Stock Pickers: This Market's Not for You

As we head into tomorrow morning's U.S. employment report for the month of February, the Dow Jones Industrials Average managed to put up at a third straight all-time (nominal) high, gaining 0.2%. The broader, market-cap weighted S&P 500 also rose 0.2%.

Somewhat surprisingly, perhaps, for the eve of a nonfarm payroll Friday, the VIX Index , Wall Street's fear gauge, fell just 3.5%, to close just above 13 -- we are back down at ultra-low levels, once more. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming thirty days.)

Stock pickers can't catch a break
CNBC.com's NetNet blog ran a piece yesterday afternoon titled
Sorry Stockpickers -- You're Still Getting Crushed. The thesis is that, despite the drop in correlation between stocks, stockpickers are still finding it hard to separate themselves from the herd (read: the index) and earn an excess return. The reason? Although correlations have fallen, so has volatility. As a result:

Just 37 percent [of active fund managers] are faring better than the basic indexes they compete against, according to data from JPMorgan Chase, while 63 percent are missing. A mere 7 percent are topping benchmarks by more than 2.5 percentage points.


If professionals are struggling, what are the odds of success for individual investors? Should they just take themselves out of the game and buy index mutual funds or ETFs instead? Here are a few things to think about, in any market:

First, unless you believe you have an edge that you can identify, you have absolutely no business picking stocks.

Second, individual investors do have at least one automatic advantage over professional investors (assuming they have the right temperament): their time horizon. Fund managers are scrutinized by investors on a quarterly, if not monthly basis, which is not an equity-appropriate time frame for assessing investment results. Consequently, fund managers behave in ways that are less-than-optimal to achieving long-term outperformance. That provides individuals who adopt the right time horizon with a massive advantage. Keep in mind, however, that professionals have one major advantage: Picking stocks is their full-time occupation. As such, I can't recommend doing battle with them if you're a pure hobbyist.

Getting back to the current market, is it bad for stock pickers? I would point to my second comment: It depends on your timeframe. For fund managers, who are assessed every quarter, the answer is "yes." For (proficient) individual investors, when stocks trade on factors other than their fundamentals, it represents an opportunity. Value -- and excess returns -- win out ... eventually.

Let the Motley Fool help you outsource your stock research. The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the brand-new free report, "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

The article Stock Pickers: This Market's Not for You originally appeared on Fool.com.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum