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  • Writer's pictureJohn Krehbiel

Is Stock Picking a Myth?

Updated: Apr 7, 2022

Yes (1). Then why do otherwise logical, analytical people believe they can beat the market by themselves, or by hiring an investment professional to do it for them?

As with most myths, we want the story to be true; we’re biased in favor of the myth:

“Confirmation” bias:

We’re more likely to remember the facts that support our viewpoint. In stock picking, this means that if we think it works, we look for evidence that it does. And there are plenty of investment managers, business “news” reporters, financial advisors, stock brokers, mutual fund managers, wealth coaches and friends who are willing to say they “know” the stocks or the funds that are going to outperform the market. They benefit if you believe the myth.

“Fair World” bias:

  1. In stock picking this means that we expect the best investment results to come from the smartest or hardest working stock pickers. That would seem “fair”. But years of actual data show that only about 30% of those hard-working investment managers outperform a simple “buy-the-market” strategy (which is the approximate percentage that would occur if it was just luck)(2). Psychologically, this is called a “conjunction fallacy” based on a “Fair World” bias(3). Stock picking is one of the few places in life where intelligence and extra effort do NOT actually yield better results.

Systemic bias of Greater Returns from Greater Risk:

  1. Individual stocks are inherently riskier than just buying a broad market fund like SPY or VFINX, which track the S&P 500. Not only is there the risk that the whole market will be volatile, but there is the additional company-specific and industry-specific risk with a single stock. But if you are willing to make a more risky investment, then you have a greater expected return. That is a basic tenet of investing. Combine confirmation bias and chances of winning big with a risky investment and you get people who boast (selectively) about their investment success.

The better role for financial professionals:

The fact that stock pickers underperform passive buy-and-hold, broad market investing strategies has been known for decades. Consequently, many financial advisors and planners have migrated to helping clients where the advisor can truly add value. Specifically:

  1. Developing and implementing a specific, full financial plan to achieve the clients’ desired life-style and retirement goals.

  2. Navigating the complexity of the many account types (401(k)’s, Roth IRA’s, 529 plans, etc.) and investment types (stocks, bonds, ETF’s, CD’s, etc.) to minimize the clients’ tax burden.

  3. Matching the clients’ investments to the level of risk they can accept

  4. Minimizing the clients’ other financial risks with insurance and appropriate estate plan documents.

Bottom Line:

We want to believe that we can beat the market, or that our financial advisor will; but the data shows that is unlikely, especially when adjusting for the riskiness of the investments and the fees that advisors charge. Because of the complexity of each individual’s finances, there is still an important, value-added role for financial advisors to play, just not in picking and choosing stocks.


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