Picking individual stocks is the fastest way to go broke

Logo of many individual stocks

A lot of people like individual stocks

I get this question asked all the time:
Why should I invest in index funds when I can get so much more by buying individual stocks?
This the other question  that I get:
How about if I only buy the winners and don’t buy the losers?
And the avalanche of examples is brought up. I could just own Apple. Google, Amazon, Alibaba, etc.
In a few of my interviews, my interviewees declared that they prefer individual stocks, in particular, dividend stocks, (check my interview with: Smile If You Dare), others have declared that they like to buy cheap stocks, according to their measurement of cheap.
One of the people I coach couldn’t see the logic of Index investing when her Apple stock had made her over 40% that year. Another person told me that he wanted to make some real money. He didn’t want that 8% stuff.
True enough, some of these stocks have spectacular gains. All you have to do is read the “High Earners” in any newspaper and you will see stocks going up very fast.
The other idea to make lots of money is simply not to buy the “bad” companies of any index, that way you can make so much more.
The question is, How do we know which company will be the best tomorrow?

The case for index investing

The truth is that we don’t know. Every day, thousands of smart full-time investors go to their computer to try to find out those gems which will do better than the market and most of them fail. In my article Active Managed Funds Under Perform the Index (Again), we see how year after year about 80% of professional mutual fund managers underperform the index. Those smart persons with MBAs and CFA cannot create a portfolio that will outperform the index.

In this other article by Investopedia, it is reported that on average, hedge funds had a return of less than half of the S&P 500 for the year 2017. And in case you didn’t know, the hedge fund industry made a $1,000,000 bet against Warren Buffett, whereas the hedge fund industry claimed they could beat the s&P 500 in a time period of 10 years. Guest who lost?

So picking out the next winner is quite hard. The other part of the equations is that avoiding big losers is just as hard. Who remembers Enron, Kodak, Blockbuster, Blackberry? the list goes on and on. One day they were big winners and the next day they were not.

Investing in index funds is investing in capitalism

When we pick the index, we don’t pick the winners and avoid the losers. You pick all of the stock in an asset class. We depend on the spirit of capitalism. We depend on the idea that every man and woman will do their best to make their companies succeed and those who fail will be kicked out of the index. The index will do the stock-picking for you. If the stocks meet the index criteria, they are in. If the stocks don’t meet the index criteria, they are out. All you have to do is to contribute regularly to your investment account and watch your money grow.

 Don’t waste your time and energy

Another advantage of Index Funds is that the investor doesn’t have to spend hours and hours analyzing their portfolios while individual stock investors spend a lot of time watching the news, looking at screens, seen their stocks going up or down all the time, or even worse, reading financial statements, financial graphs, doing calculations and second-guessing themselves. Perhaps, the worse part of being an individual stock investor is that your mind gets hijacked by the stock movement. You think about it, worry about it, dream about it, etc… and it prevents the person from enjoying themselves, or doing something productive which would give them a better return for their time and mental effort.

Related Posts

  1. Asset Allocation; bonds, stocks, commodities, gold and more
  2. Active Managed Funds Under Perform the Index (Again)
  3. Moving in with your boyfriend/girlfriend – consequences

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Comments

2 responses to “Picking individual stocks is the fastest way to go broke”

  1. Mt Guillot. Your book here link, is not redirecting us properly. It is actually redirecting us to a scam phishing. If you don’t mind to explain that 1st & we see if we keep going. Thank you.

    1. Thank you for pointing this out. I was unaware of it. I will replace all those links in my other posts.