Stocks vs. index investing

I just read Twitter Inc and LinkedIn Corp Won’t Survive and it reminded me why I prefer index investing over individual companies.

The article makes two key points.

  • Twitter and LinkedIn won’t survive
  • It’s only a matter of time before a very dangerous domino effect comes into play

Taking the first, I think it does a pretty decent job of summarising the woe’s of Twitter and Linkedin. They both have growth and product issues, combined with scaringly large headcounts. Facebook looks fantastically robust in contrast.

I have no idea if they will survive or not, but they are both in deep trouble and their stock price is taking a hammering (both have shed more than 60% of their value in the last year – see graph below).

Stocks vs. index investing - TWTR & LNKD stock price over past 12 months

TWTR & LNKD stock price over past 12 months

Taking the second, I agree, there will be other fatalities. No doubt, there are other tech companies out there with similiar problems and overvalued positions.

That said, this isn’t new. Every year this happens to many companies. And in some years this happens to a larger number of companies as part of an overall market trend / correction. It’s incredibly hard to predict. Many try. Most fail.

But at the same time, we also see new companies going public and their valuations will climb. They replace some of what is lost by the declining companies, in some cases adding more. The market is self-cleansing in that way.

And that’s where the value of index investing comes in.  You’re not trying to predict winners and losers. You own a % of every company in the index and you take the highs and lows of each. You won’t experience a 10 bagger, but you will experience slow and consistent growth over the long-term.

Take a look at Twitters and LinkedIn’s stock price over the last 12 months, when compared with the S&P 500.

Stocks vs. index investing - TWTR & LNKD stock price compared to the S&P 500 over past 12 months

TWTR & LNKD stock price compared to the S&P 500 over past 12 months

Yes, the S&P 500 also declined, but at a sixth of the rate compared to Twitter and LinkedIn.

They key to investing in indexes is taking a long term view. Evidence shows that the market always goes up in the long term and this graph shows it nicely:

Stocks vs. index investing - History of S&P 500

History of S&P 500

My investment strategy is index investing, two specifically – The FTSE All Share and S&P500. I feel it gives the best probability of return and I love the passive nature of it. I don’t need to think about or keep an eye on anything. I just contribute to it regularly like I would a savings account and get on with life.

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