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Stock picking, also known as active investment management, tends to regularly underperform a passive strategy that tracks the broader stock market indexes. In fact, research shows that more than 90% of stock pickers underperform over a 15-year period."}},"@type": "Question","name": "Who Is the Most Famous Stock Picker?","acceptedAnswer": "@type": "Answer","text": "While there are several candidates for best stock picker of the modern era, Warren Buffett is often heralded as the most prominent.","@type": "Question","name": "Why Is Stock Picking So Difficult?","acceptedAnswer": "@type": "Answer","text": "Trying to pick stocks is often quite difficult because markets tend to be somewhat efficient, especially over longer time periods. The efficient market hypothesis (EMH) states that market prices reflect all available information, and so there is no way to earn excess returns."]}]}] Investing Stocks Bonds Fixed Income Mutual Funds ETFs Options 401(k) Roth IRA Fundamental Analysis Technical Analysis Markets View All Simulator Login / Portfolio Trade Research My Games Leaderboard Economy Government Policy Monetary Policy Fiscal Policy View All Personal Finance Financial Literacy Retirement Budgeting Saving Taxes Home Ownership View All News Markets Companies Earnings Economy Crypto Personal Finance Government View All Reviews Best Online Brokers Best Life Insurance Companies Best CD Rates Best Savings Accounts Best Personal Loans Best Credit Repair Companies Best Mortgage Rates Best Auto Loan Rates Best Credit Cards View All Academy Investing for Beginners Trading for Beginners Become a Day Trader Technical Analysis All Investing Courses All Trading Courses View All TradeSearchSearchPlease fill out this field.SearchSearchPlease fill out this field.InvestingInvesting Stocks Bonds Fixed Income Mutual Funds ETFs Options 401(k) Roth IRA Fundamental Analysis Technical Analysis Markets View All SimulatorSimulator Login / Portfolio Trade Research My Games Leaderboard EconomyEconomy Government Policy Monetary Policy Fiscal Policy View All Personal FinancePersonal Finance Financial Literacy Retirement Budgeting Saving Taxes Home Ownership View All NewsNews Markets Companies Earnings Economy Crypto Personal Finance Government View All ReviewsReviews Best Online Brokers Best Life Insurance Companies Best CD Rates Best Savings Accounts Best Personal Loans Best Credit Repair Companies Best Mortgage Rates Best Auto Loan Rates Best Credit Cards View All AcademyAcademy Investing for Beginners Trading for Beginners Become a Day Trader Technical Analysis All Investing Courses All Trading Courses View All Financial Terms Newsletter About Us Follow Us Facebook Instagram LinkedIn TikTok Twitter YouTube Table of ContentsExpandTable of ContentsHow to Pick a StockDetermine Your Goals3 Types of InvestorsThe Diversified PortfolioKeep Your Eyes OpenThe "Story" Behind a Stock PickFind Your CompaniesTune-in to Corporate PresentationsThe Next StepStock Picking FAQsTrading SkillsTrading Basic EducationHow to Pick a Stock: Basic Best Practices for New InvestorsByArthur PinkasovitchFull BioArthur Pinkasovitch, CFA, has worked 5+ years as a financial analyst. He is an associate director at ATB Financial.Learn about our editorial policiesUpdated August 02, 2022Reviewed by

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A stock screener, if you use one, is prone to error. Riding the coattails of institutional investors is an option, but you should know that they tend to rely on safe blue-chip stocks that may or may not provide the best returns.

Trying to pick stocks is often quite difficult because markets tend to be somewhat efficient, especially over longer time periods. The efficient market hypothesis (EMH) states that market prices reflect all available information, and so there is no way to earn excess returns.

Right off the bat, investors should know that there's no foolproof algorithm or formula that will ensure success. As many stocks as there are, there are thousands more investing philosophies, schemes, strategies and mindsets that investors use to approach the market.

