THE ART OF STOCK PICKING
A famous quote by Burton Gordon Malkiel “A blindfolded monkey throwing darts at a newspapers financial pages could select a portfolio that would do just as well as one selected by experts” (Malkiel was an American economist and writer most famous for his classic book titled A Random Walk down Wall Street published in 1973). The book was a bestseller and this comparison with primates is well-known in the investment world. William Eckhardt who is a fund manager went one step further and said that the monkeys will do better. Experiments were carried out on the basis of this adage and the results were in the affirmative. If you find this to be amusing, wait a while since there are many people who think that the monkey will do better than even professional money managers. Personally I do not subscribe to the second part but that is not very important here. In reality, most human beings tend to take decisions for emotional satisfaction, the monkey on the other hand displays no such emotions. Hence, in my opinion the monkey may not beat professional money managers but the monkey would definitely beat many investors (especially those who trade on the basis of media stories or on the basis of ‘heard on the street – hos’, WhatsApp, SMS etc).
RISKS IN THE STOCK PICKING PROCESS
Investors on an average are not notoriously known to be great stock pickers. Why? They listen to the media and pick up stories which they wanted to hear in the first place. Their emotions get the better of themselves and emotions and markets don’t gel. It inadvertently means picking stocks which have done well in the most recent past, herding or are recommended by gurus and analysts. This is fraught with risk since no one can tell when the momentum will stop. Also, it is impossible to tell whether the momentum is a precursor for an entry or for an exit. In my opinion ‘heat chasing’ is the worst methodology for stock picking (unfortunately this method is very much in vogue in the current market environment). The fact remains that most of us still invest in the secondary market by directly buying and selling individual stock ideas. For those who want the adrenalin rush and feeling of participation, investing directly into stocks is ‘the thing’. This makes the process of stock picking even more critical. I would still reiterate (even though I may sound like a broken record) that ideally one must do both i.e. be passive (via ETF’s) and active (by directly buying and selling). The investor must then judge for himself which of the two approaches is more successful and follow it diligently.
CAN YOU OUTPERFORM THE MARKET?
I think before any investor goes about picking stocks he must ask himself the above question. The point is that if you pick a stock which goes up by 30 % and the market rallies by 50 % you still have under performance. So stock picking is trickier than is commonly perceived. Investors will be well served to remember the following:
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Do they have an edge? In other words do they know something which the market does not. If this is true, then they need to look no further since then they can consistently outperform the market. However this is not true for most of us.
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In case one does not have an edge and one is not interested in passive investing it might be a good idea to stick to stocks which are part of the ‘Broad Market Indices’ as defined on the NSE website. Please note I am not referring to the ‘sectoral’ or ‘other’ indices. This will ensure that in the longer term the investor earns a return which exceeds what he would earn in any other asset class.
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There are many who study technical levels and chart patterns. Is there a fool-proof method? The answer is NO. Investing directly into the secondary market involves trying one’s hand at forecasting which is fraught with risk. Many books have been written on the art of stock picking, the fact remains that there is no ‘comprehensive guide to stock picking’. Just to put matters in the right perspective, Warren Buffet, who arguably is the best stock picker in the world has a success ratio of around 60 % (in other words he is wrong 40 % of the time).
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Investors who invest directly into the secondary market today rely on their brokers to a very large extent, on the media and on paid / unpaid SMS subscriptions. There is a problem listening to the expert advice offered by the media almost on a non stop basis. The statistics show the ‘stock market guru’ accuracy percentage at around 47 %, which in fact is less than that achieved with the toss of a coin. The problem is not with the gurus, they are all learned and experienced, the fact is that it is very difficult to pick winners consistently. This continuous performance pressure of meeting benchmarks makes the job of the stock picking even more difficult.
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I have never been able to fathom the fact that the media can peddle recommendations on a daily basis. The fact of the matter is that even the greatest of investors can actually ‘discover’ at the most 2 or 3 stocks in a calendar year which will be multi-baggers, the media seems to do so on a daily basis.
RISKS IN THE STOCK PICKING PROCESS
Investors on an average are not notoriously known to be great stock pickers. Why? They listen to the media and pick up stories which they wanted to hear in the first place. Their emotions get the better of themselves and emotions and markets don’t gel. It inadvertently means picking stocks which have done well in the most recent past, herding or are recommended by gurus and analysts. This is fraught with risk since no one can tell when the momentum will stop. Also, it is impossible to tell whether the momentum is a precursor for an entry or for an exit. In my opinion ‘heat chasing’ is the worst methodology for stock picking (unfortunately this method is very much in vogue in the current market environment). The fact remains that most of us still invest in the secondary market by directly buying and selling individual stock ideas. For those who want the adrenalin rush and feeling of participation, investing directly into stocks is ‘the thing’. This makes the process of stock picking even more critical. I would still reiterate (even though I may sound like a broken record) that ideally one must do both i.e. be passive (via ETF’s) and active (by directly buying and selling). The investor must then judge for himself which of the two approaches is more successful and follow it diligently.
