Individual Securities Vs. Indexes: Investing’s biggest competition

December 24, 2019 - John Osbon (3 mins to read)

Nothing is more central to our economy than competition. Competition rewards innovation, smart investments and cost control. We see competition between local restaurants and between global giants like Amazon and FedEx. We also see — and benefit from — competition between divergent ideas and business methods. In the investment world, the competition between stock pickers and indexers has been raging for decades. Here’s the state of the race today.

David becomes Goliath

There has been healthy and increasing competition between buyers of individual securities and creators of indexes for at least 40 years. In the late 1970s you could count your index fund options on one hand. Now indexing is a dominant force in investing, led by huge firms like Vanguard, Blackrock and State Street.
Each year indexers continue to gain more investors and dollars. Stock picking is not dead, but is becoming more the exception than the rule it had long been. There’s no sign of this trend reversing. Some predict that in as few as ten years the only individual security buyers and holders could be hedge funds and some very wealthy entrepreneur creators like Bezos, Gates, Zuckerberg and so on.

Huge cost advantage

What’s behind the success of indexing? It delivers market level performance at very low costs. In fact, the cost of indexing has been going straight down for at least ten years. The cost includes management (traditionally very low) and trading (now free). Low costs help RIAs like Osbon Capital deliver what our clients need, and have enabled index providers to amass huge asset levels. For example, Blackrock, which did not start out as an indexer provider, is now one of the largest with $7 trillion of assets under management.

Where now?

We can’t predict the ultimate outcome of this competition, but what is clear is that individual security ownership will shift away from the liquid, publicly-traded fund area into the private fund area. We see this already among individual investors. New accounts transferring to us from big asset managers often have well over 50% of the money indexed, along with some private investments.


In the next decade we foresee investors creating their own indexes. These self-indexes will only be available to wealthy people. For example, we foresee a $1m private index of 100 US growth companies or 100 International dividend payers or 100 recession-proof stocks. To put together a diversified portfolio of several self-indexes will probably require $5-10m dollars. Of course, there will be few costs to assemble these indexes and the creator has the benefit of an individual basis in each stock.

The new decade

Since we begin a new decade next week it is a good time to examine how your portfolio fits the new era of competition. How much have you indexed? Are you holding single or concentrated securities in companies you built or invested in early? It’s healthy to assess the pros and cons of such holdings periodically.

And what about other asset classes? Does indexing also work in the bond area? How about real estate? Please contact us if you would like to see how we view the competitive landscape. We are in the early stages of developing several self-indexes for the next decade.



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