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Wait Till Next Year

Greg Spears, 2:32 am ET

EVERY YEAR, I READ somewhere that it’s going to be a stock picker’s market. These stories suggest I need an active manager to nimbly skip down Wall Street, picking the daisies and avoiding the weeds.

Then the annual results roll in. That unmoving and unmanaged S&P 500 Index fund has somehow, unaccountably, beaten those deft active managers at their game.

The S&P 500’s return of 28.7% in 2021 beat 85% of actively managed large-cap U.S. stock funds, according to S&P Dow Jones Indices. The active set returned an asset-weighted average of 23.3%. That’s a great year, except in comparison with their relentless competition.

These results can hardly be called news. This is the 12th consecutive year that Jack Bogle’s invention has bested the majority of active large-cap fund managers. I’d imagine that most active managers are handsomely paid. But what are their investors thinking?

To be fair, some might be invested in those few funds whose managers do exhibit a magic touch, like the Windsor Fund when it was run by John Neff. It beat the S&P 500 handily over a 31-year run. Others could be sitting on significant profits, and don’t want to trigger capital gains taxes by selling.

But in large part, the allure of active management seems like a win for marketing. When considering the competition, Gus Sauter, onetime manager of Vanguard’s S&P 500 index fund, liked to quote Samuel Johnson on second marriages. Active management, he said, “is the triumph of hope over experience.”

Alternatively, active fund investors could borrow a phrase from the perennially disappointed Brooklyn Dodgers’ fans of the 1950s: “Wait till next year.” Because experts suggest that 2022 will be—you guessed it—a stock picker’s market once again.

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Yuval Taylor
Yuval Taylor
2 months ago

I’m a stock picker. In 2019, I didn’t beat the market. I only made 16%. But in 2016, I made 45%; in 2017, I made 58%; in 2018, I made 14%; in 2020, I made 105%; in 2021, I made 73%; and I’m up 17% YTD. Beating the market every year. Why does stock-picking get such a bad rep? Because fund managers face awful obstacles to beating the market: money flows in at the top and flows out at the bottom; they collect enormous fees; and they can’t easily invest in microcaps. For retail investors like me, stock picking can work very well. You just have to do a lot of hard work, research like hell, and try to keep your beta low.

Philip Stein
Philip Stein
2 months ago
Reply to  Yuval Taylor

I mean no disrespect, but the returns you cite seem too good to be true. They would put Warren Buffet to shame. I’m sure even Mr. Buffet didn’t come close to doubling his money in 2020.

Are you sure you’re computing your returns correctly? Has an independent third party verified that these return numbers are accurate?

I suspect that returns of this magnitude, if valid, are the result of concentrated investment bets, and that your portfolio isn’t very diversified. Your biggest challenge going forward is to determine whether your returns are the result of truly extraordinary investment skill, or the result of an extraordinary run of good luck.

Also, microcap stocks, by their nature, are riskier that large cap, blue chip stocks. It isn’t unreasonable to expect that returns in this market segment will outperform the S&P 500 in years favorable to smaller companies. But this won’t always be the case. 

UofODuck
UofODuck
2 months ago

If the pros can’t consistently pick winners, then its a sure bet that the rest of us won’t be able to. However, greed is a powerful force and we humans are amazingly skillful at convincing ourselves that somehow, the rules won’t apply to us.

I spent 40+ years in the investment business, telling our clients about our terrific investment performance, while never fully appreciating why our active equity performance always seemed to lag whatever benchmark we were using. The eye-opener finally occurred when we began to offer an early version of a “robo” investment tool that only used funds – primarily low cost ETF’s. Almost immediately, the performance delta between our funds based tool and traditional investment platform became clear to me. I began to use a similar approach in my personal investments and, not only did my performance improve, but I no longer had to worry about another Lehman Brothers in my holdings.

Thomas Taylor
Thomas Taylor
2 months ago

I’m always hesitant to say this on this site, but I’m a do-it-yourselfer with a fairly large part of of my portfolio in stocks, but instead of my stock picking abilities, I would say I’ve done well due to my patience and really, inactivity. A large majority of the holdings I’ve had for more than 12-14 years now. It’s not really the stock as it is the business/industry that I enjoy researching. There will always be periods of ups and down, both in the business and the stock price, but I don’t bail at the first drop in price. It may be an opportunity to buy more. And I learned my lesson many years ago on taking a flyer on the “next sure thing”. The losses have taught me much more than the gains about investing. I’m glad I learned them early on in my investing life.

Since the beginning of 2020, I’ve made 2 sales in my account. One was in the travel industry and when the pandemic looked like it wasn’t going to end anytime soon, I sold in September 2020. I still thought the company had a future, but it would be a long time coming and it wasn’t within management’s control to end the pandemic. It was a very small part of the portfolio. In 2021, the other sale I did had gotten above a % I set for one stock to have, so it was more of a trimming than an entire sale. I made 2 purchases in 2021 with the proceeds of these two sales.

Brent Wilson
Brent Wilson
2 months ago

I never get tired of reading about passive index funds’ dominance over actively managed funds. When I was new to investing, I loved looking at lists of actively managed funds’ 10-year returns. Since the top funds’ returns outpaced the overall market, why shouldn’t I invest my money in these funds? At the time, I didn’t realize the odds of these same funds repeating another 10-year period of outperformance was basically zero (though there is an occasional outlier).

I know there are still plenty of do-it-yourself investors who pride themselves on their stock picking abilities. Some might even accept the passive > active funds argument, but it doesn’t deter them from picking stocks on their own. They don’t have to pay an active fund manager’s fees and, unlike an active fund manager, they do not feel pressured by an investment firm to play it safe with their stock picks.

I don’t see a ton of articles devoted to this topic, but every once in awhile I’ll come across one where a brokerage firm examines the performance of individual investors trading stocks on their platforms. These investors also lag the market. They tend to take too much risk for too little reward and are over-active by trading in and out of stocks at the wrong times.

Last edited 2 months ago by Brent Wilson

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