CAN YOU OUTPERFORM THE MARKET?
I think before any investor goes about picking stocks he must ask himself the above question. The point is that if you pick a stock which goes up by 30 % and the market rallies by 50 % you still have under performance. So stock picking is trickier than is commonly perceived. Investors will be well served to remember the following:
-
Do they have an edge? In other words do they know something which the market does not. If this is true, then they need to look no further since then they can consistently outperform the market. However this is not true for most of us.
-
In case one does not have an edge and one is not interested in passive investing it might be a good idea to stick to stocks which are part of the ‘Broad Market Indices’ as defined on the NSE website. Please note I am not referring to the ‘sectoral’ or ‘other’ indices. This will ensure that in the longer term the investor earns a return which exceeds what he would earn in any other asset class.
-
There are many who study technical levels and chart patterns. Is there a fool-proof method? The answer is NO. Investing directly into the secondary market involves trying one’s hand at forecasting which is fraught with risk. Many books have been written on the art of stock picking, the fact remains that there is no ‘comprehensive guide to stock picking’. Just to put matters in the right perspective, Warren Buffet, who arguably is the best stock picker in the world has a success ratio of around 60 % (in other words he is wrong 40 % of the time).
-
Investors who invest directly into the secondary market today rely on their brokers to a very large extent, on the media and on paid / unpaid SMS subscriptions. There is a problem listening to the expert advice offered by the media almost on a non stop basis. The statistics show the ‘stock market guru’ accuracy percentage at around 47 %, which in fact is less than that achieved with the toss of a coin. The problem is not with the gurus, they are all learned and experienced, the fact is that it is very difficult to pick winners consistently. This continuous performance pressure of meeting benchmarks makes the job of the stock picking even more difficult.
-
I have never been able to fathom the fact that the media can peddle recommendations on a daily basis. The fact of the matter is that even the greatest of investors can actually ‘discover’ at the most 2 or 3 stocks in a calendar year which will be multi-baggers, the media seems to do so on a daily basis.
Investors on an average are not notoriously known to be great stock pickers. Why? They listen to the media and pick up stories which they wanted to hear in the first place. Their emotions get the better of themselves and emotions and markets don’t gel. It inadvertently means picking stocks which have done well in the most recent past, herding or are recommended by gurus and analysts. This is fraught with risk since no one can tell when the momentum will stop. Also, it is impossible to tell whether the momentum is a precursor for an entry or for an exit. In my opinion ‘heat chasing’ is the worst methodology for stock picking (unfortunately this method is very much in vogue in the current market environment). The fact remains that most of us still invest in the secondary market by directly buying and selling individual stock ideas. For those who want the adrenalin rush and feeling of participation, investing directly into stocks is ‘the thing’. This makes the process of stock picking even more critical. I would still reiterate (even though I may sound like a broken record) that ideally one must do both i.e. be passive (via ETF’s) and active (by directly buying and selling). The investor must then judge for himself which of the two approaches is more successful and follow it diligently.
CAN YOU OUTPERFORM THE MARKET?
I think before any investor goes about picking stocks he must ask himself the above question. The point is that if you pick a stock which goes up by 30 % and the market rallies by 50 % you still have under performance. So stock picking is trickier than is commonly perceived. Investors will be well served to remember the following:
-
Do they have an edge? In other words do they know something which the market does not. If this is true, then they need to look no further since then they can consistently outperform the market. However this is not true for most of us.
-
In case one does not have an edge and one is not interested in passive investing it might be a good idea to stick to stocks which are part of the ‘Broad Market Indices’ as defined on the NSE website. Please note I am not referring to the ‘sectoral’ or ‘other’ indices. This will ensure that in the longer term the investor earns a return which exceeds what he would earn in any other asset class.
-
There are many who study technical levels and chart patterns. Is there a fool-proof method? The answer is NO. Investing directly into the secondary market involves trying one’s hand at forecasting which is fraught with risk. Many books have been written on the art of stock picking, the fact remains that there is no ‘comprehensive guide to stock picking’. Just to put matters in the right perspective, Warren Buffet, who arguably is the best stock picker in the world has a success ratio of around 60 % (in other words he is wrong 40 % of the time).
