You probably think I’d say something like.
Don’t judge me too quickly.
I’m not that close minded.
The truth is that the answer is not that simple.
Yes.
To be transparent, the majority of this video will argue against the idea of individual
stock picking.
However, if you watch to the end, I’ll share with you one scenario, actually a pretty good
one at that, where it does make sense for you to give individual stock picking a chance.
Are you ready?
Let's get right to it.
Hi, if you are new to the channel, my name is Tae from Financial Tortoise - a channel
dedicated to helping the Sandwich Generation reach Financial Security.
We are at an unprecedented time right now as regards the stock market.
Not only is the market as a whole at its all time high, but individual stocks like Amazon,
Apple and Tesla are breaking new records as well.
Whenever you turn on the news, you are bombarded with news about people who are making a killing
picking the right individual stocks.
So if you aren’t investing in hot individual stocks you feel like you are missing out.
Isn’t this what real people do?
I want to be rich one day, so I should follow suit right?
This is where I want to stop you and explain several really good reasons why you should
take a pause and think really hard before you go out and buy a load of Tesla stocks.
Brad Barber and Terrance Odean are two Behavior Finance Professors from UC Davis and UC Berkeley
who have done some extensives studies about the Average Individual Investor.
Their research demonstrates some pretty interesting and consistent findings about the average
investor.
When it comes to investing decisions, if we are guaranteed to do one thing, it is to make
the wrong call.
We believe that we are ahead of the trend, when in fact, we are chasing them.
We buy when the market is going up and sell when it is going down.
There is no better way to lock in your losses.
Talk about kicking you when you are already down.
We get too caught in past performances and make decisions that coincide with our emotions
rather than logic.
And by holding undiversified stock portfolios, we underperform the standard benchmark.
Yes, I know what you are thinking.
How do you explain my friend who knew to buy Google 10 years go?
Don’t get me wrong.
People do his occasional home runs.
But studies show that less than 1 percent of people have the ability to consistently
and regularly beat the market.
So if you think you have the ability to beat the market, you should ask yourself the question.
“Are you Warren Buffet?”
If not, I would put my money on trying to keep up with the market rather than trying
to beat it.
You might be thinking of another question.
“But, if we can’t beat the market, why are so many investment firms and brokerage
companies sponsoring classes about active trading and options?
If I can’t beat the market, why are they saying they could teach me to do it?”
Good question.
It’s because they are incentivized to get you to believe that you can.
And these incentives are worth hundreds of millions of dollars.
When you trade or make a bet on the market through their platforms, they make money by
charging you per trade.
Whether you win or lose, it doesn’t matter.
The house always makes their money.
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Let me tell you another good reason you should pause before you start trading individual
stocks.
No one in the media knows a stock’s future.
If you’ve been around the investing world long enough, you might know this guy.
Mr. Jim Cramer.
The host of Mad Money on CNBC.
If you are not familiar with him, he is the guy who will give you stock tips on his show.
He is also a former hedge fund manager and was ranked No. 35 on the list of top 100 money
managers by “Forbes” in 2008.
Pretty impressive resume I must say.
But, shows like Mad Money and thousands of other media outlets like it are spreading
the toxic and false message that playing the stocks is easy and fun.
And they have good reason to.
Many of these media outlets's entire business model is based on encouraging individual stock
picking.
CEO’s come on to discuss why viewers or listeners should invest in their companies.
Analysts appear reinforcing the recommendations.
And convinced by their cover of professionalism, we as individual investors come to believe
these “expert” analyses of individual stocks.
We are duped into believing that we too can understand company and market fundamentals.
And armed with this knowledge, we too can read the fortune cookie and make money.
And these media outlets don’t care if you make money or or lose money on your investments.
All they care about is their ratings and audience retention.
Ratings bring in ad revenue.
And do you know who most often are buying these ad slots?
Companies that want to sell you financial products.
Banks, Investment Management Companies, Trading Platforms.
No one in the media knows a stock’s future because they don’t care about accuracy.
All they care about is getting your attention.
And if they can make you believe that you can win trading stocks, that’s what they
will constantly do.
Have I scared you enough yet?
Let me give you one more reason why you should take a pause before buying individual stocks.
Let’s say that someone really did know what a stock was going to do.
He or she has figured out the golden formula for predicting the future.
What do you think this person will do?
Go out on Jim Cramer’s show and lay it all out?
Post his or her findings on a Reddit forum?
Or start a YouTube Channel to share his or her secret formula?
The bottom line is, do you really think he or she would really share it with us?
This person would likely invest that idea, make billions and move to a tax-free tropical
island living his or her days on a yacht.
And worse yet, if he or she did find out what direction a stock was going to turn via confidential
or non-public information and profited on that fact, there is a financial term for that.
It’s called “Insider Trading.”
And it’s illegal.
After all this you still want to dabble individual stocks.
I would actually say that is ok.
Because that is how many people feel.
And you shouldn’t feel guilty about it.
As long as you follow a few strong guidelines around it.
A good way to think about individual stock investing for me is to think of them like
cheat meals.
Let me explain.
In order to maintain a healthy body, when we eat, we should stick with nutritious whole
foods: A lot of vegetables, lean protein and unprocessed carbs.
This should be the staple of our diet.
But tell anyone to live off only chicken breast, broccoli and brown rice and you’ll have
a riot on your hands.
I like to think of cheat meals as individual stocks and the main nutritious meal plan as
index funds.
Like a healthy meal plan, nutritious whole foods should make the core of our diet.
Majority our meals should come from unprocessed whole foods.
But in order to ensure we stick to this meal plan, we should indulge ourselves in cheat
meals once in a while.
Not too much, maybe one or two times a week.
These cheat meals actually help us to stick to our healthy diet, not keep us from them.
If you have desires to buy and sell individual stocks, make sure you treat them like cheat
meals.
They scratch an itch and help you to stay the course, but they shouldn’t be the core
foundation of your investment holdings.
The core foundational holdings should be low cost index funds.
If you want to purchase individual stocks and test your stock picking abilities, set
yourself a percentage limit.
I’d recommend no more than 5% to allow yourself to dabble in the market with individual stocks
you might feel strongly about.
But again remember, index funds should be the mainstay of your portfolio.
Individual stock picking’s purpose here is to help you maintain that core holding,
not detract you from it.
Thank you guys for watching.
Please let me know in the comments below what you think about this video.
I’d love to hear your thoughts about individual stocks and if you agree or disagree with my
take on it.
If you found value from this video, please hit the like button, leave a comment and subscribe
to the channel so that you don't miss out on any of my other upcoming videos.
I firmly believe that being part of the Sandwich Generation doesn't have to mean financial
stress.
With careful planning and preparation, we can thrive during this stage of life.
Help me spread the knowledge.
Thank you again and I'll see you in my next video.