Do you ever kick yourself for not buying individual stocks like Google or Apple years ago? After all, had you done so, you probably would have owned Corsica by now. A day doesn’t go by when someone doesn’t ask me about this or that stock. People ask me for my opinion and if they should “take a flyer.”
Perhaps my answer is disappointing, but I almost never have any opinion on individual stocks and almost never buy them for myself or my clients. Here’s why:
Whenever you invest, you take risks. When you invest in equities, you take on “market risk.” What that means is that if the market does poorly, most equities will do poorly as well – your stock included. And when you buy individual stocks, the risk you take rises geometrically. Here’s why. Even if the market is doing well, your stock could still tank. All that has to happen is for the company you’ve invested in to run into any number of problems. An accounting problem. A supply line problem. A CEO problem. You name it…it might happen.
Besides risk, you have the added headache of signing up for a ton of work. In order to do a good job investing in individual stocks, you have to spend hours and hours poring over financial reports and industry research. Do you have that kind of time? I know I don’t.
If you buy individual stocks,how do you evaluate them to know if they are a good buy or not?
c. Hunches Don’t Buy Lunches
You might be able to make money on your hunches time and time again, but I can’t. Of sure, I might make money once in a while based on a gut feeling, but over time, I won’t. And chances are, neither will you. Over the last 27 years, I’ve seen plenty of clients make money on individual stocks. But for every dollar they made, they lost two when they invested based on their hunches. And nine times out of 10, people who buy individual stocks do so without doing their homework.
d. Home Runs vs. Base Hits
With individual stocks you could hit some home runs. But when you swing for the fences, you strike out much faster. A more diversified approach (explained below) makes it easier to get base hits. For most people, base hits are all they need. Why take the risk of striking out if all you need to reach your financial goals are base hits? My way of thinking is, never take undue risk.
So what do I suggest?
If you’re like most people who want to grow their money safely but don’t have the time to do the research or the stomach for all the risk, equity funds and ETFs are an excellent way to go. I’ll go on the record (again) and state that I do not believe that investors should buy and hold funds. In my experience, it makes sense to develop a method by which you “take the market’s temperature.” Invest as the market strengthens and divest as the market shows weakness. Of course, no method is perfect. Any approach you take to investing will have its pros and cons. But if your goal is to grow your money safely while taking measures to avoid catastrophic losses, this approach can be an important tool for you.
When would I buy individual stocks?
I do own a portfolio of stocks, but I don’t buy them based on my gut. I have developed a method by which I buy individual stocks that meet a very strict criteria based on data – not based on how I happen to feel that day. My system includes stop losses so that I won’t get my head handed to me when I’m wrong. And it leaves no room for my emotions or feelings. Finally, my portfolio includes 20 stocks. In effect, I have built my own mutual fund.
The bottom line is that emotions and money don’t mix. And when you buy individual stocks, the chances are much higher that you’ll make your buy and sell decisions based on your emotions. That’s a recipe for disaster.
Where do you stand on the issue of individual stocks? Do you buy them? If so, why? How has it worked out for you?