Flip through all sorts of market-related news and literature, and the term “stockpicker” will pop out over and over. “It’s a stockpicker’s market.” He/she is a “good stockpicker.” Nearly every manager would tell you one on one that he/she is a strong “stockpicker” capable of beating the broader averages, though we all know statistically only so many can deliver excess returns in any given year, and very few can do it consistently. Iconic investors such as Warren Buffett and Peter Lynch fall in the rare long-term consistency category. For every member of this elite club, however, there are thousands of incredibly intelligent, talented, and diligent individuals that have struggled.
We thought about stockpicking in general and some of the attributes that separate successful investors from the rest when it comes to choosing individual stocks. Noodling around the topic, one word seems to thread through the entire thought process: discipline. Below, we highlight a few attributes we think help separate the better stockpickers from the rest. Again, discipline seems to be the major tie that binds.
- Consistent Process: There are innumerable ways to approach stockpicking. Successful investors have employed many different strategies through time to achieve success. Whether using deep-dish fundamental analysis based on complex modeling and ratio analysis, or technical analysis using charts and various price-related tools (or some combination of the two), it seems that the most successful stockpickers have been able to distill which factors deliver the best performance within their stated risk/reward parameters, develop a decision-making process that incorporates these factors, and use this process consistently, good times and bad. More often than not, the successful processes are relatively simple. Read about many of the successful investors of the past century, and you’ll find that many of them focus(ed) on a relatively limited set of valuation and/or technical tools. In markets, complexity is usually the enemy over time, mostly because it’s very difficult to consistently execute an overly complex process over time. Furthermore, objectivity is key to maintaining consistency. Convoluted processes allow nasty human emotions to creep into the analytical process, eroding objectivity and consistency, especially when prices are moving the wrong direction. Consistency, objectivity, and simplicity within a process allow one to confidently ignore naysayers and purchase before the herd.
- Patience: Of course this is related to process above. Without a solid process and consistent set of parameters driving buy/hold/sell decisions, it’s very difficult to maintain the patience and discipline required to achieve strong returns in an individual stock. We’d all like every name we purchase to go up significantly in a straight line from the moment we purchase the name, then tell us in neon letters when it’s time to move on. As we’ve oft stated, the market works hard to generate the greatest number of fools possible. When buying value names especially, there can be significant turbulence that can test the most strong-willed human being. The best stockpickers seem able to ignore turbulence and market noise and keep the eyes on the longer-term return profile. It can take a long stretch of sideways, frustrating price movement before a market begins to recognize the true value in a name. Discipline and patience fortified by process minimize emotional distractions and mistakes.
- Risk-Management: Companies and the environments they operate in are very complex obviously. Even the best stockpickers would tell you that there are unanticipated significant issues that arise over the course of owning individual names that materially change the calculus of ownership. When those issues arise, it’s often better to move on and ask questions later. Dogma, emotional attachment, or complacency can lead to massive performance killing losses. Over the past decade, think about the many investment professionals that stuck with the Enrons and Worldcoms and Lehmans of the world to the lows. Again, discipline and process are key components. Whether using technical tools, stop-losses, or any number of other tools, many of the good stockpickers would say that preserving precious capital and keeping it from falling into major sinkholes is key. Keeping that “powder dry” allows one to direct capital to strong risk/reward situations, or at least live to fight another day.
We’ve discussed market noise and emotional investing on several occasions. The biggest mistakes most deleterious to performance over time, such as chasing overvalued hot stories or strong price movers and getting caught up in herd behavior, are the direct result of allowing emotion and irrationality to enter decision making. Many investors are perfectly aware which factors in the fundamental and technical areas are consistent with excess returns, yet consistently fail to capitalize because discipline and consistency are lacking. Many of the “best laid plans” fall apart amidst market noise and turbulence because too little work has been put into consistent, replicable processes and execution.
