Stock Picking has always been quite a trend since in the beginning even though it is hazardous to investor’s wealth. In fact, history has shown us time and time again that stock picking of an individual companies or businesses, and thus trying to determine which will be the winners, is not a good investment strategy.
If you happen to do it, please stop it because the chance of you picking the right stock is lesser than winning in Vegas. The reason is because the chance of you picking the right stocks in the market equals to getting head in a toss coin game. It’s a 50/50 percent chance or a zero sum game, and most of the time, stock picker failed to pick the right stock.
Now enough with introduction, let’s move on to the definition,
Who is stock pickers?
Stock pickers are all the active investors who bet they can beat the market by picking stock they believe will outperform the index or market average. So, the active investor’s portfolios would be different from each other and usually more concentrated portfolio as they take high risk and different characteristics.
Generally, stock picker take more risk than the passive investors because they only concentrating on the possible winning stocks, which is a few. Whether the stocks win or not, who knows. Ideally, concentrating ones portfolios increase their risk.On the other hand, it also increase their possible rate of returns.
Most of the time, they allocate their portfolio different from market index which contain hundreds or thousands of index constructed to mimic the components of the markets. For example, the iShares Core S&P 500 ETF seeks to track the investment results of an index composed of large-capitalization U.S. equities. In addition, it is a low cost with tax efficient and access to 500 of the largest cap U.S. stocks. Clearly, investing in the market index is the right thing to do rather than stock picking.
The sad thing about Stock Picking.
Which is when they pick the right stock and earn lots of profits with it, it is just lucky guess because the market is unpredictable. But unfortunately, most of the stock pickers don’t think it that way. They thought that it a skills which can be learn and taught. As a smart investors we should not do this. Picking a stock is like gambling with your investment money. A bad thing to do, because if you want to get lucky with your money, go to Vegas.
Why Stock Pickers always failed?
1. The market is unpredictable.
This had been proved so many time in many studies. Stocks and market price moves by news while news are unpredictable and random by nature. Since no one know whats going to happen in the future. Not to forget, the news travel so fast with the helps of the internet. And when they received the news, it has become an old news because a new news has already come out.
Hence, to think that the stock pickers with all these valuable news can predict the future is nonsense. Especially when they are going to invest in a very long time. There is no way they can and will predict the correct one consistently for straight 20 or 30 years.
2. Financial Analyst can only guess the future events.
Because mostly, an active investors or an active managers usually have a team of professional analyst backing up their claimed. They were the stock expert adviser who give advice to the stock pickers. Whether they use a high class technology or mathematical models that are hard to understand, but it is just guesses. That’s all.
If the stock market expert are so expert, they would be buying stocks, not selling advises. -Norman Ralph Augustine.
3. Diversification problems.
This is the main reason why stock picking is very risky. They tends to select a few individual stock that they think can beat the markets. Either they win a lot or lose a lot. A very risky thing to do. Like flipping a coin and hoping to get a head. Diversification does not means picking a few individuals stocks but rather rather spreading your investments throughout multiple asset classes, industries and countries. For example, you spread it on stocks, bond, real estate and commodities by depending on your risk. A proper diversification of your portfolio is key to your investing success over the long run.
Stock pickers hid the truth from you.
After reading the three reasons why investing with stock pickers is such a bad things, you must be thinking if it was that bad, why did not anybody tell me about it? The answer would be the middle man from financial world plays a huge role to hide the truth from you. And the middle man would be, the brokers, the financial advisor and the active managers and financial media.
Why investors keep picking stocks?
This is because the middle man earning their income by generating it from the investors not from the stock markets. They said to investor that, stock picking is the “sexy” way to invest. Which means that stock picking are more exhilarating and exciting if you beat the market rather than buy and hold on index funds. A very big if. Mostly, the investors fell in love with the short term thrilled and blinded by it. But the research show a pretty clear conclusion that the sexy way to invest is the sucker way to invest.
Also, the middle man plays a huge role to distracted the investors. They received their paycheck because they earn it through sells commission from buying and selling the stocks. So, if you buy and hold for a long run like a smart investor do in passive investing, it’s hard for them to earn the sells commission. To avoid this, they hid the truth from now and since now you already know. You need to stop.
In conclusion, since market price and the news are unpredictable, you should avoid stock pickers and active manager at all cost. Your time and your money would become wasted. Not to forget, to think that they charged high fees for a lucky guess and returned it with under performance rate of returns most of the time. Just forget about it.
Finally, the best way to invest is to own a global, tax-managed and diversified portfolio through index funds or ETFs. Also,don’t forget to rebalance your portfolio yearly. All of these thing, you can choose to do it on your own or with the help of financial judiciary. That is all you need to do. Period.