Welcome to the end of the week and another edition of Happy Hour! Just sit back, relax, and enjoy your end of the week roundup of all things interesting in the land of money.
I ran across a recent commentary about why stock picking is back. It’s not too far-fetched, yes it is possible, and Warren Buffett isn’t the only one who does it. The people doing it aren’t the ones bragging about it. So your stock picking neighbor who only picks winners, probably isn’t one of them.
The author’s theory is nothing new. If everyone is investing the same way, it stands to reason their returns will eventually languish, and other investment styles will rise out of the opportunity.
The dance that plays out between value and growth strategies is a good example. One will take the lead, easily outperforming the other. But only for a little while. Then it switches and the other leads. It has bounced back and forth like this over time as the economy, sentiment, and investor euphoria move stock prices. In fact, I believe we’re close to that transition again after watching value stocks do so well since the crash.
The idea, however, that index funds will somehow lead to a stock pickers renaissance, well, I doubt it. It may lead to more people trying to pick stocks, but how successful will it be?
Rather, index funds and the 401k have opened up investing to the masses, and with it, regular cycles of booms and busts. The main reason, a good number of investors shouldn’t be invested in the markets at all. They simply can’t hack the big swings and losing money. When you throw enough people like that into a room with regular folks, it’s like a domino effect. That’s when chaos and the herd mentality start to play out.
Just recognizing that and adjusting accordingly will allow you to beat the market.
Late to the Game
Last week I mentioned the over abundance of bubble talk. After the recent housing bubble (or credit bubble depending on how you look at it) and market crash, it’s really no surprise.
All this bubble talk brings with it the late to the game articles about those who are starting to get in now after the big run up. How the mom and pop investors are finally putting their money in the market now. This, of course, has to be a sign of a top! Right?
Market crashes make us overly cautious, skeptical, and anxious for the next one. Plus, we haven’t hit the euphoria phase yet, where we think we can’t lose. So, maybe the average investor is just now finally comfortable investing again. I’m not saying it’s right or wrong. It just is.