Transcript
0:00 Stock index funds, ETFs, the holy grail of investing. >> People love index funds. >> I buy index funds. >> Index funds >> solid ETFs >> low fee broad market ETFs >> by investing in index funds >> index investing >> Enough. Enough. Enough. I really dislike passive index investing. I love picking stocks. And the final straw that convinced me to make this video was last week Ben Felix interview.
0:30 >> Who should buy individual stocks? >> I honestly don't think anybody. >> What? >> >> I can't stay quiet anymore. I'm making this video to defend every stock picker. I will give you four very strong reasons why you should stop passive index investing and start managing your own money even if everybody is telling you the opposite. >> Just buy index funds and hold on forever. >> ETFs are the most powerful way to build your wealth in the stock market.
1:01 >> Invest in a globally diversified portfolio of of index funds and not worry about it. >> It's okay to buy an index fund. >> 100% >> Even if you have millions of dollars, it's okay to buy index funds, but always make sure a good chunk of your money is going into low fee broad market ETFs. You'll thank me later. >> But before the Bogleheads ETF maximalist flood the comments by saying, "Adri, go read the Eugene Fama and study efficient market theory." Let us acknowledge their favorite arguments before I tell you why I am completely against them. If you don't know, a stock ETF is simply a basket of many different stocks that track an underlying index.
1:44 Popular examples are the Vanguard VOO or VTI, the S&P SPY, the Invesco QQQ. Basically, you buy one ETF and you spread your money into hundreds and hundreds of different companies in order to be average and diversified. If you want to know more about ETFs, I suggest you the videos of Nanalyze and Ben Felix. Even if I completely disagree with them, here are the strong arguments in favor of passive index investing.
2:20 Most individual stocks underperform. Henrik Bessembinder, in his research Do Stocks Outperform Treasury Bills? showed that of 26,000 common stocks from 1926 to 2016, less than half generated a positive lifetime buy and hold return, and only 42.6% have a lifetime return greater than the one-month Treasury Bills. >> The chances of picking the right stocks are are pretty low.
2:54 >> On top of that, Bessembinder found that the top-performing 2.4% of firms account for all the 75 trillion in net global stock market wealth creation. Market returns are driven by a small percentage of stocks. So, if you pick stocks, you will miss the big winners 98% of the time. Next, the SPIVA Scorecard. They always quote the SPIVA. >> Go look at the SPIVA research. If you go to SPIVA, was it spiva.org or whatever is But it shows you managers will beat the S&P, but not consistently.
3:32 >> Almost 90% of active fund managers underperform the S&P 500 over a 15-year period. The argument here is that if professionals can beat the market, how could you? You are not a professional, right? By the way, the research is made by the same company that then sells you the index. Okay. Next, we have the psychological problems for active investing. The disposition effect, the tendency to sell winning investments and hold on to losing investments. But also the research the research has shown that investors trade too frequently and that this overtrading lowers investment returns. Ultimately, index funds Maxis conclude that Eugene Fama efficient market hypothesis is true. The price already reflects all available information. So, you will never beat the market. It's much better to buy a low-cost index funds that offers instant diversification. That's it. Now you have them. These are the Bogleheads arguments and some are quite strong, but do they change my mind? Absolutely not. Here are my four big reasons why I'm convinced stock picking is way superior. Reason number one, the counter studies. Not all academics agree with Fama and Bessenbinder and there are plenty of studies that prove that stock picking is better one way or another. For example, an empirical evaluation of tax loss harvesting alpha. We found that a tax harvesting strategy yielded a before transaction cost tax alpha of 1.08% per year. This is not possible with index funds investing. Martin Cremers and Antti Petajisto introduce a new measure of active portfolio management, active shares, which represents the share of a portfolio holdings that differs from the benchmark index holdings. Funds with the highest active shares significantly outperform their benchmarks both before and after expensive and exhibit strong performance persistence. This proves that 90% of professional funds underperform because they're all the same. They just replicate the index, but they charge you fees on top. Investors that have the courage to be different, to be concentrated, just pick 10 15 stocks, actually outperform.
6:24 >> We think diversification is as practiced generally makes very little sense for anyone that knows what they're doing. they Diversification is a protection against ignorance. I mean, if you want to make sure that nothing bad happens to you relative to the market, you own everything. There's nothing wrong with that. I mean, that is a perfectly sound approach for somebody who who does not feel they know how to analyze businesses. If you know how to analyze businesses and value businesses, it's crazy to own 50 stocks or 40 stocks or 30 stocks, probably. Charlie?
7:00 >> Yeah, what he's saying is that much of what is taught in modern corporate finance courses is twaddle. >> So, Warren Buffett, Charlie Munger, Peter Lynch, Jim Simons, Druckenmiller, and many many more managed to outperform. So, please tell me, if the market is so efficient and can be beaten, how do you explain these investors?
