Matt Koppenheffer at the Motley Fool recently took issue with me for a blog I wrote called "Ten Investing Facts You Probably Don't Know -- but Should".
Mr. Koppenheffer is a contributing writer to the Motley Fool. His biography touts his skills as a stock researcher and indicates that he is an "unabashed fan" of Warren Buffett.
Before taking shots at my statement that Buffett is a proponent of indexed based investing, and touting the screens he uses to pick stock winners, Mr. Koppenheffer pointedly notes that being an index fund adviser "seems like a bit of an oxymoron" to him.
Perhaps Mr. Koppenheffer's readers are able to put together a globally diversified, risk adjusted, portfolio of fifteen passively managed funds, in the right asset allocation, with a tilt towards small and value, consistent with the Fama-French three factor model, on their own. Personally, I have never met anyone who could do this without expert advice.
From there, it got worse. Mr. Koppenheffer correctly noted that the one article I referred to as support for Buffett's views on indexing stated that, on this occasion, he indicated indexing was the best way to invest for "...small investors who don't have time to research individual companies." Fair point.
However, as a self-styled fan of Buffett, surely Mr. Koppenheffer was aware that Buffett, at many other times, indicated his view that indexing was the best way to invest for all amateur and professional investors. Here is a fair representation of these views:
"A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money... I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform... and I could just go back and get on with my work."
With his misrepresentation of Buffett's real views in the minds of his readers, Mr. Koppenheffer offers them his stock picking advice. He likes to use screens, like valuation multiples, company performance metrics and others. He then provides a list of the stocks that some of his "favorite screens" have identified (or, as he put it "spits out.")
Why these screens would identify any mis-pricing of these stocks eludes me. All of these factors are known to millions of investors worldwide looking at the same data. It is incorporated into the price of these (and all other) stocks, making the current price a fair price. These specific stocks may increase or decrease in value, but it won't be due to the factors identified in Mr. Koppenheffer's screens. It will be based on tomorrow's news, which no one knows or can predict.
Mr. Koppenheffer dismisses proponents of indexing with some disdain, calling them non-investors who "...would rather watch a Dharma and Greg rerun, reorganize their closet, or go to the dentist."
Not exactly. They include William Bernstein, Merton Miller (a Nobel Laureate), Paul Samuelson (another Nobel Laureate), and Burton Malkiel, among many others. Indexing is also supported by hundreds of academic studies showing only about 5% of stock pickers beat their appropriate benchmark.
William Sharpe, still another Nobel Laureate, spelled out the reasons for the failure of active management (which is premised on stock picking) in this short article entitled "The Arithmetic of Active Management". I urge you to read it. It is simply stated, easy-to-understand and irrefutable.
Mr. Koppenheffer cites no data supporting his stock picking advice, which is not surprising. He also provides no data from which his readers can hold him accountable for his prior stock picks.
The thrill of the chase is exciting. Mr. Koppenheffer and many other members of the financial media see no problem in dispensing advice that generates profits for them (by increasing viewers which boosts revenues) even though those who follow this advice are likely to be harmed by it.
This is not just "foolish". It's irresponsible.
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