Good Thing I’m a Bad Stock Picker!

stock-market-board
Andrew Hallam, author of the book Millionaire Teacher, “crushed the market indexes” investing in individual stocks, but decided to sell all of those stocks, worth over $700,000, and put all that money into a total stock market index. He explained that he came to the realization that a big part of his success was due to luck even though he said that he researched companies more than anyone he knew, ordering five to 10 years worth of annual reports, and scrutinizing them from back to front. He pointed to Bill Miller, who ran a mutual fund which beat the S&P 500 for 15 straight years until the Great Recession at which time, the fund lost dramatically compared to the S&P 500. Hallam reasoned that if someone as smart as Miller, with the access to research and information that he had, could fail, then who was he to think that he could continue beating the market.

I’m not sure most people would have the self-awareness and humility to realize their limitations when they’ve been so successful. We’re humans and sometimes facts don’t matter. We often suffer from recency bias. “I’m beating the market, I must know what I’m doing when it comes to picking stocks!” It doesn’t matter that the facts and data show index investing consistently beats active investing. Sometimes investing in a bull market is dangerous because everyone thinks they’re smarter than they really are.

Back in the spring of 2000 when I was still in college, everyone and their mother was investing and making money in tech stocks. Everyone thought they were expert stock pickers and everyone was glued to CNBC. I opened a stock trading account so that I wouldn’t miss out on this money making opportunity. It was not a lot of money, but it was a lot of money to me at the time. I bought some internet stocks that were recommended by analysts which I had never heard of. I also bought well known stocks like AT&T (they were soon offering a wireless IPO and IPOs were hot!). Yes this is AT&T wireless. To you youngsters who don’t know a time without cellphones, wireless phones were a big deal back then and this stock would no doubt be a big deal (so I thought). About one month after I opened my stock trading account, the internet bubble burst and my stocks came crashing down. I lost 50% of the value in the account.

After the internet stock bubble bust, I was a little weary but I didn’t totally give up on stocks. Fortunately, when I started working, I kept most of my investments in mutual funds, and most of them were in low cost index funds. The lure of investing in individual stocks kept calling me though, because hitting a homerun with an individual stock was much more exciting than the slow gradual returns of index funds. However, I was always a little risk averse. Probably because of what I experienced during the internet stock bubble bust. That’s probably a good thing.

I invested in some winners. I purchased Nokia stock at $14. It made the most popular cellphones at the time and I loved my Nokia phones. The stock price went up to the $40 range and I held on to it…even as it went all the way down to the single digits. Around the time before the Great Recession, I held stocks in Starbucks. They were rapidly expanding and everyone had to have their daily grande non-fat caramel machiatto frappucino. However, I sold my shares in Starbucks for a small loss after the Great Recession hit, thinking the stock price would drop. Who’s going to pay $5 for coffee when the economy was in the tank and we’re in a recession? The price of Starbucks stock would eventually double and then triple from the price I sold it.

“Don’t forget that your incredible success in consistently making each move at the right time in the market is but my pathetic failure in making each move at the wrong time. … … I don’t know anyone who can do it successfully, nor anyone who has done so in the past. Heck, I don’t even know anyone who knows anyone who has timed the market with consistent, successful, replicable results” – John Bogle

I was having a conversation with a friend who thinks that he’s pretty knowledgeable when it comes to investing in the stock market. He has made some profitable investments. However, he has also often kept a lot of money in cash because he didn’t have the time to do the necessary research. He currently is staying out of the stock market because he believes that there is too much uncertainty, especially in the political arena. He said this months ago, but the stock market has still be roaring upwards. He might ultimately b e correct in his prediction, but his timing is off. You not only need to know what company to invest in. You also have to have the timing right as well when it comes to buying and selling. You have to be right about all three, which is why being a great stock picker is difficult. Do you think you can do that?

16 thoughts on “Good Thing I’m a Bad Stock Picker!

  1. Matt @ Optimize Your Life

    I am lucky that I stumbled across FI blogs before I really had any money to invest. I had just opened up my first IRA and started putting money into it when I came across discussions of index funds. It seemed to make logical sense and seemed a lot easier than doing the work to pick individual stocks, so I threw my money into a total market fund and planned to come back when I had more time to figure out the best plan for picking stocks. When I finally had the time to research, I decided not to pick any stocks at all.
    Matt @ Optimize Your Life recently posted…The Scarcity MindsetMy Profile

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    1. livingrichcheaply@gmail.com Post author

      It’s great that you learned about index funds and had the sense to follow that strategy.

      Reply
  2. Michael

    Hi Andrew,

    What do they say? It is better to be lucky than right :) Yes, I have done my fair share of investing in individual stocks. I would say that I made good money overall and I did beat market returns. I was using services that would provide value stock picks. I would do my own analysis and invest in them.

    I had my own set of rules. If a stock fell by more than 5%, I would sell and cut my losses. If my stock went up by 20% to 30%, I would sell and take my profits. Overall, I was netting a good positive return better than S&P 500 results for the few years I was actively trading.

