There are two ways to play the market. You can choose a portfolio manager or pick your own stocks. One is passive, and the other one is active investing. Many investors want to follow in the footsteps of stock-picker success story Warren Buffet and become active investors.
Is Stock Picking a Good Strategy?
Stock picking usually underperforms a passive strategy. That’s because a passive or portfolio managed strategy tracks the broader stock market indexes.Most stock pickers downplay the possibility of a bad outcome. They listen to others who push a compelling story to pick stocks with their help—but it’s still only a story.
Active investing is difficult because, over a long time, the markets tend to be efficient. That is because there’s the efficient market hypothesis (EMH) that market prices reflect all available information. In other words, the EMH implies that there is no hope of beating the market, although returns can be matched through passive index investing.
But to be fair, some question this hypothesis. They point to investors like Mr. Buffet, who focused on undervalued stocks and made billions.
Stock Market Historically Dangerous
The odds are stacked against you when it comes to capturing rising stars. This is a capitalistic society, so for every Walmart, there are numerous regional retailers that couldn’t cut it. And among some of the past stars, several stocks experienced declines.
- 57 percent of technology
- 51 percent of telecommunication services
- 47 percent of energy percent
- 43 percent consumer discretionary
For example, the tech-heavy Nasdaq had a 33 percent plunge in 2022, but experienced a 43 percent rebound in 2023. It’s a marathon.
Stock-Picking Services
Stock-picking services may help active investors. They narrow down the thousands of possible stocks and help investors choose the best stocks for their portfolios.- Motley Fool—$199 monthly
- Trade Ideas—$84 to $167 monthly
- Morningstar Investor—$34.95 monthly
- Zacks Investor Collection—$59 monthly
Anything worthwhile comes at a cost. And stock-picking services are no exception. Be aware of what a service is costing you. Decide on whether the price is worth it to you.
Look for a user-friendly platform. How do they share their stock picks? Check if they send in-depth reports, entries, exits, etc.
You'll also want to find a stock-picking service that aligns with your philosophy. For example, if you’re interested in new opportunities, like tech startups, find a stock-pricing service specializing in them.
Stock Pickers Must Research and Understand Market
If you want to be a stock picker, establish an investing goal. A young investor will have different goals than one approaching retirement.Look for companies you understand. You probably wouldn’t buy a roofing company if you didn’t understand roofing. The same goes for stocks. If you don’t understand what the tech company is doing, evaluating its market is hard. So, if you don’t know exactly what a company does, pass.
Does the company you’re interested in have a competitive edge? Buffet calls a company with a sustainable advantage a moat. He said, “The products or services that have wide, sustainable moats around them are the ones that deliver reward to investors.”
Learn to determine a fair price. Understand price-to-earnings ratios, price-to sales ratios, discounted cashflow modeling, and dividend yield.
Going It Alone Is Risky
There are some stock pickers who are winners. Mr. Buffet has proved that. But it’s probably wise to treat the exception like an exception when it comes to stock picking.According to a Hendrik Bessembinder analysis, after a survey of 15,000 firms, six out of 10 stocks lost investors’ money. Those may not be the best odds to beat the stock market.
