Many of you have asked me questions about my opinion of this or that particular stock.
While I
appreciate your confidence in my financial savvy, and I've used your letters to justify to
my boss that
I deserve a raise (it didn't work, but he asked me to express his appreciation as well),
I'm afraid I
must disappoint you. You see, I, and we as a company, don't attempt to profit by
recommending
individual shares of stock. That's why we do not comment of individual companies.
But there is another important reason why I do not respond to questions about specific
stocks. I
don't think it's wise for most people to be stock pickers.
There is a danger in issuing a warning like I just did ("I don't think its wise for
most people to…").
Because when most people who have an inclination to do something see a warning like that,
they
feel that the "most people" refers to everyone besides themselves. Such as when
a state trooper
tells me "it's not wise for most people to drive 90 mph in downtown San Francisco
during rush
hour," I presume he is talking about those drivers who possess far less skill than I
do. So, let's be
clear -- I'm talking about YOU. If YOU are buying stock for individual long-term
investment
purposes, YOU may be doing yourself a lot of harm.
I am a big advocate of equity investing. But there are many alternatives to buying
individual shares of
stock -- such as one of the 10,000 mutual funds that diversify your investment into
dozens, even
hundreds, of securities. So implicitly, if you buy individual stocks, you are saying that
you can do a
better job than all of the managers of those mutual funds. I'm here to tell you that you
can't.
If what I am saying disappoints or angers you, either you are currently a stock picker or
you are
considering becoming one. If the latter is the case, you may be motivated by the fact that
you have
some buddies who are stock pickers and rave to you about their results. But remember, just
because people brag about their skills doesn't mean they can back it up. That friend who
is talking
like a financial guru is the same one who tried to convince you her tennis game was on par
with
Venus Williams'. When she was your doubles partner, you realized she had the same court
coverage as Venus De Milo.
What about those magazine stories about people who have hit it big buying stocks? You
know, the
guy who bought 15,000 shares of Microsoft 10 years ago. The press focuses on the
sensational.
There are also stories about people winning at Lotto -- it doesn't mean that's what the
average
individual achieves. What you don't read about are the many people who bought 15,000
shares of
Pennzoil, Phar-Mor, or Clothestime several years ago. Those companies filed for bankruptcy
in the
mid-90s.
Now, if you are a stock picker, you may feel that you have done very well in your stock
selection.
However, you should know that researchers have found that most investors are
self-delusional when
review their historical performance. All of us tend to remember the positives and forget
the
negatives, so in our internally revised history, we were better than we actually were.
For example, I last played golf about 7 months ago. The only shot I vividly remember was a
lovely
140-yard 7 iron that landed within 5 feet of the hole. Recently, I came across the score
card, which
proved that there were 108 other less memorable shots that day. Professional money
managers
possess audited reports that document their performance. If you scrutinized your
investment
performance that carefully, you might find the results a bit disappointing.
Most of you probably read the sad story about the individual in Atlanta who tried buying
and selling
stocks as a "day-trader," lost all of his money and sanity, and went on a
murderous rampage. The
stories that came out around that time reported that about 90% of day-traders lost money.
Individual stock picking is not the same as day trading, and I would not suggest that 90%
of stock
pickers lose money, but the statistics about day trading point out the difficulty in
picking stocks
successfully.
When I was in business school, I was told "always know your competition." When
you are stock
picking, you are competing with professional money managers who have teams of security
analysts
and research technicians working for them. They are highly competent, they have decades of
investment experience, and they are highly motivated -- with their reputation and
incentive bonuses
on the line.
If my arguments cannot dissuade you, and you are convinced you are a budding Peter Lynch
who
can win this competitive battle, set aside a small portion (no more than 10%) of your
assets and go
to town. Indeed, if you are successful, come to San Francisco and tell me your strategy.
I'll even
take you to lunch.
By the way, I'll drive!  Lummer's
Logic Archives
Scott L. Lummer, Ph.D., CFA, 401k Forum's Chief Investment
Officer, is a recognized expert in the investment field. He has conducted extensive
research on asset allocation, international investing, risk management, mutual fund
analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook.
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