Professional investors themselves often don’t make particularly good investment decisions, so their funds often underperform or lose money. But before writing them off and deciding to do it all yourself, take a moment to ask yourself: do you really think you can select individual investments better than a professional?
Regardless of whether you can outperform the professional fund managers, investing directly in the stocks or bonds of individual companies or the bonds of countries may simply be a matter of taste. I always saw my private investment account as being like my diet: I wouldn’t choose a meal based just on nutrition and price but on taste as well. As long as my diet and portfolio are relatively well balanced, I’m not doing anything too stupid, and I’m aware of the risks, I feel comfortable with allowing myself to enjoy the process of investing. I may well have underperformed the professionals, but I’m meeting my goals, and that’s what matters.
Having said that, ‘doing something stupid’ is very easy to do, and ‘balance’ in your portfolio is incredibly elusive. So here are three laws to bear in mind if you have decided to go down the route of picking your own investments
- Never take stock recommendations from anyone without thoroughly investigating the stock yourself as you otherwise would, even if they are supposedly an investment professional. You’ve probably heard this one before. It’s very unlikely that the person you’re speaking to knows what they’re talking about. They may mean well, but for any number of reasons they may just simply be wrong. Wrong about the stock being a good investment. Wrong to recommend it (if they truly have special insights about the stock then they and you may be breaking the law by discussing it). Or wrong to suggest that the stock is a good fit for your portfolio. That last one is important to bear in mind when receiving recommendations from an investment ‘professional’: a professional stock-picker is unlikely also to be a professional wealth planner, and they are incentivised – both professionally and egotistically – for identifying stocks that go up in price, not for identifying assets that are a good fit for a specific person’s portfolio. Professional stock-pickers rarely talk to clients even in a professional capacity, so don’t trust their judgement in a private capacity. In fact, you are probably just a guinea pig for your boyfriend’s friend to express their ego, because at work they keep making bad stock calls. Investigate it objectively if you’re interested, but never invest solely on a recommendation
- Start with what you know, which is usually large well-known companies. There are easily enough large companies in the world to keep you busily reading for a long time, so focus on those. Maybe you shop with them regularly or have a subscription with them. The number of professional stock analysts that have talked to your author about balance sheets and growth forecasts and have met senior management but have never actually bought the company’s product is embarrassing. And consider the connection between this rule and the rule above. Random stock recommendations are often about small or awkward companies that you’ve never heard of, because it sounds more impressive. People don’t recommend large well-known companies because they know that chances are, you know more than they do about the company already.
- Don’t try and be too tactical. If you like the company now, why wouldn’t you like it in 5- or 10-years’ time? Yes, there is such thing as a ‘hot stock’, but don’t try and seek them out. Don’t think about it as ‘trading’, but ‘owning’. As an owner of a business, would you change your mind every year about whether you want to be an owner or not? A stock is a business, and by buying it you are becoming an owner. Only invest if you’re planning to stay invested for 5 years or more. I have very rarely divested from a stock that I bought, and even then would only sell if some important new information came to light, such as a fundamental change in business direction, or an accounting fraud (I’m lucky to not have been invested in a fraudulent business yet). Having a longer term outlook also helps you manage the inevitable emotional biases that naturally come along with investing in stocks, and a long term view is even more important when you’re doing it yourself than when investing in a fund, because funds usually have risk management processes designed to reduce bad outcomes.
In terms of what to actually look for when picking stocks, well, the ‘professionals’ go through quite an involved process, but we provide some basics in a forthcoming article.
In this post we’ve only talked about picking individual stocks. We deem it even less likely that you’ll be picking your own individual bonds (your author certainly doesn’t) but see this article for some of the basics of bonds.
We refer to lots of linked posts in this post. We hope that by following the links you can answer any questions you might have, but if anything is unclear in this post, or you have any questions relating to anything investment-related, please submit comments or questions in the section below and we’ll do our best to answer them.
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