Picking single stocks is (almost certainly) not the answer

As an old guy in this business, it is pretty astounding where we are. That I can trade stocks essentially 24 hours a day, and any stock I want, all over the world, and in Australian dollars, is pretty amazing. And as amazing as that might be, the thing that I think has made the most tangible difference to investors, broadly, is the advent of the exchange traded fund (ETF).

To be able to express a view, in a diversified way, with low fees, with a single trade, that is cheap to make, should be a boon to Australian investors who want to build quality global portfolios for long term growth.

It should be.

The truth is that for as much as the idea of ETFs has become quite common place in the Australian financial landscape, there really aren’t very many ETFs available. If you’re in the US, you have almost 2000 ETFs available to you that range from very large passive index funds that track your favourite stock market index (the S&P 500 being the most popular), right through to single-stock ETFs that are designed to get around lower-end retail investors not having enough capital to deploy to (prudently) buy even one share of very expensive stocks. And then everything in between. You can get access to every single one of the 11 S&P 500 sectors in their own ETF. And now, you can even buy Bitcoin using an ETF.

Contrast in Australia where there are only 307 ETFs on the ASX and they’re quite limited in scope given so many of them double-up on the same idea but hedge out the Aussie dollar. For example, I can buy the Nasdaq using NDQ, or I can buy the same thing hedged for the Aussie dollar, HNDQ. Or the S&P 500 through IVV, and then hedged using IHVV. That’s only 2 ideas but 4 ETFs.

What are the ramifications of that? It is two-fold. It is a much higher focus on managed funds, and a much higher focus on single-stock ideas. The focus on managed funds deserves its own wire, so I commit to writing that at some point, but for now, I want to focus on the other consequence – single-stock ideas.

The siren song of the single stock is the chance for the ever-elusive 10-bagger. I get it. Even though getting the average year-after-year will most likely achieve all of your financial goals – time in the market beats timing the market - the lure of a massive win is hard to walk away from. That’s why Australian investors love single stocks and it’s part of the reason Australia has one of the most developed gambling industries on the planet. We love a punt, and we love a win!! Interesting though, big wins happen much more rarely than you might imagine, especially amongst stocks that people actually hold.

By that I mean, there are lots of 100%, and 200%, and even 300% wins every year on the ASX but the reality is that hardly anyone holds them. 

Even if someone does hold them, there’s a good chance they hold 5 others that went to zero. In fact, the only $1B+ market cap big gainer that came up when I did the scan was Nick Scali (NCK), which was up 29.07%. Looking at the most traded single stocks YTD 2024, these are their 1-year performance numbers:

• Pilbara Minerals (PLS) -30.08%
• Commonwealth Bank (CBA) +3.52%
• BHP Group (BHP) -5.04%
• Woodside (WDS) -10.69%
• Westpac (WBC) +1.26%
• Domino’s Pizza (DMP) -42.73%
• Liontown Resources (LTR) -40.00%
• ANZ Bank (ANZ) +6.33%
• National Australia Bank (NAB) +1.29%
• Fortescue Metals Group (FMG) +27.60%
• CSL Limited (CSL) -3.52%
• Zip Co (ZIP) +19.32% (up big in the two days before I published!!)
• Telstra (TLS) -2.66%

Including NCK, the average stock price change over the last year is -3.31%. That's right, you lost money. For perspective, the ASX is up 0.48%, the S&P 500 is up 24.89%, the Nasdaq 100 is up 53.75%, and the MSCI ACWI is up 22.20%. Even the equal weight ASX is up 0.60%!!

So to the extent these ASX stocks represent high volume stocks, the best I can tell, investors are likely getting KILLED on single stocks in the ASX. But maybe that’s not fair so instead, let’s assume that the 10 biggest ASX stocks are most widely held and that works also from the perspective that most of them are pretty big dividend payers too. This should be accurate, right? OK, let’s check.

• BHP Group (BHP) -5.04%
• Commonwealth Bank (CBA) +3.52%
• CSL Limited (CSL) -3.52%
• National Australia Bank (NAB) +1.29%
• Fortescue Metals Group (FMG) +27.60%
• Westpac (WBC) +1.26%
• ANZ Bank (ANZ) +6.33%
• Macquarie Group (MQG) -0.22%
• Wesfarmers (WES) +14.90%
• Woodside (WDS) -10.69%

The average stock price change for that list over the last year is 3.54%. To reiterate, the ASX is up 0.48%, the S&P 500 is up 24.89%, the Nasdaq 100 is up 53.75%, and the MSCI ACWI is up 22.20%.

Let’s say that I own the combination of these stocks – the most traded as well as the rest of the top 10 not in the most traded – that’s the best of both worlds, right? Not really, I end up with -1.98% over the last 12 months. You lost money again.

Remember, the ASX is up 0.48%, the S&P 500 is up 24.89%, the Nasdaq 100 is up 53.75%, and the MSCI ACWI is up 22.20%. Granted, I’m not including dividends in there but I’m not including them in the index values either. Just price.

Why would anyone do that?? Oh yeah…..the 10-bagger. 

And you would have to be continually changing stocks, making trades, incurring fees, and you'd have to continually be right.

From where I stand, if you want to generate some income, especially tax effective income, there’s a good chance you can do that with a good fund manager in the space, or by buying a collection of Australia’s most popular franked dividend paying stocks. We all know which ones so I won’t go over it here. But if you want growth in your investments (and if you, for example, have a self-managed super fund, that’s all you should want), the odds are against you that picking single stocks will generate the returns you’re after.

This is the beauty of the ETF, and especially the passive index ETF – you buy it, and you hold it. If your asset allocation has to change, then make the change. If you want to sell it, you can chip some off, sell half, sell it all, whatever you want. It’s cheap, it will perform, and it’s liquid. But you buy it, get lots of companies, you maybe even just buy it once, and you’re done.

And then do the one thing that so many Australian investors do not do – buy the US. As much as you may want to buy IOZ (ASX 200 market cap weighted ETF), or MVW (ASX 200 equal weighted ETF), don’t. At least not if you’re looking for growth. If you’re looking for growth, look at this 5-year chart above – it’s obvious where you should go. It partially started post the 2000 tech wreck but no doubt that the post-GFC world has delivered a level of US capital markets exceptionalism that is palpable and real. You either have that yellow line and that light blue line in your portfolio, or you don’t. And if you don’t, you’ve taken essentially the same level risk but you’ve left a lot of money on the table.

Whatever you do, get exposed to the US equity markets. History says, and so do I, that it will serve you very, very well. And ETFs make it as easy as pie.

Good luck out there.