The return of the Stock Picker

Warren Buffet has been making the rounds due to a new HBO documentary about his life. If you haven’t read The Snowball, add it to your reading list. His investing track record speaks for itself. More importantly, he is an all-around great person. Anyways, his recommendation to non-professional investors is to buy 90% S&P 500 ETF and 10% US Treasuries. If you are not actively following the markets, this is a great idea as many professionals underperform this strategy. Ironically, Warren does not follow this advice and has consistently beat the 90/10 strategy for 50 years.

What is the S&P 500 Index

The S&P 500 represents 500 large US companies across several different industries. It is considered the most reliable gauge of the US Equity Market.  The index is weighted by market value, meaning larger companies make up a larger portion of the index. Here is the relative performance of the Index and the four largest companies included in the 500. As we can see, 3 out of 4 companies outperformed the Index.

 

Why do so many stock pickers fail

Active managers look to buy specific stocks that are expected to grow faster than the Index. While many stocks beat the index, it is very difficult to predict. Buying one stock instead of 500, can increase return but comes with considerable risk. For example, Exxon (XOM) outperformed the Index for about 10 years before oil prices crashed in 2015.

Stock correlation has fallen significantly since the US election. This is a fancy way of saying stocks are behaving differently and the potential rewards for owning an individual stock could be much higher than prior years. Financial and Industrial stocks have shot up since the election, outperforming the Index. Will stock pickers outperform this year?

Have a great weekend!

– The Risk Runner

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