Is stock picking dead?
In an environment where publicly traded stocks are increasingly correlated and similarly affected by macro factors (increase in interest rates / inflation, geopolitical risks, etc.) and given the abysmal performance of supposedly "sophisticated" public markets investors (Tiger being the best example), do you think that traditional stock picking is still relevant in today's new market environment, or will it become much less widespread the same way merger arbitrage went out of fashion?
I would very much like to believe that long-term public market investing has a future, but it now becomes increasingly apparent that the insane bull-market of the last 10 years was just the result of a massive increase in the money supply and that the only players likely to survive in a more volatile environment are not investors, but traders like MMs who are market neutral.
What do you think?
Pointing at "sophisticated" funds like Tiger and asking is stock picking dead is like pointing at an alcoholic who has been knowingly, openly imbibing on hard liquor for years and now is suffering a quite bit and asking if the beverage industry is dead
Are there any directional, fundamental investors doing well in public equities this year? Apart from literally just Impala.
A fund’s performance in any individual year should not be a testament to the viability of stock picking as a whole.
These questions have been asked a million times ever since the 1960s (Efficient Market Hypothesis) but we’ve seen AUM vastly increase in active funds.
The inflows and outflows of capital into funds itself is a market, which will have ups and downs. In a recessionary period (even one bad year), asset allocators (several of which are funded by retail households and pensions) will pull some of their capital out of equity funds in exchange for safer investments like cash/t-bills. This action has an impact on the funds themselves as they are coerced to sell off their own holdings or if enough capital is withdrawn, close shop.
The attention-seeking headlines will love to say “stock picking is dead” because of this news when in reality it is more of a matter of a market correction than extinction.
There’s no question it’s hard to beat the market. Any fund that has continued to asset gather and balloon it’s AUM is destined pop (no different than bubbles in the stock market). One bad year is all it takes for this to happen. I like to think of it as natural selection, not extinction.
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I’m at an SM and I would argue that traditional long term fundamental stock picking has become extremely challenging in the last decade. I think the MM model is a more robust way to make PnL but the construct is very strict and job security is not there. I also don’t think merger arb is dead at all. I know loads of people in the space and are doing great. Sometimes they blow up when a deal breaks but most of the time they’re doing fine and there is a very defined way you can make money there.
I didn’t even read your post because this question has been repeatedly asked on this site and the broader financial media for legitimately the past 20 years. Every time there is a market down turn people shit themselves and think the entire asset management industry is dead. It’s comical
If the market only had passive investors what you would have would be constant bubbles of overvaluation followed by a collapses. Companies with bad financials or those who are propping up their stock could constantly raise capital and burn it through selling shares through index funds. Active investors act as a price discovery mechanism that helps the passive investor.
For example, if it were not for activist short sellers researching and shorting Nikola, would it have just kept ballooning in market cap like every other promotional stock these past two years?
I love it. When every ARK shitco doubled annually, stockpicking worked, fundamentals mattered and things made sense.
But now that they stopped going up, "stock picking is dead"?
Drop the BS please.
Come back when you beat the S&P500, thx.
You're the one whining the market is not fair, bro. Good luck out there, people like you are going to need it.
No one else needs to comment because you demonstrate here that you fail to understand the role hedge funds play in a portfolio.
For a hedge fund to regularly beat the s&p (especially through bull markets) they’d have to be taking so much risk (either idiosyncratic or via leverage) or be all beta.
I think the distinction needs to be made clear. I think stock picking within the SM framework of a concentrated, ‘long term’, ‘fundamental’ framework is pretty dead. The MM model of trading intrasector pairs while being hedged (as much as they can within the rules), is obviously flourishing. Just need to look at the MM’s with a high long/short mix and their returns. Citadel is an obvious example.
I think active and passive investing is a balance, there is a need for active investing to control market behaviour
Stock picking was dead in last decade, but is going to come back in the next decade as interest rates move up.
I definitely wouldn’t say it was dead last decade. But given the elongated bull market, a lot of money was made passively.
wirh rates moving higher, volatility has to increase as will dispersion (of individual Stocks, of asset classes and of funds).
