Are you a seasoned investor? Or thinking about getting into investing? One of the first questions you must ask yourself is: should I pick the shares myself, or should I go for a tracker?
I admit, we at the Fool are a little biased….
Of course, you could say we at the Motley Fool are biased. Our share advice services, and most of our articles, are based around stockpicking.
After all, instead of buying the whole market, surely it’s better to choose the best performers among them? If you choose well, you should outperform the wider market.
On the other hand, buying a FTSE 100Â (INDEXFTSE: UKX) tracker is easier. Instead of thinking when you should buy or sell a stock, you invest in a tracker and patiently wait.
As the next global bull market gets underway, over time your investment will rise in value. There’s little thought that needs to go into it.
However, in this article I’ll argue that you should adopt a stockpicking approach, and avoid FTSE 100 trackers.
The reason is that we’ve seen profitability fall across a range of FTSE 100 companies. And at the end of the day it’s earnings, and nothing else, which determine the share price.
My view is that this fall in profitability isn’t cyclical but secular, and affects huge swathes of the stock market. And much of this can be attributed to the low-cost, deflationary, China-centric world that we live in.
We think stockpicking beats the FTSE 100 hands down
What are the biggest sectors in the FTSE 100? I can think of oil, gas and mining and banking. Then there’s retail and defence. Each of these sectors has, in recent years, been battered.
Over-investment in production capacity has meant tumbling oil, gas and mineral prices leading to crashing share prices in companies such as Rio Tinto and Royal Dutch Shell.
As for the banks, unless you’ve been hiding in a hole the past eight years you’ll know that banking profitability, and share prices, have been crunched during the Great Recession. Interest rates have fallen to 0.5%, and I believe they’re likely to stay near zero over the long term.
This means one of the main sources of these companies’ incomes has been demolished. And the reputational damage of the Credit Crunch has led to a never-ending stream of fines and litigation.
What about retail? Regular readers know supermarkets such as Tesco, Sainsbury and Morrisons have faced competition from all sides, with the growth of value rivals, premium retailers and online firms like Amazon. This has led to sliding earnings and share prices.
And defence? Contrary to popular opinion (and readers of Steven Pinker’s The Better Angels Of Our Nature will testify), the world arguably is becoming a safer place. Which is great news for the inhabitants of this planet, but not so good for BAE Systems and Rolls-Royce.
But there are also positives…. The arrival of China and India as major economic powers has hugely expanded the ranks of the world’s middle classes. These new consumers will snap up high quality branded products made by Reckitt Benckiser, Diageo, AstraZeneca, Prudential and Next.
Overall, with so many weak sectors, I expect the FTSE 100 to underperform over the next few years. Instead, choose your shares well and go where the profits will be, not where they once were.