Stock Picking a Misleading Concept
Investing for Consistent Sucess Regardless of Stock Choices
© D. Chen
This persuasive argument asserts that the common notion of "stock picking" is irrelevant to profitable investing and distracts investors from more important concerns.
The concept of “stock picking” distracts investors from realistic risk, reward, and execution level management required for consistently positive returns. To achieve success in the investment business model, potential shareholders must have realistic entry and exit plans of positive statistical expectancy.
Stock-picking Implications
The idea hints that anyone could go from rags to riches by investing in the alleged “right stock”. With no need for precision in entries, exits, risk management, potential reward estimates, supply and demand figures, etc., it sounds effortless to just buy and hold. The typical uninformed crowd likes “easy money”, or uncomplicated, stress-free ways of making some extra income.
Negative Consequences
As the above sway retail investors into a dream of riches gained easily and quickly, it does not usually end well. With every consecutive bullish time frame, the average investor becomes more forgetful of past volatile declines and becomes bolder with purchasing. The often late buying of increasingly uncertain stocks then naturally leads to negative returns for the majority. The typically pushed buy and hold scheme carries many inherent risks.
Realities of Stock Market Behavior
Like any business commodity, the prices of listed stocks move with respect to underlying shifts in supply and demand. Near the end of each rallied period, demand lowers thus offering a lower probability of continued increase for the subsequent time frame. The downturns or slowdowns frequently occur due to profit taking from institutional trading, lowering demand and increasing supply.
As the stock markets largely hold a positive correlation with the underlying economy and indexes, “stock picking” becomes irrelevant as they mostly move in the same direction concurrently. A few bad apples get out of shape and drop dead sooner than later, but the rest move with the general Dow Jones or S&P 500 and very rarely grow at significantly higher speeds.
It then makes more sense to study sentiment values, supply and demand swings of the economy and stock indexes. Initiated buy orders tend to raise prices and vice versa. Liquidity and opinions of institutional traders matter. This roughly explains the semi-mean reverting nature, i.e. the zigzag price action of the financial markets, and why it generally concurs with economic cycles.
Solutions for Consistent Gains
With every industry, a few informed, innovative business leaders get the cake while the rest take shots in the dark and barely survive. Consistent success in adequate investment returns requires proper, relevant information and connecting unseen dots. Specifically, adeptness in statistical analysis and general business administration contribute greatly.
The financial markets principally offer a price database of astronomical proportions. To analyze and unearth significant findings effectively, investors would do well to acquire an education in statistical and probabilistic mathematics. This approach takes work, and it has helped diligent investors find market inefficiencies, where practical and steady profits become available.
Stock investing functions like any other business, where it requires realistic and comprehensive plans of execution. Seasoned investors embrace concise risk and reward management schemes, then create appropriate designs of action. With clear cut strategies for both entries and exits to exploiting found statistical edges; winning will not rely on luck, but becomes destined (regardless of the stocks traded).
