Thursday, January 26, 2012

Second Look: Trying My Hand at Stock Picking

Writing this blog has taught me a lot about personal finance and investing. This is one of a series of articles where I argue with my former self by disagreeing with one of my previous articles. Unlike politicians, I’m allowed to change my mind as I learn more from my readers and my own research.

In a post on the costs of trading stocks I said
“I’m not against direct ownership of stocks. I happen enjoy tracking the progress of the businesses that I own, and I’m hopeful that I will prove to be slightly above average at stock picking.”
I followed up with my prescription for success in stock investing:
“Predicting the long-term future of a stock is best done by trying to predict the future success of the business rather than looking at wiggles in the chart of stock prices.”
I’m still not against direct ownership of stocks for highly skilled investors, and I still believe that fundamental analysis beats technical analysis. However, I’m no longer hopeful that I’m a good enough stock picker to be able to consistently beat the market averages. My record during my stock picking years beat the market, but only because of a couple of huge bets more than 10 years ago. Since then my results consistently lagged.

For stock traders, 80% to 90% of their competition is institutional investors. This is just not a game I want to play any more. Most individual investors who try to win this game will fail, but no doubt some have the skill to succeed. My guess is that the percentage of stock pickers who have the skill to consistently beat the market is extremely low.

I’d love to be able to go back to talk to my former self just after my last successful huge bet and convince myself to give up this game and just invest in indexes. Even better would be to give myself a stock recommendation, like Apple, but I don’t want to be too greedy.

On the Positive Side …

Here are a few of my older articles that I still quite like:

Insurance is not the same as protection even if it seems that way.

A game show illustrates an important lesson about the utility of money.

My visit to a doctor shows when insurance can be a bad deal.

When trying to transfer your long-term savings, it’s easier to pull than to push.


  1. What my husband does is he has 90% of his pension in index funds split between shares and bonds. The remaining 10% he picks individual stocks. And let me tell you, he has fun doing it and when one goes on a tear he calls himself an investing genius and I hear about it for weeks on end!

  2. @Farmland: It seems that most of us have some compulsion to underperform the index. At least in your husband's case, the underperformance is likely to be minimal if he limits his stock-picking to 10% of his portfolio.