-
Investors who invest directly into the secondary market today rely on their brokers to a very large extent, on the media and on paid / unpaid SMS subscriptions. There is a problem listening to the expert advice offered by the media almost on a non stop basis. The statistics show the ‘stock market guru’ accuracy percentage at around 47 %, which in fact is less than that achieved with the toss of a coin. The problem is not with the gurus, they are all learned and experienced, the fact is that it is very difficult to pick winners consistently. This continuous performance pressure of meeting benchmarks makes the job of the stock picking even more difficult.
-
I have never been able to fathom the fact that the media can peddle recommendations on a daily basis. The fact of the matter is that even the greatest of investors can actually ‘discover’ at the most 2 or 3 stocks in a calendar year which will be multi-baggers, the media seems to do so on a daily basis.
CAN YOU OUTPERFORM THE MARKET?
I think before any investor goes about picking stocks he must ask himself the above question. The point is that if you pick a stock which goes up by 30 % and the market rallies by 50 % you still have under performance. So stock picking is trickier than is commonly perceived. Investors will be well served to remember the following:
-
Do they have an edge? In other words do they know something which the market does not. If this is true, then they need to look no further since then they can consistently outperform the market. However this is not true for most of us.
-
In case one does not have an edge and one is not interested in passive investing it might be a good idea to stick to stocks which are part of the ‘Broad Market Indices’ as defined on the NSE website. Please note I am not referring to the ‘sectoral’ or ‘other’ indices. This will ensure that in the longer term the investor earns a return which exceeds what he would earn in any other asset class.
-
There are many who study technical levels and chart patterns. Is there a fool-proof method? The answer is NO. Investing directly into the secondary market involves trying one’s hand at forecasting which is fraught with risk. Many books have been written on the art of stock picking, the fact remains that there is no ‘comprehensive guide to stock picking’. Just to put matters in the right perspective, Warren Buffet, who arguably is the best stock picker in the world has a success ratio of around 60 % (in other words he is wrong 40 % of the time).
-
Investors who invest directly into the secondary market today rely on their brokers to a very large extent, on the media and on paid / unpaid SMS subscriptions. There is a problem listening to the expert advice offered by the media almost on a non stop basis. The statistics show the ‘stock market guru’ accuracy percentage at around 47 %, which in fact is less than that achieved with the toss of a coin. The problem is not with the gurus, they are all learned and experienced, the fact is that it is very difficult to pick winners consistently. This continuous performance pressure of meeting benchmarks makes the job of the stock picking even more difficult.
-
I have never been able to fathom the fact that the media can peddle recommendations on a daily basis. The fact of the matter is that even the greatest of investors can actually ‘discover’ at the most 2 or 3 stocks in a calendar year which will be multi-baggers, the media seems to do so on a daily basis.
I think before any investor goes about picking stocks he must ask himself the above question. The point is that if you pick a stock which goes up by 30 % and the market rallies by 50 % you still have under performance. So stock picking is trickier than is commonly perceived. Investors will be well served to remember the following:
-
Do they have an edge? In other words do they know something which the market does not. If this is true, then they need to look no further since then they can consistently outperform the market. However this is not true for most of us.
-
In case one does not have an edge and one is not interested in passive investing it might be a good idea to stick to stocks which are part of the ‘Broad Market Indices’ as defined on the NSE website. Please note I am not referring to the ‘sectoral’ or ‘other’ indices. This will ensure that in the longer term the investor earns a return which exceeds what he would earn in any other asset class.
-
There are many who study technical levels and chart patterns. Is there a fool-proof method? The answer is NO. Investing directly into the secondary market involves trying one’s hand at forecasting which is fraught with risk. Many books have been written on the art of stock picking, the fact remains that there is no ‘comprehensive guide to stock picking’. Just to put matters in the right perspective, Warren Buffet, who arguably is the best stock picker in the world has a success ratio of around 60 % (in other words he is wrong 40 % of the time).
-
Investors who invest directly into the secondary market today rely on their brokers to a very large extent, on the media and on paid / unpaid SMS subscriptions. There is a problem listening to the expert advice offered by the media almost on a non stop basis. The statistics show the ‘stock market guru’ accuracy percentage at around 47 %, which in fact is less than that achieved with the toss of a coin. The problem is not with the gurus, they are all learned and experienced, the fact is that it is very difficult to pick winners consistently. This continuous performance pressure of meeting benchmarks makes the job of the stock picking even more difficult.
-
I have never been able to fathom the fact that the media can peddle recommendations on a daily basis. The fact of the matter is that even the greatest of investors can actually ‘discover’ at the most 2 or 3 stocks in a calendar year which will be multi-baggers, the media seems to do so on a daily basis.
-
Do they have an edge? In other words do they know something which the market does not. If this is true, then they need to look no further since then they can consistently outperform the market. However this is not true for most of us.
