Why Are Most Retail Investors Bad At Stock Picking?


in Memos & Musings · 2 min read

The stock market is a place where the majority of the people are not meant to do well. It’s a hard truth but something that either you should acknowledge and become better or else become part of it. 

So let us consider how the majority of investors actually pick their stock. How and what do they consider when choosing the stocks to buy?

Majority of the investors just read research reports by brokers, watch the news or follow tips from their friends or colleagues. They follow closely to ongoing events or topics like the spread of COVID, trade wars, geopolitical events or on the economy like inflation or interest rates. They focus on just about anything and everything except for the actual company itself. This is definitely not the way to make money and there is no edge that you derive as an investor by doing such things that everyone else is. Because these things are easy to do and you often find yourself late to the party by being reactive. 

The things that will give you an edge over other market participants must come from your own hard work and analysis that has proven to work. Fundamental analysis can be done to study the financial statements and performance of the company. This will give us a good sense of the possible future growth rate or earnings in the long run. You can use technical analysis to identify if the stock is reasonably overbought or oversold and get a sense of the market sentiment in the short term. It can be by understanding how the market makers make their money by creating the greatest loss to the most number of people and how you can take advantage of that. It also can be by knowing how to reduce your risk and increase your returns in an intelligent manner through the use of the appropriate options strategies for you as an investor. All successful investors that I know of do something along these lines. Even just one of these areas will already give you an immense edge beyond most retail investors.

And picking the right stock and buying them is just one part of the story in becoming a good investor. There are other considerations when it comes to investing such as risk management. It will be a topic for another day that I will write about.

About Kathy

Co-Founder of The Joyful Investors and Manager of The Moneyball Portfolio. I graduated with a degree in Economics in National University of Singapore (NUS). My previous experience with traders at the Merrill Lynch enable me to realize many counter-intuitive truths about how the financial markets work and to uncover the challenges faced by many new investors. We believe that investing can be astoundingly simple and want to make financial education understandable for everyone.

Important Information

This document is for information only and does not constitute an offer or solicitation nor be construed as a recommendation to buy or sell any of the investments mentioned. Neither The Joyful Investors Pte. Ltd. (“The Joyful Investors”) nor any of its officers or employees accepts any liability whatsoever for any loss arising from any use of this publication or its contents. The views expressed are solely the opinions of the author as of the date of this document and are subject to change based on market and other conditions. 

The information provided regarding any individual securities is not intended to be used to form any basis upon which an investment decision is to be made. The information contained in this document, including any data, projections and underlying assumptions are based upon certain assumptions and analysis of information available as at the date of this document and reflects prevailing conditions, all of which are accordingly subject to change at any time without notice and The Joyful Investors is under no obligation to notify you of any of these changes.

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