This evergreen topic of active vs. passive investing, respectively stock picking vs. investing in index funds via ETFs, is a clash between two absolutely different philosophies. The only thing that’s certain here is that both parties will likely never agree. Both think they’re right and the opposition is wrong. As a passionate stock picker myself, I was triggered by a recent twitter post that in my view has spread a dangerous and misleading message.
Summary and key takeaways from today’s Weekly
– Active vs. passive investing is an evergreen debate.
– However, passive investing has clear flaws many investors are either not aware of or are absolutely ignorant about, creating huge risks for their investments, despite thinking they’re broadly diversified.
– This couldn’t be further from the truth: A strong plea for active investing and cleaning up with a few misconceptions.
Longer-time Financial-Engineering readers know how I think about passive / index investing. Rest assured, my view has not changed! My blog has its clear purpose and I will continue to dig for nuggets for my members.
To recap for my newer readers, I am NOT strictly against it.
However, only given you are aware of what you’re doing. In many cases, I am not so sure this is indeed the case. This view of mine might be a bit surprising, given my work is to write and publish reports with stock ideas for my members. However, I am against spreading misinformation, whether intentionally or due to a naive view, and simply not knowing better.
And this is how I developed the idea to write this weekly, my last one for 2025.
On twitter, I saw a post that asked a question, clearly mocking stock pickers. In my view, this post was very low-level — stylistically, but more important: it showed the messenger does not seem to know what he’s talking about.
This is very dangerous. Especially for younger and less-experienced investors, and those who have never experienced a prolonged downturn.
Time to shine a light on the truth.
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Note: I pre-wrote this weekly, hence the performance data is per the end of last week.
both as per 19 December 2025 market close – since August 2022
Why living in the past is dangerous
Personally, I am not against nostalgia — only in everyday life, though.
But not when it comes to investing in stocks. A few common (mis)beliefs and points for criticism of index / ETF investors against stock pickers are that
- with stock picking one cannot beat the market over time
- it is a highly dangerous adventure due to individual company / stock risks
- portfolios are too concentrated, increasing risks from a lack of diversification
There are likely more, but these are the most common.
Interestingly, the risk aspect of active investing is flagged, which I like to hear, as I have been preaching about risks whenever and wherever I can. However, these phrases are often used in propaganda campaigns against active stock picking, while simultaneously passive investing is portrayed as kind of the holy grail of investing.
Even as a stock picker, it is likely one has heard about the “golden formula” to buy just two ETFs, the MSCI World as the base investment and the MSCI World Emerging Markets as a growth kicker.
What in theory sounds like a nice idea, in practice has massive flaws, despite solid performance numbers in the past. In brief, ETF evangelists ignore their own mantras.
Here’s the post that triggered me to write this weekly.
It is no secret that I am not the biggest friend of the dividend investing community, as my observation shows these people heavily rely on the past to justify their investment decisions. Think of dividend track records, and you know what I mean. There’s not much explanation needed that this view is rather myopic, ignoring present developments and possibilities for dividend cuts when fundamentals deteriorate.
As if it has never happened.
Indeed, I was a bit surprised that an account having “dividend” in this name is mocking stock pickers, as dividend investors are often stock pickers either…
Anyway, what this account is referring to is that stock picking is gambling (he said so) and that passive investing is the opposite, i.e. serious and significantly lower-risk investing. What sounds logical to the untrained ear, indeed is highly dangerous propaganda, as the most successful investors are stock pickers, not ETF investors.
Even if one assumes that only a minority of pros can achieve outperformance with active investing, the post shows the messenger does not seem to understand what he’s written to begin with.
Instead of gambling with individual stocks, one should better buy index funds to “own the whole farm”. Let’s examine this part closer.
My interpretation of “owning the whole farm” is that an ETF spreads an investment over many, many individual stocks. Much more than can be typically found in individual stock portfolios. Not 10 to maybe 30 stocks, but much more — we’ll return to that further below.
In other words, it shall be a highly diversified investment, not a concentrated “gamble”. This is one of the most frequently used arguments against active stock picking.
The (pretend) lack of diversification.
Here the first problem already arises — what is proper diversification? How many positions qualify for a well diversified portfolio? And if you buy just everything (index funds), won’t you pick up the biggest garbage for free either?
There’s no definitive answer to the question how many stocks offer a diversified-enough portfolio, as it is a highly personal view of every investor. For some, 10 is a great number. Hard-core pickers can have less than that even. The rule of thumb is that above 15–20 picks the diversification effect quickly vanishes, while at the same time the expected return is sacrificed.
This is important to understand.
Many stock pickers — like me — argue that if you have done your homework, namely business and stock analysis (fundamentals, valuations), you have already laid a solid foundation for good returns, as you don’t touch too risky stocks. Risk factors can be high debt, falling sales and margins, negative free cash flow, astronomical valuation multiples, etc.
So, what’s so great about ETFs that active stock picking is said not being able to offer?
Taking a look at the factsheets and the compositions of the MSCI World and its sibling the MSCI World Emerging Markets, we can see that both are “highly diversified”, having over 1,100 individual names inside them.
A risk-free setup, isn’t it?
While it might sound so on the surface, this thought has huge flaws.
