“Buy the Haystack” So You Don’t Miss the Next $NVDA

Picking a winning stock is similar to finding a needle in a haystack. Why try to find the needle if you can just buy the whole haystack through index funds!

Ben Felix and Dave cover this topic and all things investing in our latest podcast episode. Available now on all platforms!

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You mentioned something earlier though, that I don’t think it’s nearly enoughattention and that’s the skewness of returns. So when you hear all of the experts out there saying, and I think wisely, so people should be using index funds as their core holdings and maybe even as their exclusive holdings for their equity exposure, they almost always talk about the fees.

Or they talk about how difficult it is to pick the professional money manager. But one of the reasons it’s so difficult to outperform is that the outperformance or the strong performance of the index is usually made up of very few stocks doing exceptionally well and pulling the numbers up and finding those needle in a haystack to use an off use expression is extremely difficult by the haystack.

And I think that’s the best way to get reasonably good performance over the years, own everything, and then you’re going to have NVIDIA and you’re going to have those stocks that go in those great runs and you’re going to hold them the entirety of that run. Now, sooner or later, they’ll regress to the mean and have their difficult times, but then others will be having their role and that’s how the index keeps going, because.

But I don’t think a lot of people understand that. In fact, most people think that stocks move in tandem and that they kind of all average the same return. And of course, that’s not the case at all. In fact, in many years when the markets have been strong, more stocks have gone down than have gone up.

Yeah. Yeah. The skewness and returns is extreme and we, we, we had really good data on that starting in, I think it was 2018 that Hendrik Bessembinder came out with his first paper on this. He’s done two papers on it now, one on US stocks, one on, on global stocks. but yeah, I mean, if you miss those best performers, uh, you’re, you’re not going to beat the market and most actively managed funds.

I don’t remember the specific number. It’s in uh, one of Besson binders paper. but on average, actively managed funds hold relatively few stocks. I, I wish I had the number in my head, but it’s whatever, call it 30 stocks or something like that. Um, and just because of that, you know, there are thousands of stocks in the market.

If you just hold a small subset of them, you’re, you’re, there’s a really good chance you’re going to miss those top performers and there’s a really good chance you’re going to underperform the market even before fees, keeping in mind that, that fees are. shifting the whole distribution, uh, a little bit more negative.

So yeah, it’s really, those two factors, costs and skewness are really death blows to active management. In my opinion

They are. I’ve actually started talking about the skewness issue more and more on stage because again, I just think it gets very little attention compared to the other points we’ve brought up.