What Do You Believe (Who's Side are You On)?

There is a battle raging in the world of finance. Two ideologies are at war, and every investor, even you, has taken a side.  Does this sound surprising?  Did your financial advisor ever ask you whose side you were on?

The stock market, with its images of bulls and bears, Wall Street, ticker tape, and bell ringing, is a part of American culture. The allure of “getting rich” in the stock market has attracted investors for decades.

Benjamin Graham was one of the first people to seriously study investing. His book, Security Analysis, was considered the ultimate stock picker’s guide. He was very much admired by a young Warren Buffet, so much so that Warren used Graham as a middle name for one of his sons.  Many of Graham's ideas live on today.

Jim Cramer is picking stocks on CNBC.  You can watch shows like Fast Money (also on CNBC).  Many brokers are touting their “stock picking” ability, and a legion of mutual fund managers are dutifully trying to pick the "best stocks" to include in their mutual funds.

In the 1960s, academia first started to take an interest in the markets. A burgeoning mutual fund industry was emerging. Scholars wanted to determine if all of these stock pickers could add any value to investing. Could they "beat the market" by finding the best stocks, thus delivering a superior return to their clients?  This was first tested in 1965 with a study by Beckencamp, and it was determined that mutual fund managers were NOT beating the market. But the industry was not concerned as people at that point had no alternative.

But in 1976, shortly before his death, the very father of stock picking said the following:

I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when [the bible of fundamental stock analysis, Graham and Dodd's Security Analysis] was first published; but the situation has changed. I doubt whether such extensive efforts will generate sufficiently superior selections to justify their cost.

But the industry forged on unaffected. Fast forward to today, and the lines are clearly drawn. Academia has come a long way since the 1960s, and volumes of academic work have been produced which show repeatedly that stock picking and “active management” do not work. But we still have a flourishing financial services industry, using investor’s money to pick stocks, speculate, and gamble with your hard earned money.

Not in your portfolio you say?  Really? Can you tell me the turnover rate of your mutual funds?

So I ask you, what do you believe? Do you believe that someone can "beat the market" through stock picking and speculation (the methods of many in the financial services industry)? Or do you believe academia and in their findings that the market is random and not easily beaten by any money manager, financial guru, or stock picker?

If you believe in the later, don’t give up hope. There are ways to invest in the market which avoid Wall Street’s games. If you are interested in learning about this disciplined, common sense approach, please contact us at 920-893-5262.

Jeremy Burri

Investment Advisor Representative

Veritas Financial Services