Should you buy individual stocks?

I love podcasts (if you have any recommendations send them on. And if you’re looking for new ones, have a look here). One of the shows I listen to every week is Pivot, which is a tech, business and politics show. One the hosts, Scott Galloway, has been touting Roblox as a buy for well over a year. Anyone with young kids who play games online will be familiar with it. It is a basically a platform where people can host their clunky looking games and kids love it. They can buy stuff using Robux, which you can buy with real money. It was supposed to IPO last year, delayed it and went public earlies this month at a valuation of $29.5 billion. My daughter and her friends love it so I can imagine the worldwide demand for the app and was seriously thinking of buying a few shares in it, a change from my strategy of buying the S&P 500. In the end, I didn’t and for a number of reasons.

Research

Because my daughter and her friends play it all the time isn’t good enough research into buying a stock. For many investors, this is the level of research that people make in deciding to buy a stock. Another one in the past was buying C&C stock because people buy Bulmers in the summer when it gets warm.

If you are going to buy stock in a company, you need to do proper research on it, assessing the valuation of the company, future prospects and whether it is a good buy. Markets are forward looking so if you are reading about the a new product in the paper and think it is a good buy, it is too late, it is already priced into the share price.

Zero sum game

Buying and selling stock is a zero sum game. When you are looking to buy stock, you have to buy it from someone else. That seller could be a fund manager, who has a team of analysts who have done their research and as a result of that, have come to a decision on the value of that company and whether to hold onto the stock or not. They will look for people willing to buy the stock at a certain price and only sell if they can achieve that. Likewise, when they are buying, they will only buy at a certain price and all traders have the software available to them that they can see what is available in the market and at what price.

Your ordinary investor just executes the trade at the price when they hit the buy button on their online platform. They don’t know whether they are getting the best or worst price and don’t even think that they are trading against traders who do this for a living everyday. Chances are, you are not going to get the same price that a professional would get for the same stock.

When to get in or out

I was reading an article today by a trading strategist who said that “to achieve superior returns consistently requires a robust investment process and a strong sense of market timing allied with strict discipline and risk controls”. Market timing is incredibly difficult to do and is more reliant on luck than skill. How many time has an investor seen their stock rise from €50 to €90 and them tell themselves that when it hits €100, they will sell. But it never gets to €100. It has reached its peak at €90 and starts to slide back down in value. As you only bought them on a hunch or a tip, you had no idea that even getting to €90 was an incredible price for the stock.

Or even if you do sell at €90 and take your gain, seller’s remorse kicks in when the stock price keeps on growing and you are annoyed you didn’t let it run further. You tell yourself that you won’t do that next time.

Then there are investors who won’t sell a losing stock out of fear that it will come back in value some day. How many investors still hold shares in Irish banks in the hope that they will come back some day? If they do ever come back, they will tell you it was worth hanging onto them over the long term, ignoring the fact that they could have sold them at a loss, invested the proceeds into something else and offsetting the losses against future capital gains.

Funds/ ETFs

What I love about funds and ETFs is that you don’t have to make any decisions. Investing in the S&P 500 for example, Standard & Poors set the criteria for who makes it into their index, what weighting they have, who drops out and when. It means the index is constantly changing to reflect who the biggest US companies are at any time. Ten years ago, energy companies made up 10.89% of the index. Now they make up just 2.5%. As an investor, I didn’t have to make any decision on whether to make that change, Standard & Poors did.

 

It is alright to dabble in the markets yourself with a portion of your money, but if you don’t have a plan and the discipline to sell when certain metrics are met, you should let someone else make those decisions for you.

 

If you have any questions, send me an email at steven@bluewaterfp.ie

 

Steven Barrett

29 March 2021