When the times are tough, retail investors seem to think that stock picking doesn't work. Burned by their losses, they concur with their finance professors that stock picking is a losing game. However, the same folks who lost a good chunk of their portfolio investments during the global financial crisis of 2008-09 jumped back into the market when they felt it was safe again. Although their trust in the market appeared to be shattered, there was a feeling that they were missing out on the upside. So here we go again-retails investors are investing in stocks when the times are good, but this time around they are doing it more intelligently.
What good retail investors quickly realize is that portfolio diversification is key to solving woes related to stock picking. On a global level, the right allocation among bonds, stocks, mutual funds and ETFs leads to higher returns in the long run. So rather than allocating 100% of their investment into high-risk stocks, they distribute their dollars across a number of asset classes. Secondly, even for the stock portfolio, key is to diversify and know how to use the wealth of information available out there to make calculated bets.
Good retail investors take stock picking to the next level: they learn from the likes of Warren Buffett, Ben Graham, and Peter Lynch. Consider what Charlie Tian, the founder of Guru Focus, had to say about his early stock picking attempts:
"..I Had One Problem: I had absolutely no knowledge whatsoever when it came to investing. At the peak of the internet bubble, I was buying shares in fiber optic companies which I thought had the brightest future. My fiber optics stocks quickly doubled or tripled. Making money with stocks was easy, I thought. Then the bubble burst... "
What Tian did post bubble burst is quickly learned principles and built confidence about investing in stocks. He found out about Peter Lynch and his books that taught him about Warren Buffett, and his mentor, Ben Graham. And then he read all of Buffett's shareholder and partnership letters of the last 40 years. In other words, Tian did more than just a quick homework-he realized that successful investing is about knowledge and hard work, the idea that led him to start GuruFocus.
Easy to say, hard to do-you may think-as most of retail investors don't have enough time in their lives to research stocks. But there is a shortcut in the process-you can stand on the shoulders of giants. Let me explain what that means. There are more than 10,000 stocks traded on NYSE and NASDAQ. Rather than coming up with your own ideas for stock investments, you can generate ideas from the portfolios of most successful investors. If you ride on the coattails of investors who are doing it for living, wouldn't your risk of making bad bets drop precipitously?
Theoretically, yes. Practically, you still need to be able to decipher signal from noise. There are so many tools and web sites that go into technicalities of investing, which is too complicated for most retail investors. Whatever requires more knowledge than high-school algebra, i.e., value screeners for ideas generation and research tools for idea analysis, is too complex for most stock pickers to digest in a short period of time they have to think about investments.
The alternative is to consider simple tools that provide stock pickers access to what current top investors are investing in today. It's important to note that current top investors encompass a much broader set of analysts than stock picking gurus such as Warren Buffett or Peter Lynch. Take for example the current list of top equity analysts-it features up and rising stars, in addition to star analysts such as Doug Anmuth of JPMorgan and Stephen Kim of Barclays. Bottom line, you don't need to do all the analysis if you're serious about stock picking-but you need to take input from those who have done the work, have a consistent track record you can rely on and are willing to share their latest recommendations and picks.
Like any other investment class, stocks are not going away any time soon. Neither is stock picking. But what has changes since the last bubble burst is the level of rigor investors bring into stock picking. And maybe the overall allocation of investment portfolios on stocks. And for retail investors, stock picking needs to be as simple as you can make it-which today is a significant gap in the retail investment space.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.