Yesterday morning I saw a harrowing video flash up on Youtube about gambling addiction. It was done several years ago by a man in Las Vegas who put together a series of short videos he did recording his descent into financial oblivion on the slots. Watching it you can hear the words of a gambling addict and see too how they talk about what they are doing as they wipe themselves out.
As I watched it, I wondered how many people are going through this now thanks to the Robinhood app and crypto trading this year, wiping themselves out in the stock market. A few months ago one Robinhood customer got so angry over his losses that he got arrested for sending threats to the company. Over a year ago another one committed suicide and I remember in the 2000-2003 bear market that a daytrader shot a bunch of people after bankrupting himself. The bear market is real and eats people alive and so many this time have been programmed to become gamblers through the very design of these apps.
One thing the guy says is that he just was trying to get ahead with slots. He went in the casinos and saw photos of people holding big money checks they won from playing the machines. It looked easy. All he had to do is play long enough and he could win too is what he had convinced himself into believing.
Off course that wasn’t realistic, but how many people over the past few years have seen screen images of big gains in an account thanks to an option trade or heard of a stock making a big gain on TV or in ads on the internet and gotten convinced that they too could get rich if they just got in the right stock. People on social media said it was easy.
And how many people sold them on the idea that a magic stock pick or crypto coin could solve all of their problems?
In fact most people think that people get rich in the stock market thanks to being able to pick out stocks.
Propaganda telling people that is nonstop.
Yesterday, someone forwarded me a story from MarketWatch with a headline that read: “Are retail investors better at picking stocks than hedge funds? Bank of America says the answer is ‘yes’.” According to the story some study showed that the stocks that retail investors tend buy go up more than those that hedge funds buy for at least a few weeks after their purchase.
The implication is that you can win by picking stocks.
The reality is stock picking abilities actually have very little, if nothing, to do with real investing and trading success.
It took me years to realize that.
When I got into the market it was in the late 1990’s and I went and grabbed a bunch of books about picking out stocks.
I read about “value investing” and “trend trading” and found William O’Neill’s “How To Make Money In Stocks” and Peter Lynch’s “One Up On Wall Street” as among the most useful, and still recommend them. When I went and got these books from the store I just thought these were smart guys and I wanted to learn from them.
I didn’t know that I was actually late in a secular bull market and that they had become what were among the top bull market gurus of that cycle.
Peter Lynch made a name of himself as a master stock picker.
Cathie Wood became this cycle’s top guru.
The difference is Lynch knew how to manage money and retired before the top of the cycle and Wood’s talk is a lot of hype and technobabble, but she was the perfect guru for a generation of people’s whose main interface with the financial markets is a trading app, with little information on it except the daily gyration.
It took me a long time to realize that while everyone talks about stock picks, the reality is no one really gets rich from putting their money in just a few stocks they picked out and having them just go up like crazy.
What makes people money is money management techniques – position sizing, diversification, and a strategy of buying and selling.
I can only think of two people that I have heard of that got rich by having all of their money in one single stock.
One was a guy I read about in the local newspaper years ago who died with over $30 million dollars in Philip Morris. He was a tobacco farmer who just bought the stock every month no matter what it did. He bought nothing, but that one stock.
He got lucky.
What if he bought the wrong stock?
What if he was trying to buy crypto?
Another person owns another stock that his family had owned for a decades.
If he was in the stock of a company that had gone bankrupt he would not be so lucky today.
It’s just luck.
The William O’Neill book had one chapter in hundreds of pages about picking out stocks that said that when it comes to whether a stock goes up or down what is most important is not the characteristics of the individual stock itself, but what the overall market does and the sector the stock is in. The performance of an individual stock is over 90% correlated with that of the sector that it is in. So a bank stock will just about mimic the action of the XLF ETF and a large cap gold stock that of the GDX.
So sector selection is more important than individual stock picking.
There are lots of studies out there that show that money managers can’t beat the performance of the market through stock picking.
I think one a long time ago showed that a monkey could pick out stocks at random and beat them.
You do not need to pick out stocks to beat the market.
Instead, focus on beating the market by picking out the sectors you want to invest in and by building a money management system that works best for you.
Edward Thorp came out with a book a few years ago titled a Man For all Markets.
In it he has a chapter that says that if you buy a group of a few dozen random stocks in the S&P 500 you’ll simply match the performance of the index.
So, if you buy a group of random bank stocks you’ll pretty much match the performance of the XLF ETF if you want to invest in bank stocks.
Why notjust buy the ETF?
Well, if you do that you’ll have to pay ETF fees and you’ll get fewer dividends.
If you buy stocks you can sell losers from time to time and then move the money into new stocks – which provides tax loss selling benefits that can help you in the long run.
When the stock market was crashing March of 2020 I went to over 90% cash after it fell 1/3 off of its high and then bought back after the bottom.
When I bought back I did so mostly in individual stocks, but I picked them out by figuring out what sectors I wanted to invest in and then just ranked the stocks by market capitalization and dividends and bought from the top down.
That’s how I picked out stocks.
I bought a lot of REIT’s stocks doing this in 2020 and did ZERO research on the companies.
A few of them ended up getting bought out after I bought them and I had no idea that would happen.
I also bought energy stocks, mining stocks, and other commodity related stocks.
By the end of last year among my biggest gainers were XOM and MOS.
I had no idea they would be my best stocks when I bought them and I don’t think there was a way to predict that they would be.
Stock picks are basically useless.
Despite that fact all of the financial media and market commentary, not just on TV, but on the internet and by individual traders themselves, is devoted to stock picks, because that is what people want to hear about.
It’s what people will click and read or watch a video about on Youtube.
The truth is if I did a video on Youtube about this post very few people will watch it and the Youtube algorithms won’t promote it as a result.
People think of a stock pick as the equivalent of hitting the button on a slot machine.
My advice is to watch this to help get out of the stock picks is key to riches mentality that people like Cathie Wood and the Robinhood help are helping to drive.
This is a time when stocks picks just aren’t important compared to money management and risk control.
The bear attacks are eating people alive.