Is Stock Picking A Time Waste?

Making money seems simple. Buy low, sell high. There’s really not much more to it than that. However, just because something’s simple doesn’t mean it’s easy. It can’t be. If it was, everyone would be rich already and there’d be little left to think about.

But that’s obviously not the case. People are constantly getting stuck on the details. Details like human psychology, our understanding of risk, and an often fundamental blind spot when it comes to the realities of chance and probability.

Success in investing for the long-term actually follows some fairly basic rules. Here, we’ll investigate why you can’t always trust the experts, where exactly you might be going wrong in your own stock picking, and what you can do to remedy it.

Why Buy Stocks At All?

It’s an often overlooked question that’s worth thinking about for a moment: why play the stock market when there’s plenty of “risk free” investments out there guaranteeing income with very little downside?

Whether it’s government-backed bonds, high interest savings accounts, or just those plain old certificates of deposit, investors are never short of options when it comes to investment vehicles that carry little exposure to risk.

The problem with this approach, however, is two-fold: first, in reality, there’s never a “no-risk” investment opportunity. Low-yielding investment instruments are always at the mercy of inflation – you might not lose your initial investment, but the spending power of your returns once you cash-out might actually be less than it was when you first put in.

This brings us to our second point: ultimately, investors must speculate to accumulate – the degree of risk you’re willing to foot determines the returns you’re liable to receive. Yes, if a low-risk investment works out, you’ll make a little money. But that’s all. 

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So How Do You Know Which Stocks To Pick?

Choosing which stocks to buy isn’t easy at the best of times. Even those famous faces you see on TV recommending various companies to viewers often get it wrong.

In fact, a recent study by Reddit user “nobjos” set out to analyze the stock picking decisions of some high-profile investment figures, including Jim Cramer, Michael Burry, and even the democratically elected public representatives in the United States Congress.

The results were pretty interesting.

Jim Cramer Stock Picks

For instance, Mad Money’s Jim Cramer had mixed fortunes when his stock picks were evaluated over various different time frames. In the short term – one day, to be precise – his stock recommendations performed shockingly well; that is, if investors bought every one of his buy picks the day he announced them, then sold them 24 hours later, they would be up 555% if they followed his advice for the full year.

However, if investors held Cramer’s picks for the long-term, their performance would have been nowhere near as good; over a time span of one month, the Mad Money presenter’s cumulative return on his long positions fell to a loss of 223%, with only 45% of his picks being right during that time. Similarly, his short pics also flatlined, going from a 119% cumulative return after one week, to a paltry 1.6% after one month.

Politicians Stock Trades

So how did those upstanding public servants in the Senate and House of Representatives fare in their efforts to outperform the stock market?

Well, on the face of it, they didn’t do too bad. Benchmarking their trades over the month and the quarter, Congressmen appeared to beat the S&P500 by 0.12% and 1.34% respectively.

That said, there’s a problem for those of us outside of Congress wanting to follow their investing decisions; we’d have to mirror every trade made by the House members – and there were thousands of them – just to get a small, low single-digit advantage.

Michael Burry Portfolio Returns?

But could Michael Burry, the naysayer who predicted the 2008 sub-prime housing crash, do any better?

Seemingly not.

His prophetic touch appears to have failed him lately, with claims about an Index Fund bubble and the imminent downfall of the stock market having not turned out as forecast. 

That might leave you wondering who to turn to for quality stock picking advice. Well, there does appear to be one class of people who seem to know what they’re doing: Financial Analysts.

Are Financial Analysts Worth Following?

Yes, that’s right – the professionals.

It shouldn’t come as much of a surprise, but those folks whose expertise it is to do the number crunching and take deep dives into the inner workings of a company appear to outperform TV pundits and career politicians. 

In another Reddit post from user “nobos”, the intrepid researcher shone a light on just how well the Wall Street analysts were doing in their own jobs.

It turns out, in fact, they were doing pretty good; their buy recommendations beat the S&P500 by over 40% in the first week, and almost 23% for the quarter.

So does that mean that retail investors can just cut-and-paste what the big finance houses are doing? Not quite. The problem for regular investors is that these firms charge a high price for access to their portfolio picks.

Goldman Sachs (GS), for example, sells its basic analysis to customers for $30K, while Barclays can charge up to $455K for its equity research offering.

What’s The Alternative?

There is some good news, however. Investors don’t need to give thousands of dollars to Wall Street hedge fund managers to obtain access to prime stock analysis. There are myriad options now for investors keen on getting reliable and actionable information on the best the stock market has to offer.

Platforms like Financhill are changing the game in favor of the private investor, with an innovative approach to stock picking and pricing, and a commitment to solid, rigorous research that digs down into the nuts-and-bolts of what makes a company tick.

Rather than simply choose stocks for their short-term gain, Financhill’s in-depth coverage investigates and dissects what really determines whether a business in successful or not. 

Research articles on Financhill typically cover a company’s key performance metrics through quantitative methods such as cash flow analysis, sales growth, profitability trends and a stock’s most pertinent financial ratios.

In addition to this, the qualitative aspects of a firm will be discussed too, including whether a company enjoys a meaningful business moat, its position in the wider market with respect to its competition, as well as macro-economic factors such as the current political environment and prospects for international expansion.

Successful companies are generally successful because they can stay the course. Understanding what makes a business thrive is key. Whether it’s a 100-year-old Dividend Aristocrat, or a relatively new tech giant of the FAANG kind, each stock has to be approached on its own terms.

Google’s decades-long rise to one of the largest companies in the world wasn’t always obvious to the average onlooker – but for those that did the due diligence and dug deep enough, the clues were there all along.

If you’re an investor searching for precisely this kind of analysis, Financhill is just a click away.

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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.