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Do Stock Pickers Add Value?

By beled | June 5, 2014

 

Comments from David Leslie:

Leslie comments, ‘For years there has been a debate about whether or not stock picking adds value or whether index tracking ultimately delivers superior performance.

‘Let me take a step back and explain fully what a bespoke portfolio manager actually does, because it amounts to far more than just stock picking.  Yes, choosing quality shares is absolutely crucial, but it is more than just choosing the right stocks.  Companies that offer quality management, stable earnings and good growth prospects are easy enough to spot, but it is not enough to buy their shares regardless of price.  We always look for quality with an overlay of value.  So, if the herd is chasing a quality stock and pushing the price up, then we step back.  On the contrary, when a quality share is under-valued for one or another reason, that’s when we buy.

‘Secondly, we need real conviction before we buy or sell any stock.  We never make decisions on a whim or chase ‘quick wins’.  We rely on thorough fundamental analysis before making a decision.

‘Thirdly, we don’t take a short term view – ever.  Frequent buying and selling is costly and can undermine the stability of a portfolio.  After all, if you have conviction about buying a particular stock, then there should be no reason for this conviction to change in the short term (there may be exceptional circumstances, but this is rare).

‘It has been said that your portfolio manager removes you from the emotion of the market and this is a valuable insight.  It is easy to follow the herd and difficult to take a (well researched) contrarian view.  Emotion is dangerous when it comes to markets and that is one reason why individuals should leave critical investment decisions to experts who follow a robust investment strategy.

‘So does this answer the question of whether or not stock pickers can add value?  I believe that it does, since ‘stock picking’ – when done correctly – involves all of the elements above: choosing quality stocks, buying them when (and only when) they offer value, taking a long term view of the chosen stock and remaining calm in the face of market sentiment (particularly fear, which can result in panic selling).  Simply tracking an index cannot afford you the opportunity of specifically raising your exposure to a quality share when it is under-valued and leaves you at the mercy of the prevailing market sentiment.  And bear in mind that 100% of index tracker funds underperform their respective indices after fees!  Therefore I believe that stock pickers can certainly add value.  The trick is to have the right manager making the picks.’

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