Why You Shouldn't Pick Individual Stocks: People Who Have “Too Many Interests” Are More Likely To Be Successful According To Research

Why You Shouldn't Pick Individual Stocks: People Who Have “Too Many Interests” Are More Likely To Be Successful According To Research

Stock picking, the act of choosing individual stocks to invest in, has long been a popular investment strategy. However, recent data suggests that stock picking may not be as effective as many believe. In fact, most people, including professionals, struggle to beat the index. So, why shouldn't you pick individual stocks?

The evidence is clear. According to the SPIVA report, which analyzes the performance of equity markets worldwide, 75% of funds fail to beat their benchmark over a five-year period. These funds are managed by professionals who work full-time with teams of analysts. If they can't consistently outperform the market, what chance do you have as an individual investor?

One of the main challenges with stock picking is that it's difficult to determine whether someone has true skill in this domain. In other fields, such as basketball or computer programming, skill can be assessed relatively quickly. However, with stock picking, the feedback loop can take years. It's hard to determine whether a stock went up or down due to your own decision-making or external factors.

Research suggests that only 10% of stock pickers have skill that persists over time. This means that if you choose a stock picker at random, there's an 80% chance you won't be able to identify their skill level. This uncertainty makes it challenging to prove that you are good at stock picking, especially when your performance inevitably goes through periods of underperformance.

Losing your touch in any endeavor is difficult, but it's even harder when you don't know if you've lost it. This is why many experts recommend investing in diversified income-producing assets instead of individual stocks. By diversifying your investments, you can reduce the risk of underperformance and potentially achieve more stable returns.

Additionally, picking individual stocks goes against the investment philosophy of many financial experts. It's important to practice what you preach and align your actions with your beliefs. If you believe in the value of diversified investments, it's wise to follow that philosophy in your own investment strategy.

On the other hand, research suggests that people who have "too many interests" are more likely to be successful. These individuals, known as polymaths, become competent in multiple domains and integrate their knowledge to create breakthrough ideas. By combining diverse skills, they have a unique advantage in their core field.

Specializing in one specific skill may be difficult and highly competitive. However, becoming very good at two or more complementary skills can set you apart from the crowd. The key is to find rare and valuable knowledge that few others possess. This can be achieved by integrating skills from different fields and staying curious about new developments.

In an era of accelerating change, being a polymath can be advantageous. Polymaths have the ability to quickly adapt to new fields and integrate their existing knowledge to create innovative solutions. Specialists, on the other hand, risk becoming obsolete if their field evolves or disappears.

To become a polymath, it's important to start with a strong foundation of mental models. These models transcend disciplines and can be applied to various areas of life. Once you have a solid understanding of these models, you can begin to explore diverse fields and connect the dots between them.

In conclusion, stock picking may not be as effective as many believe. The majority of funds, including those managed by professionals, fail to beat their benchmark over time. The uncertainty and difficulty in assessing skill make it challenging to prove that you are good at stock picking. Instead, consider diversifying your investments and focusing on income-producing assets.

On the other hand, being a polymath can increase your chances of success. By integrating diverse skills and knowledge, you can create breakthrough ideas and have a unique advantage in your core field. Focus on developing rare and valuable knowledge that sets you apart from others. Embrace change and adaptability to thrive in an ever-evolving world.