Is Long Term Stock Selection Dead?

Since the financial meltdown of 2008 I’ve been trying to pull my thoughts together around the idea that long term stock selection is dead. Recently, I came across two articles that really got my thoughts in order.

Article 1: NY Times. Nov. 26, 2010A Dying Banker’s Last Instructions. Gordon Murray was a hotshot at Goldman Sachs, Lehman Brothers and Credit Suisse First Boston. Even though he was in the business for over 25 years his own finances were pretty haphazard and realized most investment advice is skewed in favor of the advisor. Meaning the advisors select products that maximize the advisors returns not yours. The general theme of the article is that no one can predict the future with any regularity, so why would you think that active managers can beat their respective indexes over time?

Article 2: SF Mag. Dec 2006. The best investment advice you’ll never get. Google can afford to bring in the best investment advisors and they did right before their IPO. Most of the big names said the same thing:

Put your savings into some indexed mutual funds, which will make you just as much money (if not more) at much less cost by following the market’s natural ebb and flow, and get on with building Google.

I couldn’t agree more.

For most people getting an index fund that tracks the entire market is the way to go. I believe picking a basket of stocks today and saying it’s part of your long-term portfolio is just plain stupid, it might have worked in the past but there are to many new factors that might skew the 10-30 year horizon for investing.

Case in point, Skype filed their S-1 document in August with the intention of going IPO very soon. Skype is an amazing technology/service and I have been using them for many years, but would I buy their shares during the IPO? no chance.  Do you honestly think Skype will be around 10-15 years from now? I doubt it, the speed with which internet technologies move, Skype could be outdated in 5 years. An IPO is simply a way for founders to get liquidity, plain and simple. Of course, everyone will point to a Google or the highly anticipated Facebook IPO but those are far and few between.

Let’s forget technology for a while and focus on what made America great – the car industry. If you had GM shares from the first IPO they would be worthless today. In a cruel joke, the US government took over GM and then re-IPO’d the shares in the world’s largest IPO a couple weeks back. I would love to ask those fund managers back in 2000 where GM would be in 10 years.

It’s not just the US, look at the current flavor in India – microfinance.  3 months back everyone was tripping over each other to praise SKS Microfinance and the feel good story of helping poor woman in India make a living. Now the stock is down over 20% because the business model is not healthy…what? SKS has been around for 12 years and somehow in the last 90 days their business model is out of whack?  I would say it has more todo with politics and money, people saw how much money SKS made in the IPO and they felt left out.

So what is an investor to do? As I said before put most of your equity allocation into an index fund and forget it.  Then if you have the urge to gamble, put 10-15% of that equity allocation into investments you track on a daily/weekly/monthly basis. Activities can include trading stocks based on information you get or the latest algo-trading genius or some new IPO to flip. This approach will give you the “feel” of the market and yet have most of your equity investments in an index fund.

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