Stock Pickers No More?

by: Roger Nusbaum

CNBC's website posted a wide ranging article titled Why the Days of Stock Picking May Be Coming to an End. It covered why stock pickers have generally not done well in the last couple of years, why this has helped sector ETFs (and maybe country funds too?), how stock analysts are not political analysts and why that matters. There was also a discussion about passive versus active management.

For part of the article stock pickers were synonymous with active managers. It has been a while since I heard anyone say "it is not a stock market it is a market of stocks" but this entire notion should be dismissed for most market participants. Yes, certain types of fund managers do need to be accountable in three month increments but there aren't too many people whose actual goals are tied to the calendar quarter. If your portfolio owns a couple of stocks that are up a bazillion percent since you bought 25 years ago and/or your yield exceeds your cost basis, then you probably don't care that it lagged the SPX this year.

If people perceive that stock picking has become more difficult, then it is logical to think that sector funds, country funds and thematic funds have found an audience. At least I hope so. I believe there has always been a middle ground between owning a couple of the broadest indexes via funds and a portfolio with room enough for seven different biotech stocks. ETFs now make it much easier for this middle ground to build a portfolio in this manner.

I think most bottom up stock pickers would say they are not concerned with the macro political environment--a telecom analyst would probably want to keep tabs on big stuff going on at the FCC though, as an example. However top down portfolio managers do keep tabs on political goings on and while no one may get them all correct, it usually is part of the process.

Active versus passive is always a worthwhile discussion but usually incomplete IMO. To make the discussion complete it needs to include the appropriate time horizon and risk-adjusted results. Specifically these things need to align between manager and client. Generically speaking, getting 80% of the market's return with 50% of the market's risk or volatility (however you want to think about it) is a fantastic result as long as you know that is what your manager is trying to do and understand what your manager is trying to do. If you must be up 15% in an up 10% world, that is not what your manager is trying to do and if you don't know this, then there will be serious disappointment.