Why Most of Us Suck at Stock Picking

by Ouida on March 13, 2010

I used to be long on APPL. I bought when Apple missed earnings early in 2000 and bought at $22 dollars a share. I got stopped out during the market meltdown of 2008. Did I re-purchase? No. Why? Because I wasn’t going to get as good a price as I got when I originally bought Apple. In other words, I got cheap. Also when I bought in 2000, I bought with the general feeling that Apple was a good company with good products and that the overnight halving of its stock price was market overreaction. I had no understanding of Apple’s financials, I just had a feeling. Feelings were very different during the market panic that began in 2007 and gathered steam in 2008 when I was more heavily vested in the markets through my 401K and watched my portfolio shrink by a third. It was painful, it was hideous and that time brought out one of the main reasons most people, including 80% of fund managers suck at stock picking: we cannot control our emotions when making crucial buy and sell decisions. The other reason of course is what I call the “Walmartization” of America. We are always looking for things on the cheap, rather than things of genuine value or the pearl of great price. Most of us consider our investments defensively, even the investments we understand. I am lousy at picking stocks but I am a pretty good real estate investor. I buy cash producing properties. What I find is that even when looking at two properties, the fundamentals of which I understand, I will go for the property that feels safer or more comfortable for me to buy rather than the property that seems a little bit riskier even if the riskier property has the greater upside potential. About 18 months ago I purchased two triplexes rather than a 4 plex because I felt more comfortable with the triplexes, smaller loans, known costs to repair, known rents. The 4 plex had a larger mortgage and I was going to have to increase the rents 25% to make the property work. The property, however, abuts one one of the most popular open malls in the city. The failure to buy the 4 plex is a reminder to me to broaden my comfort zone to accept, yet manage slightly more risk and to value investments properly rather than look for cheap. The reason that I enjoy real estate investing is that I can mitigate loss through legal entities and insurance. I am not nearly so confident with stocks. Finally most people play small with their investments, buying 25 shares of a stock rather than 100 or 1000 and blunting their returns and settling for a little bit of gain rather than risking greater loss by investing more. All of these actions and results can be traced to the emotional environment of investing and it is a wonder therefore that we do as well as we do. I cannot help but wonder, though, if part of the reason that 43% of americans have less than $10,000 saved is that many Americans are ultimately pessimistic when it comes to money and don’t believe they can accumulate it and manage it wisely.

Are you emotional when it comes to money and investing? Please comment.

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