I started to post this as a comment in response to this post but I felt it better as a post here.
First, I call BS. While there is nothing wrong with investing in index funds, or even mutual funds, it doesn’t mean you can’t beat the market by investing in individual stocks. Anyone who makes a blatant claim like that is just voicing either ignorance or is closed minded. Anyone who is willing to put in the right effort can accomplish almost anything. If you aren’t willing to put in the time and effort, then by all means pick a fund of some sort and leave it alone. There is nothing wrong with that and it is the means by which most people invest. Congratulations, at least you are investing.
However for those who don’t mind putting in the effort, you can make money and beat the market. The argument that even analysts don’t make money is also a little too vague. Maybe this comment applies to actual analysts and brokers, but doesn’t necessarily apply to the investors themselves. Do you actually think that index or mutual funds only contain the best stocks? Not likely.
By applying sound advice and research, you can beat the indexes and the market in general, even when there is a bear market. While I don’t advocate most systems, I have read (as you can see from the left sidebar) both Jim Cramer and William O’Neil and while each has a different approach to buying stocks, both are very, very successful at it. As I have once heard “If you want to be rich, learn from someone who is rich”.
Yes, there are a lot of losers in the market. Why? Because they don’t know what they are doing. The ‘play’ the market or solely take the advise of a broker. They have no entry strategy, no disversification strategy and worse, no exit strategy. You could even make the argument that funds are over diversified and that dillutes the returns.
Now I am by no means an expert at buying and selling stocks, but I am also not afraid of them and more importantly I don’t mind doing a little research and I don’t get emotional about them. This has lead me to be consistent with my goals for each stock and most importantly when I sell a stock that isn’t performing. With my approach (which is O’Neil’s for the most part), I only have to be correct on a buy 1 time in 3 and I still make money. Why? Because my good stocks end up being good performers, like Google where I am up 24% as of this writing.
So again, while there is nothing wrong with funds, don’t let anyone scare you into thinking that buying stocks is a bad thing or that you are going to loose all of your money.
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I would agree that on an individual basis, if you put in the time and effort and get a little lucky you can beat the market. But, countless studies have all but proven that actively managed mutual funds do not beat the market over long (5-10 yrs) periods of time. There are superior money managers at some funds of course, but once they’re streak/history gets well-known, so much money pours in that it dooms them to mediocrity.
Beating the market as an individual is much easier than as a mutual fund with billions of dollars, but it takes considerable amounts of time. Everything I’ve read on the subject talks about spending at least an hour a week on each stock you own. Most people can’t/won’t make that kind of a commitment…
If people consider an hour a week for each stock a ‘considerable amount of time’, well, that is too bad. I own a total of 3 stocks and most experts agree that people only need 4-6 good stocks at once, regardless of how much you have invested.
And yes, some of the best mutual funds do fall prey to their own success, but it is mostly because they can’t move that money fast enough, not because they don’t pick the right stocks. I’m not sure where your countless studies are that show mutual funds don’t beat the market, but I can easily find many, many that have over the same periods of time. However, with mutual funds you more or less have the same problem that you do with stocks, you have to pick the rights ones. With mutual funds though you are looking for the right segment — growth, value, income, etc. — as opposed to stocks where you are almost always looking for stocks in the current cycle that are performing well — tech, oil, construction, etc. — and tend to be more short term.
In any event, thanks for the comment!
Robert, yeah now that you mentioned it in your comment on my blog…I realized that I had liked your theme before too :)..I am going to try it out now. Thanks much.