Did your stock picker perform this well?
Earlier this year, I tracked the highest-performing stocks each day for a 10-day stretch, purely out of curiosity. I then calculated the hypothetical returns if someone had invested in those top performers on their peak days. The resulting portfolio would have yielded an impressive 1,418% return in just two weeks. To put that into perspective, a $1,000 investment, timed perfectly, could have grown to around $15,000—a 15X return in just two weeks would be remarkable.
It’s interesting how often people express regret over missing out on a particular stock’s rise, assuming that as a financial professional, I should have predicted those top performers. There’s an implication that I should have known where to invest ahead of time. Some even suggest that, in my place, they would have seen the surge coming and acted accordingly. However, predicting the market with that level of accuracy is incredibly difficult, if not impossible.
While I don’t have a time machine, I do rely on the SPIVA report. Each year, S&P Global releases the SPIVA (S&P Indices versus Active) report, which compares the performance of active fund managers to their benchmarks over the previous 12 months. In the past 23 years, an average of 64% of active fund managers have underperformed their benchmarks, and the odds of underperformance increase over time. While there’s always a chance of finding a successful stock picker, the data suggests that the long-term odds aren’t in your favor. Rather than relying on luck, we should look at the data.
Why not just use data?
Michael Lewis’s 2003 book "Moneyball: The Art of Winning an Unfair Game" highlighted how the Oakland A’s used statistical analysis (sabermetrics) to build a successful baseball team by defying conventional scouting wisdom. Managers, coaches, and scouts touted metrics like stolen bases, runs batted in, batting averages, and pretty girlfriends (at least in the movie adaptation) as the keys to selecting the next star players. Instead, they found better data points to use when building a team, and it worked – I can spare you the details; it’s a great book (and movie!). Similarly, many money managers and fund advisors often select stocks using little more than a finger to the wind. While some may claim to have unique market insights, the rapid dissemination of information today makes picking an undervalued stock because of exclusive knowledge nearly impossible. Well, it’s possible, but it’s called insider trading, which is illegal.
Like in Moneyball, we now have an abundance of data that helps us understand what is useful and what isn’t. And while past performance does not guarantee future results, we can use historical data to inform our decision-making moving forward. With this broader market insight, we can have productive conversations with clients about their goals and the strategies needed to achieve them. Advisors who adopt this approach may not hit grand slams with portfolio returns, but they’re likely to provide steady, reliable growth over the long term. The goal is to get from point A to point B with as smooth a ride as possible.
I’ll be the first to admit that I can’t pick the top-performing stock even for one day. If you find someone who can, by all means, hire them—I might even feel a bit envious. But if not, remember:
Hindsight is 20/20— a stock’s success often seems obvious in retrospect.
Nearly all stock pickers underperform over time.
Trading on material non-public information is super illegal – a given, but work with me.
Many advisors build reasonable portfolios using historical data and current market prices—if you trust their approach, keep working with them.
If an advisor claims superior market forecasting, they are flying just as blind as you are and probably lying or misinformed – my suggestion, run.
While the idea of identifying the next market sensation is tempting, the prudent path is to embrace data-driven strategies, recognize the limitations of stock picking, and entrust your investments to advisors grounded in evidence-based methods.
If you don’t have a financial advisor or find that your current approach isn’t meeting your expectations, let’s have a conversation about how we can help you achieve your financial goals. I’m confident we can design a strategy tailored to your needs that will help you navigate the market with confidence.
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