The End of Stock Picking

by Cullen Roche, Pragmatic Capitalism

Jason Zweig has a nice piece in yesterday’s Wall Street Journal on the end of the stock picking asset managers.  He notes:

The debate about whether you should hire an “active” fund manager who tries to beat the market by buying the best stocks and avoiding the worst—or a “passive” index fund that simply matches the market by holding all the stocks—is over.

So says Charles Ellis, widely regarded as the dean of the investment-management industry.

Stock picking “has seen its day,” he told me this past week, as assets at Vanguard Group, the giant manager of market-tracking index funds, approached $3 trillion for the first time. “With rare exceptions, active management is no longer able to earn its keep.”

Jason is totally right.  The myth of Warren Buffett is running its course.  The idea that we can all pick stocks on our way to riches is little more than a myth.  And so the rise of asset allocators is taking hold.  And most importantly, the rise of low fee asset allocators is taking hold.  Stock pickers are getting lost in the dust and being increasingly exposed as closet indexers trying to charge people fees for claiming to be able to “beat the market” by picking stocks inside an index.

The mainstream public is catching on.  And that’s a good thing.  Closet indexers are a waste of money and unfortunately still hold way too many assets.  It’s nice that they’re starting to become extinct.

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