Human nature is not changeable. If people do significantly less well managing defined contribution assets on average than a comparable index fund, then they should not be managing their own assets, much less concentrating into a small number of stocks. I don’t care what Baruch says (whoever he is), or what my friend Josh says. Markets are complex, and investing is hard, not easy.
Just as I believe that most people don’t have the capacity to run their own businesses, the same is true of investing. Both require a lot of discipline, and most people do not have a lot of discipline.
It takes time to learn how to analyze investments. I think of people taking the CFA courses/exams, and I say to myself, “”Yes, better than nothing, but we need practical experience to truly train them.”
As an aside, when I went to take CFA exam level one, a few younger people snickered at me and said, “Who’s the old guy?” (Note: I was 34 at the time; the beard probably didn’t help, and I sometimes let it grow longish back then.) I turned to them and said, “I am an actuary. I have already been through a set of ten-plus exams far more difficult than the CFA exams. I am skilled in compound interest, accounting, statistics, economics, modern portfolio theory, and mathematics to a degree that AIMR does not consider. I am battle-tested in exams more difficult than this, where we had to read far more, and wonder whether we would be tested on minutiae such that AIMR would never consider for CFA candidates. Further, I have lived under an ethics code for ten years, so I get the AIMR code. Do you get it?” After an uncomfortable silence they looked away, and I did too.
My portfolios are concentrated by industry, but diversified within industries. I have worked hard at my theories for around 18 years now, with my current strategy running for 10+ years.
It is not easy to do well in investing. First, you may not understand the basics of valuation. Second, you may not understand what factors can drive stock prices. Third, you may not understand how industries move a groups. Fourth, you may not understand how changes in the economy may affect your investments. ANd there is more.
What’s that, you say? You don’t need to know those things because you can read a chart? Okay, good. Momentum tends to work, but chart-reading after momentum may not work. Yes, things that have gone up tend to go up further, because of disbelief among investors. Here’s the test — how often have you made money buying negative momentum, or selling positive momentum? My guess is that momentum incorporates most of technical analysis, and that most of the detailed technical analysis ideas are empty. Test: show your technical analysis idea to technicians of a different flavor, and see what they say. It’s like Evolution versus Special Creation — Evolutionists trash Creationism, but they don’t agree among themselves to any significant degree. There are few, if any ideas, that all Evolutionists agree on except the negative, “Not Creation.” (I had a more offensive version using Canadians and Americans. I passed.)
I incorporate momentum into my fundamental investing. It helps to erase the problem of value investors always being early.
Most people that I have known that have ventured into individual stocks gave up because they lost money, or didn’t make much money. Skilled amateur investors are few. This is my razor: if they can’t manage owning an S&P 500 index fund, what makes us think that they can manage a more volatile portfolio of common stocks?