Stockpicking - to be or not to be?

As we come to a new year, some of us will be looking back at our investment performance in 2022. If you are primary invested in US equities you may be hurting right now. 

As we can see from the S&P 500 ETF (SPY), 2022 was a bad year.

Our reactions to this may depend on our experience (or lack thereof). Those of us started investing in recent years may not have much historical context to draw upon. Even those of us who have seen the Dot-com crash may feel nervous right now.

No matter how good we are, we will face down years. The point of this post is not to dunk on anyone but I think times like this are a test of our investment approach as stock pickers and a test of why we are bothering to do this. 

Investment approach

There are many decisions we make with respect to our portfolios, some short term and tactical, others longer term and perhaps more philosophical. During times of market downturn you get to see your decisions in action and to be optimistic, allows you to identify weakness and adjust for them.

For example, as we see from the graph, the SPY index had a bad year. However, it is not so bad if you compare yourself to other stocks

On the other hand, if you had just put your money into the Straits Times Index ETF in 2022, you will actually be in the green this year.

If you find your portfolio behaving like the SHOP/DOCU/SQ/TWLO/TSLA group, you may want to consider how diversified your portfolio truly is.

Why am I bothering to do this?

In trying times like this, you may be doubting if you should be picking stocks in the first place. It is hard to feel good about your decision when the stock is down 60% to 90% in a year, and an ETF is down about 20% or flat or profitable. Stock picking is by it's nature is more time consuming than following a more passive strategy like using ETFs. It is hard to avoid the feeling that all the effort was for naught. There is also a psychological element to investing and when times are bad, euphoria turns to fear/worry/frustration. These take a toll on a person and is the non-quantifiable "cost" of being in the market. 

Even if you are an experienced investor, you may be entering a part of your life when you need more stability in your portfolio for retirement purposes. It is easier to shrug off a loss of 50% on a 10,000 bucks portfolio as a 23 year old, compared to a 50 year old suffering a loss of 25% on a 1,000,000 dollars portfolio.

You may also come to a realization that maybe, just maybe, you were successful because of luck despite surviving multiple market cycles. Andrew Hallam had this epiphany in 2011 and switched from stock picking to passive investing.

This is one of the tough parts of stock picking that is seldom discussed in good times. Experienced investors know that you can only guess (not know) that you have skill, if you measure performance over a full market cycle. Unfortunately, market cycles last for years. So you are essentially trying out something for years before you know if this is for you. Nick Maggiulli spoke about this in an interview in 2022. 

Find your own path

Ultimately, personal finances and investing is personal. Just because somebody sticks to stock picking and recovers from downturns means you will do so. Using the Dot-com as an example, a portfolio comprising of Microsofts and Amazons is very different from a portfolio comprising of Enrons or Worldcoms. As we enter into 2023, we should evaluate our situation and make the decisions most suitable to our circumstances, armchair generals and naysayers be damned. 

None of the above should be construed as financial or investment advice. Do your own due diligence as I will not be responsible for any loss/risk.