Do you like to?make your own stock picks? Or have you thought about it but just don?t know where to start? The maturing of the bull market in the past five years has to have some of us thinking that there?s got to be a better way to pick stocks – an inside secret even.
Most of us go with mutual funds so that we can at least keep pace with the general market. Mutual funds are after all managed by people who are in-the-know, so to speak. Or at least they should be.
If we decide that we?re not comfortable with mere market performance, we have to pick our own stocks and see if we can do better. But how do we do that?
Most of us lack either the time or the resources to pick our own stocks, and truth be told, while we have access to more information than ever before, the sheer volume of it can be overwhelming. How do we make sense of it against the backdrop of complex economic, regulatory and technological environments?
A strategy to pick stocks that probably isn?t new, but it?s still worth thinking about
In post on this site by Rob Bennett some time ago, Stock Picking Works (But Probably Is Not for You), corpfan1 commented and hinted at an interesting strategy to pick stocks in his comment:
?Why go with an index fund when you can choose the best 2 or 3 stocks out of that fund??
His comment got me thinking about a cohesive strategy using the same basic principal.
What if we can choose five (or ten, or what ever number we want) high performing mutual funds, and look for common holdings among them? Choose from stocks that appear on most or all of the portfolios of the funds, and those are the ones we buy.
The point is, we don?t have time to research all of the stocks on the market?or even a large number?so we use a poor man?s way of tapping expert advice. We?re looking at where the Big Guys are actually putting their cash. We get access to the professional management of the funds without committing money to them and the plethora of other stocks sitting in their funds that we don?t have much interest in.
There?s a herd mentality in all investments and among most investors, and even among fund managers. By looking for common plays, we?re getting in where the traffic is the heaviest.
This is probably not original?hey, I?m not claiming expert investor status here?but is there any merit to this? Are there any risks?
That?s just my shot in the dark, but I think there are three basic sources we can identify as sources for stock picks.
Choosing from among the ?Nifty Fifty?
My little expansion on corpfan1?s idea is based on this. In bull markets the broader markets may rise, but the greatest growth is concentrated in a small number of stocks that have become ?hot?.
This narrow segment has sometimes been referred to as ?The Nifty Fifty? or by some other title. Translated, it represents the stocks that are the markets biggest cash magnets. Everyone wants to get into them, but the big boys usually get in first.
Identify this group early enough, and the profits can be substantial. Downside: this group is a moving target, and you can never tell when the big money will shift into a different set of stocks.
Finding the Golden Goose of stock picking strategies
Stock picking gurus abound. If you can identify one or two who are really good at what they do you may be on an elevator ride up the wealth tower.
The issue here is that you usually have to pay for the strategies or picks they have, and that can be more expensive than the fees paid for mutual funds.
Even if they?re the real deal, investment experts are notorious for hot and cold streaks. Some are very good in bull markets, some in bear markets, some in lateral markets, but very few will do well in all or even most markets. Alas, we?re all painfully human, even the experts among us.
Cutting your own path
The third alternative is to develop your own system, strategies and abilities. If you?ve already done this successfully, chances are you?re one of the investment guru?s discussed above!
In truth, few people have the ability to consistently pick winners in the market, at least not over the long run. Stock picking isn?t just an intellectual pursuit either. Emotion plays a powerful role in investing; can you stay the course when the market has turned against you? Can you buy when everyone else is selling? Can you sell when everyone else is buying? Most of us can?t.
Another caveat is that developing your own system takes time?years if you?re going to truly perfect it. Along the way money can be lost, and years of compounding with it.
I?m not being too encouraging here, am I? What methods of stock picking can you offer?
Do you pick your own stocks, or do you prefer to go with mutual funds? If you pick your own, what strategies do you use?