You are busy. Equity markets are volatile. The stock market feels like a no-fly zone. Yet when markets rise and fall, you see friends making money by picking stocks. And so, because you think it must be easy, you try and do the same. What is more, several fintech platforms now make taking the plunge and picking stocks a simple act of swipe, stop, buy. How convenient, right? Hmm.
Cut to a few quarters later. The valuations become rich, the universe of good stocks at a discount is less abundant, which is when things start to get tricky. You are now on slippery ground. You are not unsure of what to do. You don’t have the time to immerse yourself in this world. You are flying blind. You are now gambling, and this is not the way to pick stocks.
On the other hand, let’s look at how the experts do it. There are research analysts and fund managers who understand macro factors and do the math before picking stocks. They look for a fundamentally good business, determine its intrinsic value, buy that stock for half that value, and consistently create wealth for their customers (unitholders in mutual funds). This is stock picking at its fundamental best.
Managing money demands expertise and time. People who have experienced the ups and downs of the market know this all too well. Not everyone does. Or can do this. Sure, the internet offers the tools and resources to research at minimal costs. But, research aside, one needs to understand the basics of stock picking. Also, and this is important, the key to successful stock picking is to do it again and again for years. So the question you must ask yourself before trying to pick stocks all by yourself or based on what your friends say is thus: can you do it for yourself for years and years and meet your long term financial goals?
In order to answer this question, let’s examine how a long-term diversified portfolio mutual fund would have performed between 2011 to 2021.
Example on regular investing
|Sl No.||Fund type||Monthly investment For last 10 years||Current value May 2021||CAGR %|
|1||Large cap Fund||10,000||26.19 lacs||14.90%|
|2||Midcap Fund||10,000||30.09 lacs||17.50%|
|3||Small cap Fund||10,000||43.49 lacs||24.30%|
Example on lump sum investing
|Sl No.||Fund type||One time investment||Current value May 2021||CAGR %|
|1||Large cap Fund||10,000||37,756||14%|
|3||Small cap Fund||10,000||48,497||17%|
The tables above demonstrate the power of compounding returns over longer periods of time. Abnormal returns in the short term are not dependable.
Most of the equity funds have delivered the expected returns over the long term. So why do it yourself when there is a supreme investment option available? Use your time for many beautiful things in life and outsource the decision making on buy/sell/hold to the experts.
Furthermore, the two tables above show the comparative growth of regular investing versus one time investing over a 10-year period.
When you talk to experts or people who have made money in stocks, they will tell you to invest in a business you understand. If you were to buy a running business rather than stocks, would your filters for doing that be any different? If you observe, large investors only invest in a company they would like to own in the long term. Thinking about buying stocks as if you were buying the company will help you invest in an informed way.
When covid is over, will you have the time to track the developments in the company stock you have in your portfolio? Will you swiftly change your stock once you decide when to exit or stay liquid till you get another opportunity? These are not easy questions to answer yourself without the benefit of experience and dedicated research. That’s why it makes sense to let professionals do this for you.
In a developing country like India, there are continuous opportunities to invest in large, middle-sized, and small companies. The great challenge is to choose the right stock from this listed universe.
In our view, mutual funds provide a beautiful opportunity to invest across some of the finest companies after the fund manager runs filters like corporate governance, valuation, business moats, and business scalability, to mention the most important ones. Our long term investors have benefited significantly by investing regularly in mutual funds rather than gambling on questionable stock picks for the short term.
2 thoughts on “Am I a good stock picker? You be the judge.”
Hi Ravi Sir, This is one of the finest writeup on
the need & importance of Certified Financial
Planners on Personal Financial Planning. It’s
also an alert for the uninformed /opportunistic
traders on the risk of losing their capital. The
new set of traders has not seen the other side
of the market… It’s a timely one.
Thanks, Ajesh, for your kind words.
Team Gaining Ground Investment Services