Is Stock-Picking Dead?
By Alex Dumortier, CFA March 20, 2010
Last month, I attended an investment conference in New York that brought together some of the luminaries of the value investing world, including Marty Whitman, the founder of Third Avenue Management and one of the deans of the business and William Browne of Tweedy Browne -- the company that used to execute trades for Ben Graham and Warren Buffett. As I listened to the panels of elite stockpickers, I was left with an unsettling question: As companies and governments continue to juggle with the aftermath of the greatest financial crisis since the Great Depression, is stock-picking dead?
Top-down or bottom-up?
Specifically, I was thinking about the investment implications of the sovereign debt burden of advanced economies. Under ordinary circumstances, the risks associated with government debt are not something value that investors spend any time thinking about -- but these are anything but ordinary times, and investors need to think about them.
Apparently, my concern wasn't academic. John Botham, the European equity head at Aviva Investors told the Financial Times at the beginning of this month that bottom-up stock pickers have been caught flat-footed as top-down, macroeconomic factors continue to drive stock returns this year.
Stock picking still matters, and significantly so
However, as I began to give the matter more thought, including an examination of specific data, it became clear to me that stock picking still matters and, in fact, it matters quite a bit more now than it did during the worst of last year's market downturn. Here's why.
What happened since March 2009
Since the March 9 market low in 2009, the spread in individual stock valuations has widened substantially across nearly all sectors, with energy, materials, health care, and telecoms experiencing the largest expansion. more...
