Market Commentary - April 2019

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Stock Picking

This month's commentary is a continuation from my post in February. Every so often you may hear people in the industry talk about how it's a "stock pickers market" or about a firm that just launched a fund based on its "best investment ideas". We always ask ourselves, "why are now and based on what data?" Stock picking is not what it once was. The rapidly free flow of all information has turned stock picking from a skill to a game of risk and gambling. The reality is many stocks underperform the broad market. Since 1973, only 22% of rolling 10 year periods were the number of stocks that outperformed the S&P 500 at 50% or higher. Unless someone is lucky enough to consistently picks winners their performance will lag the benchmark. Not to mentioned likelyhigher total fees.

Let's look at some other data and statistics provided by VanguardJ.P. Morgan.

  • Since 1980, ~40% of all stocks have suffered a permanent 70%+ decline from their peak value in the Russell 3000 Index. This percentage spikes when looking at technology, biotech & metals/mining stocks.

  • Since 1980, 320+ companies have been removed from the S&P 500.

  • Two-thirds of all stocks underperformed vs. the Russell 3000 Index, and for 40% of all stocks, their absolute returns were negative.

  • From 1987 to 2017, ~47% of stocks were unprofitable investments and ~30% lost more than half their value. On the other hand, roughly 7% of stocks had cumulative returns over 1,000%.

Pretty eye opening stuff which makes me wonder why so many try to "beat" the market when the odds aren't in your favor from a risk/reward basis. There will always be a small percentage who outperform, but that is the exception, not the norm. If you're picking stocks and don't own the 7%, good luck keeping up with the index. Also, if you miss on the 7%, the tendency is to attempt to close the gap by chasing returns/performance which rarely works.

I get it, many think they can find the "next" Apple or Amazon, and a few will. Even if you were lucky enough to invest in both early on, each have experienced multiple 50% to 75% declines and sticking it through is extremely difficult especially when it's a large percentage of ones portfolio. Not to mention for every Apple and Amazon there have been countless stocks that have wiped out shareholders. We consistently preach the key to investing is managing risk. There are few who can handle multiple 50%+ corrections without reacting. The reality is most investors make portfolio changes based on emotions (greed or fear) and not based on fundamentals. While I understand why this happens, the key is avoiding it.