“Are You Still Picking Stocks? You Are Ridiculous. Here’s Why.
Prior to learning about real estate investing, I thought that the best way to satisfy my need to take control of my finances was through investing in stocks. Specifically, I thought that I could improve my finances by researching and analyzing individual companies and placing careful bets on select stocks, with the expectation of beating the market.
In this article, I want to explain how foolish stock picking is, especially for a young person worth less than $1 million. I want to describe how incredibly outmatched young investors like me are in successfully picking stocks, and how even an investing prodigy like Warren Buffet would be wasting his time picking stocks at a low level of net worth.
Instead, ambitious investors worth less than $1 million should focus on actively managed assets like real estate or small businesses, while less ambitious investors should simply put their money into passively managed index funds.
There is just no point in expending energy researching individual stocks for 99% of the population.
Below, I’ll illustrate two reasons why stock picking makes no sense and follow with an explanation as to how a similar effort directed at real estate CAN generate outsized returns for the beginning investor.
Two Reasons Why Stock Picking is Ridiculous
Reason #1: The Competition is Out of Your League
Let me tell you about a friend of mine who invests in the stock market. We’ll call him Matt.
Matt manages a pretty sizable fund at a well respected firm in New York City. He spends perhaps 80-100 hours per week studying his industry (technology stocks) and has done this for over a decade. He reads annual reports, market news, and press releases from his Bloomberg terminal, and studies investor decks the moment they become available.
He also attends annual shareholder meetings, networks directly with executive officers at the Fortune 500 companies that he invests in, and meets with other large stakeholders from all over the country. Matt is one of the most well-informed people in his entire industry and is therefore in perhaps the best position imaginable to predict the future success or failure of these companies.
After hundreds or thousands of hours of careful research and methodical number crunching, Matt leverages his research and his decade of experience to purchase tens of millions or hundreds of millions of dollars of equity in the companies he selects.
Matt’s target is to be correct just 60% of the time. If he hits that target, his fund will make hundreds of millions of dollars, and he’ll take home a fat bonus. He’s well incentivized to squeeze every additional basis point in return he can each year for his investors.
Matt is every bit as smart as you, and as an alumnus of an elite business school, he is better educated than you. He’s willing to work hundreds of hours per week and to do everything in his power to get access to critical information as soon as it becomes available. He studies the market all day long and goes home to dream about it at night. He is training young analysts (also smarter, better educated, and working longer hours than you) in his approach to perform ever more thorough due diligence. Because of his training, expertise, resources and results, thousands of wealthy investors give Matt hundreds of millions of dollars to invest for them via his fund.
Matt’s fund has well over $500 million in assets under management. He buys and sells enough shares of multi-billion dollar companies that he can single-handedly change their market price with individual transactions.
Because of his efforts, resources, training and expertise, Matt has beaten the market by about 1-2% per year throughout his history as an analyst. He charges high fees for this extraordinary performance, and his happy investors end up slightly better off than if they had invested in a passive fund investing in technology stocks. They are very lucky to invest with Matt because 85% of his competitors failed to beat their benchmark last year, after fees.
You will have to get up pretty early in the morning to match the performance of Matt’s fund with your own stock picking. Best of luck to you….”
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