So, you’re ready to make the move up to the big leagues and become a stock picker? That’s what I like to hear! Honestly, it can be stressful to invest in individual companies, but I am here to help try to eliminate some of the stress of the unknown for you.
What do you think of when you hear the term stock picker? Maybe Leonardo DiCaprio from Wolf of Wall Street?
Or maybe you’re thinking of one of those day traders that have a desk that looks like this:
Honestly, when I first started investing in the stock market, that’s kind of what I thought of. I even had the benefit of having a father that invested in the market, and while he looked nothing like Leo and didn’t have a desk at all like the one above, he had been involved in finance his entire life and it scared me away from even thinking about it.
I had a thousand reasons not to invest and they all boiled down to me simply being scared and not knowledgeable enough. But those were just excuses – and ones that many other people will make as well.
I would always at least max out my employer match on my 401k but that was the extent of my investing. It was managed my Fidelity so literally all I had to do was put the percentage contribution into the Fidelity website and the rest was done for me.
Then after one weekend in Chicago, where we did nothing but blow money, I realized that enough was enough and decided to take things into my own hands and become a stock picker. What exactly did that mean for me specifically?
It meant that I was going to get fully-leverage on margin, borrow as much as I could, and only use options to trade penny stocks!
Kidding. I literally did none of that.
I started the same exact way that Andrew talks about in his eLetter – investing $150/month. I set aside $75 from every paycheck to invest into the stock market to try to finally get ahead. Many people advised me to only buy ETFs because they were less risky but I didn’t take that advice.
Personally, ETFs are great when you’re looking to gain exposure to a new sector/industry or when you’re wanting a hands-off approach, but I didn’t want either of those. I wanted to start investing and learn! So, I became a stock picker.
When I first picked the stocks that I wanted to own, I did so with $500. I bought some shares of the company I work for, some shares of a Master Limited Partnership for the company I work for, and then a company called Sunrun.
I found Sunrun by googling “Best stocks under $10 to buy” (seriously) and then 5 minutes of reading on those companies. This sounds like a horrible investing strategy, right?
Well, it is. But do you know what it did? It took away that fear of just jumping in. I was in the pool. The decision was made to buy. So now I was just going to sit there and read more and more about the company to try to make educated investing decisions.
Turns out that stock that I bought for $7.93 actually became a tenbagger within the next few years so I guess you can call me an investing savant…or Buffett’s dad. Whichever you prefer 😉
Kidding – I sold it at like $15. Still a great gain, but man…the pain, the pain.
But I am here for one reason and one reason only – being a stock picker doesn’t mean that you have to be smarter than everyone. It doesn’t mean you have to be spending 40 hours a week looking at stocks. It doesn’t involve anything at all that you’re not currently doing.
In my eyes, being a successful stock picker really comes down to just a few personal qualities and then a few tangible takeaways that you can implement:
- Be Hungry for Knowledge
Honestly, this might be the most important trait when you’re first starting. You don’t know anything and you’re not supposed to, but if you want to be successful, you need to crave knowledge. Do anything and everything to learn about investing.
Personally, I am a huge podcast fan. I like to listen to podcasts while I work out, do chores, and obviously while I drive, because it’s just dead time where I can actually learn while doing other tasks.
Both of these books have tangible take-home lessons that you can implement in your investing journey from day 1.
If you don’t have a true, genuine craving for knowledge, then being a stock picker might not be what’s best for you.
- Be curious
This is very similar to being hungry for knowledge. The difference is that you are seeking out areas that you might not know as well as you want to. Don’t just stick to what you know the best but try to expand your circle of competence to become a better, more well-rounded investor.
I am a huge advocate of staying in your lane when you’re first getting started but once you have a little experience under your belt, start to dabble a bit and look at other industries.
I work in the oil industry so while energy was my first few investments, I quickly moved onto other things that really sparked my interest, which was primarily tech.
I started with an ETF because I found that ETFs are great ways to get exposure to an industry, as I have talked about with my recent experience with Cloud Computing Stocks, and then once I became confident, I then bought some tech companies that I liked a lot such as Visa and Apple.
It started with me being curious and wanting to learn more about these companies that I was familiar with from a consumer standpoint but really no idea at all on how they had performed as companies or as stocks.
