Stock Picking Shouldn’t Be About Beating The Market

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The problem with this “beating the market” mindset is that when looking for ways to outperform the market, most investors tend to forget one thing: risk. Not volatility, but the risk of permanently losing capital.

Serious stock picking for the long term should be about finding investments that you are 90% sure will deliver returns. Not necessarily the best returns, just good returns you are sure will be there because they don’t depend on hype, the FED printing money, or generalized mania. If that also leads to beating the market, then great. But that should not become an obsession.

People forget that 10+ years of beating the market can be easily wiped out by just a few bad picks that crash and never go back to the price you paid. Which is why the priority should be to avoid huge risks if you want that compounding to happen nicely: remember that after a stock goes down -75%, it has to do a 4x to go back to where it was before. Not just a +75%, but a much harder +300% return just to break even.

And this is especially important when it comes to investing in the current hot and trendy market. On one side, you have hot growth stocks so overvalued that they will probably fall by over 50%, and on the other you have index funds that rely on monetary steroids. I choose to pick individual stocks because I have much more control over the risk and reward, which is why I tend to avoid both of those. Even at the cost of under-performing in the short term.

And there still is risk even with index funds. Sure, American indexes have always gone up over the very long term, but keep in mind that those who bought the Nasdaq in 1999 had to wait 16 years for their portfolio to turn positive. Sixteen years of opening their account and seeing unrealized losses. And assuming they kept investing regularly, they were still down 50% at the bottom of the 2008 crash. Yes, they might be up 1000% now, but they had to wait for 20 years and for massive monetary and fiscal stimulus to happen.

And investing risk is a function of price. We’re now basically at all-time-highs, and the S&P 500 is currently yielding 3%, so what if something like that were to happen next year? Would you have enough faith in the market to patiently wait 20 years for another monster bull run? And are you sure that another bull run will come soon enough? I’m not so sure, so I choose other things I can be sure of. But maybe I’m saying this just because I come from a country where the market never recovered from 2008:

FTSE MIB Italian stock market Index from 2004 // TradingView

Now, I’m not saying something like that is bound to happen, I’ll probably be proven wrong in just a few years when the FED restarts with the monetary steroids. Nor am I saying that you should ditch ETFs altogether, don’t get me wrong. I’m just saying that I have more faith in myself and in my abilities. Which is why I (along with the many other serious stock pickers out there) prefer to find the returns by myself, without running the risk of Mister Market going into a coma for another 15 years or doing something crazy. I’d rather take a safer 8–10% return that I actually have control over. How? By picking great individual businesses that I know will be fine and deliver over the next 5 to 10 years.

The truth is that active stock picking is not just about making crazy gains and flexing on TikTok. The people that do are speculators, not real investors. I mean, why do you think rich people still choose hedge funds over ETFs? It’s not because they’re fools, it’s just that active management still has some benefits.

Hedge Funds vs Sp500 / Source: JP Morgan

And by “risk protection”, I don’t mean that we should all stick to a 5% return or buy bonds or something. I’m just talking about certainty of outcomes, because there are ways to obtain the 8–10% return of the S&P 500 without running the same risks.

If you want to keep buying ETFs, go for it, I’m not going to say you shouldn’t. But at least pick that strategy while knowing all the facts, and not just because your pal told you “you can’t beat the market so ETFs are obviously the best”. That’s only half the picture.