The Stock Picker’s Dilemma (one of them)

January 16, 2026

One of the things you see around the New Year, and it seems to happen every year, is a group of analysts saying "This year is going to be a stock picker's market." I've never been able to figure out what this means. I think they mean that there might be a divergence in winners and losers in the coming year. But if this is the case, why not buy the index and own all the positions, because you don't want to risk picking the loser? If there is not a divergence in winners and losers, what's the point of picking anything? If they all do about the same, why not just own the index?

Picking stocks can be fun, and if you do it, I suggest you keep the amounts small and limit yourself to, say, 3 trades per year.

It's only January and I don't want to rain on the stock pickers' parade yet, because they’re probably already feeling a little grumpy with Dry January dragging on and all the online sites telling them how great they’re supposed to feel with that, but I feel compelled to. Let's look at an issue in picking stocks, specifically in a taxable account, that's not talked about a lot. That issue is private equity, and there is a lot of it in this era. Private equity folks prowl around the markets, looking for firms they can take private. Sometimes the companies they buy are in tough shape, and they need new management teams, the corporate jet fleet has to get sold, etc. But in other cases the private investors see a great company and they believe it is better than the markets appreciate.

So you and private equity agree, this firm rocks, let's ride it to the moon. Except then private equity embraces the adjective in their name, and they proceed to take the firm private. Your romance with them ends as you realize that not only do you not get your moonshot, you get a significant tax bill handed to you as you are forced to recognize your existing capital gains, giving your returns a haircut.

Ok, say you get lucky and the founder of the firm is still in control, and she listens to the "go private" pitch from private equity and says "No, actually I like being sued by endless plaintiffs' attorneys every time our stock drops a little. That's fun for me and I'm going to stay public." And the private equity guys get ushered out of the conference room dejected but they are all thinking "Wow that was pure steel" and they're all buying her shares for their personal accounts on their iPhones as they enter the elevator.

So the stock keeps running up, but the problem is all good things come to an end. Today, half of all of the companies that were in the S&P a decade ago are no longer in it (though this includes buyouts).¹ Eventually the business and the stock plateau, and now, as a shareholder, you're kind of stuck. It's tough to get out of the position because of the taxable gain. But you don't really want to be in it either. Note that real estate and other asset purchases have the same problem.

Index funds are so good at saying "I told you so" that it almost gets annoying over time. But here again the index says "Guess what, using some fancy financial technology, we swapped that mediocre firm without creating a taxable gain and added in a new firm with better prospects." And then if done correctly, One Day In July can manage the rebalancing system among indexes without ever recognizing gains. This can get a bit tricky, but the objective is that both within and among the indexes, no recognized capital gains are created, even over long periods of time.

So in addition to protecting you from the "stall out problem" of an investment, the indexing strategy helps minimize taxes. Indexing should get a seat at the table, perhaps the head seat, in any tax planning strategy discussion.

~Dan Cunningham

1. Innosight Corporate Longevity Report. https://www.innosight.com/insight/creative-destruction/