Traditional theory and especially the movement started by Jon Boggle says that individual stock picking is a loser’s game. 90% of investors should stick in passive ETF funds and Warren Buffet thinks the same. I also do.
Cognitive psychology also says that it’s very difficult to convince yourself that you are not in that 10% and missing great value. I am one of them. The statistics needed to convince me otherwise, or anyone for that matter, need to be gathered during multiple years. By the time you have enough data to confirm that you are in this 10% and you can beat the market, money has no value because you are living in a nursing home.
There is no way that an individual non professional can gather enough information (public or not) to beat the market on a particular stock. That’s why the most profitable trades are insider trading activity or from senators like you can see here. What can a mere mortal do?
Try and educate yourself as much as you can. As a non professional I got most of my knowledge through Coursera and Edx. They have amazing courses. I have taken courses on portfolio management, economic theory, stock valuation amongst others. One I highly recommend is Damodaran’s free course on valuation. Still then, you need to spend a great amount of time going through 10-Ks and subscribing to all the Bloomberg news for that stock. If you are not a professional and have other business to attend to like me, it’s a no-go.
I have developed a mental framework with some rules in order to buy a specific stock. Loosely my thinking goes like this:
Is this a sector I look favorably? As an example many yoloed in cruising and airline stocks during the pandemic. Did I miss some profit? Sure. Could I make a huge blunder by miscalculating? Certainly. Remember according to Buffet and poker theory, the game is to minimize errors and big blunders that give significant blows to your budget.
Is it a household name that for some reason is being oversold but I think it has a good future? Is it a product I personally use? I never held Facebook stock but during the pandemic in March I found myself constantly overusing it. The stock was at an all time low. It was a no-brainer.
Is the company a rising or falling one? I will explain in another article why I think technical analysis is a losing game but suffice to say I do look at the graphs. Is the company graph rising during the last years? If it’s filling it means that the company is not going well, there is a hidden problem with management or sector prospects.
Is the company at a value that I like? How do I know what is a good value? Without time consuming valuation you can’t. So I just look at the market competition and the graphs and see how others valuate this company. In a way I am using collective intelligence for that. One aspect I need to work on is being afraid to buy tops and fast rising companies. I used to detest buying a stock after it has gone up fast 20-30% but many examples made me rethink on this. Of course common sense should prevail and buying a pump and dump stock that is up 100% in two days is not worth it but I’m mostly talking about stocks like Tesla as an example.
In conclusion this is a fun game to play that maybe is profitable although you never know until many data points are available (see years). Then again, there was that famous research with dart throwing monkeys beating the market..
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