Stock picking has always been a fools errand in large caps IMO.Like don't come and tell me you have better insight on Apple's valuation then the 5000 analysts that follow it. All large caps have millions of businesses within them as well, so the return on time spent analyzing is overall crap. You're better off trading on technical analysis lol.
Moreover, the movements in these stocks is largely going to be driven by flows and overall market sentiment. Apple stock is almost like an asset class. Us large cap tech is an asset class. Chinese tech as well.However, where you have an edge is the small-mid cap space. Some stocks are doing better than others for good reasons,even in the tech space.
So no, stock picking is not dead, and if you're doing terribly its because your shit, all beta, that's it. Or you are in the large cap space and playing an unwinnable game.
To be honest, drawdowns are normal, especially if you have been riding the tech boom. That's what you have to pay for outperformance. But having stocks going down 90+% after you bought their ipo at >30x sales does make you the VCs and Banker's b***h wich is unacceptable.
Playbook: buy something at 80x sales, and then blame the bond market when sht hits the fan.
I think several wise apes have made their opinions known here, including some pretty colourful ones. I will keep it simple and to the basics - what is your edge?
Look at Mauboussin's work and figure out where you can stand with Behavioral, Analytical, Informational, or Structural edges. Most of the issues you pointed out are with people who had a certain structural/analytical edge. And whenever that happens, people will be more than happy to dismiss active management (yours truly has also been in that band of people.)
Active investors are compensated for pounding public/private information into security prices. Some securities are and will remain too complicated for the common narrative to catch up to. Hence, it is more a matter of edge and how scalable that edge is, and not the death of active management.
In fact - there is some case to be made that with the looming recession, there might be some space for more mispriced securities. Each extreme brings inefficiencies. You just have to be looking early enough at an opportunity that is not yet crowded enough.
And, stop extrapolating insights that colour the market in a certain way based on the performance of certain managers, strategies, or even investment styles. Active, passive, and quants - the concentration of capital and performance will keep shifting but I do not see any of the three completely going away. At a portfolio level - for the average Joe and for the Joe HPWS running the endowment fund - certain types of returns are necessary and hence will lead to demand for that type of return coming from that type of strategy. Some strategies will always be too small to be automated, too chaotic to be passively invested, or too observed to have any inefficiencies.
P.S. If you, by any chance, were talking in the context of Equity Research as a career - well, that would be a completely different conversation.
As always - feel free to dismiss everything I said here. Cheers.
The OP can pretty much take that thesis and apply it to almost any point in history. A tired but true reality is that everyone thinks their period of time is unique. Its not.
Simply put stock picking is not dead, is it evolving sure, but its not dead. Investors (not traders) think through cycle, can't look at short term markets dynamics and claim the sky is falling.
Stock picking isn’t dead just because market beta is down. The whole point of stock picking is in the alpha space. Making money taking nets in the market isn’t stock picking. That’s monetizing market timing and portfolio leans.
If you pick the next Amazon or the next Google, I guarantee you will make more money than S&P.
I know half the readers are probably first year bankers and college students, but it’s important to distinguish alpha from beta and distinguish sharpe and uncorrelated returns from absolute returns.
*at the right price
If you “stock picked” Amazon with a differentiated thesis 10-15 years ago, whether s&p was trading at 14x or 20x didn’t matter. 100 baggers are 100 baggers and much of that was numbers revision and a fundamental change in the business trajectory over the decade relative to buyside.
But agree with your statement - alpha curve is real and “the right price” is usually a function of both market environment and fundamental differentiation. I was speaking more toward the latter vector!
I've been at several hedge funds - known large single managers and now a known multi-manager - and I've yet to see anyone generating sustained alpha doing generic fundamental stock analysis on liquid names. Most of the sustained PnL is coming from people getting a real edge through sophisticated quantitative analysis/signals, earning carry on high-yielding illiquid assets, or special situations / distressed where there's a real value-add process to unlock value. Maybe the closest thing that I've seen reliably work is some of the arb strats where there's deeper market technicals at play than just 10Ks and earnings calls. Just my 2 cents, noting that I don't work in the equity space. So feel free to dismiss me as uninformed but track records don't lie.
We can agree to disagree, but I’ve worked at a known MM for almost a decade and happen to know several analysts that generated alpha year after year for 5+ years. Probabilistically should not be possible if alpha is a coin flip.
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