Stop Banking on Algorithms

A quick primer on the stock market - the price of a company’s stock is not set by the company and is certainly not pegged to its profitability. It is set by the algorithms of computers and the emotions of investors who buy and sell the stock every day.

Hard to believe, I know, but that means when you invest in an individual company, you are not banking on the future success of the company, you are banking on the emotions of investors and the algorithms of computers.

Maybe that is why so few professional stock pickers (also known as mutual fund managers), consistently outperform a benchmark index.

In fact, none of them do, according to the S&P 500 Dow Jones Indices (SPIVA) Persistence Scorecard.

Among all actively managed funds whose performance over the 12 months ending June 2018 placed them in the top quartile within their respective category, not one fund in any fixed income and equity category remained in the top quartile in each of the four subsequent one-year periods ending June 2022.

Looking for data beyond that? Let’s review the performance data that impacts you the most - the blue-chip component of your portfolio.

SPIVA research reveals that over the 15-year period ending June 2022, only 10% of domestic large-cap funds beat the S&P 500 Index. No, that isn’t a typo. Only 10%.

When looking at this data, what baffles me isn’t that so few professional stock pickers can consistently beat the market.

What baffles me is why so many individual investors (maybe even you?) try the same with individual stocks in their portfolios. I know this to be true because so many investors, armed with this data, have reached out to The Coffeehouse Investor over the years looking for guidance when transitioning portfolios from individual stocks to low-cost index and passively managed funds.

Next week we will look at the painful price investors pay over time through ownership of individual stocks.

Stay tuned.  

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