The stock market has returned to record levels, powered by a few of the world’s biggest and best-known companies.
That has spawned talk of how it’s a “stock-picker’s market.”
The market observers who say this drivel aren’t particularly observant, or they would have long ago noticed that good stock-picking never goes out of style.
Yes, there are times when the rising tide of the market lifts all boats so that investors could have the worst stocks and still come out ahead – and there are times like now when a few issues carry the day, but there is never a bad time for good stock-picking or, more generally, for being invested.
Yet for those who doubt the market’s rally since a precipitous freefall in February and March, the perceived need for expert stock picking often becomes a reason to avoid investing, to sit out current conditions in anticipation of tough times ahead.
And that is where investors who think they can be winners in the longtime battle between active and passive investing can come out losers no matter what the market does next.
No matter which side of the argument you are on – whether you are an active investor who either picks specific securities or uses a fund manager to do it – or a passive investor who relies on index funds, the most important decision is the one to put money to work in the market, not the one that decides how it will be run once it gets there.
Ironically, many investors were so scared by the market’s 35% four-week meltdown that they now don’t trust the subsequent almost 60% gain that brought the Standard & Poor’s 500 back to record levels.
There was little that good stock-picking could have done to avoid the pain of the decline, and not much chance that great stock picking would improve on the subsequent rebound.
Consider two different ways to invest in the S&P 500, the SPDR S&P 500 ET (SPY) and the Invesco S&P 500 Equal Weight ETF. The former is built like the index itself, with each component weighted by its market capitalization, meaning that the most valuable companies – Apple, Microsoft, Amazon.com, Facebook, and two different share classes of Alphabet (Google) – drive the index direction much more than the smallest names, Coty, News Corp, H&R Block and two classes of Under Armour.
Those big names – among the year’s biggest stars – represent nearly one-quarter of the index and, therefore, the SPY. The bottom five stocks represent 0.03 percent of the index and the corresponding fund.
By comparison, the RSP gives each stock in the index the same weighting, roughly 0.2 percent, making tiny Coty as big a deal in the ETF as Apple.
It’s no surprise, therefore, that the SPY is up roughly 10.7 percent year-to-date, while the equal-weighted RSP is down about 1.85 percent.
With that wide discrepancy despite both funds being based on the same underlying benchmark, you could make an argument that it’s actually an index-picker’s market, where what matters is picking the right benchmark.
Even so, the RSP is up more than 10.5 percent annualized over the last five years, meaning it has delivered even better than the long-term historic annualized average for stocks. While lagging the market as measured by the S&P, it still has been a far sight better than keeping the cash on the sidelines at a time when interest rates have been near zero.
So while the financial media lionizes stock pickers who make their mark with brave calls, investors don’t need to get bogged down in that action; that advice comes straight from Craig Callahan, president of the ICON Funds and an accomplished stock picker.
Callahan appeared on my show, Money Life with Chuck Jaffe on Friday, March 20, and said at the time that stocks represented the best bargains he had ever seen in his long career picking stocks.
In short, he was saying that stocks weren’t as horrible as the market was pricing them, which I described as “the worst-sounding, most optimistic statement” I ever had heard on the market.
Callahan assured me the buying point for investors was close; the market bottomed out the following Monday.
Callahan and I chatted again in August, and while he said the market’s rebound has made it slightly harder to find bargains, he described pricing as ripe for the protracted rally he sees continuing.
He breaks companies into three groups, starting with the ones unaffected by the pandemic and recession, the issues hurt by those conditions but expected to recover soon, and the firms that have been truly damaged and impaired this year.
And while that description hints at this being one of those times when stock-picking wins out, Callahan was quick to suggest that engaging with the market is what matters most long-term.
“That last 11-year bull market has been called unloved, and there has been plenty of data from individual investors to pension plans that says they doubted that market and didn’t fully participate,” Callahan says. “The same thing is going on now with this rally that started March 23.
“There are still people on the sidelines missing out on this opportunity to rebound and accumulate wealth so, to us, the first thing is to participate.”
If you are investing broadly and actively tilting your portfolio toward what you expect to work, you will come out ahead, Callahan says. “And if active doesn’t beat passive, so what? That’s nitpicking.”
Investors may want to score the big win, but the market does give trophies for participating.
Participate, says Callahan, “and deficient stock picking is still going to make you adequate money and beat the inflation-type goal that you are trying to beat.”
In other words, you don’t have to be a stock-picker to pick stocks, but you should be choosing stocks – actively, passively or however you are comfortable – in order to come out ahead in the long run, no matter how scary you think things look now.