And herein lies the danger. These ETFs might give the IMPRESSION that they offer a broadly diversified portfolio of the most important stocks, spread all over the world via the MSCI World, respectively more focused on key emerging markets via the MSCI World EM.
Looking closer, we can see that the top ten account for 27.8% in the MSCI World and even 30.2% in the MSCI World EM. These weightings come from just rounded 0.8% of the total portfolio holdings each.
In consequence this means that what follows the top ten quickly drops to meaningless by-products. While the biggest ten represent a significant share already, the remaining more than 99% of holdings (!) fight for the rest.
Quite the opposite of “broadly diversified”. But it gets better.
This is the result of the market cap weighted structure.
Looking at a few often ignored numbers to the left of the factsheets, we get more interesting details to better grasp what’s inside.
The MSCI World has a total market cap of 70 trillion USD, with the two largest names having a weighting of more than 5% each. The median, however, is only 18.5 billion USD. The MSCI World EM on the other hand has a market cap of close to 10 trillion USD, with the biggest name alone accounting for 11% even — one position. Quite aggressive for shy investors. The median here is 3.2 billion USD.
Why the median and not the average which is much higher?
The median is the position exactly in the middle, i.e. in a basket of 100, it would be the 50th position. One half has higher figures, the other lower than the median. The average is a dangerous number that should be viewed in the correct context, especially here, as it is artificially pulled up by the few mega caps. That’s why the difference between median and average is so high.
To better understand that, a quick example.
This divergence becomes more extreme with every rise of the top positions. If a top position with a market cap of say 4 trillion USD rises 10%, it adds 400 billion USD in market cap to the index. For a small holding that has a market cap of 40 billion USD — that would be double the median in the MSCI World — this position would need to 11x to keep pace.
In other words, what comes after the top ten quickly loses relevance for the entire investment case.
Not to mention that one buys into lots of garbage that gives you underperformance for free — although thankfully at very low weightings.
Personally, I have difficulties in understanding why and how these two setups are offering big diversification and where the edge is versus active investors that have say 20 stocks in their portfolio.
Looking now at the sectors in these funds, the next problem arises.
On the left screenshot, you can see that 27.3% of the holdings account for technology. These 27% alone would not be what I’d consider broadly diversified, but that’s only half the truth. To the right, you can see what is in the top ten, with the exception with spot number ten, all these names are commonly considered tech stocks — but some of them are grouped into non-tech categories like communication.
So effectively, the real tech share is even much higher in the MSCI World.
Source: MSCI, see here
In the MSCI World EM it is similar.
So in this light, where is the promised diversification? For me, it looks more like a heavy bet on the biggest companies out there which coincidentally happen to be predominantly tech stocks.
In my view, this is a more dangerous high-momentum approach than stock picking where one would typically have a few energy names, maybe some consumer stocks, some special situations, Pharma / biotech, whatever. But spread over many sectors and ideally the most promising names chosen for each.
I do not see it here.
What also flew on my desk for a perfect finish of this weekly, was a German-language article from manager magazin, titled “With the MSCI World, you buy the past”.
The article features an interview with Tim Garratt, a partner at the renowned Scottish asset manager Baillie Gifford (known for early investments in tech giants like Tesla (ISIN: US88160R1014, ticker: TSLA), Amazon (ISIN: US0231351067, ticker: AMZN), and Nvidia (ISIN: US67066G1040, ticker: NVDA), and close ties to Silicon Valley). So, this is not nobody.
Baillie Gifford’s core criticism of the popular MSCI World ETF: “It is buying the past”.
The core essence and deciding factor is that the MSCI World as a market-cap weighted index — what I described above — is dominated by yesterday’s winners, i.e. large, established companies. By investing here, you’re essentially extrapolating historical success into the future, which often fails, or is at least heavily challenged, during periods of disruption and innovation.
Does anyone remember Nokia (ISIN: FI0009000681, ticker: NOKIA), once having been one of the world’s largest companies? Imagine, you’re positioned in today’s Nokia’s and similar names under the assumption that you own the best companies in the world.
Today’s index composition is the result of past performance.
These companies face slowing growth, regulatory pressures, and competition from newer innovators. This is not speculation, but just a question of time. It would be the first time in history if not. This time’s different? I have some doubts!
What comes on top, buying today’s heavyweights leads to missing future winners: Passive investing underweights or even entirely excludes fast-growing disruptive companies (think of Apple in 1997 or Tesla in 2015) that are not yet large enough to dominate the index.
Baillie Gifford argues this leads to missing out on outsized returns.
In consequence, Baillie Gifford advocates long-term active investing in high-conviction growth stocks, rather than broad passive indexing. While MSCI World ETFs are simple and low-cost, Baillie Gifford warns they are backward-looking and risk underperforming in an era of rapid technological change, driven by AI and innovation.
I absolutely agree.
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Conclusion
Active vs. passive investing is an evergreen debate.
However, passive investing has clear flaws many investors are either not aware of or are absolutely ignorant about, creating huge risks for their investments, despite thinking they’re broadly diversified.
This couldn’t be further from the truth: A strong plea for active investing and cleaning up with a few misconceptions.
By becoming a Premium or Premium PLUS Member, you get instant access to all my already published research reports as well as several updates.
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