At this point the superiority of passive investing has been beaten into investors’ skulls so aggressively that it’s almost an oxymoron. For those who have yet to be slapped in the face with the concept: Investors who buy well-diversified index funds and leave them alone tend to make more money than those who actively trade their portfolios.**
The problem for those who actually seek to find value hiding in the stock market is two fold. First, doing so is hypothetically impossible. Second the stock market has nearly tripled in the last five years. If there was such a thing as an undervalued market it seems unlikely to exist now.
Enter Guy Spier, author of The Education of a Value Investor and Warren Buffett disciple. In the attached clip Spier says there are still good buys hiding in plain site for those willing to do some work.
Spier explains that the legacy of Great Recession isn’t just slow-growth employment and endless fiscal stimulus. Investors are also struggling to trust the market again after the crunching decline of 2008 and 2009. As a result, demand for stocks is still being rebuilt despite rising prices.
“The human memory for crisis lasts as long as 17 years. Even though it’s five years away the financial crisis is still strong in many people’s minds. There’s an Arabic expression: You get bitten by a snake once then you run away from every coil of rope you ever see.” In Spier’s view there are more people afraid of getting bitten than most of us can imagine.
Ultimately it comes down to a lack of alternatives. Bonds are offering “return free risk,” cash loses to inflation and commodity hedges have only been protecting people from gains over the last several years.
As for specific investments, Spier offers a hearty (and entirely unprovoked) endorsement of this program’s sponsor, Bank of America (BAC) and other money center banks. It’s a simple matter of profiting from the unfairness of the Fed’s stimulus programs. In a world where it’s still hard for many individuals to get loans Bank of America, Citigroup (C) and other big financials are rolling in liquidity. If you give smart people access to capital for next to nothing they tend to make profits. The fact that bank stocks have largely underperformed the broader market makes them all the more attractive.
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**The fact that passive investing doesn’t technically exist is just an uncomfortable wrinkle. The debate is over passive vs. active investing and active investing lost.
