“Just buy the index.” “It is cheap and gives you access to the whole stock market.” “You’ll outperform in the long run.” Statements like these seem to be commonplace in our financial media.
Blindly buying a collection of stocks is widely believed to be a much better approach than more fundamental investing. Recent stock market performance seems to support the case for indexing. But is there more to investing than blindly picking an index? Let’s look at a case study for both stocks and bonds.
Buying a company simple because it is part of an index doesn’t make any sense to me. When you buy a stock, you are essentially buying their profits and losses. Before I bought a business, I would want to know:
How much money does it make?
What are the prospects for future profits?
What do its customers think?
What about competitors?
How about government regulations?
Buying a company without considering these variables seems reckless to me. For a case in point, consider Tesla. Most of us are familiar with the care, but is the company a good investment? As many of you know, I do not have opinions on individual stocks and leave that decision to the mutual funds managers I work with, but let’s take a deeper dive into Tesla.
The company is burning through cash as it attempts to position itself as the leader in electric, and ultimately, self-driving cares. Elon Musk recently raised $2.7 billion in company stock after saying he didn’t need to raise capital. Recently he tweeted that the $2.7 billion will last just 10 months. The stock is down 41% this year, making it the worst performer on the NASDAQ 100 list. One analyst recently wrote that in a worst-case scenario the stock, which closed at $190.63 on Friday (5/26/2019, could trade for $10 a share. It was just about a year ago that Elon famously tweeted, “funding secured at $420 a share.” Sometimes it pays to kick the tires.
How about Bonds? According to Barron’s, the “quoted value of negative yielding debt the world over hit $10.6 trillion the other day… (5/27/19)” In other words, somebody is buying bonds that give then a guaranteed negative return. Who would lend $100,000, ask for no interest, and settle for getting $99,500 back in 10 years? Who is buying this stuff?
According to the same Barron’s article, it’s index investors. “…anybody who owns a passive mutual fund tied to the Global Agg. Or anyone who might now own a passive ETF tied to a global bond index. Or anyone who owns a popular target-date fund that has passive exposure to global bond indexes. In other words, millions of Americans.”
I simply believe you have to know what you own and why you own it. Investing blindly is not smart and may get you invested in a car company that is a losing a lot of money, or lending money to the Swiss government at -0.50%. Common-sense long-term investing may not get you rich, but it should help you earn a reasonable rate of return over time.