Environmentalists might cheer the re-population of a previously endangered species, but cocktail party-goers shouldn't. With the Nasdaq up almost 100% since in March 2009, and an increase of 23% in the last 2 months, stock pickers have become much smarter and they're starting to tell others!
Stock pickers are happy to tell you about the stock that they bought six months ago at $12 and is now at $50, but their memories are selective. This kind of result does not typically reflect their investment portfolio, but rather is just a lucky guess. Speculation is not investing. What they don't tell you about are the 3 other stocks they bought at $12 and are now trading a $6. Or the "investments" they made during 2008 that are now worthless. When the stock market is shooting up, anyone can pick a winning stock.
But the direct hit is seductive. The first thought that comes into someone's head is, "Should I invest in that stock?' or "This guy must know a lot about investing." But here are the questions that should pop into your head - "Where has this guy been for the last 10 years?", "I wonder what the investment return for his entire portfolio has been during bull and bear markets?", and "Does he have an investment philosophy, or is he just throwing darts at a board?" At CoPilot Financial, we don't advise investors to buy individual stocks, and we approach concentrated positions in company stock conservatively.
Stock picking is fun when you get it right, but it is not investing and it should have a limited role in any financial plan. Remember, only one in five professional investment managers beat the market in any one year, and practically no one does it over time. What makes you think you, or anyone else you meet at a cocktail party, can do it?
You should think of stock picking like a responsible investor thinks about gambling in Las Vegas (but please remember that stock picking is not investing and that investing is not gambling, when done correctly). When you decide to play craps at the casino, you take out a set amount from the ATM (which should represent a ridiculously small percentage of your income or investment portfolio) and are prepared to lose it all - it's entertainment, right? Right! Stock picking is the same - take a ridiculously small percentage of your investment portfolio (if you must) and have fun. Enjoy the direct hits, but be prepared to lose it all. And if you have direct hits, don't tell anyone at a cocktail party, unless you're ready to tell them about all your trades...
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