I Was a Teenage Stock Picker

By Scott Lummer
Chief Investment Officer, mPower

Many of you have asked me questions about my opinion of this or that particular stock. While I appreciate your confidence in my financial savvy, and I've used your letters to justify to my boss that I deserve a raise (it didn't work, but he asked me to express his appreciation as well), I'm afraid I must disappoint you. You see, I, and we as a company, don't attempt to profit by recommending individual shares of stock. That's why we do not comment of individual companies.

But there is another important reason why I do not respond to questions about specific stocks. I don't think it's wise for most people to be stock pickers.

There is a danger in issuing a warning like I just did ("I don't think its wise for most people to…"). Because when most people who have an inclination to do something see a warning like that, they feel that the "most people" refers to everyone besides themselves. Such as when a state trooper tells me "it's not wise for most people to drive 90 mph in downtown San Francisco during rush hour," I presume he is talking about those drivers who possess far less skill than I do. So, let's be clear -- I'm talking about YOU. If YOU are buying stock for individual long-term investment purposes, YOU may be doing yourself a lot of harm.

I am a big advocate of equity investing. But there are many alternatives to buying individual shares of stock -- such as one of the 10,000 mutual funds that diversify your investment into dozens, even hundreds, of securities. So implicitly, if you buy individual stocks, you are saying that you can do a better job than all of the managers of those mutual funds. I'm here to tell you that you can't.

If what I am saying disappoints or angers you, either you are currently a stock picker or you are considering becoming one. If the latter is the case, you may be motivated by the fact that you have some buddies who are stock pickers and rave to you about their results. But remember, just because people brag about their skills doesn't mean they can back it up. That friend who is talking like a financial guru is the same one who tried to convince you her tennis game was on par with Venus Williams'. When she was your doubles partner, you realized she had the same court coverage as Venus De Milo.

What about those magazine stories about people who have hit it big buying stocks? You know, the guy who bought 15,000 shares of Microsoft 10 years ago. The press focuses on the sensational. There are also stories about people winning at Lotto -- it doesn't mean that's what the average individual achieves. What you don't read about are the many people who bought 15,000 shares of Pennzoil, Phar-Mor, or Clothestime several years ago. Those companies filed for bankruptcy in the mid-90s.

Now, if you are a stock picker, you may feel that you have done very well in your stock selection. However, you should know that researchers have found that most investors are self-delusional when review their historical performance. All of us tend to remember the positives and forget the negatives, so in our internally revised history, we were better than we actually were.

For example, I last played golf about 7 months ago. The only shot I vividly remember was a lovely 140-yard 7 iron that landed within 5 feet of the hole. Recently, I came across the score card, which proved that there were 108 other less memorable shots that day. Professional money managers possess audited reports that document their performance. If you scrutinized your investment performance that carefully, you might find the results a bit disappointing.

Most of you probably read the sad story about the individual in Atlanta who tried buying and selling stocks as a "day-trader," lost all of his money and sanity, and went on a murderous rampage. The stories that came out around that time reported that about 90% of day-traders lost money. Individual stock picking is not the same as day trading, and I would not suggest that 90% of stock pickers lose money, but the statistics about day trading point out the difficulty in picking stocks successfully.

When I was in business school, I was told "always know your competition." When you are stock picking, you are competing with professional money managers who have teams of security analysts and research technicians working for them. They are highly competent, they have decades of investment experience, and they are highly motivated -- with their reputation and incentive bonuses on the line.

If my arguments cannot dissuade you, and you are convinced you are a budding Peter Lynch who can win this competitive battle, set aside a small portion (no more than 10%) of your assets and go to town. Indeed, if you are successful, come to San Francisco and tell me your strategy. I'll even take you to lunch.

By the way, I'll drive!

