“The reason why 90 percent of investors and fund managers cannot pick stocks is simple: Whenever you buy or sell a stock or bond, there is someone on the other side of that trade, and that someone most likely has a name like Goldman Sachs, PIMCO, or Warren Buffett.…Trading individual stocks is like playing tennis against an invisible opponent; what you don’t realize is that you are volleying with the Williams sisters.” William J. Bernstein, Investor’s Manifesto
When Peter Lynch came out with his classic Beating the Street in 1994, I was excited – and determined to follow his advice. I even gave out copies to a few CPA clients (I was not yet a financial planner). Mr. Lynch coined the phrase “ten bagger” to signify the potential growth in a stock price by a multiple of 10. Buy for $10, sell for $100 – who wouldn’t be all over that? However, I soon realized that it was extremely difficult to find, buy, and hold ten baggers (or even two baggers), and then call the right time when to sell them. In fact, it was much easier to find stocks that appeared to be fabulous, but weren’t, because:
- the fabulous-ness was already priced in (meaning, the secret was out), or
- the company was just about to announce bad news that I wasn’t privy to, or
- a competitor had learned how to improve on their business model, or
- their product is about to become obsolete, or
- (you fill in the blank)
This list can go on forever. And yes, there are great stocks to be found, but in our little world, it’s mostly a matter of luck. Kind of like the luck you always hardly ever have in Las Vegas. What about your broker – isn’t it his business to know? Consider this – he’s privy to the same information you can dig up yourself on the internet. There is no crystal ball – not even for Warren Buffett. Even more damning – your broker is frequently selling products that will earn a commission and/or that the home office is pushing.
Then what is the key to successful saving and investing? Here’s the real secret – keep a well-diversified equity index mutual fund/ETF portfolio, rebalance periodically, and follow a plan. Over the long term – which is the only timespan to invest – what really matters is having a workable plan and sticking to it. So if I don’t buy stocks, what is the solution?
Our solution is to focus on our clients’ behavior and building a financial plan that will get them where they want to go between now and dead. We can’t change the stock market, but we can ensure you accomplish the goals in your financial plan. Is it as exciting as picking the next ten bagger? No, but you can go to the casino for excitement. What our clients want is clarity about their finances.
Still want to invest in stocks? Here’s my rule of thumb: put no more than 10% of your portfolio in individual stocks and invest only as much as you are willing to lose. Therefore, if you’re not willing to lose 10% of your portfolio, perhaps you should reconsider your brother-in-law’s advice about that new solar power company. And if you’re thinking of buying stock in a company that is undervalued, consider this: the stock market has been gaining ground since 2009 – why would you want to own a business that can’t do well even now?