Picking Stocks: Sound Fun? Think Again

By January 17, 2014Financial Planning

My dad was a Stockbroker for many years before he went to work with my grandad in the newspaper business. He had played the game, knew the rules, and explained it to me pretty clearly one day while we were sitting on the back porch of our house in Taylor, Texas.  Now with twenty years of my own experience, I have additional insight that builds a solid case for investors to avoid picking individual stocks.

Nobody can predict the future. For my dad, it was the spontaneous national boycott of meat prices by consumers in 1973. He was completely invested in the booming cattle industry at the time.  Needless to say, things did not turn out so well. Reliance on a single stock or industry exposes us to risk that is not worth taking.

As an amateur you will lose to the pros. DO NOT even for a SECOND think you can evaluate, pick, and trade a stock at a good price. You will pay more than the pros because, well…you’re not a pro. Retail stockbrokers and investment advisers are also at a great disadvantage because the “pros” as I define them are traders, not salespeople, who sit all day trading in a single sector or position with sophisticated software and algorithms designed to shred amateur stock pickers to pieces.

Any insight you think you have is unoriginal and based on old information. Information moves at a greater speed than your fingertips in the stock market so whenever you (or I) click “submit” we are trading light years behind the real price of the stock. Daily trading volume on the New York Stock Exchange is measured in the BILLIONS. Think about it, billions of shares trading between people who all think they bought or sold at a better price than the true value. Not likely! If you think a particular stock is a good buy, most certainly your logic is already reflected in the price of the stock.

If you need return on your money to achieve your goals, the stock market is a fantastic place for you to invest, but not with individual stocks. It’s best to find a way to better diversify away unpredictable events like meat boycotts. And would it not be more efficient to have your portfolio traded by professional traders at fair prices on your behalf?

Funny thing, most professional money managers even lose when it comes to picking stocks. In my practice, I prefer to buy large baskets of stocks that fit certain measurable criteria, not a money managers whims. In any case, we should acknowledge our disadvantages and use the resources available to us to invest wisely.

By Rob Schulz