globalsailor (82.00)

Why I don't like ETFs

November 04, 2009 – Comments (0) | RELATED TICKERS: BRK-A , WFMI

When I first saw the commercial for the SPDR securities I thought they were kind of cool.  Now, however, I think that they might be a somewhat dangerous acquisition.  Normally when one buys a security you know what you're getting (sort of).  However, when you buy an ETF you would have to evaluate more than twenty (if not one-hundred) securities.  For me that's kind of scary.  People say "why do I need to pick which stocks are best?" why can't I just pick the best industry?  Well industries are very difficult to analyze.  They have up years and down years and if you don't know what your industry is worth (what exactly is an industry worth?) then you have a hard time knowing if the drop in price of your ETF is a sign that your industry is bad or actually undervalued.  You can't analyze it.  All you can do is chase returns: buy at the top, sell at the bottom and lose money often.

The stock market exists so that individuals and organizations can own shares of publicly traded companies.  Treat your securities like your own businesses.  Vote in their board of director elections, be willing to buy or recommend their products, and make sure that their ethics matches your own. When you put this much thought into your companies, even if you lose money in the short term, you will have the peace of mind to know that the company has a high value.  Eventually your foresight will be rewarded by others in the market who realize the value of your company.

This goes especially for small caps.  There are only so many people who can invest in a single small cap company so if you invest in it, you might as well visit it.  Then you'll really know what the company is about and what your piece of paper actually means long before anyone else. 

My sentiments are not original but are just copies of Warren Buffet, John Mackey, and quite a few other business leaders.  I guess imitation is the best form of flattery.