There Is No Such Thing As A Stock Picker’s Market

The next time you hear someone use the phrase “a stock picker’s market” it’s a signal that the next few minutes of your life are going to be a giant waste of time. Why? Because there’s no such thing as a stock picker’s market.

What Is A Stock Picker’s Market?

The term is used quite a bit by analysts, fund managers, journalists and others. It refers to market conditions where active managers should be able to more easily beat the market. Generally speaking, these market conditions are bear markets or sideways markets. There seems to be a bit of a concession from the active community that indexing looks great in strong bull markets, but looks less attractive in down markets where supposedly, an active manager should be able to identify the few good investment opportunities from within the overall market, hence the term “stock picker”. Their argument may be that while they concede to having difficulty with keeping up to the market in good times, they add value by protecting during the bad times and overall this leads to better returns. (It doesn’t.)

Actually, That’s Not The True Meaning Of A Stock Picker’s Market

I’m sorry for throwing this tangent at you, it should probably be a separate post on its own, but I might as well throw it in since we are on the subject. The previous paragraph is the understanding of the definition of a stock picker’s market for probably 90% of the times you’ll see it referenced. You could skip the rest of this section and continue on with this article and be fine because it relates to the mainstream use of the term.

For those who are interested in precision and suffer from a mild case of perfectionism, that is not what I consider to be the TRUE definition of a stock picker’s market. A true stock picker’s market is when the dispersion in returns of stocks within a given GICS sector is abnormally wide. This means that if you were only looking at the financial sector and the returns of the big banks ranged from -20% to +60% for the past year, depending on which bank you were looking at, this would be indicative of a larger amount of dispersion of returns. Conversely, if the returns of those big banks were all pretty close to +10% for a given year this would be indicative of a narrow amount of dispersion of returns. The former would be a stock picker’s market, the latter would be a market when sector exposure (and specifically, which sectors you were exposed to) would be more important than which individual stocks you owned.

Okay, So Why Is There No Such Thing As A Traditional Stock Picker’s Market?

  1. Whether the market return is positive or negative, there will be individual stocks that do better than the average return. Therefore, it should always be a “stock picker’s market”, and therefore this shouldn’t be a phrase at all because it wouldn’t mean anything.
  2. From 1825-2008, approximately 70% of all calendar years were positive and 30% were negative. Using the phrase “a stock picker’s market” suggests that 70% of the time, your fund manager is useless and you would be better off indexing.
  3. Ironically, you normally hear the phrase being used by active management companies as part of their marketing efforts. Do you want to give your hard earned money to a company who, probably unbeknownst to themselves, have just suggested they aren’t worth using 70% of the time?

It’s possible that I’m the one who is out to lunch. Hey, it happens. If someone can enlighten me, I’m all ears and willing to correct my thinking. The floor is yours….

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 3 comments
  • Michael James

    I always thought the phrase “stock picker's market” referred to a sideways market where prices are neither rising nor falling. In these conditions, broad indexing will obviously make nothing. The only way to make money is active management, hence a stock-picker's market. Of course the logic is hopelessly flawed because the only way to lose money is also to try to pick winners and incur extra costs. Losing money is what will happen to most stock pickers in a so-called stock picker's market.

  • Brian

    Sound advice Preet. This is the kind of information that is rarely seen or heard on TV mostly likely because of point #3.

  • jamespelmore

    Hi Preet, I agree, it is always a stock pickers market. Any equity manager that generated returns better than the benchmark they are investing in, consistently, over varying periods of time, likely did so by stock picking. I concur with the general statements in your post. I'm an alpha beta investor who loves paying for alpha when I can find it. J