Finding good stocks is harder than you might think.
Not even the best money managers in the world can consistently identify good stock choices in advance. Some stocks that look quite promising tank, and others that don't look so great surprise everyone and take off.
This has been proven in contests like the Wall Street Journal’s fourteen year dartboard contest where they pitted investment pros against random stock picks chosen by throwing darts. Before you go picking your own stocks, you best read up on it in Can Monkeys Pick Stocks Better Than Experts?
It has also been proven in the comparison of actively manged mutual funds to passively managed funds. Active managers engage in ongoing research to pick winning stocks, but are consistently unsuccessful at delivering returns that exceed those of a fund that simply owns a basket of un-managed stocks that fit a specific criteria.
Why Is it So Hard to Find Good Stocks to Invest In?
The smartest people in the world are scouring the market every day looking for good stock picks. This means good opportunities are spotted fast and an undervalued stock’s price quickly gets bid up to fair value. Be realistic - do you think you’re going to get lucky and spot an amazing opportunity that everyone else missed? You are competing against professional money managers - and even they are not consistently successful at their attempts.
What about the winning stock stories you hear? Most people who made a lot of money from a good stock investment did it the same way a lottery winner does; they were in the right place at the right time. Maybe they worked for a company like Microsoft, Apple, or Google, who gave them stock as part of their compensation package.
Or maybe they just happened to make a bet and put all their money in a stock that did well. Just because they won that bet does not mean it was a good investment. It was luck!
A Better Way
I think a better option than picking individual stocks is to bet on capitalism. I don’t know which particular stock might be best from year to year, but I do believe that over time publicly traded companies are in business to make money and collectively I think they will do so. I can own just about all the publicly traded companies out there with a single trade by using one or two index funds. No, I’m never going to double my money in a month, or even in a year, by using index funds, but I’m not going to lose it all either.
- You can get a baseline comparison of the difference between index funds and stocks in What Would I Do – Buy Individual Stocks or Stock Index Funds.
- I’d also suggest you check out Risk in a Stock vs Risk in an Index Fund.
If you are really searching on the internet for “good stock investment” or “what’s a good stock to invest in right now” it is time to get some common sense. By the time such a tip made it to the internet, lots of people would have already bought that stock!
Before investing in stocks, get some street smarts. There are message boards that will promote particular stocks, and they are not always on the up and up. Sometimes someone who owns a thinly traded stock will start putting out messages or sending out email blasts hoping to make the stock they own popular so when the price goes up a little they can dump it. People who are too gullible and pick stocks this way get left holding the bad investment.
Learn How to Invest
What you need to do is get a few classic books on investing and learn what you are doing before you lose your hard earned money.
- I’d start with Four Pillars of Investing by William Bernstein.
- Then check out A Random Walk Down Wall Streetby Burton Malkiel.
- Next read The Intelligent Investor by Benjamin Graham.
- And you have to check out The Big Investment Lie by Micheal Edesess. Once you learn to stay away from the big investment lie, you'll be a much better investor.