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Why stock picking is so hard

Lessons from a stock market analyst

If you're thinking about dabbling in stocks, you're going to want to read this week's Clarity blog post. 

 

Picking stocks is hard. 

 

I say this as someone who did it for a living for almost 15 years. Making a "buy" recommendation on a stock took weeks of research and analysis and much hair-pulling, culminating in a debate with my team of fellow analysts and portfolio managers. No "buy" decision was ever taken lightly.

 

As a DIY investor, I'm going to guess that you don't have the time for that. You probably have a job (that isn't stock picking) and plus you've got those other pesky things on your plate like grocery shopping, driving your kids to swimming, and going to the dentist.  

 

It seems to me that many DIY investors pick stocks based on current trends: electric cars (Tesla), e-commerce (Amazon) and at-home workouts (Peloton). These trends often lose steam and the reality of the business sets in. And when frenzied optimism meets reality, stocks plunge. 

 

How to do research

 

Here are five things that professional stock analysts consider before making an investment:

 

  1. Demand for the product
  2. Profit margins 
  3. The balance sheet
  4. Track record
  5. Qualitative information

 

You can read more about each of these and why they are so important in my blog post.

 

A story of fraudulent sales numbers

 

To demonstrate the importance of research, I share the story of my experience with two companies who pumped up their sales numbers using fraudulent means: Valeant Pharmaceuticals and Luckin Coffee. In one instance, I did the proper research and avoided the disaster - in the other, I fell for the hype hook, line, and sinker (and yes, the stock really did sink). It's a fun story - I think you'll enjoy it. 

 

The point of all of this is to say that you should think carefully about picking stocks as your main investment strategy. Choose a few ETFs and you'll get exposure to hundreds of companies. If a few of those turn out badly, that's ok - you've got a whole bunch of good ones. If you have some "fun money" that won't impact the quality of your retirement should you lose it, use that to pick stocks that are interesting to you. And yes, you might get some winners!

 

Take care of yourselves (and your money),

 

Anita Bruinsma, CFA

Clarity Personal Finance

 

Read more on the Clarity blog

Read more in my blog post

"Why picking stocks is so hard."

 

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