The great debate – vanilla or hokey-pokey?

I think it was Jackie Stewart, the Scottish F1 legend, that once said that ‘if you wrap yourself in cotton wool, then all you taste is cotton wool’. He was talking about risk. Something that is not only crucial in Formula One racing but also in investing.

Result season is now in the rear-view mirror and as usual we have learned plenty about the state of Corporate Australia. Few obvious ones, the banks are machines that continue to spit out money (still waiting for the mortgage cliff), Retail is not dead, cost control has been imperative, pricing power too, and the balance sheets of ASX listed companies are in rude health. Plenty of cash and debt is not an issue. And that cash is earning good interest now too.

We have also learned a lot about risk. Companies that have reported well have ben feted with huge price bounces, only a week or so ago, Life 360 (360) rose almost 40% on its result. 40%! So much for no surprises and continuous disclosure. Individual stocks have performed brilliantly in places and abysmally in others.

This brings me to the Great Debate. ETFs or Stock Picking. 

I must declare from the outset; I am a stock picker. There is nothing I like better than working through the catalyst for a rerating and see it play out. On one media channel before Christmas, it had a number of ‘experts’ pick an Advent Calendar pick for 2024. I picked ZIP. I know. Plenty of smirks. Plenty of “are you really sure”? Plenty of naysayers. All I can say is from 38c, where I recommended them to 103c, in the space of three months is good enough for me. Stock picking. I do not include myself as an ‘expert’. My view was based on the premise that the consumer was not dead but just paying for things in a different way. Cyber Monday and Black Friday in the US was a neon sign of that. At least to me.

Stock picking is not easy. It is not supposed to be. Making money requires effort. Making anything requires effort. The very act of ‘making’ is effort.  Plenty of times I get it totally wrong. But I get it right enough times to make it worthwhile. For me, it is an intellectual exercise, which far outweighs the risks. It brings me great satisfaction to pick a ZIP. A three-bagger. In three months. It gives me even more satisfaction when I get an email from a member thanking me for the recommendation.

This brings me to ETFs. To me, they are a ‘lazy’ way to play things. They are far safer of course. Far safer. There is no result season dramatics. Swoons, and falls. Short squeezes or surprises, but then again, the gains are smaller. The ASX moved very little during reporting season. An ASX 200 ETF would have been boring as hell. That can be a good thing. That can be what conservative investors want. Dull. Big themes. Broad brush strokes. Diversity of a portfolio. Vanilla ice cream. But you do give up something. Returns. Slow and steady is a more than valid mantra. It does work. We all know the power of compound interest. Einstein nailed it there with the most powerful force in the universe theory. 

Now ETFs have become massively popular. Pick a theme, buy an ETF and let the power of the market do the work. They have become an almost unstoppable force. The reality is that an ETF is just a managed fund’ that trades on the exchange. It is liquid (mostly), transparent (if you bother to look) and most importantly it seems, low cost. It follows an index perhaps. You are not paying some fund manager to use his/her ‘black box’ to manage your money for an exorbitant fee, and let you know how its going once a year when he buys a new holiday home in Palm Beach. Most of the time the manager does not beat the index anyway but still wants your money.

Don’t get me wrong, I do like ETFs. They do what they say on the tin. Just ensure that you have read the tin thoroughly. Making big asset allocation investments can certainly pay dividends. For instance, a Nasdaq ETF has risen 39% in the last 12 months. Pretty impressive. Nothing to be sneezed at. But if you had just picked Nvidia, your gain would have been 6 times that. It is up 244% in the last 12 months. Dull, boring old Microsoft is up 63% over the last year. Instead of buying a Nasdaq ETF, buying just two stocks would have been so much better. Stock picking.

As I said for me, ETF investing is ‘lazy’ investing. You wake up one morning and decide the big theme is EVs for instance. You know that to get broad brush exposure to the sector, there is an ACDC ETF on the ASX. Easy. Buy that and just sit back and watch the theme play out. Except it doesn’t. The underlying composition of the ETF is predominantly car companies. BMW, VW, Honda, Renault. This thing should have a code of CARS instead. Sure, they all have EV exposure, but you have a lot of car maker exposure too. A lot. It is down 2% for the year. Even Pilbara Minerals (PLS) which has run hard in the last few weeks is now up 5% over the last year. Now it has been more volatile, I grant you that and has required fortitude and courage, but for me anyway, the volatility is opportunity. It is mispricing sometimes by the market that can lead to big gains. 

We have one member that we originally dubbed the 6-Million Dollar Man as he had made a colossal, life-changing amount of money in one or two lithium stocks. Investing in ETFs will ultimately build your pile of money, it may take longer. You will probably sleep at night, not worrying and can get on with the rest of your life. That is perfect for some. There are more important things after all. But stock picking for me, will always trump the ETF.

Of course, some ETFs offer exotic sectors and ways to get exposure to stuff that maybe retail investors don’t normally have access to. There is a new Private Equity ETF. There are some ETFs with gearing. Not great long-term investments. There are some that give you instant liquid access to emerging world markets and economies. Something that is hard for retail investors perhaps. But then again what the hell do I know about Indian companies. I have enough trouble trying to work out whether BHP is a great investment. In days gone by, it was hard for an Australian retail investor to buy Microsoft or Nvidia directly. Not so nowadays. ETFs filled that hole before. Now you can buy direct. And very low brokerage.

The ETF marketing machine is now all-consuming. But we could end up with a world where ETF flows just dominate and are the only driver of markets. Analysis of companies? Who needs that? There is an ETF that covers that. Maybe even an App. And don’t get me started on AI! But if that stock picking and analysis becomes an extinction event, that is a dangerous thing. The checks and balances for a company rather than money flow, ceases. That can be problematic. 

I remain a dinosaur maybe. A stock picker. Somewhere who accepts the volatility, the risk, the thrill maybe, the intellectual challenge of working out which companies will thrive and which companies will just drive to survive. Much as I like cotton wool and vanilla ice cream, I am more of a fan of Hokey Pokey. You may not always get the big chunks of honeycomb, but it is so much more rewarding than vanilla.

Come to think of it maybe the best advice is Hokey Pokey. After all, 90% of it is vanilla. Maybe that is the way, good, diversified ETF exposure and selected chunks of ‘Honeycomb’ for that flavour hit. So much nicer than plain dull vanilla. So much nicer than cotton wool. 

Jackie was the Master of Risk Management in an era where a large number of drivers died. 1968-1973 was brutal. Watch the latest Hollywood movie Ferrari to see the human cost of the 50s!

I will finish on another quote from Sir Jackie, that also can be applied to successful investing:

It’s not when you brake, but when you take them off that counts. Most people don’t understand that.”

Wise man Sir Jackie. Good investor too.

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