Is stock picking a myth ? Or is it that one can actually pick a stock very easily with the knowledge of how to do it. Can he do so if one is armed with technology and tools. Do fundamental analysis of stocks along with technical analysis make any sense at all in deciphering the price or value of it? Will stock picking make a difference to your financial planning at all ?
Is stock selecting an art or a science ?
I don’t know frankly. but I know one thing for sure – if stock selecting isn’t a mirage, at least it is darn tough.
Stock picking is a myth ?
ou could have been a multi bagger stock picker before liberalisation All you needed to do then was to watch a few TV channels, read a few newspapers. Even listen to your neighbor on which stock to pick And with a little bit of luck on your side, you could have picked some of the best ones.
The stock indices were at abysmally low levels. Over a period of time, they took to new heights and along with it most of the good stocks.
But during the journey, when the bubble burst, that is when everyone realized that this just wasn’t a walk in the park.
Be it the Harshad Mehta scam or the IT bubble of early 2000s, one’s ability to pick stocks was tested time and again by the various financial scams.
In the stock market, there is both good news and bad news. The good news is that if you pick a stock way ahead of the masses, you will be laughing your way to the bank. The bad news is that that ability is not something which you can learn by reading a book.
In fact, I am not sure whether one can learn that ability at all – I might earn the wrath of so many readers here who have been picking stocks well over the past years. But if this was such an easy process to follow, why did India not discover Satyam before Ramalinga Raju owned up himself ?
I know that Rakesh Jhunjhunwala exists and he made his riches on the stock market so probably stock selecting cannot be a myth, but if it were so easy, why isn’t everyone doing it ?
Stock Picking – So why do we fail ?
Selecting stocks is hard work. It requires study, time, effort, discipline, technology upgrades and much more.
If you think for a moment, the process is fairly simple.
You pick up a company, analyze it’s balance sheet and income and expense statement; it’s growth over the last few years and some ratios that can help you compare it with its peers. You then need to understand that buying a great company is not the underlining secret. Buying a greatly valued company is. You need to understand what is a equity? You are buying a piece of the company when you are buying the stock.
All these are fairly simple to understand for a commoner. Everyone knows that buying great bushiness at reasonable valuations is the key.
The reason we fail is because we fail to understand that the company fundamentals influencing stock prices. This is something which is valid only for long term investing. In the short term, a host of other factors take over common sense. The the price of a stock fluctuates wildly. These factors have no bearing or relation to the fundamentals of the company.
Remember for choosing stocks, one needs to have guts to be different from the crowd. One needs to take a view or different which no one agrees to. That requires a great deal of courage and conviction to decide whether the world is talking crap or you are.
The greed and the urge to make quick money on the stock market let investors down. Also the adrenalin rush brings losses. Most of us fail to understand that winning the stock game is a failure for the short term. But probably not for the long term.
And for those who believe that stock selection is a fairy tale, you can SIP in stocks.Yes for higher returns try systematic investment planning of mutual funds.
Stock picking is definitely not a myth in my eyes. Stock picking is actually a science because it requires lot of analysis, studying P&L statement, balance sheet etc of a company before picking a stock. Even after picking it is necessary to do a periodic review of the company’s performance. You can’t just rely on your gut feel if you are serious about making money in stock market.
The reason not many people are able to do it right because they are just not able to control their greed and emotions. They simply follow the herd i.e. buy when stock market is going up and sell when stock market goes down. This strategy is fundamentally wrong and people are just not able to acknowledge this underlying truth.
In my case I stopped picking the stocks the day I acknowledged this fundamental fact. The reason is not because I don’t think I can but I know I need to spend a lot of time and energy in studying this scientific subject, which right now I don’t have.
@Vivek K, Exactly, time is required to do this actually.
Also Vivek I had a doubt – even if you know everything, chances of your going wrong in the long term are less or more ?
@Radhey Sharma, If I know everything about stock picking the chances of me going wrong will definitely be reduced because I’d have taken an educated and informed decision.
If I don’t know anything about stock picking then my decision is bound to go wrong unless of course luck is on my side. I might not loose money altogether but I’d earned much better else where.
What are you thoughts on this?
@Vivek,
Agree with you. If you have done your homework on a good stock, you won’t fail. But again we have seen companies inflating their books, Satyam was a good example.
