Ultimately, Krantz doubts the ability of individual stock picks to outperform the market. He contends that time spent on research is not fruitful enough vis-à-vis likely gains, and points out that Cramer’s stock picks performed less admirably when compared to alternate benchmarks.
But the omission of vital points makes me want to shout, ‘Wait!’ The article fails to offer a full view of the benefits of self-directed investing. Somewhere between Cramer’s frenetic style and Krantz’s restrained approach, I believe lies a measured, successful strategy for self-directed investing. Indeed, by carefully researching and monitoring a handful of stock picks, I am confident individual investors can outperform the market. Several fallacies lead individuals to underestimate their own potential to trade successfully:
* First, the lay investor may look to the less-than-exhilarating performance of mutual funds (only 25 percent regularly beat the market) and unfortunately conclude that a ‘regular Joe’ cannot consistently beat the market, either. But mutual funds cannot be accurately compared to individual stock picks. Administering a large portfolio, as mutual fund managers do, inherently minimizes the incremental benefit of each particular trade. Also, fees and hidden costs associated with mutual funds take a bite out of any gains that have been made.
* Second, individuals may erroneously believe that taking charge of one’s own portfolio means keeping up with a vast array of stocks, and is thus too complicated. Actually, six to eight stocks – only a small handful --- provide adequate diversification. And staying on top of one’s own stock picks has never been easier or more affordable: A plethora of research information can be found for free or for a very low price on the internet, and likewise, individual trades can be conducted for little or nothing.
* Third, those outside the professional investing circuit may mistakenly judge that individual stock picks carry undue risk. However, diligent research and monitoring mitigate the potential downside. As investment guru Peter Lynch puts it, “Risk can be reduced greatly by concentrating on only a few holdings if it forces investors to be more careful and thorough in their research.” Timing is also a vital tool in self-directed investing. The actual risk perceived by an investor may be much lower than that dictated by historical statistical measures, especially for short-term moves. Individuals can optimize investment timing by combining fundamental stock analysis with technical analysis, particularly in the case of short term entry and exit.
Besides the benefits already mentioned, the individual has the option to select stocks with higher risk, and thus higher expected returns. Concentrating on a few thoughtfully chosen stocks also increases the chances of hitting a ‘home run’. And of course, being one’s own investment advisor means that no money is wasted on management fees and expenses.
Sure, I understand that a few folks out there genuinely lack the time and capacity to manage a portfolio – for them, index funds such as the Vanguard 500 are probably the best bet. However, for the rest of us, self-directed investing is a worthwhile endeavor. With a bit of focus and diligence, we can successfully manage our own portfolios and beat the market consistently – and in doing so, provide better for ourselves and our loved ones. And that, if anything, is worth a big Boo-Yah.