This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.
Why Stock Picking is Bad
Do you know who can pick stocks well enough to beat the average market return, i.e. that which a dartboard, a monkey or an index fund could do? You know who?
Almost nobody, that’s who.
Sure, some people can beat it for a year. Some, for several years in a row. But the guy who can beat it over and over again, for decades, is very rare. In fact, he’d be a celebrity. In fact, he is. His name is Warren Buffet, he lives in an old house and he thinks he should pay more tax. And even he has not been doing that well lately. And finally, he himself recommends index funds for the average investor like you.
Of course, I’m being a little facetious. There are other people who are clever and talented enough to beat the market. But they are few. Are you really one of them? Do you have any idea how recent unrest in the Middle East is likely to impact oil prices, and how this might flow on to consumer confidence in the US? Have you factored in how changes in Chinese currency policy might affect the electronics market? And what about how self-driving cars might influence wages in developed countries?
If you really think you know as much about these issues as any professional who calculates the odds full-time for a living, maybe you’ve got what it takes. Alternatively, you might be an expert in one particular area of the market, say, gaming software, and therefore you might know what’s a hot investment in that area. In this case it might be worthwhile, but if you’re only investing in gaming software companies then your portfolio will lack diversity. What if the whole gaming market slumps? It could happen.
In general, picking your own stocks takes a lot of time and effort in research and monitoring, and all this hassle only brings you higher risk and not much prospect of a higher return than the market average.[i] Do yourself a favor and use that time to work on a side hustle instead, as discussed in Step 5: Increase Your Income.
If you really, really want to get into DIY investing, I recommend you put most of your money into an index fund anyway and use 10% to play the market. And if you get really good, and choose to directly invest all your money, and make a fortune, and keep on beating the market over a twenty-year period, good on you. Write me a letter and tell me how stupid I am.
I don’t expect to get too many letters.
Now, the discussion thus far assumes you’d be investing in shares for long periods of time. That would be a good idea. There is a whole other field of speculative investing that involves rapidly buying and selling shares for short-term gains. As mentioned earlier, it is called day trading and almost everybody loses at that game.
If you pick your own stocks for long-term investment and diversify broadly then you’ll probably make around the average market return or a bit under in the long run, despite all that extra effort. On the other hand, if you get into crazy speculation then you might lose the lot.
[i] https://www.whitecoatinvestor.com/picking-individual-stocks-is-a-losers-game/
Also available on many other platforms.
SovietMen 
I pick my own stocks. Started in 2011 or 2012, but didn’t get serious until 2015. By that, I mean I didn’t sell all of my ETFs and mutual funds and go all in on individuals stocks until then.
Man, did I ever make some huge mistakes. Got punished by GM, TGH, GE, GERN, XOM and RDS.B. One of the worst days of my life was the day I had to go back to work after a vacation in 2017. I simultaneously found out that my ex-GF, whom I was trying to get back with, was leaving that company for another, and I wouldn’t see her again. And GERN dropped about 70% that day before the market open, costing me around $60k literally overnight.
The lessons I learned were brutal ones, but they served me well. Now I have a stock portfolio that paid me $14,995 in dividends in 2021, while appreciating by nearly $121,000 in the same time period. Still, it is probably not due to me improving so much as a stock picker, and more about the policies of the ruling elite, which benefit share owners. That, and God being merciful to a faith-filled knucklehead.
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If you’ve been doing it 10 years and reckon you know what you’re doing, you may be among the elect.
What were the lessons that you learned?
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Good question!
#1. Most importantly, do NOT chase dividend yield. It is literally a crap shoot, like going to Vegas and rolling dice. Literally 80% of my high-yield stocks lost money for me. Leave high yield to the full-time experts who study it 60 hours a week.
#2. Second most important, only ever invest in high-quality companies with talented management. You MUST study companies and their management in order to evaluate management’s performance. This takes time, which is why your advice to go with funds, Nikolai, is so good for the majority. Most people do NOT study management closely enough. And they don’t even have time to do so.
#3. Look for businesses that have, as their clients, other businesses. There are exceptions, such as Apple. But for the most part, my portfolio is full of companies that either cater to human addiction (nicotine and carbohydrates), or else they sell their products to other businesses. Retail is subject to the whims of retail shoppers. Normies. Their tastes change: “Oh, I used to like Prada, now I like Nike”.
So the lesson is, avoid retail crap like the Black Plague. For every Walmart there is a Service Merchandise or Montgomery Ward (Who??). The majority of the companies I have stock in are selling their products or serices to OTHER COMPANIES. Check out Parker-Hannifin, for example. Or MSFT, FAST, ADP, etc.
But the number 1 lesson is, you MUST LOVE LOVE LOVE researching and studying stocks. If you don’t, you will absolutely fail and lose money. And seriously, this is the vast majority of investors.
Which is why I always try to agree with your advice. Because it is absolutely the best route for the vast majority, who don’t like studying this boring (to them) stuff every day for 10 years.
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