Stock Pickers Market?

Just getting back from the Dimensional Fund Advisors (DFA) conference in Austin. Other than 104 degree temperatures, it was a great conference.

Anyways, I got to meet and talk to Eugene Fama and Kenneth French. They will probably win a Nobel Prize at some point for their ground breaking research on which our portfolios are based. They are some big brains!

I’d like to share with you a little of what French had to say. I love the consistency of his message. He doesn’t change with the wind. Based on his extensive research, he knows what works and he sticks with it through all market cycles. He only has ONE message.

He points out that the aggregate of everyone’s portfolio is the market. Together everyone is the market. So the total return of everyone’s portfolio minus fees and expenses equals the net market return. By using low cost passive index funds, you’re fees will be lower than actively traded funds. French points out, therefore, by using the lower cost passive approach for once you can be certain to be better than average. It’s just simple math…. your lower fees, reduced turnover will give you higher returns. You can be certain to beat the aggregate every year without exception. This is brilliant in its simplicity and a fact that gets overlooked by most investors.

Why is that? Why do not most investors take advantage of this? Most investors think they can pick only the winning managers so they’ll win and the rules of logic don’t apply to them. Fact of the matter is though, there is no evidence that anybody can consistently pick these winning managers. Are you willing to spend your hard earned dollars to find these elusive money managers? The fact that the debate goes on about being able to pick winning managers is really proof that it can’t be done.

If some of the smartest guys around don’t think they can beat the market or pick winning managers what makes us thing we can? Here’s a video from 2008 with Ken French talking about stock picking versus indexing so you can hear for yourselves. Hope you enjoy it.

http://finance.yahoo.com/tech-ticker/article/127723/A-‘Stock-Picker’s-Market’-Keep-Dreaming?tickers=%5Egspc,%5Edji,%5Eixic