Friday, November 2, 2012

Short Takes: Defending Stock-Picking, Debt Reduction vs. Weight Reduction, and more

Tom Bradley at Steadyhand makes his case for why it’s possible to win at stock picking. What makes his argument unusual is that he acknowledges the obvious mathematical fact that stock-picking winners must take money away from stock-picking losers. Too many advocates of active investing pretend that we can all somehow be above average. Bradley explains why he thinks he can beat the index without resorting to magical thinking.

Big Cajun Man shows an important difference between how you progress toward debt reduction and weight reduction goals. I found this to be a very interesting insight.

Canadian Couch Potato says that teaching your children important lessons about investing shouldn’t begin with stock-picking.

Preet Banerjee says it’s time to plan your Christmas spending now, but he doesn’t mean to start buying gifts now.

Congratulations to Tim Stobbs at Canadian Dream: Free at 45 who is now mortgage-free at age 34. Not to be competitive, but I paid off my mortgage at age 28. However, I bought a bigger house a couple of years later and got a new mortgage that I paid off at age 35.

Money Smarts was a little annoyed at an article claiming that ETF costs are way higher than just the cost of MERs. He shows that with a more reasonable investment plan, MERs really are the bulk of investing costs.

Million Dollar Journey says that financial independence doesn’t come from paying off debt and having safe investments, but rather from having a huge nest egg. I think he’s right about the independence that comes from having large savings, and right about needing to invest in the stock market rather than just GICs, but I disagree about the debt part. There is nothing wrong with making paying off debts a central part of your financial plan. Unfortunately for financial advisors, if you pay off your debts, you’ll have less money to invest with them.

Freakonomics has an amusing story of free enterprise being discouraged at Bible School.


  1. On occasion I have been known to make an insightful statement, no matter what Mrs. C8j says.

    Have a great weekend

  2. @Big Cajun Man: Your post was indeed insightful, and many of your other posts are inciteful :-)

  3. Hi Mike
    Were you persuaded by Tom Bradley's defense of stock picking? Wouldn't the market discount the anomolies arising from closet indexing, etc. until they were random walks?

  4. @Larry: Many active stock pickers make the argument that succeeding at stock-picking is easy because there is so much institutional money out there doing dumb things like window-dressing and investing for the short term. They have a point, but it is way over-stated. It's true that dumb money creates opportunities for smart money, but the effect is far smaller than stock-picking proponents like the Motley Fool make it out to be. This is largely due to the effects you mention of the market discounting anomalies, etc.

    I think Bradley gets it about right. He's says that it's tough, but not impossible to exploit this dumb money and beat the index after costs. I think he's right. I also think that most pros who try will fail, and almost all individuals will fail except by luck. However, it's plausible that a small minority of pros could succeed over the long term. I'm not one of these pros, and I wouldn't know one if I met him or her, so I don't spend any time seeking alpha. If Bradley believes he's one of these pros who can beat the index, I'm not going to say he's wrong. But I do vote with my money, and I'm long on the index.

    A big part of what I liked about Bradley's piece was the honesty of admitting the game is zero-sum and that winning it is difficult. Too few active stock-picking proponents are willing to accept basic math.

  5. @Michael: I also liked Bradley's pointed out that if ETFs are increasing correlation between stocks, that actually increases opportunity for active investors. Definitely one of the most reasonable defenses of active stock-picking I've seen.

  6. You paid off your first house! Wow, good for you. I didn't manage that with my first one. This is also my second larger home.

    Thanks for the link,