Recently I read excellent article Researching Stocks Is a Total Waste of Your Time .
Find out about what actions are unnecessary when trying to be a good stock broker. There are many things that brokers believe are important to do in order to be in touch with stocks, but as Daniel Solin explains, are time wasters.
The action that takes most of the time in every sense, but is not necessary at all, is researching individual stocks. The problem with things that people needlessly do is that those things look as if they make sense, or seem to be easy to do and logically needed; it feels like a thing to add to your daily routine. In Daniel solin’s example of how people are being lead to believe such things, he gives the case of Jim Cramer, a supposed to be financial media “guru”, where he offers his “golden rule for long-term market prosperity” in which he advises investors to get “a solid understanding of a company’s fundamentals”, “…read newspapers, and analyze Wall Street news…”.
To many people, it seems logical advice to follow, as in most of other things in life it makes sense, and it applies, but when investing is in question, David Solin states that it gets to be counterproductive.
Why is it better not to investigate in this way?
David Solin’s career has proven him to be a sophisticated investor. He has written six books, two of which were on the New York Times’ list of bestsellers. He has written thousands of financial blogs and hundreds of reviews on different investing articles.
He, on the other hand, does not research on any stock in his portfolio. His lack of interest in searching the small details of companies he invested in did not make him one bit less successful than he could possibly be had he researched.
Let’s see his view on the global marketplace. The U.S. stock mutual fund has average return of 8.18% for the past ten years, but as for investors, they earned only 6.52%. This difference occurs because of those investors who are trying to act according to time when they believe it is the best time to buy and sell. The sources they have are reviews of “investment gurus”. If those reviewers knew what they were talking about, almost 2% difference between the profit of the US stock mutual fund and the investors would be in investors’ favor.
Another profile of investors who earn smaller amounts are those who buy stocks, but sell on wrong timing, as opposed to those who use “buy-and-hold-“ strategy. But periodically, they should rebalance in order to lower the risk. They should disregard the news about markets’ performances.
Daniel Solin explains why there is no point in doing research, and he gives a good point. He advocates the idea that a researcher could not possibly see something that a hedge fund managers or analysts from Wall Street did not see, having in mind that those big shots have all the possible resources, or at least, more and better than an average investor could have.
What Daniel notices is that even with numerous resources, by the end of June, 60% of the significant mutual fund managers did not perform over their benchmarks. The period of previous 36 months shows even worse score of those who researched with all the possible sources – 85% underperformed.
Solin points out the fact that the situation is the same all over the world. For the last five years, over 70% of funds that were managed actively, considering all the research could not perform as good as to get a return that would be greater than benchmarks.
The reason for this underachieving is that the information upon which millions of investors decide whether to buy or sell, the chances that a simple “researcher” could find a valuable information that non of others would are very small. Everything is public, so whatever is obvious as worthy of buying or selling is visible to everybody, which makes it meaningless. It can’t even be considered more than “general knowledge” in that case. Whatever you know, everybody knows.
Solin challenges everybody who favors research to analyze their own results.
Solin’s “alternative” is this; don’t get involved in the high risk stock picking – rather buy index funds with low management fees in a globally diversified portfolio. Concentrate on how to allocate assets instead of doing the research in order to beat the market.
The result Daniel Solin achieved with NOT doing the “homework” is not unique; people such are Eugene Fama, Merton miller, Harry Markowiz, Daniel Kahneman, William Sharpe – who are all Nobel laureates, or the most famous investor nowadays – Warren Buffet, and as famous as could be – Peter Lynch are also those who agree with Solin’s strategy. So if you listen to Daniel Solin, who is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham, you will get closer to this brave bunch.