Now is a great time to pick stocks because most of the market is now represented by passive index funds.
More passive investors mean active investors can take advantage of opportunities in the stock market.
Here’s how to beat the stock market in 2024, says Bank of America’s Savita Subramanian.
As the investing world shifts from active to passive investing, the prospect of outperforming the stock market has never been brighter. Bank of America Equity strategist Savita Subramanian.
In a recent note to clients, Subramanian highlighted that active investors will face structural tailwinds in 2024 that will help them beat the stock market.
Subramanian said: “The brain drain (20% fewer sell-side eyeballs) and asset attrition (40% fewer funds) from active fundamental investing to passive and private equity suggests that equity markets may be less efficient, providing more alpha potential. .”
Passive investing Currently, passive investments account for 53% of U.S. assets under management, compared with 47% for active investments. Subramanian said that given that passive investments account for 75% of the Japanese stock market, the share of passive investments in the U.S. stock market is likely to rise even higher.
Greenlight Capital founder David Einhorn is concerned about the continued growth of passive investing. said last week that it had “fundamentally damaged” the stock market.
But Subramanian sees the rise of passive investing as an opportunity for active stock pickers.
Here’s how investors can capitalize on the growth of passive investing and beat the stock market in 2024, according to Bank of America.
“Choose stocks that behave like stocks.”
“When we narrow the scope to ‘stock-like’ stocks, the fundamental signal improves significantly,” Subramanian said.
In her analysis, Subramanian breaks down S&P 500 Index There are two categories: stocks that trade primarily based on company-specific developments, and stocks that have less company-specific risk and trade based on the macro environment.
Subramanian found that a fundamental investment strategy based on earnings growth, return on equity and analyst outlook revisions will generate more performance than a group of stocks that trade primarily on company-specific news.
Subramanian said: “Consumer, technology and healthcare companies are sectors where stock picking may be more effective, while sectors such as financials, utilities or commodities may be affected by macro cycles such as interest rates, inflation, economic growth trends, etc. push.”
“Take the road less traveled.”
The stock market is highly efficient, but less efficient for companies with fewer Wall Street research reports.
Less efficient stocks hold greater opportunity and risk than companies that are followed and owned by almost everyone on Wall Street. This suggests that investors should focus their investments on less popular companies.
“When we restricted our coverage to stocks with lower sell-side analyst coverage – arguably a less efficient coverage – fundamental performance improved significantly,” Subramanian said.
“Extend your time frame.”
With the rise of zero-day options, investors have become increasingly short-sighted in an attempt to make a quick buck. But this is not a sustainable approach when it comes to investing, especially if you want to beat the market.
“As investors collectively shift to short-term investments, we remind ourselves that by extending the holding period from one day to ten years, the probability of a loss in the S&P 500 drops from a coin toss to a 2 sigma event,” Subraman Nia said.
As long as investors make good use of it, time is on investors’ side.
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