THE BLOG

Twilight for Stock Pickers?

08/16/2012 01:31 pm ET | Updated Oct 16, 2012

An obituary of sorts for day trading and stock picking was published last week, though few noticed it. It came courtesy of Groupon, which offered up, not the usual discounts for manicures, restaurants or skydiving classes, but a jaw dropping deal on a four-day class given by Chicago's Bulls on Wall Street. The regular $1,500 list price was dropped by an astonishing 96 percent to $49.

As it turns out, this is not the first day trading concern to offer up classes via the social couponing discount site. Lex Van Dam Trading Academy offered a 95 percent discount earlier this year. So too did a Chicago-area branch of Online Trading Academy, which managed to get away with a mere 71 percent price cut.

Of course, you could say these offerings are loss leaders, a way of getting potential customers in the door so that they can be sold on other classes, other types of trading, not to mention the potential profit in getting these would-be masters of the universe to use the school's proprietary trading systems.

Nonetheless, no one is giving out discounts like this unless they have to.

The news of trouble in day trading shouldn't come as a surprise. The evidence suggests that many of us are eschewing individual stock picking in droves, with the Investment Company Institute, the lobbying arm of the mutual fund industry, releasing figures weeks in and week out that show people are pulling money out of equity based mutual funds.

Yet there is one arena bucking the general trend: index funds.

According to figures released last week by Morningstar, even as investors have taken almost $50 billion out of the stock market in 2012, money continues to pour into passively managed funds, with total gains of more than $40 billion year-to-date.

Call it a triumph of common sense.

Even in the days before high frequency trading, individual stock picking was oversold as a way of making money. Study after study shows that the vast majority of us -- whether working at a computer in our pajamas or running a multi-billion dollar mutual fund -- are absolutely incapable of beating the market. What miniscule gains we can make, are almost always eaten up by the transaction costs that come with an actively managed portfolio.

As far as the average ordinary investor is concerned, nothing matters more to their long-term prospects than the expense ratio of their investments. Make no mistake, those numbers are high when it comes to stock picking, 0.93 percent high for an actively managed equity index fund, versus 0.13 percent for indexed mutual fund, according to the Investment Company Institute. If actively managed funds and index funds were running a race in the Olympics, the former would start almost a second behind.

The fact is the stock market wasn't designed to have retail investors compete with computers, not to mention the legions of hedge funders and investment bankers (or your local member of Congress) who are able to profit by everything from devoting intense amounts of effort to parsing particular sectors of the market and individual companies to gaining access to relevant information before it is released to the general public. As we all now know, ordinary investors were encouraged to invest in the Facebook initial public offering even as more privileged entities were were tipped off to potential earnings trouble.

And even, if by some magic, we could somehow manage to trump all these advantages of the professional investor, the discipline of behavioral finance says the vast majority of us will still not manage to invest effectively. Even when presented with the facts, we often make wrong decisions, buying into the stock market when things are going up, selling on downward winds. We are, despite what we think, the opposite of disciplined.

This is why more and more advisers and investors are admitting that automatic investing into a properly diversified selection of index funds is the best strategy to help us achieve our long-term goals, ranging from buying a home to saving for retirement. It's not glamorous, but as the founder and CEO of Betterment, a company that encourages long-term investing via indexed exchange traded funds, I can safely say you'll never see us offering up our services via a 90 percent plus discount via Groupon or other social networking site either.