Why are the “experts” wrong about stock picking

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Warren Buffett thinks individual investors are better off investing in low-cost index funds to reflect the market and ensure long-term earnings rather than trying to pick stocks themselves. Fund managers and financial advisers would certainly prefer you to trust them with your money rather than yourself. After all, retail money is often associated with being “stupid money”.

For retail investors who have made big bets on struggling companies like Hertz or GameStop in the hope of making a fortune with them, they might be better off not picking their own stocks. But that doesn’t mean that stock selection is bad or that you have no hope of beating the market. If you are rooted in the fundamentals and don’t invest in high risk penny stocks, outperforming the market is not an unrealistic expectation at all.

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The key is to focus on growth

A good way to maximize your chances of success is to invest in growth stocks. Dividend stocks can be great sources of recurring cash flow, but these companies are generally conservative in nature and are best suited for risk averse investors. You are unlikely to beat the S&P 500 that way, just because investors won’t be willing to pay a hefty premium for companies that aren’t generating a lot of growth.

Instead, focusing on constantly growing businesses can dramatically improve your chances of beating the market. A good example of this is the online retailer Amazon. Over the past five years, its stock has climbed nearly 400% while the S&P 500 has doubled in value. And five years ago, Amazon was already a huge company that generated over $ 135 billion in revenue and kept growing (last year its sales topped $ 386 billion); it was by no means a high risk or small stock. Apple did even better during that time, increasing over 480% in value.

It’s not just technology stocks that can generate great returns for your portfolio. Drug manufacturer Eli lilly (NYSE: LLY) also outperformed the markets, advancing nearly 200% in five years. The healthcare company hasn’t even seen extremely high growth – sales of $ 24.5 billion in 2020 were only 16% higher than the $ 21.2 billion reported in 2016. But growth. Stable and consistent, along with strong gross margins of over 70%, helped the company’s bottom line more than double during this period to $ 6.2 billion.

Here, too, there was no great mystery that there would be large numbers in front of the business. By the end of 2016, the signs were already there that his diabetes drug Trulicity (now the company’s bestseller) was a winner for Eli Lilly, which could help generate significant growth for the company. That year, its sales of $ 926 million were more than three times the $ 249 million generated by the drug the year before. In 2020, its sales totaled $ 5.1 billion.

Why choosing your own actions isn’t a bad idea

Renowned stock picker Peter Lynch believes people have an advantage on Wall Street because they can identify trends ahead of time. While experts can rely on earnings figures and upgrades or downgrades to determine whether they should invest in a stock, individuals can know ahead of time whether a company is likely to succeed or fail. fail if they know its products and services and will be appreciated by consumers.

It’s always necessary to research a business and understand its fundamentals before investing in it, but Lynch believes individual investors can use their knowledge of a business to their advantage and outperform Wall Street.

As long as individual investors don’t get drawn into investing in even high-risk stocks or betting on penny stocks that only burn money, there is no reason to doubt that they cannot do as well or better than the so called industry experts. With the wealth of information on the Internet and the variety of exchange-traded funds (ETFs) to choose from, investors need less than ever to rely solely on the market.

Even if someone doesn’t want to pick individual stocks, ETFs can help target certain high growth sectors. For example, analysts expect the global cannabis market to grow by a compound annual growth rate (CAGR) of 28% and to reach over $ 90 billion by 2026.

Meanwhile, the telehealth industry is growing at a CAGR of over 37%, and 5G could be one of the hottest industries, growing over 70%. By focusing on these segments rather than the overall market, investors can potentially outperform the S&P 500.

Should you choose your own actions?

If you just want to buy and forget or if you don’t feel comfortable choosing investments on your own, then you are probably better off investing in an index fund or a large ETF that covers many different sectors. However, you shouldn’t let the “experts” dissuade you from picking stocks, as fund managers and financial advisers will have better trick you into believing that you need them to perform well.

While this may have been true decades ago, it is no longer the case now. As long as you are doing your due diligence and not looking for high risk stocks to bet on, it is definitely possible to beat the market.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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