I’d tell this “expert” who emailed me today to just go buy some index funds and go home

Here are a couple trader-psychology thoughts to help keep you in the right frame of mind today.  First, I just got this pitch from some pundit who didn’t bother to find out that I quit TV so his entire pitch was wasted on me anyway:

The environment is prompting traders and investors to play direction moves at the sector level instead at the individual security level. Stock picking becomes very difficult work, giving more traction to ETF’s. Because of the uncertainties at the global macro level on account of the major systemic concerns, a significant portion of long-term investors are underinvested. We are still in a binary environment and the exit of the current range will be brutal, whether on the upside or downside:

• If the European regain the favors of investors, and offer an appropriate definitive solution, then we will have our year end rally. This will end ‘only’ the systemic risk, but that is mandatory at this point.

• If the European do not manage to work together and offer real guarantees to prevent contagion, then it is game over and chaos ensues.

I’m not going to criticize his “binary” outcome conclusion although the “If the latest banking crisis is temporarily solved, we rally” and “If we don’t bail out the banks who thought that a 3% return on that investment was reasonable on the money they were lending to corrupt and bankrupt governments in Europe” is rather too obvious and simple-minded and somehow I think the market might be a little more tricky than that.

Rather, I’m going to criticize the very distracting and meaningless comment of “The environment is prompting traders and investors to play direction moves at the sector level instead at the individual security level. Stock picking becomes very difficult work, giving more traction to ETF’s.”

It seems to me that if most investors and traders are leaving “individual stock picking” for mindless ETF trading that such a circumstance is a dream-come-true for stock pickers. I’d much rather compete against fewer guys willing to do the homework on finding, investing in and trading individual stocks.  So let them work “sector” themes while you and I go out and find the very best, cheapest, safest, fastest-growing individual stocks within those “sectors”.

And that leads me to the second point — Remember when I wrote this:

One of my mentors used to say that traders who use exchange-traded funds are lazy. Because when you’ve done the “top down” analysis — looking at a sector and how it fits into the economy — then you’ve got your starting point. After that, you need to dig into the actual companies in that industry, doing “bottom up” analysis — looking at a company’s specific fundamentals and positioning.

The only way to truly outperform the markets over the long-run is truly find great individual stocks and trades.  That’s what separates the winners from the losers over time. Why bother managing money, even your own, if you’re just going to trade indexes and hope you somehow time things better consistently for the next few decades?  This is a tough business — and I’d tell this “expert” who emailed me today to just go buy some index funds and go home.