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Where To Fish For Stocks Now?

There is popular restaurant in Orchard that’s been around for about as long as I can remember.

It serves a wide range of cuisines. But there is something quite striking when you look around at the things (or I should say the thing) that diners order…..

…. almost without exception they choose the Fish Soup Noodles.

There is little doubt that the bee hoon in fish broth is quite outstanding. But diners are really missing out, if they just order the same dish, over and over again.

What is even more curious is that people who might have never eaten at the restaurant before are somehow drawn to the same Fish Soup Noodles.

How bizarre!

There are some interesting similarities with investing.

Passive investors who put their money to work in the stock market through Exchange Traded Funds (ETFs) are disproportionately attracted to just a handful of stocks.

They are, unwittingly, ordering Fish Soup Noodles at the expense of other superb items on the menu.

That’s because money that flows into shares through those ETFs are weighted by market capitalisation. In other words, the most valuable companies get most of the money….

….it’s just like the diners at that restaurant who unfailingly order the Fish Soup Noodles… but only worse.

All bull

Since the start of 2008, the ETF industry has attracted over $2.8 trillion in new money. And as more cash follows ever more cash into the market, the flow into ETFs has propelled one of the longest bull runs in US stock market history.

What’s more, in the first 11 months of 2017 investors had already ploughed $391 billion into ETFs. That was more than last year’s record annual inflow of $390 billion.

And guess what?

The flow of money continues to drive the US benchmark index to one all-time high after another. That’s great news if you are invested in US shares through an index tracker.

But the gains have been far from equitable.

Toothy grin

Money flowing into ETFs has disproportionately benefitted the likes of Facebook, Apple, Amazon, Netflix and Google (Alphabet).

That’s quite extraordinary.

The five stocks accounted for around a-third of the gains of the 500 largest companies in the world last year. That has created some unintended inefficiency in the rest of the market.

But one investor’s inefficiency could be another investor’s opportunity.

While the market has been pushed higher by the surge of money flowing into ETFs, many other stocks have been left trailing.

No choice

Thing is, ETF managers don’t have a choice about where the money should go. They don’t have any powers of discretion. They have to order Fish Soup Noodles, whether they like fish or not.

That creates lots of openings for us stock pickers.

But it is important to bear in mind that not everything that has been left behind is a bargain.

We still need to be selective. We still need to be discerning. We still need to look for wonderful companies that are selling at fair prices.

In case you are wondering, I used to like the Fish Soup Noodles. But I now prefer the Hainanese Pork Chop.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned. The Motley Fool Singapore has recommended Amazon, Apple and Facebook.