The Data on Why You Shouldn’t Pick Individual Stocks?

The Data on Why You Shouldn’t Pick Individual Stocks?

Even the best and the brightest in the financial services industry don’t always know when it’s a sure thing. Today on ThinkSmart with TMFG we take a look at what the data says about stock picking.

Key Points:

Financial Experts
Chances of Outperforming the Market
The Market 100 Years ago vs. today
Data on Stock Picking
Diversified Portfolios



Rob (00:00):

Hello. This is Rob and Mike from The McClelland Financial Group of Assante Capital Management, and this is Think Smart with TMFG.

Today, on Think Smart with TMFG, Mike and I are going to be discussing why you should not be buying individual stocks. Mike, that’s a pretty bold statement for me to make. I think we are evidence-based advisors, and I think it’s important to look at some of the evidence as to why individual stock selection doesn’t make sense for, probably, 95% of investors.

Mike (00:43):

Well, the only reason you would buy individual stocks is if you could have a chance of outperforming the market, because we know, just through straight math, that individual stocks are going to have more volatility than a basket of stocks put together. We understand that. So if you’re going to take a chance and buy a individual stock, your reason for do it would have to be the chance of outperforming that basket of stocks, correct?

Rob (01:10):

You might think you’ve got a great idea, or you’ve seen a great company, or you’ve had a great service, or you’ve bought a great product, and you think that company should be a good buy.

Mike (01:21):

I guess now the next thing is to go to the success rate of outperforming that basket of stocks and how many people are successful at it. The second question, if you’re going to be one of those people.

Rob (01:31):

So let’s look at some of the evidence. Number one, most people, even the professionals, can’t beat a broad index of companies, so you shouldn’t even bother trying. If you look over a five-year period, 75%, almost three-quarters of active managers, don’t beat the index, don’t beat the market, as we call it.

Mike (01:55):

I think we got to get straight to people too what an active manager is and what they have to go through. If you graduate the top of your class in business school out of a strong business school, Harvard, or let’s say a Western biz school or something like that, your dream job is to become a manager of a fund managing that money. It’s not just your average person. We’re not saying the Joe lives across the street. This is the top echelon of business graduates in the country that get these jobs.

Rob (02:27):

They might go down and get lucky and get a chance to work on Wall Street when they’re in their early twenties. And they probably have to put in a minimum of 5 to 10 years of working with other professionals to be in a position to start managing some money on their own. And again, not everybody makes it. It’s la creme de la creme. Of every hundred hires, probably one or two of them become money managers.

Mike (02:52):

Let’s go to the next step: access to data and information for these people. Because they’re working for these large firms, they’re going to be with all the biggest firms in the world, like in Canada with RBC, in the US with Citibank and Goldman Sachs and all these firms. They have access to every type of research you can possibly get. They’re even going to have access, at certain points, to the people who own these companies. If you’re with Goldman Sachs, and you’re going to make a large investment into a firm, you have access to talk to the CEO of the firm, to the president, to everyone. And you have the budget to actually let you do that. So with all this access and all this smarts and brains and everything, what’s the actual chance of outperforming the index? What percentage do outperform?

Rob (03:36):

It’s not just the individuals, it’s the team behind the individuals. Behind that expert manager or managers, there’s maybe 10 or 20 analysts that are supporting them in stock selection. Yes, there’re tools available on the internet that really can help you, but these managers have far better tools than we do. It’s like the professional golfers have the best coaches in the world. You can get a golf coach, but if you’re Tiger Woods and you want a golf coach, you get la creme de la creme. Well, that’s what these professional money managers have in terms of analysts and tools.

Mike (04:14):

So I’d assume that about 90% of them outperform the index, isn’t it?

Rob (04:18):

No, it’s the other way around. Over a 10-year period, 10% of them outperformed the index, which means 90% of them underperform the index. So you’ve got a 1 in 10 chance of picking the best manager.

Mike (04:33):

This is where it seems absurd when people try to do it themselves. We joke about it. But when you look at these odds and everything these people have going for them and what little percentage actually outperform the index, and you go to think you’re going to sit… I’ve met these people. They’re smart people. We’ve sat down with them. They’re way smarter than I am. I’ve sat down these managers. I’m willing to admit they know a lot more than I do about everything. I’ve been in conversations with them, and they follow everything. They get up at 5:00 in the morning. They work harder than I do. They’ve go more school than I do. They’re just straight smart people. And they still don’t outperform the index.

