By: Matt Garrott
The S&P 500 gave back almost half of its first quarter gains in April, dropping over 4%. The Federal Reserve held rates steady as US GDP came in well below expectations and inflation remained sticky. The US Postal Service recommended raising the price of a First-Class Forever stamp to $0.73 from $0.68.
“Why don’t you just buy the good stocks?”
It’s sometimes an artifact of survivorship bias, asked by investors who own shares of their employer’s stock, were gifted stock from a family member, or bought stock in companies whose products they used or admired. And then that stock went up. Put another way, we are more likely to get this question from someone who found themselves or someone they know owning Nvidia stock, than someone who bought Peloton or Blockbuster stock.
“Take all your savings and buy some good stock, and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.” This is the tongue-in-cheek advice from Will Rogers shortly after the Great Depression started. “Why don’t you just buy the good stocks?” My initial reaction is to get defensive, but I find that the 100-year-old question is usually posed in earnest.
The simple answer is that no one knows what stocks will go up. Good stocks go up, but bad stocks do, too. Bad stocks go down, but good stocks do, too. Sometimes a stock is both good and bad. Tesla is up over 1,000% over the last 5 years, but at one point in April it was down over 50% from its high last summer. Buying good or high performing stocks is no guarantee of future gains. By the way, owning an S&P 500 index fund would give an investor a 5% allocation to Nvidia, no research or market timing needed.
If Fairway can’t pick winning stocks, what about Wall Street? The big institutional traders and money management complexes have nearly unlimited budgets and access to the smartest minds on the planet. They jockey to position their servers as close to the market exchanges as possible for micro-second advantages in trading. And they still don’t beat the market consistently.
Consistently is the key word. In any given year, a percentage of managers do beat the market, but outperformance one year tends to result in underperformance in the next. Looking at SPIVA data from S&P Dow Jones, the longer the time period, the less likely a manager outperforms each year. This is how index peer rankings rise over time. Consistently good performance rises to the top over time while fad investments fade away.
We prefer passive index investing and active wealth management. Instead of spilling energy into picking stocks, we focus on activities we can control such as expenses and taxes. Having a plan and diligently rebalancing and harvesting tax-losses allows the market’s volatility to do some heavy lifting without the need to predict market movements in the short-term. Just picking good stocks is hard to do and is no guarantee of success. Maybe the best answer is another question: “Why don’t you just make a good financial plan?”