@Rakesh, Exceptions like Satyam will always be there. There is nothing one can do about it, its just bad luck person has to live with. Such things happen in every profession so can’t conclude anything negative about stock picking with such rare incident.
@Radhey, just noticed this in your article: –
If you had invested in the Indian stock market in the early 1990s before liberalization kicked in, you could have been a multi bagger stock picker. All you needed to do then was to watch a few TV channels;
Did we a “few” TV channels back then? I remember watching only Doordarshan!
@Vivek K, hummmm I think Zee TV was first to come though not sure which year it started.
@Chirag, Yea Zee TV and the famous Tara serial 🙂 .. but not sure on any stock programs.
@Vivek K, ok sir, you have become so clinical 🙂 Apologies for my mistake !
@Radhey Sharma, aree no sir, I just wanted to clarify. I am not qualified enough to pick mistakes in your articles.
@Radhey,
Did you mention following TV channels. According to me most of the analysts on TV are a bunch of jokers, one day they will give a buy sign on a stock and the next day a sell sign. Poor investors who follow them will be trapped.
@Rakesh, I meant that in early 1990s, even if one had blidnly picked a few good stocks (by following TV channels and reading papers), he would still have made money.
Today, that ain’t the case anymore. TV is “paid advertising” and mostly crap.
@Rakesh,
Agreed, very true. My dad had applied for HDFC IPO in 1990’s for Rs. 10.
Ya stock picking is very tough and required a lot of analysis plus courage. For normal investors better to be with MF SIPs.
If one is really good to and have lots of time to do all the analysis, it’re really good for long term investment.
Many people lose money because they try to start as investor and end up being trader (due to grid of earning more) which ruins everything and person gets negative feeling about stock market.
If a normal/regular guy still wants to try his hand anyway, then spare some money and prepare mentally that you are ok even if you don’t get that money back.
I used to buy very few stocks earlier with the same mentality in mind. I bought Satyam at 17 and later sold at 90+, it was a good deal :). In 2007-08, I bought stocks before market fall, I didn’t get panic as I had no problem holding it for long time, didn’t want that money immediately. I sold them later and that’s too with good profit. I was not so good still I thought of getting experience (LOL) and did it. It requires a lot of time when you decide to buy a stock. Currently, I don’t have that much time and happy being with MF SIPs.
So if you really want to go with stock be brave and keep long term in mind with atleast good basic analysis. Don’t only decide based on news-paper / tv / sms / web-sites /email recommendations, ya that might be useful as one of the factor for analysis.
@Chirag, Let me tell you a fact about the recommendations, which I read in some book. When the so called “experts” recommend general public to buy some stock they have a hidden agenda to sell that stock and vice versa. Since they deal in huge quantities they need people to buy what they want to sell, hence their recommendation.
So, my advise is to simply stay away from recommendations and always do your own research and discuss with a trustworthy and knowledgeable person.
@Vivek K, Yeah I know it.
@Chirag,
I liked your statement “start as investor and end up being trader” – that is so true.
It requires a lot of sanity to keep one’s ground in not being sucked into greed. If only that was easy.
@Radhey Sharma, Sometimes I wonder I should just open a company and somehow get it listed on stock exchange. There are plenty of people out there who can make me rich, what say? 😉
@Vivek,
If you had done this few years maybe you company would have been listed. SEBI has become little vigilant over the years but still we have many companies floating ipo’s and when they list their prices are there to see.
Over the last two years only a few IPO’s have been successful.
@Rakesh, hahaha it was just a wild thought Rakesh, business is not my cuppa tea but good to know that SEBI is vigilant and businessmen can’t make fool out of people so easily.
@Chirag,
I started as a trader, then became an investor and back again to trader.
@Rakesh, That’s really interesting Rakesh :). You seem to be an experience and knowledgeable investor from your comments, so you know and analyze better what to do when.
Somehow one can’t avoid booking profit and greed of making quick money. That’s where normal investor become trader, I think, what do you think :)….
@Chirag,
Agree with you, with the market not showing any direction it is better to take out some profits. It goes up 500 points then comes down and then again goes up. Market is now waiting for directions from budget. A good budget will see a smart rally but a bad budget could see a huge correction. But if we are long term investor then we just just have faith and sit on our investments.
@Radhey,
According to me, Stock market is an art. Lot of efforts have to be put in. I have been involved in the markets for over 10 years but still learning every day. If you learn this art then there is nothing like it, it can act as a second source of income. I am striving hard towards it.
