Is Investing In Stocks A Waste Of Time?

Investors new and old alike are captivated by the idea of individual stock investments. They have dreams of winning the proverbial stock lottery – or beating the market. But the problem lies in the biases all humans can’t help but succumb to, and that includes overconfidence. The bias of overconfidence refers to overestimating a good outcome’s probability – and underestimating the chances of a bad one.

You see stories of people who grew their riches in stock picking – Warren Buffett ring a bell? However, it’s not the Warren Buffetts of the world pushing that ever-compelling story – Listen to me, and you’ll become rich.

If you look at stock picker data and research, you’ll find that this compelling story is little more than a story.

So, what is a stock picker and what exactly do they do that warrants such a following?

What is a Stock Picker?

A stock picker is simply a financial analyst who chooses stocks based on various strategies. These strategies inform the analyst which stocks to buy and which to sell, and when either action should be taken.

But there are so many variables in choosing stocks, that even the best stock pickers may have the luck of the times on their sides – or just the opposite.

Every stock picker is different and use different strategies to inform their choices which can change over time.

Let’s take a look at some various stock pickers overall.

Jim Cramer

Jim Cramer of Mad Money fame is touted as one of the most on-point stock pickers in history – yet actually digging into his track record tells a different story. He’s been wrong more times than he’s been right. From the beginning of his stock picking career, he’s only been right 42% of the time and he didn’t beat the market in 2021 according to nobjobs, a user on Reddit.

Several theories have been put forth as to why this is, but the winner is called the Cramer Bounce, or the Cramer Effect. According to this theory, any analysts’ stock picks could actually be the cause of the return effect.

Congress

Since Congress is required to disclose the stocks members invest in, could this be a viable way to pick stocks? Not necessarily.

While member investments have beaten the S&P over time, choosing stocks based on member picks might not work out as intended – members have up to 45 days to disclose their trades.

By the time the trades are published the stocks may have already made their moves.

Financial analysts

The most important factor of following financial analysts’ picks is this – for the “best” information, analysts charge quite a hefty fee for their analysis reports and other services. For instance:

• Bank of America (BAC) is reported to charge as much as $80,000
• Goldman Sachs (GS) is reported to charge as much as $30,000
• Barclays charges up to $455,000 for its Gold package

Is the cost worth the insights?

When analyzed over a week’s time, Barclays’ buy or hold recommendations outperformed the market by 40%. Analyzed over a month’s time, these same recommendations outperformed the market by 22%.

Barclays’ sell recommendations were relevant during the week in which stated, but over a month’s time, those sells ended up outperforming the market.

So, is stock picking a waste of time? While there’s some merit to picks and reports, it’s also quite possible that it could actually cause the outcome claimed.

Why Investors Follow Stock Pickers

There are many reasons why investors look to these individuals and others for their stock choices – perhaps the greatest reason is that it puts the responsibility of research on someone else.

But this is the epitome of placing all your trust in another individual to choose where you’ll spend your money. They may not choose based on the same criteria you might. And this means risk.

The two main types of risk that investors tackle are systemic and idiosyncratic.

Systemic risk

Systemic risk considers the fact that the whole stock market could crash. No mater how diversified a portfolio, there’s no protection for a market crash.

Idiosyncratic risk

Stock picking isn’t (always) a game you can win. Choosing individual stocks means greater chances you won’t beat the market, which is the reason people invest in the first place.

But the majority of stock pickers say you just need to find the top 4% of stocks driving the market to become rich.

Is Stock Picking a Waste of Time – The Bottom Line

Stock pickers have always been a hotly debated topic and the opinions you’ll get vary. Academic studies, research, and evidence suggest just how difficult it is to consistently choose the stocks that will always beat the market.

Instead, do your own research using a trusted platform with insights that let you screen for criteria you consider important: growth rates, valuation metrics, revenue and eps trends, seasonality, and so on.

Financhill is a stock research platform where you can find stocks with strong fundamentals that have the potential to sustain their value and grow over time. You have access to historical prices and future potential. If you pick stocks based on price, like many stock pickers do, you can run into trouble quickly. But if you focus on the inner workings of a company, over time you’ll see the value reflected in share prices. Some things to consider when researching your stock picks includes:

• Does it have a MOAT?
• Does it have a strong trend of sales growth regardless of economic conditions?

So, is stock picking a waste of time? You be the judge.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.