Stock picker or passive investor: Does reporting season volatility make the case for either?

Despite outward appearances, it's been a reporting season to remember.

But before we get to that, a quick history lesson. 

For millennia, the philosophical field of epistemology (the study of knowledge) was built on the concept of "justified true belief", or JTB.

Something could be considered knowledge if it met three essential criteria: it was true, you legitimately believed it, and the belief itself was justified. 

This fundamental principle was upended with the release of a three-page paper in 1963 by Edmund Gettier, in which he put forward two counterexamples (known as Gettier cases) that challenged the idea that JTB represented knowledge. 

Here's an example:

Say you were looking out at a field in which you could see a single sheep.

Justified true belief would suggest you had "knowledge" that there was a sheep in the field. 

After all, it was true, you believed it, and you were justified in believing it. 

Unbeknownst to you however, was that what you believed to be a sheep was actually a wolf disguised as a sheep. 

To complicate things further, there was in fact an actual sheep standing directly behind this wolf in sheep's clothing, perfectly obscured from your view. 

So while you were technically correct in thinking that there was a sheep in the field, this "knowledge" was based upon faulty beliefs. 

Which gets us back to reporting season. 

For those on the outside, it might have looked like August's results delivered little in the way of shocks. 

After all, the ASX 200 finished 3.1% higher for the month, extending a run of five consecutive months of positive growth. 

That's surely not suggestive of a stock market that endured one of the most topsy-turvy reporting seasons in memory. 

In philosophical terms, you could have had a justified true belief that the ASX 200 had seen fairly unremarkable August results. 

But you would be mistaken. 

As Wilsons wrote in a recent note to partners, "beneath the surface there was a large dispersion of returns within the index, as reporting season featured the most extreme price swings in recent history."

More than half of ASX 200 stocks saw price swings of at least 5% (in either direction) on the day they released results.

Almost 1 in 3 moved 10% or more. 

And some of the biggest movers were the ASX heavyweights like CBA, James Hardie, CSL and Woolworths. 

With even reliable blue chips getting crushed on not-disastrous results, surely investors looking for steady returns were better keeping their capital passively invested in an index fund instead of risking big losses on individual stocks? 

Or did this increased volatility make it a golden opportunity to invest directly in high-conviction stocks or go with an active fund with a good track record of picking winners? 

It's the eternal question, made more complicated by recent results. 

Let's start with some simple numbers. 

The S&P/ASX 200 is up 7.95% year-to-date, and 10.78% over the last 12 months. 

Of the stocks in the index, 149 were in the green, with DroneShield (ASX: DRO) the standout on a 304% return. 

51 stocks would have given you negative returns, with Reece (ASX: REH) the worst performer at -62%. 

More importantly, of those 200 stocks, 112 have a 1-year return above 10.78% (the ASX 200's return). 

In the crudest probability terms, blindly picking just one of the stocks in the ASX 200 would have given you a 56% chance (112/200) of beating the index's performance over the last 12 months. 

Going further still, 78 of those stocks have more than doubled the index's return. That gives you roughly a 40% chance of picking a big winner. 

The numbers are very similar year-to-date. 113 of the top 200 ASX stocks have beaten the return of the broader index (7.95%) in 2025. 

But presumably any stock-picker or active manager worth their salt should be able to beat the regular odds? This would suggest an active approach is the better way to go. 

In the second half of 2025, the return of cyclical trades and the potential for over-performance at the smaller end of the market could also present better opportunities for active investors with their finger on the pulse. 

As Tyndall's James Nguyen wrote in Livewire, "while heightened volatility can be unsettling, we view it as a stock picker’s ally — a dynamic environment that enables us to acquire quality businesses at attractive valuations and exit positions where we believe market exuberance appears unjustified."

Yet active funds are under increasing pressure to keep pace with their benchmarks, as passive money and retail investors drive the broader market ever higher.

This can mean taking outsized positions on the kinds of stocks that are no longer immune to violent selloffs, as evidenced by the August reporting season.

Someone buying CSL a year ago was roughly 10% down before reporting season. They're now almost 30% down.

That's a tough position to be in, especially if the index is up 10% in that time. 

By comparison, passive investors would have limited exposure to those dramatic moves down, but would also miss reaping the full reward of any successful thematic trades. 

And that gets to the heart of the matter. 

Passive investing vehicles like ETFs moderate much of the risk of stock investing, relatively speaking. That also means they moderate the potential rewards.

In the not-unlikely event that the market corrects at some point in the near-future, that could also be a blessing or a curse.

It would mean suffering only the weighted average fall of the index, but also deny you the opportunity to minimise those losses. 

The other downside to passive investing is that you're caught up in the flows that now dictate so many of the defining movements in the stock market, CBA being the most obvious recent example. 

So where does that leave us?

Ultimately I've probably just used a lot of words to say what we knew all along - active investing offers the possibility of bigger returns and bigger losses than employing a broader investing approach.

It's up to you to decide what makes the most sense. 

Justified true belief, you could say.