Peter Guay September 25, 2018 Personal Wealth Starting Out Passive Investing in 2 Numbers Picking winning stocks is easy. Just buy Apple, or Amazon, or Netflix. It’s a slam dunk, right? There are some serious misconceptions about active management and index investing which I’d like to walk through with you today. I’m going to hit you with two really staggering numbers about the US stock market, then explain what each of these data points imply for active and passive investors. I think they make a pretty convincing case for Indexing. As always, I’d love to hear your thoughts, so please comment so we can start a conversation. Two Stats for Passive Investing My first stat: 3,800. From 1996 to the end of 2016, the number of publicly traded US companies dropped from over 7,000 to below 3,8001. That’s a huge change! Almost in half! There are plenty of explanations for this phenomenon, but what matters is how this affects investors. Over the same time period, the number of financial analysts holding the Chartered Financial Analyst designation has also skyrocketed. In other words, many more analysts are covering far fewer stocks than ever before! This only supports the fact that markets are getting more and more efficient. Any news about any company gets reflected in the stock price extremely quickly, because of the extraordinary level of scrutiny these companies are under. My second stat: 140%. This is the dispersion of returns between the best performing stock in the S&P500 and the worst performing stock, over the first 6 months of 2018. Dispersion, in this case, refers to the extent of the difference in returns between stocks. This is a bit more technical than my first stat, so let me explain. Over the first 6 months of 2018, one of the best performing stocks in the S&P500 was Netflix, which returned 103%. In other words, it doubled in 6 months. One of the worst performing stocks was L Brands, which owns Victoria’s Secret and La Senza. It lost 37%2 of its value. Too much Netflix and not enough chill… Seriously though, my point here is that such a large spread between the best stocks and the worst stocks should make beating the market a breeze, shouldn’t it? All you have to do is not buy the bad stocks, right? Unfortunately, the evidence shows that despite very wide dispersion of returns, active managers don’t beat the market. Why didn’t managers simply load up on Netflix at the beginning of the year? Can’t See into The Future The reality is that they didn’t, because no one knew ahead of time that Netflix, or any of the other great stocks of the first 6 months of 2018, would do as well as they have done. As proof, Standard and Poors publishes an annual report called the SPIVA report that examines the failure rate of active managers in beating the market. The results are pitiful… Over the last 5 years, 85% of active managers underperform the S&P500 in the US. Over 15 years, the number increases to 92%3. These two stats show that beating the market is incredibly hard! In fact, fewer managers beat the market than you would expect by luck alone. For me, this makes the choice really easy. Buy the market and trust that capitalism will create value over the long run. I’ve included a bunch of links in the description with more information about these two phenomena, so take a look. Thanks for watching! —– 1 https://personal.vanguard.com/pdf/ISGPCA.pdf 2 https://seekingalpha.com/article/4185058-50-best-performing-s-and-p-500-stocks-1h-2018 3 https://ca.spindices.com/search/?ContentType=SPIVA&_ga=2.154582520.1394538290.1535054980-1336222523.1523284088 Share: Facebook Twitter LinkedIn Email CIRO Advisor Report
Investment Strategy Peter Guay Investor protection in Canada still has a long way to go Apr 18, 2024 Investment Strategy