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The Stockpicker's Last Stand

The bleeding has stopped at Capital Group, the $1.4 trillion money manager that operates the American Funds family of mutual funds. Investors pulled $250 billion from the Growth Fund of America and its siblings from 2008 through 2013. Redemptions, which peaked at $81 billion in 2011, declined to $19 billion last year and have ended in 2014, according to Morningstar (MORN) data. The company stemmed the outflows by improving its performance, hiring more salespeople, and promoting its belief that traditional stockpicking, if practiced by the right people, can beat the market averages over the long haul. “We believe in what we do even if at times the world doesn’t,” says Timothy Armour, head of mutual funds.

Armour and his boss, Capital Group Chairman James Rothenberg, are speaking up for active management at a time when more investors are accepting the futility of trying to beat the market and putting their money in index funds. As of Oct. 31, only 1 in 10 actively managed U.S. equity funds had beaten the Standard & Poor’s 500-stock index over the previous year. For five years, the figure is 33 percent, and for 10 years it’s 49 percent. Funds run by stockpickers suffered withdrawals of $5.7 billion in the first 10 months of the year, while stock index mutual funds and exchange-traded funds (ETFs), almost all of which mimic indexes, took in $201 billion.

Prominent investors, including Warren Buffett, are saying that hiring stockpickers is often a waste of money. In a March letter to shareholders, the Berkshire Hathaway(BRK/A) chairman said he told the trustees managing his affairs that after his death he wanted 90 percent of the cash he leaves for his wife put into a low-cost S&P 500 index fund. The results, Buffett wrote, are likely to be “superior to those attained by most investors—whether pension funds, institutions, or individuals—who employ high-fee managers.” In his letter, Buffett recommended a fund run by Vanguard Group, the leader in cheap funds that track indexes. Vanguard’s mutual funds attracted $400 billion in the same six years Capital Group shed the $250 billion, according to Morningstar.

Get Best Tips For Investment, Steps To Take Before Investing In stock

Tips for investing in stocks

Everything you need to know about investing in stocks.

1. Stocks aren't just pieces of paper.

When you buy a share of stock, you are taking a share of ownership in a company. Collectively, the company is owned by all the shareholders, and each share represents a claim on assets and earnings.

2. There are many different kinds of stocks.

The most common ways to divide the market are by company size (measured by market capitalization), sector, and types of growth patterns. Investors may talk about large-cap vs. small-cap stocks, energy vs. technology stocks, or growth vs. value stocks, for example.

3. Stock prices track earnings.

Over the short term, the behavior of the market is based on enthusiasm, fear, rumors and news. Over the long term, though, it is mainly company earnings that determine whether a stock's price will go up, down or sideways.

4. Stocks are your best shot for getting a return over and above the pace of inflation.

Since the end of World War II, through many ups and downs, the average large stock has returned close to 10% a year -- well ahead of inflation, and the return of bonds, real estate and other savings vehicles. As a result, stocks are the best way to save money for long-term goals like retirement.

5. Individual stocks are not the market.

A good stock may go up even when the market is going down, while a stinker can go down even when the market is booming.

6. A great track record does not guarantee strong performance in the future.

Stock prices are based on projections of future earnings. A strong track record bodes well, but even the best companies can slip.

7. You can't tell how expensive a stock is by looking only at its price.

Because a stock's value depends on earnings, a $100 stock can be cheap if the company's earnings prospects are high enough, while a $2 stock can be expensive if earnings potential is dim.

8. Investors compare stock prices to other factors to assess value.

To get a sense of whether a stock is over- or undervalued, investors compare its price to revenue, earnings, cash flow, and other fundamental criteria. Comparing a company's performance expectations to those of its industry is also common -- firms operating in slow-growth industries are judged differently than those whose sectors are more robust.

9. A smart portfolio positioned for long-term growth includes strong stocks from different industries.

As a general rule, it's best to hold stocks from several different industries. That way, if one area of the economy goes into the dumps, you have something to fall back on.

10. It's smarter to buy and hold good stocks than to engage in rapid-fire trading.

The cost of trading has dropped dramatically -- it's easy to find commissions for less than $10 a trade. But there are other costs to trading -- including mark-ups by brokers and higher taxes for short-term trades -- that stack the odds against traders. What's more, active trading requires paying close attention to stock-price fluctuations. That's not so easy to do if you've got a full-time job elsewhere. And it's especially difficult if you are a risk-averse person, in which case the shock of quickly losing a substantial amount of your own money may prove extremely nerve-wracking.