It used to be a lonely endeavour when I was advocating ETF investing more than 10 years ago. Today, the awareness has been a lot higher and in fact, there are plenty of ETF advocates and their voices are beginning to sound like a broken record.
I tend to play the counterweight to any dominant thought of the day. So I would like to sing the opposite tune to ETFs for once.
Most of the ETF advocates sounded like these,
“Most professionals cannot beat the markets, what makes you think you can? If you can’t beat the market, buy the market!”
“Fees can compound over time and erode your returns. Choose low-cost ETFs.”
“Warren Buffett has left instructions to invest 90% of his estate into S&P 500 index funds and 10% in government bonds. He’s the most well-known stock picker and he is saying ETFs are the best bet after his death!”
I agree with most of what the advocates say otherwise I wouldn’t have championed for ETFs in the early days.
But I am also afraid that the ETF voice is so loud that investors stopped to think and challenge the dominant thought, and began to believe that ETFs are the only way to invest.
Here’s a short story to why a groupthink can be formed and we eventually give up challenging it.
Imagine a cage with five monkeys.
Once in a while, a banana is lowered from the top of the cage.
The monkeys could see it, smell it. They desire it. They also eye it suspiciously.
In no time, the bravest (or greediest) monkey would take a step towards it and reach out for it. All the other monkeys watch with keen interest.
The very moment greedy monkey lays his hands on the banana, the other four monkeys would be doused in cold water. All four of them.
No one likes cold water. Monkeys included. Greedy monkey now becomes public enemy #1.
After a while, another banana is lowered. This time round, before greedy monkey could even make a move on it, the other four monkeys surround him and block his progress. The banana hangs there untouched.
Now imagine swapping away greedy monkey and introducing innocent monkey in his place.
He comes into the cage, sees the banana hanging there and everyone eyeing him suspiciously. He conforms, by leaving the banana hanging.
Slowly we repeat the process, replacing monkeys one by one.
The new monkeys come in naturally puzzled – why is no one interested in the banana? They ask, in monkeyspeak, and all they get are hostile stare downs. If one is brave enough to make an attempt on the banana, he gets taken down in no time by the others.
In no time, all the original monkeys are replaced. None of the current monkeys know for sure the reason behind the hanging banana.
When asked, they shrug and say – this is how we do things around here.
ETF advocates sound like the four monkeys now. Anyone who attempts to invest differently get discouragements and stares. I don’t think that is healthy.
Just like in the case of entrepreneurship – most would discourage anyone to attempt it. The dominant thought about entrepreneurship in our culture sounded like these,
“Study hard and get a good job.”
“Most businesses fail. Don’t do it.”
“You know that uncle so and so? He poured his life’s savings into his business and failed. Now he’s still paying off his debts. You don’t want to end up like him.”
It is true that most shouldn’t attempt entrepreneurship because of a lack of risk tolerance, stress management ability or even skillsets. But it doesn’t mean we should pass such advice to everyone we meet – even on the bravest and greediest monkey. It is almost like a judgment we make on someone’s ability, a subtler version of ‘I don’t think you can make it’. We have no right to do so.
Perhaps this is one of the key reasons why entrepreneurship isn’t very popular in Singapore. And it is so hard to foster that spirit when you have the dominant culture of discouraging it. For every voice you make to encourage entrepreneurship, you have ten voices to douse and bury it.
If one does not want to be an entrepreneur and prefers to invest to become rich, I believe he can build massive wealth by concentrating his investments in a handful of high conviction stocks. Again, the dominant thought was Markowitz’s Modern Portfolio Theory which emphasised on minimising risk through diversification. The shadow thought of Kelly Criterion was largely forgotten and only practiced by a some successful investors such as Warren Buffett and George Soros. Naysayers will argue that there were a lot more unknown losers who have made concentrated bets in their investments. True that. Likewise for failed entrepreneurs. Does it mean we should discourage totally? I disagree. We should let individuals decide what they want to do with their lives and money.
I hold the belief that having too many ETF investors would actually create more pronounced booms and busts, and it doesn’t help investors make more money because the human greed and fear have not been eradicated regardless of the advancement in financial products or technology.
ETFs track indices and invest in the same stocks over and over again. There will be some momentum effect whereby investors would plow more money into the ETFs (greed) after see a particular index doing well. More money chasing the same stocks would cause the index to rise even higher. The reverse is true. A huge drop in the index could beget more selling in the ETFs (fear) and leads to dumping of the same index stocks. This is why I believe too much dollars in ETFs would eventually make sharper booms and busts because humans’ greed and fear get manifested in a small group of index stocks.
Hence, we cannot afford to have everybody to become job seekers and ETF investors. We need some individuals to take risks. The diversity is what makes our society strong and helps it progress. I wish for a more balanced voice and a more tolerant society, not just in the topics of investments and entrepreneurship, but also in many other areas of our lives.
So telling people to do stock picking is like telling them don’t study too hard but to get real world practical experience from young & be entrepreneurs / businessman. 🙂
Right off the bat I’d say why not have both etfs & individual stocks? Hell, throw in gold, cash, treasuries, junk bonds, properties, cryptos & options into the mix. And have them on different industries & countries.
Not sure why nowadays people are fixated on all or nothing, or binary option. Diversification and having tilts or nuances seems passe & even those who talk about diversification have bastardise it to mean stock picking of 20 stocks instead of stock picking into 1 stock. ????
If there are other successful intergalactic civilisations, I’d diversify there too.
Even halfway in between is considered diversified. It depends on your goal. If you want to minimise risk then diversify. If you want to grow wealth fastest then you have to focus and be damn good in one area. Nothing wrong with diversification. But we ultimately need some people to sacrifice for risk taking to move our society forward.
True. However today’s entrepreneurs don’t throw in everything & putting themselves and loved ones at risk if they fail. They have backups, hidden stashes, a few Plan B’s, a few escape routes etc. In other words, they are diversified. But no entrepreneur wants to talk about this, certainly not in front of investors or even media writeups — it gives the impression that they are half-hearted, not committed, uncertain. LOL!
Haha. Stock picking is for those who are really talented. I still think for average Joe like me, ETFs investing is a way to go. Can you get rich by picking individual stocks?Of course you can but maybe 20-30 percent of the time if you are the talented one.Can you get rich by investing the correct ETFs? Yes, you can and most probably 90% of the time if you buy and hold.
I am not disputing the higher probability of success for index investing vs stock picking. Just like getting a job is more suitable for most people rather than starting a business. What I mean is dont go around and dish advice and discourage those who want to pursue the lower probability ventures.