Rob (05:12):

Let’s go back to the question, Well, why not individual stocks? Why can’t an individual pick? I think it’s interesting to look some of the evidence.


There was a researcher Hendrik Bessembinder, and he did this paper on Do Stocks Outperform Treasury Bills. He went back to 1926 and looked at the data, and here’s what he determined. The best 4% of listed companies explain the entire net gain of the US stock market since 1926.


Now, that seems crazy. 4% of all the stocks from 1926 to 2020 created all the excess returns. 5%, just five companies, accounted for 10% of all wealth creation. What are those five companies, Mike?

Mike (06:06):

Five companies? Exxon, Apple, Microsoft, GE, and IBM.

Rob (06:12):

Well, those are some pretty big companies.

Mike (06:15):

Big companies. A few of them have had issues lately, but they are incredible companies. But when you go through, and you see how much creation has come from those, and remember, it’s easy to go Apple right now. Apple went through a lot of crap in their lifetime. I remember when Apple was a dog on the whole marketplace. Steve Jobs got kicked out. It was just a terrible company for a long period of time. IBM had won the battle. Big Blue was taking over. Apple was a bit of a joke, coming up with funny-colored computers. Look where the company is now.

Rob (06:48):

Most stocks die on the vine. Here’s a little more research. In 1950, there were over 28,000 companies in the market. By 2009, so we’re looking at 59 years later, 22,000 of those companies had disappeared. Almost 80% of the companies that were there in 1950 had disappeared by 2009. Over a 10-year period, half of all companies will disappear. 10 years. So if you look today at all these great companies, even the S&P 500, half of them will disappear.

Mike (07:28):

Even when you do research, you go back… The Dow Jones, if you go back to the Dow Jones in March of 1920, not a single one of those companies that was on the index in 1920 is still there now. Imagine that.

Rob (07:41):

I don’t know whether I stole this line, but I made the line that every company goes bankrupt eventually. Most professional investors don’t beat the market. The proportion of winning stocks that you’re trying to find is very low. And those winners aren’t winners forever. Just look even this year, look at Shopify looked like a brilliant winner. The stock’s down 75% as we speak. It’s still trading at over a hundred times its earnings.

Mike (08:13):

When I started in the industry, I remember hearing General Motors paper was the equivalent of a government bond. That’s what they used to tell me. When you start, “Well, it’s GM paper. That’s the same as government bond.” And then all of a sudden in 2008, we saw GM going bankrupt. We were told that was almost as safe as a treasury bill, and that’s what was told for us to put out to clients. “That’s the same as buying a treasury bill. It’s GM. Nothing can happen to GM.” But obviously, they went through their issues.

Rob (08:41):

I think it’s always interesting when we look at something like this. Are you a good stock picker? I’ll use some examples. If you’re a hockey coach, and a player steps onto the ice, how long does it take you to be able to tell whether that player’s any good at hockey?

Mike (08:58):

A couple of strides, basically.

Rob (08:59):

A couple of strides. And if it’s in a game, maybe 10 minutes. Couple of shifts, right?

Mike (09:03):

Yep, yep.

Rob (09:04):

If you’re playing with a golfer, how many holes does it take before you figure out whether the guy’s any good or not? Or girl is any good?

Mike (09:12):

Just a couple.

Rob (09:12):

Just a couple. They may get lucky for one. By the time you’re two or three holes into it, you know pretty much who you’re playing with. How long does it take to figure out whether someone’s really good at individual stocks?

Mike (09:23):

That’s not as easy. Luck and skill can get very mixed in with picking investments. It’s not like a golf swing. You can see if someone has a good swing or not. It’s not like hockey. You can see how they skate and how they shoot. With picking stocks, random picks and smart picks can look very similar at any point in time.

Rob (09:46):

Let’s say I went out and bought five individual stocks, and I put $10,000 in each. And three years from now, three of those stocks have done really well, and two of them are break even. Am I a good stock picker?

Mike (10:01):

Hard to tell.

Rob (10:02):

What about if over the three years after that, I don’t do very well. My returns aren’t as good as the market. Am I a good stock picker?

Mike (10:10):

Very difficult to tell.

Rob (10:12):

I’m six years into it, and you can’t tell me whether I’m a good stock picker?

