Is stock picking a myth ? Or is it that one can actually pick a stock very easily with the knowledge of how to do it and if one is armed with technology and tools. Can fundamental analysis of stocks along with technical analysis make any sense at all in deciphering the price or value of it? Can stock picking make a difference to your financial planning at all ?
Is stock selecting an art or a science ?
I don’t know frankly, but I know one thing for sure – if stock selecting isn’t a mirage, at least it is darn tough.
Stock picking is a myth ?
If you had invested in the Indian stock market in the early 1990s before liberalization kicked in, you could have been a multi bagger stock picker. All you needed to do then was to watch a few TV channels; read a few newspapers and even listen to your neighbor on which stock to pick and with a little bit of luck on your side, you could have picked some of the best ones.
The stock indices were at abysmally low levels then and over a period of time, they took to new heights and along with it most of the good stocks.
But during the journey, when the bubble burst, that is when everyone realized that this just wasn’t a walk in the park.
Be it the Harshad Mehta scam or the IT bubble of early 2000s, one’s ability to pick stocks was tested time and again by the various financial scams.
In the stock market, there is both good news and bad news. The good news is that if you pick a stock way ahead of the masses, you will be laughing your way to the bank. The bad news is that that ability is not something which you can learn by reading a book.
In fact, I am not sure whether one can learn that ability at all – I might earn the wrath of so many readers here who have been picking stocks well over the past years. But if this was such an easy process to follow, why did India not discover Satyam before Ramalinga Raju owned up himself ?
I know that Rakesh Jhunjhunwala exists and he made his riches on the stock market so probably stock selecting cannot be a myth, but if it were so easy, why isn’t everyone doing it ?
So why do we fail ?
Selecting stocks is hard work. It requires study, time, effort, discipline, technology upgrades and much more.
If you think for a moment, the process is fairly simple.
You pick up a company, analyze it’s balance sheet and income and expense statement; it’s growth over the last few years and some ratios that can help you compare it with its peers. You then need to understand that buying a great company is not the underlining secret but buying a greatly valued company is. You need to understand what is a stock or equity and that you are buying a piece of the company when you are buying the stock.
All these are fairly simple to understand for a commoner. Everyone knows that buying great bushiness at reasonable valuations is the key.
The reason we fail is because we fail to understand that the company fundamentals influencing stock prices is something which is valid only for long term investing. In the short term, a host of other factors take over common sense and the price of a stock fluctuates wildly. These factors have no bearing or relation to the fundamentals of the company.
Remember for choosing stocks, one needs to have guts to be different from the crowd – in that sense, one needs to take a view or different which no one agrees to. That requires a great deal of courage and conviction to decide whether the world is talking crap or you are.
The greed and the urge to make quick money on the stock market along with the adrenalin rush that it brings with it is what lets investors down. Most of us fail to understand that winning the stock game is a failure for the short term but probably not for the long term.