Markets have remained surprisingly resilient this year, but not because of the usual suspects. The Magnificent Seven look frazzled. Tesla is down 30% from December, Microsoft is down 15% from its peak, and even Nvidia can’t seem to make any gains. On the other hand, staples have quietly made progress, defense stocks are en vogue, and Visa seems to be the new darling of Wall Street.
Is it time to ditch the index trackers and start picking stocks? Maybe, but it does come with a few headwinds. The biggest reason no one beats the markets is not what we buy but what we don’t. Walmart may look good value here, but by going long, we essentially go short the other 499 stocks in the index, and it’s tough to take a view on all of them.
The other reason has to do with timing. Say, we are down 5% in the first month after piling into our favorite telecom stock. Do we hold, buy more, or cut our losses? Likewise, if we do take profits after a move to our advantage, we need to buy something else and fast, because the market is always moving on.
Then there are the probabilities. In the first instance, anything we buy has a fifty percent chance of going down. Even if we think we can do slightly better than that, the numbers hardly work in our favor by merely picking a few stocks for the long term. Given the empirical evidence, we may be better off picking something else rather than trying to outperform the markets.
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