The term “stock picker’s market” really gets some investors going. It gives them the false hope that they can beat the broader stock market by carefully buying the right stocks. The end result is often misery.
Decades ago, William Sharpe warned, “Properly measured, the average actively managed dollar must underperform the average passively managed dollar.” Was he right?
Charlie Billelo at Pension Partners put it this way: “In a relentless up-trending market, investors become highly confident in their ability to pick stocks, naturally calling it a ‘stock picker’s market.’ After all, any stock they pick is going up and to the right.
“We saw the most extreme example of this in 2013, which set a record in terms of breadth with 93% of stocks in the S&P 500 finishing positive on the year,” he said. “Never mind the fact that a blindfolded monkey throwing darts was likely to pick a winning stock last year; most investors came out of 2013 believing they were the next Warren Buffett.”
What about just buying and holding a portfolio of individual blue chip stocks? Surely, this is the easiest and smartest way to outperform, isn’t it?
Putting this theory to test, I examined the five-year track record of all 30 stocks in the Dow Jones Industrial Average and here’s what I found: A pathetic 67% of Dow stocks (20 of them) have failed to beat their peer industry sector and the corresponding passive sector ETF (from April 28, 2009 to April 28, 2014).
The results were particularly heinous for stock pickers in the technology sector. Every single Dow component in the tech arena, from Intel to Microsoft, lagged the Technology Sector SPDR ETF (XLK). Rather than trying to pick themselves to glory and riches, technology investors would’ve been better off with a passively managed tech fund.