Stock Picking Gets All the Attention, But This Skill Produces the Best Results
Most investors spend the majority of their time picking stocks, but very little on what will ultimately determine how much they make or lose.
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There is a saying in golf: "Drive for show, put for dough." The stock market has a rough equivalent: "Pick stocks for show, trade for dough."
Stock picking receives far more attention from investors and the business media than trade management, but it is the way that you manage those stock picks that will ultimately determine your level of success far more than anything else.
Investors who focus on trade management will usually outperform pure stock pickers by a substantial margin. That is because even the best stock pickers will have many poor picks. If those poor picks are not managed in a way that keeps losses relatively small, they more than offset the gains from good stock picks.
Bad stocks are inevitable, and the manner in which they are dealt with has an out-sized impact on trading results. I often write about the importance of keeping your accounts as close to highs as possible. If you are able to do that, then you will benefit from the great power of compounding. Compounding only comes into play when you are making gains on your gains. You can't do that if your losing stocks prevent you from producing new highs in your accounts.
Most investors spend the majority of their time on picking stocks and very little time on actually managing them. This is likely due to the Warren Buffett myth of passive buy-and-hold. Warren Buffett's success isn't simply because he is a long-term holder. His success from spotting the very few stocks that are worthy of being held for decades. What he does is the hardest thing to do in investing. Buffett himself has said that only a handful of long-term buy-and-hold stocks come around in a lifetime.
Those of us who don't possess Buffett's skills will have to deal with the inevitability of picking some lousy stock. Holding the wrong stocks for the long term will doom you to many years of underperformance. It is how you manage those losing stocks that will influence your results more than anything else.
As someone who often discusses my stock picks, I need to spend much more time discussing how I am actually managing those stocks. Simply naming some stocks I like isn't very helpful if they are not managed correctly. Most stock market advice pertains to stock selection, and very little of it deals with actually managing those stocks once the buy is made.
Obviously, good stock selection makes investing much easier, but if investors spent an equal amount of time on trade management, they would likely have far better results. Far too often, the main excuse for not dealing with a stock that is acting poorly is that it is a long-term investment. That attitude produces inertia and always leads to the biggest losses.
My best advice is to simply be aware of the tendency to focus on stock picking over investment management. Allocate more time to making plans for stocks once you buy them. What are you going to do if the stock you choose isn't the next Apple AAPL?
At the time of publication, DePorre had no position in any security mentioned.