-
In case one does not have an edge and one is not interested in passive investing it might be a good idea to stick to stocks which are part of the ‘Broad Market Indices’ as defined on the NSE website. Please note I am not referring to the ‘sectoral’ or ‘other’ indices. This will ensure that in the longer term the investor earns a return which exceeds what he would earn in any other asset class.
-
There are many who study technical levels and chart patterns. Is there a fool-proof method? The answer is NO. Investing directly into the secondary market involves trying one’s hand at forecasting which is fraught with risk. Many books have been written on the art of stock picking, the fact remains that there is no ‘comprehensive guide to stock picking’. Just to put matters in the right perspective, Warren Buffet, who arguably is the best stock picker in the world has a success ratio of around 60 % (in other words he is wrong 40 % of the time).
-
Investors who invest directly into the secondary market today rely on their brokers to a very large extent, on the media and on paid / unpaid SMS subscriptions. There is a problem listening to the expert advice offered by the media almost on a non stop basis. The statistics show the ‘stock market guru’ accuracy percentage at around 47 %, which in fact is less than that achieved with the toss of a coin. The problem is not with the gurus, they are all learned and experienced, the fact is that it is very difficult to pick winners consistently. This continuous performance pressure of meeting benchmarks makes the job of the stock picking even more difficult.
-
I have never been able to fathom the fact that the media can peddle recommendations on a daily basis. The fact of the matter is that even the greatest of investors can actually ‘discover’ at the most 2 or 3 stocks in a calendar year which will be multi-baggers, the media seems to do so on a daily basis.
IS THIS A STOCK PICKERS MARKET?
The term ‘stock pickers market’ is a fallacy. If one had bought anything in Jan 2014 it would have doubled by now (barring some exceptions). Is this the definition of the term ‘stock pickers market’? I would think not. What I am saying is that the term is used loosely depending on the market direction and the investing environment. In a market which has moved relentlessly upward investors become highly confident of their ability to pick winners and hence call it a ‘stock picker’s market’. After all any stock they pick is going to move up. In a ‘sideways’ market such as the one we are currently witnessing the media uses the term ‘stock picker’s market’ to keep investors interested in the game. They say that investors need to do their ‘homework’ and separate the wheat from the chaff, after all there are always some stocks which are in a bullish phase. Which one’s for gods sake? In other words there cannot be an opportune moment for stock picking. The answer to this rhetorical question of whether or not we are in a stock pickers market is ‘always and never’ according to Vanguard’s Jim Rowley as can be seen in this video. (Vanguard is the worlds largest mutual fund company).
CONCLUSION
The question uppermost in the minds of most investors: Are there any stocks worth picking at these index levels? The entire market has practically doubled in the last 3 months. The absence of an edge does not mean that one has to shy away from investing in stocks. I would argue that in the market as it is valued today, there is a scope for stock picking. Why? Because:
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The index is at an all time high, this however means nothing and holds no predictive powers. The sentiment surrounding recent index highs and the medias obsession with the same suggests that this bull market has plenty of steam still left in it. Bulls lose steam when investors become euphoric and fail to notice failing fundamentals – there are no signs of this at present. In short, apart from the momentum plays there are still many neglected names in the stock universe.
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If the market crashes from here then our investments in stocks will be the least of our worries since it would mean that the economy would have crashed or is headed for a recession. I do not consider this to be a probability since the magic indicator of economic recessions is trending upward. To clarify, there is something called a Leading Economic Indicator (LEI), it is also called the leading economic index. This generally falls many months before an economic recession, a rising LEI indicates the opposite. This indicator has in the past successfully predicted turning points in the economy. In the case of the Indian economy the indicator has been rising for the last three months, you can read more about it here. It is popularly said that ‘the LEI don’t lie’.
Thanks for sharing another good article on my favorite subject! Unbiased writing, straight from the heart!!
In my view, a stock is your investment. Its like you invest in your best friend. You may have many friends. But you may have only a few, selected and loyal friends, with whom you are even closer than your kith and kin. Don’t try to evaluate your friendship by graphs always! However do check if your friend is with any bad company!! Otherwise what appears before us is always black and white; neither black 100% nor white 100%!!!
Don’t you think stocks like Lupin, Yes Bank, Page India, Gujrat Gas, LIC Housing are eligible to become your (wealth creator) best friends?
If one throws peanuts,then will get peanuts, likewise many sudarshans r there in the market cause of whom the word-technical analysis has become a slang word. Otherwise RSI and moving ages if read correctly with some other hypothesis or rather some key parameters( my secret), do predict all markets correctly.
I mean by throwing peanuts, u will get monkeys