@Rakesh, vow, 10 yrs is a looooong time. What were your top 3 hits and top 3 misses ?
@Radhey,
3 misses, i have over 30 of them………….
Top 3 hits
HDFC
Reliance
Jaihind projects
3 misses
Lokesh machines (bought on tip that RJ increased his stakes)
Walchand Industries
Indian humepipes
@Radhey,
You wrote,
“I know that Rakesh Jhunjhunwala exists and he made his riches on the stock market so probably stock picking cannot be a myth, but if it were so easy, why isn’t everyone doing it ? ”
According to me, most the Indian investors lack patience. They feel we can make quick money in stocks. It is very importance to control one’s greed and emotions.
@Rakesh, Agreed. Patience is the key here. That ties in to long term investing, doesn’t it ? So tough to hold onto the long term.
@Radhey,
It’s not tough to hold long term. The lure of booking profits come to your mind. I have my neighbors who had invested in early 80-90’s and are living only with the dividend money.
@Radhey,
I only know two methods of analyzing stocks, Fundamental & Technical.
In case of fundamental you go through the books of accounts, namely P/L, Balance sheet. In case of technical you follow various charts/trends. I tried hard but could never understand technical analysis. But i have seen few people who predict markets correctly based on technical charts.
@Rakesh, Exactly! It is very much required and not at all easy and that’s why very few people can do it right. So, stock picking is not a myth, it is art/science [depends how you want to see it] and very few people can master it because very few take it seriously.
@Vivek,
That’s why they say on 10% can make money in stock and the rest fail. But i have seen people quitting their full-time jobs and doing trading.
@Rakesh, This is very dangerous, such decisions are based on greed and not thought through. Doing it part time is still ok but quitting full time job and picking trading is just bizarre to me.
@Vivek,
Yes even i was shocked. I can give you a very good example of greed. I had a colleague who used to be a trader who used to trade in India and other foreign exchange. He made 50,000 USD profit during Dec,2007 and we had urged him to sell and book profits but he did not, greed took over. In Jan his portfolio was – 5000 USD.
@Rakesh, And still people don’t learn, how bizarre!
@Vivek,
Yes, that’s just one story, I have many similar ones. Another friend lost over 8 lakhs in F&O in 3 months.
@Rakesh, just be careful man, hope you don’t get influenced by stories surrounding you.
@Vivek,
Yes, i did burn my fingers long time back but now i am very cautious.
Apologies to contradict this article – i agree that research, knowledge helps in picking stocks but i personally rely on reading a bit of information and then using my ‘intuition’. It has worked wonders whether with Mutual funds or stocks – always clock profits. Now, hopefully this will not jinx it!
@Minku,
I’ll go with intuition, works for me too. What is relying on reading a bit of information, does it not come under research?
@Minku, hahaha I couldn’t stop laughing after reading your comment Minku.
Actually I have a friend who keeps on trying such things just to check how good is he with his intuitions. Be it stock picking, match predictions, counting no of cars on the road, he would do it all.
So, yea it works for some and as long as it is working why not? Although a FP would never encourage such practices. 🙂
@Vivek,
Agree, works for some. I was thinking of selling some LNT shares as they ran up quite fast but for some reason did not sell. Today it was 4% up and managed to sell few.
You friend has a strange habit of counting cars on the road.
@Rakesh, haha I know, he does all the weird things to check his intuition and so far it’s been doing well for him.
@Minku, So Minku what stocks have worked well for you with your intuition?
@Vivek and Rakesh – i picked up L&T, RIL and ITC when they were at 52 week lows… have a jump of 10% from the base capital in 5 months.
@Minku, That’s great Minku! You have picked the right stocks with your intuition. Let me know when you plan to pick the next one, I shall follow you .. LOL !
@Minku,
Good choice, I have L&T & RIL. Yesterday i sold L&T when it was 4% up and today its down 4%. Sometime intuition works like a charm.
If one want to choose n pick the stock, see analyzer section on http://WWW.QuantsPartner.Com
there are so many worksheet which has data for all the companies.
For e.g. if your one of the yard stick is ROE(%) for last 10 years, then there is a worksheet which list all the stocks with 10-15 columns of Yearly ROE…. so one can choose which stock they want to forward….
I found all that useful !!!
@Lalit,
This does not work for Indian Market. Some good stocks have crashed for no reason at all.
Its the flow………..