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WHY DO I AVOID individual stocks today? I’ve previously written about the big loss on a broker-recommended stock that led me to manage my own investments.
That loss, however, didn’t deter me. In my early days as a do-it-yourself investor, I mainly bought mutual funds, albeit too many of the high-fee actively managed variety. But I still had an interest in picking individual stocks.
In fact, it was part of my investing heritage. My father had always invested in individual stocks. In his day, mutual funds—much less index mutual funds and exchanged-traded index funds—weren’t yet “a thing.” And he had done well with individual stocks, so his success was likely in my thoughts.
I don’t know exactly how he picked his stocks, but some of it was probably based on the advice of stockbrokers. In addition, my dad was involved in business and civic affairs in our hometown of Dallas, and knew many of the people who ran some of the companies he invested in. If he thought that they were capable and of good character—character was paramount to my dad—he likely thought that was a good enough reason to invest in their company.
The upshot: In my early days, I wanted to put at least some of our modest investment money into individual stocks. But I’m not the public citizen my dad was and have no personal insights into how any company is run. I have virtually no education or work experience in finance or accounting. When I read a company’s annual report or SEC filings, frankly, it’s pretty much Greek to me.
So what’s a boy to do? Well, a smart one would’ve chucked the whole idea, bought some funds and been happy. But that would’ve been too easy, so I decided on a method of picking individual stocks that made sense to me. No, I wasn’t so foolish as to rely on tips from friends and family. I thought I had a more logical route.
What I would do is simply study the reputable financial magazines of the day—Forbes, Kiplinger’s, Barron’s and so on—and see which stocks the whizbang writers for those venerable publications were recommending. I would then do a sort of cross-reference. If I saw three or four different writers in three or four different publications recommend the same stock, bingo, I had a candidate. After all, if the movie experts and insiders at the Academy agree on some movies to nominate, chances are those are pretty good movies.
And in those days—the late 1990s—the recommendations were largely tech stocks, so I bought away. We all know how that turned out. The dot-com bubble burst in 2000 and I, along with a lot of others, got skinned.
I realized that my “cross-referencing the experts” method was a bust, and I lost as much or more than the typical investor. It was yet another painful lesson learned, but it paid off in the long run. I abandoned any hope of beating the market and, as so many wise men and women now advise, I was happy to simply own the market through index funds.
I still remember well that, of all those once-mighty tech companies that I read about and invested in, the one that was recommended by more experts than any other was a company called WorldCom. Its chief executive, Bernie Ebbers, was often described as a genius among geniuses. In the tech crash, WorldCom’s stock went from a peak of $64.50 to less than $1, before trading was halted. And what of Bernie Ebbers, the genius of geniuses? He was later sentenced to 25 years in federal prison for fraud and conspiracy.
Andrew Forsythe retired in 2017 after almost four decades of practicing criminal law, first as a prosecutor and then as a defense attorney. Along with his wonderful wife, kids and grandkids, he loves dogs and collecting pocketknives. His previous articles were The Path Not Taken and Saved by a Crash.
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I took a continuing education seminar in stock picking shortly after finishing college. We did an exercise, looking up the last year’s prices of highly recommended stocks in current issues of financial magazines. I was impressed that the prices had risen over the previous year and was ready to go buy stocks. Then our instructor pointed out that those stocks would have been a great deal a year ago, but were probably overpriced now. We looked at P/E ratio and such, finding that the stocks were pricy by the conventional measures she was teaching. Lesson learned: By the time a stock is being highly rated by popular finance magazines, the real traders have already run the price up.
She suggested buying boring stocks, ones that slogged along with minor price changes and regular dividends. I was disillusioned though and bought the variable annuity from the nice salesman at the office instead. Five years later, when I finally studied up on variable annuities, I consoled myself thinking I’d at least developed the “pay myself first” habit and switched to index funds.
After watching the mutual funds I owned get hammered with losses during the Great Financial Crisis, I decided I could do no worse than those managing mutual funds. It definitely takes a lot of time but by limiting myself to a small set of companies and focusing solely on them, I have averaged 24% per year since going DIY vs. SP500’s 13%. Yes, I know I’ve been super lucky and I agree, if you don’t have the time, then invest in ETF index funds. (RSP looks good right now.)
Yet another article entirely relevant to my own investing journey, but sometimes reading it in another’s words is more impactful. I’ve as well had winners and losers in individual stock picking (who hasn’t?), but have long since settled on broad market plays with a variety of sector bets (yes, IMO they may be “reasoned”, but they’re still bets) via ETFs, which has proven thus far to be a pretty productive strategy. Sure, I see the Teslas of the world roar past me, but for every one of those rarities my “field bet” on mostly the S&P 500, NASDAQ 100, and health care-related funds has allowed me to both sleep soundly at night and not have to wake up and check the market first thing in the morning.
I have to admit, I’ve always rather enjoyed not having to select which stocks to buy. I know that as soon as I did I’d have buyer’s regret, and gaze longingly at the small cap stock that climbed 100% last month. Better just to own the haystack.