specific investing goals should do with the stock picks. One set of picks is not really meaningful for people with very different needs.
The second issue is that of which stock-picker — and which stock picks — to follow . . .