Ben Stein once noted (me paraphrasing from memory), “unless your name is Warren Buffet, you can’t pick stocks.” This essentially restates the theory of Princeton professor Burton Malkiel, which is you can’t beat the market. The evidence seems to demonstrate he’s right. What that means is that, if you want to best guarantee returns on your investment, put your money in a passively managed index fund which tracks the major market indexes.
Think of beating the market like beating the house in a casino. If you put your money in the index fund, then you are the house.
Or if you do want to pick stocks, realize you are doing it for fun or some other reason; you might win big, but you probably won’t beat the market. There is one major difference, as I see it, between “picking stocks” and casinos. I think picking stocks, as long as you aren’t putting all your eggs in one basket, is still safer than going to casinos where you are almost guaranteed to lose over the long run. Picking stocks rather means you are likely, over the long run, not to beat the market. You still may come out ahead.
So you may wish to pick stocks for the similar kind of thrill or fun as the gambler gets from going to the casino. But as noted above there may be “other” reasons why you want to pick stocks. Enter Peter Thiel, a figure for whom I have a tremendous amount of respect (despite his endorsement of Donald Trump). He doesn’t endorse Malkiel’s approach, but he knows he can’t refute it.
Rather, Thiel has a different vision — call it a moral vision — for investment. For Thiel, you put your money in companies whose ideas you believe in, and attempt to change the direction of the future by doing so. It’s impossible to do that by just dumping your money in a passively managed index fund and waiting for returns on investment that nearly perfectly track the market.
And of course, the vast majority of us aren’t, like Thiel, venture capitalists who have large sums of money to invest in changing the direction of the future.
Thiel is fond of noting how as it relates to technological breakthroughs, we are experiencing a “great stagnation.” There was tremendous economic progress — what Deidre McCloskey terms “the great enrichment“– coupled with dramatic scientific breakthroughs starting around the year 1800. Economic growth and scientific breakthroughs aren’t necessarily the same thing. Thiel argues that as it relates to the latter, we reached the peak in 1969 when we landed a man on the moon.
Of course information technology is excepted. In those non-IT areas (the world of “atoms” as opposed to the world of “bits” — transportation, construction, engineering, medicine, etc.) year by year we do get very slight gradual improvements (think air bags in cars). But no major breakthroughs. No Mr. Fusion Flying Cars as Back to the Future II promised us.
But IT is currently riding a wave that constitutes a continuous breakthrough. The name of that wave is Moore’s Law.
The main reason why we can’t “pick stocks” is that we can’t predict the future. If psychic future readings were a real phenomenon, why aren’t they all billionaires? They would be able to pick stocks. Likewise, think of how embarrassingly wrong the record of future predictions has been, from Hal Lindsey (who is going to die of old age before the rapture occurs) to Paul Ehrlich.
Except it seems on Moore’s Law grounds, we actually can predict future changes. AT & T did it in 1993.
I have no idea whether the “event horizon” Ray Kurzweil terms “The Singularity” will occur as Kurzweil describes it (where we achieve immortality by uploading ourselves into something like The Matrix). I do believe however, that everything Kurzweil predicts that will occur before that event, will occur on a similar timeline as he predicts.
So as it relates to investing, we can try to pick stocks that anticipate those changes which are predictable. There’s just one problem. That AT & T commercial got most things right; but it got one big thing wrong. It said that AT & T would be the company that would bring these things to us. But, by and large, they didn’t. Other entities did. In 1993, Apple or Microsoft would have been the stocks to pick and hold onto. (Though I think from 1993-2016, AT & T did “beat the market.”)
Think VCRs. Who could have predicted that VHS would put Beta out of business (I think Beta was the better product). Or as between MySpace and Facebook, who could have predicted? So even if one adopts the Moore’s Law investing strategy, you should still hedge your bets. Put 1/2 into Beta, half into VHS, 1/2 into MySpace, 1/2 into Facebook.
So the 85% could be the dollar cost averaged index funds (i.e., your 401ks and Roth IRAs). The other 15% is your play money. The Moore’s Law stock picking investing strategy would fall within the 15%.