INVESTING WITH CLARITY™ BLOG

Pure Stock Pickers Are A Dying Breed

November 22, 2011 1:51:00 PM

Or are they?

The title of this piece was inspired by an article I saw in Yahoo Finance titled, Man Vs. Machine: Stock-Pickers, A Dying Breed?

Obviously, as a firm that strongly believes that one of the fundamental keys to successful investing is to be an investor in businesses, NOT just in the stock market \, I was obviously very intrigued to read this article.

Before I get into the meat of the article, I think it is important for readers to understand that personally, I do really believe that pure stock pickers are a dying breed. My premise is really pretty simple. I believe the average investor in the stock market today views their equity investments as stocks\, or a piece of paper that can be bought and sold any time in the stock market using a short term mentality.

Additionally, with the continued growth of exchange traded funds (ETFs), more and more investors are using EFTs as the vehicle of choice to invest or frequently trade in and out of the market. By the way, when I say investor, I am referring to BOTH individual investors and professional money managers.

Is that really investing? I, of course, would argue, no!

Because of the growth in ETF trading, it has created additional volatility in the stock market. This is why I believe volatility is here to stay. Personally, I think that is great news! Remember, volatility is the tool which allows true investors to take advantage of buying more of the companies they want to own at lower prices. Assuming of course, you are an investor.

I would argue that the stock market is merely an avenue to purchase investments, or companies we want to own, and not just stocks. Therefore, as we often tell clients, BE AN INVESTOR IN COMPANIES, NOT IN THE STOCK MARKET.

As Warren Buffett once said, uy a business, don't rent stocks.

According to the Yahoo article, his has been a tough, confusing time for serious stock pickers, whose investment strategies are based on the fundamentals of businesses.

Additionally, the article states, as stocks get swept into various indexes by ETFs and are actively traded via algorithms and machines, there is a genuine concern that these changes are leading to the death of stock picking as we know it.

Because of the growth of ETFs, the use of algorithms and machines and the general psyche of the average investor, many view the stock markets as an avenue that favors short-term thinking.

I believe this is great news. Frankly, if you think about it, isn't an economy grown by functioning and profitable businesses? Personally, I view the idea of owning a business or businesses as the greatest way to grow and sustain wealth: NOT trading in a stock market that is driven by fear, greed and machines!

As I have said many times before, What is the most common way in which wealth is created and sustained? It is by owning good businesses and continuing to invest or dollar cost average into those businesses over time.

As I stated earlier, volatility is here to stay. However, it is that volatility which allows smart investors the opportunity to continually dollar cost average into the companies they want to own.

At the end of the day, history has shown and will always show: fundamentals trump volatility.

Mark Pearson


Mark Pearson

Mark Pearson

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