- Play Devil’s Advocate
Playing Devil’s Advocate is one of the best things that you can do in so many areas of life. Of course, you need to make sure that you’re doing so respectively because the difference between being a devil’s advocate and a jerk can be a fine line at times.
If you’re doing so in a respectful way, you’re going to challenge the norm, question the way that things should be done and identify unintended consequences before they arise. You’re going to challenge yourself to find potential pitfalls, and solutions, before things even occur.
When you do this with your investing you can identify some obstacles that a company might need to overcome in the future and also identify if you think that the company is well-positioned to overcome those hurdles.
For instance, if you’re looking to invest in McDonalds, you might think that the world is slowly starting to move away from fast food to healthier foods and even meatless options – can McDonalds adapt? Have they shown signs of being able to adapt in the past? Can they adapt better than their competitors?
Having answers to these types of questions will make you more prepared than ever and will give you confidence to remain invested in a stock when the going gets tough.
- Play Chess, not Checkers
This is such an overused phrase but I really do think it fits here. You’re not investing in a company because you think they can beat earnings (or at least I hope not). You’re not investing in companies for a short-term pop just because they might be on the verge of an acquisition. You’re not investing in a biotech company just because you think they might be the first to come out with a coronavirus vaccine.
You’re looking for companies that are going to set you up for YEARS of success in the future. You should want to buy a company and have so much confidence in it that you don’t even start to evaluate the performance for years down the road.
Now don’t hear what I am not saying – I am not saying to buy a company and then never pay attention to them again until they declare bankruptcy a year later. I am saying that when you buy them, you will have the confidence in them that despite checking up on them, you’re not intending to sell but merely monitoring their performance.
Or, for instance, maybe you think the housing market is going to boom, right? But you already own a couple REITs or home builders and want to get exposure a different way – how do you do it?
This is something that Andrew talked about in his recent eLetter where he bought Whirlpool (he sold it recently after, though, for a hefty, hefty gain I might add) to try to get exposure. It was his way of thinking a little bit more down the line and trying to find a premier appliance brand that would give him that housing market exposure without directly being correlated, and it really paid off!
That’s the type of chess that we like to play – the type that always has you thinking a couple moves in advance of the market.
- Be Patient and Not Impulsive
This is one of the hardest ones that you’re going to have to learn. And truthfully, you’re probably going to fail – a lot. I know that I certainly did.
When I first was starting with my investing, I would do this analysis, have a ton of faith in the company, and then maybe they’d miss earnings and the stock would drop 10%.
I would panic sell just for the company to rebound the next couple weeks. It was the absolute worst. I would not only lose money but also would lose out on the future gains that the company had all because I was not patient and I was impulsive.
I was playing checkers, not chess. Focused on the short-term despite my long-term love for the company. Do you know what I should’ve done?
Have you noticed that it seems like stocks are the only thing that people won’t buy more of when they’re on sale?
If Apple misses their earnings and the stock drops 10%, is the company really 10% worse off than they were before? No!
They’re just 10% cheaper. And honestly, now they likely will have lower expectations going into their earnings the next quarter meaning it’ll be easier to get those gains right back.
So why do we sell then?
Because we’re human. We make mistakes. When we lose money, we want to stop the bleeding. It’s natural. But it’s wrong.
What we should be doing is a 2-step process:
1 – Determine if anything has fundamentally changed with the business
Is the stock down because a new competitor is taking market share? Has something unethical or illegal been going on with Apple? Or are they maybe just having slower earnings because of COVID? Context is key.
2 – Act
If something has drastically changed for the negative, do not hesitate to sell and write that loss off. If it hasn’t, why not buy more? You’re buying this same great company but for a clearance deal of only 90%!
This was really hard for me to wrap my mind around but I finally got there. You need to make sure that you’re not blindly buying stocks all the way down to $0, though, and the way to do that is to have conviction in the company and trust that they’re poised for long-term success.
Continue to evaluate these companies and make sure that they’re still that same company that you invested with in the first place.
If you can implement these 5 tips into your investing journey, you’re going to be a fantastic stock picker. If you feel like you have these under control and are ready for a more tangible list of things to look for, I highly recommend you work on developing your own investing checklist for finding companies.
Sound tough? It can be, but that’s why Dave shares his method with all of us so we can learn from the best!