Now is a great time to pick stocks, with the majority of the market now represented by passive index funds.
More passive investors mean active investors can capitalize on stock market opportunities.
Here's how to beat the stock market in 2024, according to Bank of America's Savita Subramanian.
The outlook for stock market outperformance has never been brighter as the investment world shifts away from active investing and toward passive investing, according to Bank of America Savita Subramanian, equity strategist.
In a recent note to clients, Subramanian highlighted that there are favorable structural factors for active investors in 2024 that should help them beat the stock market.
“A brain drain (20% fewer observers on the seller side) and an asset flight (40% fewer funds) from active fundamental investing to passive and private equity suggests that financial markets “Stocks could be less efficient and thus offer greater alpha potential,” Subramanian said.
Passive investment now represents 53% of assets under management domiciled in the United States, compared to 47% for active investing. Subramanian said the share of passive in the US stock market could further increase given that passive investing accounts for 75% of the Japanese stock market.
Greenlight Capital founder David Einhorn is concerned about the continued rise of passive investing, saying last week that he had “fundamentally broken” the stock market.
But Subramanian sees the rise of passive investing as an opportunity for active stock pickers.
Here's how investors can take advantage of the rise in passive investing and beat the stock market in 2024, according to Bank of America.
“Choose stocks that act like stocks.”
“When we narrowed our universe to stocks that ‘act like stocks,’ the fundamental signals improved significantly,” Subramanian said.
In his analysis, Subramanian broke down the S&P500 into two groups: stocks that trade primarily based on company-specific developments, and stocks that have fewer company-specific risks and trade more based on the macro environment.
Subramanian found that fundamental investment strategies based on earnings growth, return on equity, and analyst outlook revisions would have generated greater outperformance than the group of stocks traded primarily based on stock-specific news. the company.
“Consumer, technology, and healthcare companies are sectors where stock picking may be more successful, while sectors like financials, utilities, or materials may be driven by macroeconomic cycles of rates, inflation and economic growth trends,” Subramanian said.
“Take the road less traveled.”
The stock market is very efficient, but it is less efficient for companies that benefit from less research from Wall Street.
And less efficient stocks present more opportunities and outsized risks compared to a company followed and owned by almost everyone on Wall Street. This suggests that investors should focus their investments on less popular companies.
“When we limited our universe to stocks with lower coverage by sell-side analysts – arguably a less efficient universe – fundamental factor performance improved significantly,” Subramanian said.
“Expand your time horizons.”
With the rise of zero-day options, investors are becoming more and more myopic and trying to make money quickly. But that's not a sustainable investing practice, especially if you're trying to outperform the market as a whole.
“As investors have collectively turned to the short term, we are reminded that the probability of losing money in the S&P 500 shifts from a coin toss to a 2-sigma event by extending the holding period of 'a day to a decade,' Subramanian said.
Time is on the investor's side, provided he takes advantage of it.
Read the original article on Business Insider