Team Favorite At the Money: Should You Be A Stock Picker?
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Bloomberg Audio Studios. Podcasts. Radio. News. I'm Barry Ritholtz, and on today's edition of At The Money, we're going to discuss whether or not you should try your hand at stock picking.

It's fun. It gives you stuff to talk about at parties. But is it profitable? To help us unpack all of this and what it means for your portfolio, let's bring in Larry Suedro, Head of Financial and Economic Research at Buckingham Strategic Wealth.

The firm manages or advises on over $70 billion in client assets, and Swedro has written or co-written 20 books on investing. So, Larry, I know you're not a big fan of stock picking. What's the problem with throwing a couple of great stocks into your portfolio?

If it's done for an entertainment account in the same way that we don't expect to get rich going to Las Vegas, no one would invest their IRA in casinos of Las Vegas or go to the racetrack with it. So that's okay if you're prepared to lose.

The evidence is very clear that stock pickers on average lose because of their trading costs, not because they're generally dumb. Although I will add this, Barry, the typical retail investor is actually dumb or naive.

And they get exploited by institutional investors. And it's a lot to do with biases on the behavioral side. They like to buy what are called lottery-like stocks.

Things that the vast majority of the time do poorly, but occasionally you find the next Google. So stocks they like to buy include things like stocks in bankruptcy, penny stocks, small cap growth stocks with high investment and low profitability. Those stocks have underperformed treasury bills, but they're the favorites of the retail investors.

And the institutions avoid them, giving them somewhat of an advantage. I know you wrote a book about what a great investor Warren Buffett is and how we can invest like him. Peter Lynch was a great stock picker. Carl Icahn, Bill Ackman, all these different Fidelity fund managers have been great stock pickers. How hard can it be? Why can't we just go out and pick a few great stocks? And that's our portfolio. Right.

Okay, so let's start with the premise that markets are not perfectly efficient. There are a few people who have managed to outperform for whatever reason. And I would agree with you that Peter Lynch certainly was a great stock picker.

maybe Bill Ackman you could add. I would disagree with Warren Buffett being a great stock picker, taking nothing away from what Buffett did. But the research shows that Buffett generated massive out returns, not because of individual stock picking skills,

but because he identified certain traits or characteristics of stocks that if you just bought an index of those stocks, you would have done virtually as well as Buffett did in the stock picking. He has been telling people for decades to buy companies that are cheap, profitable, high quality, low volatility of earnings, et cetera. And the academics,

through reverse engineering, though it took them 50 years to figure it out, now have identified these characteristics. And all of the mutual funds I use run by companies like Dimensional, Bridgeway, AQI,

They all use the same strategies. And Buffett's Berkshire has not outperformed in the last couple of decades because the market is quite up to him and eliminated those anomalies, if you will. You can do the same thing. So it takes nothing away from Buffett. He gets all the credit for figuring it out 50 years before everybody else.

But it wasn't stock picking, and it certainly wasn't market timing. So I know the indexes will give me 8%, 10% a year annually, and those are great returns. But Netflix is up like 1,000% over the past couple of years, and NVIDIA is up 3,000% over the past couple of years. Wouldn't that goose my returns if I can own companies like that?

Yeah, that's certainly true, Barry, but we got a couple of problems with that. But by the way, those kind of returns are the ones that encourage people to try to hit those home runs. The data shows this. Out of the thousands of stocks that are out there, over the, you know, now of 100 years virtually of data in the U.S., only 4% of stocks hit.

4% have provided 100% of the risk premium over T-bills.

What are the odds you're going to be able to find those stocks? Problem number two is people cite the NVIDIAs, but they also forget that last year, a good example, while the S&P was up 26.5%, 10 stocks underperformed by at least 60%. At least 60%. Down at least 32%. So everyone likes to point out the winners, but

But you also then have a good shot at getting the losers. In fact, the odds are you're going to pick the losers. Here's why. Because only 4% of all the stocks account for all the outperformance, that means the average stocks underperforms the average. So the odds are you're going to pick the underperformers, not the outperformers. That's simple math.

So the more stocks you own, the better your odds of earning the average. So if I'm a stock picker and I have a full-time job and I'm doing this on the side, what sort of performance should I expect?

should expect a performance that if you are familiar with asset class pricing models. So if you buy a large value stock, you're probably going to get the returns of a large value index, but with a lot more volatility because you own one stock instead of maybe 200. So you could

to have what's called tracking variance around that of five or even ten percent but the more stocks you own the closer you're going to get to that index so why bother you're better off just owning the index at very low cost you don't have to spend any time doing it your life will probably be a lot better

And, you know, because you'll spend more time with your wife and your kids enjoying a nice round of golf or a walk in the park or do what I do playing with my grandkids. Get a lot more pleasure out of that than trying to pick stocks or time the market.

What about emotional biases? How do they affect people who think they could go out and pick the winning stocks versus simply owning a broad index? Yeah, there's certainly that emotional biases are part of the reason people think they're going to outperform. Uh,

The research shows, for example, that we're human beings and we tend to be over optimistic, over confident in our skills so that 90% of the people think they're better than average regardless of the endeavor, whether you're a better than average driver, a better

than average lover or a better than average stock picker. So you think you're likely to outperform. In fact, studies have shown people were asked, did you outperform? And by how much the people who thought they actually outperformed actually even lost money in the years. Not only did they not outperform. So selective memory creates a problem as well. Amazing.

One of the things I've heard people talk about is setting up a small, what I've heard described as "cowboy account," where they can throw caution to the wind. They take less than 5% of their liquid assets, and that's as much as they're willing to risk, and allows them to scratch that itch of either stock picking or whatever it is. What are your thoughts on that sort of approach?

Taking 5% of a portfolio is not likely to cause you great harm. And if you don't do a lot of trading and you build a little bit of diversified, you're probably going to get something like market returns. And if you follow the research as presented in my books, you can avoid those lottery stocks improving your odds. You know, but my question to you is, if you need to get

enjoyment out of stock picking to have a good life, I suggest you might want to get another life. Now, I say that with tongue-in-cheek because people like to go to the racetrack and, you know, go to the casinos. There's nothing wrong with that. But if that's what you really need to enjoy your life, you might want to think about

about where your values are. Again, I say that with tongue-in-cheek, though. So to wrap up, investors who think they can become winning stock pickers face long odds. Most of the stocks that are out there will underperform the index and certainly not be a source of outperformance. The odds are that they're going to add risk and volatility while spending a lot of time and effort to pick stocks. And the key takeaway is...

They're going to underperform a broad index anyway. That's what they need to understand. If you want to set up a cowboy account with a tiny percentage and play with it, knock yourself out, have some fun. Just recognize that's all it is, and your real money should be locked away and working over the long haul for you. I'm Barry Ritholtz, and this is Bloomberg's At The Money. Because I'm a picker, and I'm a sinner. Ain't my music in the sun.

Join Bloomberg in Atlanta or via live stream on February 11th for The Future Investor, Finding the Opportunities. This 2025 event series will examine how companies are investing in their businesses to create efficiencies, innovate their products and services, and improve the customer experience. This series is proudly sponsored by Invesco QQQ. Register at BloombergLive.com slash Future Investor Atlanta.