Needle in a Haystack
Research shows us that the most common outcomes when it comes to stock picking are:
Losing everything (i.e. close to 100% of your capital)
Multiplying your capital by 9 times (a more than 900% return)
These results are represented in the chart below — as you can see, the experience of many investors fall in those two categories. When it comes to stock picking, all of us dream of achieving the right hand side of this distribution.
Does Return Horizon Matter? Implications for stock returns, mutual fund returns, and investment performance measurement - Hendrik Bessembinder, 2019
Wouldn’t we all love to own that multi-bagger? However, using simple example based on the research above, it is obvious as to why a strategy that focuses on global diversification (buying all the stocks) works.
Imagine buying a total of 10 stocks for $100 each:
2 out of the 10 dropped to $0.
Another lost $80.
A couple more lost $50 each.
Another 2 didn’t make money at all and stayed at $100.
2 made you $50
and the last gave you a whopping 900% return (for a value of $900)
Tallying it all up, you now have $1,520 from a total outlay of $1,000. Sounds good? That’s an average of 5.2% return from your 10 stocks - below the long term benchmark return of around 8% from a globally diversified stock portfolio. We haven’t even taken into account transaction and other fees.
The real question is whether you can get your hands on that magical stock which can boost your returns by 9x. After all it’s a 6 out of 100 chance (for global stocks) and a 9 out of 100 chance (for US stocks). A peer-reviewed study in the Journal of Financial Economics presents a bleak outcome when it comes to picking individual stocks — it is more likely that you’ll lose rather than gain money as more than half of the stocks globally (54.8%) results in negative returns (below 0%).
Picking that winner is like finding a needle in a haystack. While there might be many courses out there which claim to be able to teach you how to do it, exactly how many success stories have you heard of? There are many more cases of investors losing it all compared to those who succeeded.
For the majority, you are better off buying the whole haystack with the needle in it. When you average all winners and losers, you get the market return — no more, no less.
If you’ve been thinking about starting to invest but have been held back by questions like:
Can I avoid permanently losing capital in the market?
(You now know that the odds are stacked against you)Can I really depend on investing to secure my future?
Can I invest to earn returns and yet manage my risk?
Please do not hesitate to reach out to us to find out more.
Having been experts in managing private wealth for almost 20 years, we have helped many investors navigate through the complexities of financial markets, a much needed service especially in times just like these.
Due to the unique market conditions that we are in, we have specially dedicated a team to address such concerns. Click here to schedule a 30-minute pre-discovery sessions where we can have a chat with you to understand and better assess if we are able to add value to you.