“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.” – F. Scott Fitzgerald
Let’s give this a try. In this weekend’s Barron’s there was a Q&A with Nobel Prize winning economist Richard Thaler in which he talks about why he does not pick individual stocks. He says:
“The biggest mistake people make in life is overconfidence…Most active managers underperform, at least by their fees, or more. So if professionals with their Bloomberg terminals and access to all kinds of information can’t do better than throwing darts, why should individual investors think they can?…I think picking individual stocks for your own account is a fool’s errand. I don’t do it.”
It’s hard to argue with anything Thaler says. There is a case to be made for at least trying to pick individual stocks at some point in your investing life. And by that I mean with real money in a real brokerage account. No paper trading, no stock market simulations, no stock market contests, etc. As Andrew Hallam at TEBI notes in this post about the downside of school-based stock market ‘games’:
“Real money, no matter how modest, will be more exciting than play.”
The elimination of stock commissions and the introduction of fractional share trading open up the world of investing to anyone who has saved up a few bucks.* These marginal frictions are no longer a hurdle to someone wanting to DIY their own portfolio. If you want to buy $100 of Apple, even though it is trading a touch under $300 a share, you can.
That 1/3 of an Apple share will, if nothing else, be an introduction to the stock market, business and the global economy. One need only look back at 2019 to see that a whole lot went on for Apple, the company and the stock. Of course, not every stock is going to go up like Apple did last year, but that is part of the process as well. As Thaler noted, overconfidence is a mother. There is nothing like a stock going down to teach you that lesson.
In the end, the vast majority of investors will do best with a tax-aware, diversified, low cost investment solution, as Richard Thaler recommends. The goal being to best earn what the market provides, not try to beat the market. However the lessons that a real money introduction, albeit modest, to individual stocks can last a lifetime.
The point of this is to get started. No matter how small. Compound your knowledge and experience, while you compound your portfolio. As Howard Lindzon writes:
We all develop our own styles. Compounding is no doubt the biggest factor in growing your portfolios, but none of it matters if you don’t get started.
Get to it.
*Please note that before anyone puts money to risk in the stock market they should seriously think about having an emergency savings fund available for life’s inevitable setbacks.