Why Stock Picking Does Not Matter
61Stock picking is often considered a double-edged sword in the world of investments and stock portfolios. Some people think they have found a unique strategy for stock picking, but the reality is there is no magic solution. In most cases, stock picking usually doesn't make sense for expanding your wealthy and investment portfolio. Here are the key reasons why:
- Most of the information isn't measurable, and it's hard to factor in multiple factors all at once. Stock picking is essentially subjective.
- The stock market is unpredictable; even though analysts have created remarkable formulas and projections, it is not an infallible system.
- A company's health and overall outlook is measured with many different tools and criteria; it would be impossible to hone this down to a specific topic and make a decision based on this analysis
- A company may be misrepresented, and this information may not be discovered until a later date; even though the majority of trading is based on high ethical standards, the system is not without its problems.
- Overconfident sellers. You'll notice the telltale signs of a sales pitch when working with many analysts and sellers, so be vigilant about how you choose.
- Luck does have a lot to do with it. Even though analysts are making information and statistics readily available, the most effective stocks are discovered through timing and chance.
There are many ways to apply formulas to a stock picking strategy; a fundamental analysis calculates the intrinsic value of a company, giving you a good idea of the company's standing and overall financial health. Other analyses include CANSIM, GARP, and technical analysis which helps to forecast future prices.
A stock picking strategy is based on a combination of factors, including experience, past performance, and economic theory. In most cases, it is a fairly good estimate or assessment for the future; in other situations, it's just a matter of trial and error over a specific period of time.
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Ralph Deeds says:
16 months ago
Most people are better off not trying to pick or even own individual stocks. Exceptions may apply to individuals who are able and willing to devote enough time to researching the companies and industries and to those who enjoy analyzing companies and investing a small portion of their assets in them. Otherwise, most people are better off investing in no-load, low-cost, tax-efficient index mutual funds.
Why is this true? Because individual stocks fluctuate much more widely than a diversified mutual fund such as an Index 500 fund or Total Stock Market Fund, or a Total International Index Fund, and most people don't have sufficient money to invest to provide prudent diversification if they invest in individual stocks. In other words, for most people investing in individual stocks entails excessive risk.
Second, individual investors don't have access to accurate, up-to-date information on individual company develoments. They are at the bottom of the food chain--the last to hear the good news and the last to get the bad news. Therefore, they tend to buy high and get left holding the bag.
Third, investors in individual stocks pay higher brokerage fees and higher taxes on their earnings than investors in index mutual funds. Very few investors beat Index 500 mutual fund investors. Some do. As Sabah Karimi says, "Luck does have a lot to do with it." If you feel lucky, try to pick a few winners with a small portion of your savings. You may get lucky. Don't play high stakes poker or roulette in individual stocks with your life savings. You may end up working til you die or retiring in a slum tenement, sitting on a broken down bed with a bare lightbulb hanging from the ceiling, a bottle of Ripple on the floor and pee stains on your underwear!