As a newer investor, or even as an experienced market participant reexamining your own approach, it's helpful to understand the following principles. Here are seven things you should know before picking stocks:

By opting to pick individual stocks, you're betting on your ability to beat the market and exceed the return of the stock market at large. This is extremely difficult to do: 84% of professional fund managers, whose entire job is to beat the index, fail to outperform their benchmarks after a five-year period. After a 15-year period, more than 89% of managers fail at that task, according to the SPIVA U.S. Scorecard, a study by S&P Global.

Individual investors face even bigger hurdles to success and not just because they don't have the luxury of dedicating their entire working life to studying investments. Psychological mishaps like buying when stocks are on a run and selling when they're down, as well as overtrading, are largely to blame for the miserable actualized returns of everyday investors.

So, while this principle is arguably the least satisfying of the seven, it's also the most fundamentally important. By choosing to pick stocks and not buying a low-cost index fund like the Vanguard 500 Index Fund (ticker: VOO) that automatically earns you market returns, you're engaging in a bit of hubris and choosing to go against the odds.

Do you have a shorter runway, and simply desire to play it safe and maybe earn a little income while you're at it? You'll likely only want to consider blue-chip companies and dividend stocks; you may find some ideal portfolio pieces among real estate investment trusts or dividend aristocrats.

"If you do decide to handpick individual stocks, learn as much as you can about them and have a level of conviction about their story, balance sheet and where they're going," Cronin says. "This will help you stay the course when their share price drops."

If it's too good to be true, it probably is. This ancient aphorism holds true in the stock market, where many deceptive temptations can await investors. One common mistake newer investors can make is to be drawn in by stocks with attractive-seeming valuation metrics, most commonly the price-earnings ratio, or P/E ratio.

Cyclical companies like homebuilders, automakers and banks may on occasion sport P/E ratios much lower than the rest of the market, making them appear cheap. But just because you see companies trading for single-digit P/E ratios doesn't mean these stocks are oversold. In fact, the market may be signaling that the peak of the earnings cycle is in the rearview mirror, and trailing earnings are much higher than one can expect moving forward. These kinds of seemingly cheap stocks are known as "value traps."

Especially if you want a set-it-and-forget-it portfolio, you'll want to pick stocks of companies that have long-term competitive advantages distinguishing them from the broader market. Warren Buffett refers to these perks as "moats" that protect the corporate castle.

The last thing to know about how to pick stocks is that your portfolio will frequently rise and fall for reasons unrelated to the specific stocks you own. Last year provided a great example of systematic risk in action, as all three major U.S. stock market indexes entered bear markets as inflation, war and soaring interest rates shellacked equities.

While systematic risk is a part of life, investors can confront it by buying stocks with lower correlation to the market, known as low-beta stocks, or embrace it by selecting high-beta stocks. Beta measures the volatility of the wider stock market, which is always 1.

While beta isn't a perfect metric, generally speaking, stocks with betas below 1 will move in a less pronounced way when markets rise or fall, while the opposite is true for high-beta stocks. In theory, this makes low-beta stocks more preferable in bear markets and high-beta stocks better picks for bull markets.

Full-service brokers provide well-heeled clients with a broad variety of financial services, from retirement planning and tax preparation to estate planning. They also can help you buy stocks. The trouble is full-service brokers charge steep commissions compared to online brokers.

For wealthy individuals without a lot of extra time to stay on top of their complicated financial lives, full-service brokers offer special treatment as well as a high level of trust. If all you want to do is buy stocks, a direct purchase plan or an online brokerage is a better choice.

There are thousands of different publicly traded companies offering shares of stock on the market. That makes it daunting to decide which stocks to buy. One way to think about researching the stocks you want to buy is to adopt a well-thought out strategy, like buying growth stocks or buying a portfolio of dividend stocks.

Whichever strategy you choose, finding the stocks you want to buy can still be challenging. Stock screeners help you narrow down your list of potential stocks to buy and offer an endless range of filters to screen out all the companies that do not meet your parameters. Nearly all online brokerage accounts offer stock screeners, and there are more than a few free versions available online. 041b061a72