Mike (10:15):

Well, do you remember when the Wall Street Journal put the monkeys throwing darts against their stock pickers, and the monkeys won? They took all their top financial analysts in there and had a monkey throwing dart at the Wall Street Journal. Wherever the dart would hit, they’d put it in the portfolio, and the monkeys were beating the people picking.

Rob (10:33):

The problem is early success is not good in stock picking, because you actually think you may have a skill. But it can take a lifetime, it can take 20 years before you really determine whether you have a skill. You could have a good run for five, six years, and then you could have a horrible run for a few years.

Mike (10:52):

When I was in my twenties, I once went to a casino. I went to play roulette, and I won a lot of money. I put on one, and I won a tremendous amount of money. I think I put $20 or $30, and I walked out with quite a few hundred dollars. I had this great night. And for some reason, I assumed I was a good gambler. I don’t know why, but in my mind, my young mind, I somehow assumed I was good at gambling. I picked a number. It had nothing to do with any skill set. But because I won, I thought, “Well, I’m pretty good at this.” The only thing I was good at was I knew I liked getting money, and I got the hell out of the casino pretty quick. But I guess that makes me a better gambler than most. But it’s funny, luck and skill can be very, very tough to distinguish between.

Rob (11:34):

So a final thing, what’s been our experience? How does this go down? We talked about this, but typically, I’ll get a call from a client. They’ll say, or it’s in a meeting, they’ll say, “My friend, my brother-in-law, my neighbor, he’s really good at picking stocks, and he’s got a really hot one that he thinks I should put some money in. I’d like to take some money out of our globally-diversified, perfect portfolio and I’d like to put it into this individual stock.” So Mike, you continue with the story. What happens after they do that?

Mike (12:09):

Well, after that, we always have a discussion with them. Number one, they generally want to move it out of their globally-diversified portfolio. They don’t want to give you new money. A lot of times I’ll say, “Yeah, yeah. So where do you have the money from?” “No, no, no, no. I’m going move money.”

Rob (12:23):

They’re going to move money?

Mike (12:24):


Rob (12:25):

Out of the portfolio that’s been doing relatively well. Okay. Because we’re going to do better with this 50,000.

Mike (12:29):

And they say, “Where should I put it?” And of course, they give you the idea that they’re going to gain 500% of that stock, so they want everything to be tax-free, because they couldn’t imagine ever losing money on us.

Rob (12:39):

So they put it in their TFSA.

Mike (12:40):

Yep. They don’t put it in their TFSA. They move money from-

Rob (12:44):

From the globally-diversified portfolio…

Mike (12:45):

From a globally-diverse portfolio that’s been averaging whatever percentage per year. Now they’re going to move it over to this high flyer. Many of the cases in, I’m going to say 99% of the cases I’ve seen, it’s down by 50 to a hundred percent in the next year and a half or two year.

Rob (13:05):

What’s interesting though, that first year, it often goes up. It’ll often go up 20, 30, 40%. And your client’s going, “I told you so.”

Mike (13:17):


Rob (13:17):

And six months later, you look at it, and it’s down 50%. And two years later, it’s down, as you said, 90%. This happens so often that it’s like a repeatable thing.

Mike (13:31):

I have a few clients, and they buy off the news. It’s exactly like that. They buy off the news. They have all the articles cut out of everything they heard, and they’ll do that and play around. And every time, you get that initial push off whatever’s going on, whatever reason, whoever’s supporting, whoever’s writing all the articles gets initial push. And then reality comes in, and everyone realizes they’re not making money. It’s more of a marketing ploy than an actual business ploy.

Rob (13:56):

So back to the question, should you buy individual stocks? If you want to have some money to play with, maybe $10,000, or if your portfolio is big enough, maybe you have $50,000 to play around. Anything more than that, I believe is a waste of time and money.

Mike (14:13):

Entertainment, not investing.

Rob (14:15):

That brings us to the end of another week. Thank you for joining us. This is Rob and Mike with Think Smart from The McClelland Financial Group of Assante Capital Management reminding you to live the life that makes you happy.

Assante Capital Management (14:49):

You’ve been listening to The McClelland Financial Group of Assante Capital Management Limited. Assante Capital Management Limited is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate and Insurance Services Incorporated. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources. However, no warranty can be made as to its accuracy or completeness. Before acting on any of the previous information, please make sure to see a professional advisor for individual financial advice, based on your personal circumstances. The opinions expressed are those of the authors and not necessarily those of Assante Capital Management Limited.


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