Scott L. Lummer, Ph.D., CFA, mPower's Chief Investment Officer, is a recognized expert in the investment field. He has conducted extensive research on asset allocation, international investing, risk management, mutual fund analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook. He wants to know what's on your mind, so feel free to send him your questions about the stock market! He'll answer as many as he can in his weekly column.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

I Was a Teenage Stock Picker

By Scott Lummer
Chief Investment Officer, mPower

Many of you have asked me questions about my opinion of this or that particular stock. While I appreciate your confidence in my financial savvy, and I've used your letters to justify to my boss that I deserve a raise (it didn't work, but he asked me to express his appreciation as well), I'm afraid I must disappoint you. You see, I, and we as a company, don't attempt to profit by recommending individual shares of stock. That's why we do not comment of individual companies.

But there is another important reason why I do not respond to questions about specific stocks. I don't think it's wise for most people to be stock pickers.

There is a danger in issuing a warning like I just did ("I don't think its wise for most people to…"). Because when most people who have an inclination to do something see a warning like that, they feel that the "most people" refers to everyone besides themselves. Such as when a state trooper tells me "it's not wise for most people to drive 90 mph in downtown San Francisco during rush hour," I presume he is talking about those drivers who possess far less skill than I do. So, let's be clear -- I'm talking about YOU. If YOU are buying stock for individual long-term investment purposes, YOU may be doing yourself a lot of harm.

I am a big advocate of equity investing. But there are many alternatives to buying individual shares of stock -- such as one of the 10,000 mutual funds that diversify your investment into dozens, even hundreds, of securities. So implicitly, if you buy individual stocks, you are saying that you can do a better job than all of the managers of those mutual funds. I'm here to tell you that you can't.

If what I am saying disappoints or angers you, either you are currently a stock picker or you are considering becoming one. If the latter is the case, you may be motivated by the fact that you have some buddies who are stock pickers and rave to you about their results. But remember, just because people brag about their skills doesn't mean they can back it up. That friend who is talking like a financial guru is the same one who tried to convince you her tennis game was on par with Venus Williams'. When she was your doubles partner, you realized she had the same court coverage as Venus De Milo.

What about those magazine stories about people who have hit it big buying stocks? You know, the guy who bought 15,000 shares of Microsoft 10 years ago. The press focuses on the sensational. There are also stories about people winning at Lotto -- it doesn't mean that's what the average individual achieves. What you don't read about are the many people who bought 15,000 shares of Pennzoil, Phar-Mor, or Clothestime several years ago. Those companies filed for bankruptcy in the mid-90s.

Now, if you are a stock picker, you may feel that you have done very well in your stock selection. However, you should know that researchers have found that most investors are self-delusional when review their historical performance. All of us tend to remember the positives and forget the negatives, so in our internally revised history, we were better than we actually were.

For example, I last played golf about 7 months ago. The only shot I vividly remember was a lovely 140-yard 7 iron that landed within 5 feet of the hole. Recently, I came across the score card, which proved that there were 108 other less memorable shots that day. Professional money managers possess audited reports that document their performance. If you scrutinized your investment performance that carefully, you might find the results a bit disappointing.

Most of you probably read the sad story about the individual in Atlanta who tried buying and selling stocks as a "day-trader," lost all of his money and sanity, and went on a murderous rampage. The stories that came out around that time reported that about 90% of day-traders lost money. Individual stock picking is not the same as day trading, and I would not suggest that 90% of stock pickers lose money, but the statistics about day trading point out the difficulty in picking stocks successfully.

When I was in business school, I was told "always know your competition." When you are stock picking, you are competing with professional money managers who have teams of security analysts and research technicians working for them. They are highly competent, they have decades of investment experience, and they are highly motivated -- with their reputation and incentive bonuses on the line.

If my arguments cannot dissuade you, and you are convinced you are a budding Peter Lynch who can win this competitive battle, set aside a small portion (no more than 10%) of your assets and go to town. Indeed, if you are successful, come to San Francisco and tell me your strategy. I'll even take you to lunch.

By the way, I'll drive!

Scott L. Lummer, Ph.D., CFA, mPower's Chief Investment Officer, is a recognized expert in the investment field. He has conducted extensive research on asset allocation, international investing, risk management, mutual fund analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook. He wants to know what's on your mind, so feel free to send him your questions about the stock market! He'll answer as many as he can in his weekly column.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.