This is a guest post from Van Beek of Stock Trend Investing, a blog about getting better stock market trading and investment returns to grow your savings for retirement, college, and financial freedom.
You have heard the stories. You have had the thoughts: “If I just would have bought those Apple shares in 2010 I would have doubled my money in two years!” You also know that you could have made way more money if you have invested even earlier. If, for example, you would have bought $1,000 of Microsoft shares in 1995, then a few years later your $1,000 would have turned into $10,000. More recently, Google shares tripled in 7 years from 2005 to 2012. And who knows how much Facebook shares will increase in value the coming years. “It is all about picking the right stocks, isn’t it”?
In hindsight, it looks so great and sounds so easy. Everybody knows who the winners are. The only thing you would need to do is to invest some of your savings in those winners a few years earlier and you would never have to work again. But real life does not work that way.
Find out why and what you can do instead.
A Lot of Sweat and No Certainty
Picking the right stocks is hard work and takes a lot of time and a lot of luck. It requires a lot of sweat and offers no certainty. When the winners of today were still small companies, there were hundreds or maybe thousands of companies like them. When their stocks were still cheap, it was not clear at all that Apple and Microsoft would be eventual winners. Now, just look at the Apple dividend – who would have thought?
Remember those great promising companies of the past like Pets.com, Boo.com, Netscape, Lotus, Atari and many more? When those companies were “hot” many stock pickers believed that they would make them a fortune. Now we know they didn’t.
Finding companies that are undervalued and could provide you with great returns is hard. How many very smart people in the world are scanning the markets every day to identify these companies: thousands, millions of people? And the current market price reflects what all these people are thinking and doing. You can bet that the most promising companies have a big price tag. And are you that much smarter and more talented than all these other stock pickers?
Everyone could be lucky once and pick a good stock. But to do this systematically requires more than luck. I think that picking more often than not the right stocks, is very hard work, very competitive and without exceptional talents, impossible. I’m not one of the lucky ones.
Why Stock Picking Doesn’t Last
Another problem with stock picking is that your picks don’t last. A company that is great now, could be in deep financial trouble in a few years. In 2008, Nokia “owned” more than 40% of the global mobile phone market. It excelled in high-end smart phones. Four years later, in 2012, Nokia posted a $1.7 billion operating loss in quarter one. Its market share is declining steadily and in the high-end phone segment, Apple and Samsung are giving it a run for its money. In 4 years, Nokia shares lost about 90% of their value. But only 4 years before they were considered to be the gorilla of their market and a safe bet.
And remember MCI WorldCom and Enron? The apparent “winners” don’t always last. When you are in the stock picking business, make sure you have the time and enthusiasm to keep reviewing both your old and new picks all the time. Otherwise, those millions of people who are competing with you are suddenly passing you up.
Of course, you can make the choice to become a professional stock picker. This isn’t a hobby. If you have the talents and stamina for it, you can become rich beyond your wildest dreams. You could even end up in the top 10 investors of all time. Just know that millions tried and only 10 or so succeeded (there are countless others who have done very very well). I don’t have the statistics, but can guarantee you that most of all those others who tried and failed, lost more than that they gained. They lost their money, they lost their time and they lost the opportunity to do something smarter and simpler.
Thus, unless you are getting a college education in stock picking or you have the talents to make this into a successful profession, I would recommend that you spend your time and money more wisely.
Spend Your Time Wisely… Invest Simply Now
Regardless of whether you are in college or working, your time is limited and valuable. Why would you spend this time on picking stocks? Spend your time on your education or on doing a better job. Then you will learn something that has more lasting value. Learning which company you want to pick now has little lasting value unless you want to make this your profession.
I strongly recommend you start saving and investing some money when you are still in college or in your first job. The amounts don’t have to be high. It is about the experience and insights that you gain…. and the money that you make of course.
Keep it simple. Start with broad market index funds like the SPY that tracks the S&P 500. Every quarter, put some money aside that you would not need for years to come and invest it in such a fund. Read some basics about the different type of accounts that you need when you start investing, and go at it.
Adding some money every quarter to your index fund will not make you rich immediately. This is a long-term approach. It takes time; but your odds are very good. If you do not start now, you will only have to wait longer to reap the returns. The power of compounding is amazing, but it takes time.
While you start investing in this way, you can experience first-hand how your emotions react to the movements in the market. Making investment decisions that are driven by emotions is a recipe for disaster. Starting small now helps you to recognize and control your emotions when your investments soar or decline. You just need to follow the plan. Your plan is to add every quarter to your index fund. That is what you do, regardless of the ups and downs.
Later, when you have more money to invest and proven to yourself that you can stick to your investing plan, you start applying more advanced strategies. Then you start diversifying, going international, selecting special dividend funds and following the market.
For now, forget about stock picking, spend your time wisely, and start investing every quarter your savings in a simple broad market index fund.
I think that Van Beek provides some solid advice on investing in a broad market index fund and keeping it simple by investing quarterly. What are your thoughts on investing simply?
Right on! Sort of like gambling, I think the worst thing that can happen to a novice stock-picker is an early win. Impressed with his or her own cleverness, the novice commits themselves to repeating the achievement, and a long string of losses is more than likely inevitable.
I’ve never thought of that, but an early win really could give a false sense of abilities in the stock market.
Good point Kurt. An early win, based on pure luck, can put you one the wrong track. The opposite is valid as well. Solid investing strategies ask for a long-term perspective. A novice investor could start on the right track, be discouraged by the short-term results, and abandons an approach that would have worked over time very well.
I’m a big fan of “Fooled by Randomenss” which posits that even the “top” stock pickers, mutual fund managers, etc. attain their accolades purely through random statistical noise. Of course out of 10,000 mutual fund managers, there will be a couple that beat the index each year! But look at them 5 years out from when they made the cover of Money mag? They all suck. It’s random luck.
Yes, I like the books and views of Nassim Nicholas Taleb as well. And he has actually worked as a trader I believe. Its recommended reading.