Why Are Most Retail Investors Bad At Stock Picking?

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.