After a pointless conversation with a JNJ board member who didn't know what an index fund was, it got me to thinking... How many people here prefer indexing to stock picking, and vice versa, and more importantly why?
I tend to prefer indexing in most cases, although I do buy individual stocks. My reasoning is simple:
1. Research has long shown that over time passive indexing almost always outperforms stock picking and actively managed funds, especially when fees, taxes, and commissions are taken into account.
2. The only reason to buy a stock is if you believe it's mispriced and will outperform the market going forward. In order to make a rational bet that this will happen, you must know something which isn't known to most other market participants and therefore not reflected in the current price.
To make the topic relevant to JNJ, in 2011 I believed JNJ was mispriced for various reasons. In 2013, I no longer see a mispricing. (I'm not predicting JNJ won't do well going forward!) Hence, I sold JNJ and moved the money into an index fund and 2 stocks which I believe are mispriced (VTI, Wells Fargo, and a very small position in Banco Santander, for the record).
Why the thumbs down? I'm just looking for honest opinions on investment strategy.
I probably should have left out the part about selling JNJ. People tend to get defensive when you tell them you sold their favorite stock. This wasn't meant to be an anti-JNJ post... It's one of the great American companies and I'm sure it'll do fine going forward.