    This was burning me out. Then I moved into indexes and that was the best decisions I have ever made.

    –Michael
    Michael recently posted…Stretch A Dime – February 2017 UpdateMy Profile

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    1. livingrichcheaply@gmail.com Post author

      You definitely did a lot more research than I did when investing in individual stocks. It does take a lot of time and research though…a lot of that time could be used for more productive things since index funds perform better.

      Reply
  3. EL @ moneywatch101

    Hey that was a truthful post, and most times people make bad trades in individual stocks. I picked Sirius radio at 6 dollars and it went down to 3 bucks. I didn’t purchase much but it stinks to pick a loser stock. The majority of my money is in Mutual / Index funds. I like the security of that, even though the dividend is very low like 2.%.
    EL @ moneywatch101 recently posted…How to Stop Financial PrideMy Profile

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    1. livingrichcheaply@gmail.com Post author

      Ahh, I remember Sirius radio at that price point. There was a possibility of a merger with XM radio also. I was thinking about investing in that stock as well…glad I didn’t.

      Reply
  4. Mustard Seed Money

    Trying to time the market is a fool’s game. I have a friend that has been in cash since 2011. He’s missed out on tremendous gains because the stock market hasn’t behaved like he’s wanted it. Even when it pulled back 10% two February’s ago he still stayed in cash. Seems pretty nuts to me. I’d rather dollar cost average and call it a day and do something else with my time :)
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  5. Matt @ The Resume Gap

    I have a wealthy friend who is a strong believer than he can pick winners. “You just have to have a strong thesis,” he’s told me with regard to projecting which industries will outperform. That’s fine… but everyone and their mother has a thesis, and they’re theoretically incorporated into the stock prices already. I could research all day long, but it’s still not going to lead to anything more than an educated guess. Perhaps someone can consistently pick winners time and time again, but it’s definitely not going to be me!
    Matt @ The Resume Gap recently posted…How Much Does Van Life Cost? – Volume IIMy Profile

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  6. James

    Andrew Hallam created that luck! He knew what to do, and everyone who is willing to learn can create that luck too. Hallam has served as an inspiration for so many and will be for many years to come.

    Reply
  7. DC @ Young Adult Money

    I think a lot of stock picking is luck. A tech company I’ve invested in has slowly dropped the past couple of years, causing millions of equity to be lost by stockholders. The CEO finally addressed it in a conference call and basically said this seems to be inconsistent with competitors when you look at market value, growth projectory, tech platform, etc. I can’t help but agree with him – it may just be bad luck that people aren’t familiar with the company and therefore there isn’t demand for the stock like some competitors.
    DC @ Young Adult Money recently posted…14 Smart Things to Do With Your Tax RefundMy Profile

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  8. Amanda @ centsiblyrich

    A very small percentage of our investments are in individual stock – I was given 108 shares of an insurance company when it went public and haven’t sold it yet. I mean, it was free. :)

    Other than that, we’ve never invested in individual stocks. I’ve been grateful for all the great information on FI blogs in recent years that introduced me to index funds. We have moved everything to index funds in the last few years.

    I have a family member that has been trying to get rich picking stocks for the 20+ years I’ve known him. Last I heard he was sitting on mostly cash because of fear. Makes me wonder how much growth he’s missed out on over all those years.

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  9. Fulltimefinance

    I did my individual stock investments around the same time, not long before the dot com bust. I only invested a small amount, but ultimately I went from 1k to 10k and then to 100 dollars. These days I have a few dividend stalwart legacy stocks, but in general I only buy index funds and I rarely sell.
    Fulltimefinance recently posted…Sometimes Free isn’t FreeMy Profile

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  10. Willow @ Miter Saws and Mary Janes

    I have zero interest in trying to time the market. I have money in target-date funds, mutual funds, etc. I also have a majority of my wealth locked in real estate. I’ve found it easier for me to time real estate markets around the country where I do my flips and hold rentals.

    While real estate can always be a gamble, I’ve educated myself. I have concrete sets of data points I painfully analyze before making any purchase decisions. I also have found a niche for my flips that has nearly guaranteed me $40K+ profits on every single project.

    It’s more about education and less about timing, IMO. With something as volatile and complicated at the stock market, I’m not sure it’s easy enough for the average person to educate themselves well enough to routinely outperform the averages.
    Willow @ Miter Saws and Mary Janes recently posted…Tiny House Living: How to Transition to a Tiny HouseMy Profile

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  11. SMM

    “It made the most popular cellphones at the time and I loved my Nokia phones”

    Sorry about the Nokia loss. I started out with their phones too and loved them. They were easy to use, durable as anything and had that snakes game! I wouldn’t call myself a great stock picker. There are wayyyy too many things to consider, which is why I am slowly moving towards index funds and ETFs.

    Reply
  12. Joe

    All our investments are in index fund except our dividend portfolio. It’s been up and down, but I’ve been happy with it. However, we’ll probably move these to index fund as we get older. It’s just so much easier.
    Joe recently posted…Blog Income Wrap Up – 2016My Profile

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