• February 4, 2023

Is This Really a Stock Picker’s Market? And How to Invest In Such a Market

THEOne of the common themes at the moment investment professionals appear on financial television seems to be that it is a “stock picker’s market”. That shouldn’t really surprise anyone. For a stock picker, there is always a stock picker market. I should know because in many ways I am one.

That doesn’t mean every investor should rush to buy every single stock picks they hear about. Even in a stock picker’s market, stock picks are stock pickers and the rest of us should stick to a more passive investment style.

When I write about a single stock, it is intended for an audience who already invest some of their capital this way, are aware of the risks, and know how to manage such a trade or investment. If you don’t belong to this group, just because you hear the phrase “Stock Picker’s Market” won’t be tempting to join.

You should keep in mind that actively managed funds often have to tell you this, otherwise no one would ever pay the relatively high fees for their services. If they didn’t point out the times when the indices were moving in one area while some stocks were doing well while others were falling, an even greater percentage of the money invested would simply go into passive funds than track indices. However, the fact remains that for most investors, those who neither have the inclination nor the time to manage their investments on a full-time basis, chasing every idea they read or hear about is not a good idea.

For starters, stock picks tend to have a relatively short time horizon, while most investors don’t. When I say that I expect a stock to do well without explicitly saying something like “long-term,” I’m implicitly saying that I expect it to outperform the market at most in the next few months. That’s fine for those who sell after one try and move on to the next trade, but most people don’t. You tend to buy something, watch it do better for a while, and then sit on it while it returns to the mean, as most things end up doing.

If you recognize this pattern of behavior because you’ve lived it too often, it’s probably better to ignore the “stock picker’s market” thing.

Then there are the other types of stick picks that don’t work. If you’ve ever followed my advice or any other expert, curse us to yourself as the stock you bought drops dramatically and stays down for a while, constantly undercutting the market while still holding on to it and on one Hope you shouldn’t pay any attention to the “Stock Picker’s Market” for miracles.

Investing in stocks is essentially swing trading, and it requires a trader’s mindset and discipline to do so successfully. A big part of this is setting and maintaining a stop loss level at which you can get out of position no matter how you are feeling right now. If you can’t or don’t want to do that, take the more boring but statistically more profitable investment approach: buy an index fund or ETF and forget about it for a while.

There is ample evidence to suggest that this is the best approach. Morningstar’s table below shows the average relative performance versus indices of actively managed funds in various categories on a half-yearly basis from 2014 to 2019.

As you can see, there are big differences, but overall, only around 31% of the time more than half of the funds outperformed their indices over that period, and this is true for funds that are actively managed by professionals. The message is clear: it is possible to beat the market, but almost impossible to do it consistently.

The problem right now is we all hear of stories like GameStop (GME) or look at massive returns in Tesla (TSLA) or Bitcoin or whatever and think, “Why didn’t I get a piece of this?” What we don’t hear are the myriad stories from people who have gone broke over the years and spent every penny trying to try. Remember, these success stories aren’t in the news because they happen on a regular basis. It is their scarcity that makes them current.

Maintaining your own account and incorporating a few individual stock choices can be fun and even profitable, but you need to follow some basic rules. Remember, in this scenario, you should trade and only ever commit to trading money that you can afford to lose. In addition, acting requires discipline, and if you are unwilling to act in this way, you are not acting at all. If you keep both of these things in mind you will be fine, but if not then ignore the phrase “stock picker’s market” and overnight millionaire stories, trust the long-term data, and invest in the market as a whole.

The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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Jack

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