Saturday, February 26, 2005


It's a "Stock Picker's Market"

Yeah and I'm Warren Buffet.

For those who don't already know, I'm a financial planner. And sometimes the self-serving investment cliches become too amusing not to share. First, a little primer for folks not hip to the Wall Street "insider" scene: the big brokerages stand to profit the most when investors trade often and buy actively managed mutual funds. The opposing strategy would be to buy and hold passive funds - those that essentially just try to duplicate the performance of a major index like the S&P 500.

Both have their merits and I'm not taking sides in that debate - only pointing out the obvious motives for Wall Street to push the "stock picker's market" theory. Basically, they say, in a flat or down market, the seasoned stock pickers have a much better chance of beating the overall market. These mutual fund sales guys come into our office all the time to push their products. Invariably, we'll get the stock picker's market line.

Of course, now that we know it's a stock picker's market (because this sales guy with an obvious agenda told us so), we then need to find the cream of the crop stock picker and invest in his fund. And, well, whaddaya know? All of this company's funds have wonderful long term track records. How did they do it? Well, long term track records - by definition - are available only to funds that have been able to survive a long while by performing well. The funds that suck disappear. They have either been liquidated or merged into other funds.

The bottom line is the investment world is mostly smoke and mirrors. There are plenty of ways to spruce up a portfolio to make it look sophisticated or add a certain cache, but over time all investment vehicles tend to revert to the mean. It's a boring concept to have to accept, but it's true according to most studies and a lot of objective people who are typically reliable.

In the end, it's the basic advice that will serve you well. Diversify, buy and hold, and become less aggressive as your time frame for needing the money shortens. You can attribute to luck most any hot stock that serves to provide for cocktail party boasting.

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