7:32 Luck? Let me flex a little bit and make a stupid example from a stupid YouTuber like myself. Purely anecdotal, no scientific value, I'm aware. But still, 3 months ago I published this video. Seven crashed stocks that I'm tracking before they double. Very cheesy clickbait title, I know. The seven stocks were: Celsius, up 10%. Elf Beauty, up 100%. Lulu, down 5%. HubSpot, up 30%. Vix, up 65%.
8:11 Mercado Libre, up 18%. SoFi, up 15%. Average, up 33%. S&P up 3% and the Nasdaq is down 1%. I know, I know, everybody's a genius in this bull market. Okay. But still, if the market were really so efficient, you would expect YouTubers with public portfolio to underperform, right? How come Joseph Carson, Couch Investor, Kristof Nuwer, and of course, the best of all, Adreconomics, are all outperforming? But Adre, over the long run, you will all get burned. Sure, it's possible. Let's see. We will know in some years. Reason number two, my personal experience.
9:02 Studies show that 90% up to 90% of retail investors lose money. >> Very few individual investors beat the market. >> So what? The research behavior of individual investors proves that investors spend approximately 6 minutes on research per trade. 6 minutes. Over 90% of retail investors never opened a 10-K report.
9:32 They spend like 5 minutes scrolling on Instagram before bling, buy. So, if you do like that, please consider index investing. Otherwise, the good news is that the competition is really, really weak. It's exactly like in poker. If you don't know who the fish is at the table, it's you. 95% poker player lose money. And they should lose. Trust me, I was a professional poker player in my twenties. Part of that 5% winning and people play horribly. They play drunk, they play distracted, they don't know the basics of the game. Of course, they lose. It's the same in the stock market.
10:20 Study the game, research a company a week, and you will be better than 90% of other investors. Study 6 minutes and you will lose. Reason number three, probably the most important for me. Index Maxi assumes that the only goal in our life is to maximize and optimizing for returns. Nothing else. Ben Felix talk about objective reasons. >> Producer like commit to picking individual stocks as part of the long-term investment strategy for reasons like for objectively objective reasons like it's going to improve the long-term outcome. I honestly don't think anybody.
11:02 >> Sure, morality is subjective, but let's say that for an extra bit of profit, you would have to invest in the more nasty businesses that you really hate. I'm talking about guns and weapons. Fossil fuels like big oil, animal violence, cigarettes, gambling, and so on. No matter what it is actually, but I am sure that there are some up companies that in your opinion that you really hate? Well, when you buy a market cap index fund, you do not get to choose where your money goes and a part of your money goes exactly into that. Defense contractors like Lockheed Martin, big tobacco like Philip Morris, fossil fuels like Exxon or Chevron. The larger this company gets and the more index funds capital get pumped into them. I'm not here to judge anyone. Some of my investments are morally weak as well.
12:07 But do you really prefer to have one 2% extra points of returns instead of deciding who deserves your money? Index investing gives your money to the company that you hate and the bigger they are, the more of your money they get. >> Who should buy individual stocks? I honestly don't think anybody. >> It's time someone asked the hard question to these people that are suggesting the VTI, the VOO, the Spy, the QQQ.
12:37 Do you really want me to invest in these companies that are destroying the planet just because it's profitable? Personally, this is the main point for me and ASG funds don't cut it. I want to personally decide who deserves my money and if this conscious decision cost me to underperform, I would gladly lose 1% return and make my own choices. Reason four, active investing is a great teacher. Passive investing teaches you nothing. I like picking stocks is an activity I find interesting. It's brain stimulating. I like to execute my contrarian ideas and thesis. At least I'm going to learn something about the market, but especially about myself.
13:32 I honestly prefer to invest, lose, and learn something than diversified, buy everything, be average, and learn nothing. Lastly, if you invest in index funds, you are vulnerable to changes in the index rule themselves. For example, the one that just happened a couple of months ago to immediately include SpaceX at a crazy $1.8 trillion valuation into the Nasdaq. Basically, early investors need an exit.
14:08 And what a better way than not to dump it in the portfolio of people that just don't decide how to invest? They just have to change a couple of rules, and SpaceX go in their portfolio. And the paradox is that the more is overvalued, the more ETFs and index funds have to buy it. To conclude, your money, your decision. If you don't have any interest in stocks, you don't like to read financial reports, and you are okay being average, and you don't care who gets your money, by all means, buy index funds.
14:46 Also, Warren Buffett is saying the same. >> Buy an S&P 500 low-cost index fund. The trick is not to pick the right company, it's to be cuz most people aren't equipped to do that, and plenty of times I make mistakes on that. The trick is to essentially buy all the big companies through the S&P 500, and to do it consistently, and to do it in a very, very low-cost way. >> It's okay, I understand. Just please don't tell me >> invest in a globally diversified portfolio of of index funds.
15:18 >> Because if you want to think independently, support the companies that align with your morality, learn something, try to be extraordinary instead of being average, then you should pick your own investments. Let me know what you think. Leave a comment, leave a like, share this video with your index maxi friend. Thank you for watching. See you next time. Peace out.