Friday, February 10, 2006

When People Jump on the Bandwagon

Markets tend to get overvalued.

Interesting study was highlighted in The Economist about how more and more people are just investing in the index or funds or funds of funds. And as this has happened, genuine stock picking, requiring detailed analysis and insight that nobody else has, has declined.

Thus, consider, if people just invest in the index because it beats the majority of investment professionals, it becomes a self-fulfilling prophecy as more and more money purchasing indexed funds, drives the price of the index up.

Perhaps we are entering an era where the majority of investment professionals will actually do their job and beat the index....and then I think about my peers at the Carlson School and say naaaaah!

1 comment:

JTapp said...

I found it interesting that the article notes in countries like Germany there is much more stock-picking still going on.