In Defense of Stock Picking

Stock Pickers are as good as a monkey with a dartboard. This often repeated cliche may at first seem plausible when one looks at the performance achieved by the average portfolio manager. But what would happen if all investors decide to invest in index funds? Who would cause shifts in relative valuation in the universe of investable shares? The answer is that there will always be investors who - rightly or wrongly - will try to pick the right shares. The rewards are huge in this real-world poker game. And like in the card game the winners take (absolute or relative) performance gains from the losers. And like in Poker anyone who is cognizant of his lack of relative skill is well advised to stay away from the game, unless he enjoys the thrill of the chase.

Do you really understand your funds?

Looking at some Investment Agreements that were leaked one has to wonder how many investors really are able - or willing - to understand the nitty gritty contained in these lengthy documents. As the agreements referred to in this link cover investments by professional investors in Private Equity Funds they are drawn up by expensive lawyers in order to be read by expensive lawyers. But even where professional investors are involved we doubt that their ultimate paymasters - the trustees in pension funds for example - really bother to read the agreements from end to end. So any private investor has to be extra careful before handing over his hard-earned money to any investment adviser, however nice the offices are, however impressive his or her credentials or the brochures and presentations that are offered.

A 90/10 rule that protects all us two-brain investors

How to avoid being tempted into reckless investment decision (MarketWatch).

Can your ‘money-losing behavior’ be cured?

Lessons from a new study on why investors make bad decisions (MarketWatch).

Dollar-cost averaging - useful in combination with index funds

Dollar-cost averaging may not be a 'sexy' investment strategy but it may suit conservative long-term investors that realise that they will never be able to 'time' the market perfectly. As equities (hopefully) have an upward bias an investor should be able to generate a satisfactory return - especially if he does not focus on stock-picking (this could lead to pick the wrong stocks that do not participate in the overall market trend). The same strategy can be applied to bond investments. The main difference would be that the investor could in addition vary the maturity term of his bond investments, i.e. longer maturities in high interest environments and vice versa.

Stock Market - Ponzi Scheme or Engine for Growth?

When the share price of the likes of Facebook climbs to levels that appear to be absurd when compared to traditional yardsticks of value one has to wonder what the function of a stock market is supposed to be. What happens in cases such as Facebook etal is that the saving public (via the services of momentum-chasing fiduciaries in the fund and private banking industry) hands their hard-earned money to the insiders who can cash in their chips and bank immense amounts of money. Has any value been created by this casino-like activity? Only if you believe that the transfer of money from losers to winners at the poker table creates value. The huge transfer of wealth - especially in the USA, but to a lesser extent in all stock markets - not only concentrates wealth in the hands of the few ultimate winners (remember the poker table!), it also creates a drag on economic and income growth as the few tend to hoard most of their gains - how many steaks can you eat? not mentioning how many monster yachts or ostentatious holiday homes can even the Super rich acquire? Stock markets are a useful and necessary tool to share risk and finance long-term investment but at present they are not serving the interests of the wider investment public. Only those that can avoid the hype - or get of the roller coaster at the right time - benefit from investing in shares in the present market structure.

What happens if your Financial Adviser goes bust?

The Credit Crisis and ensuing market crash might already be a distant memory. But one of the key lessons that could be learned was the fact that even financial firms with a century-old pedigree could go under. So investors are well-advised to check their financial arrangements and ask themselves if they are protected in the case their financial advisory firm goes out of business.

How and how much to pay for Financial Advice

Some suggest financial advice can be provided for free, some advisers now charge a fixed fee...all these schedules have their advantages and disadvantages and selecting the right package will potentially have a significant impact on your investment outcomes.

How are Investment Bubbles created?

Highly paid 'experts' working for Brokerage firms or Investment Managers tend to be chasing price momentum when making investment recommendations or investment decisions. No one blames them for being wrong as a consequence of following consensus opinions but missing the boat is a big career risk for these experts. In addition their actions can deviate from what a reasonable private investor would do as their own money is usually not at risk.

Fund Manager Selection

When You Evaluate a Fund Manager, Look Beyond Results
New York Times