July 17, 2020

Investing Principle #4: Don’t Try to Pick Individual Stocks

If you have ever watched a flock of birds or school of fish, you have seen how they move in unison. Changing direction quickly and precisely, all together. But if you focus on just one bird or fish, things appear much more random. The animal might be out of sync. It might go left when the flock or school goes right or it my lag behind or struggle a little bit. It is much easier to see what the group as a whole is doing and where it is heading.

Stocks are the same way. Individual companies may or may not follow what the rest of the market is doing. Perhaps a new product is not selling well. Perhaps their CEO was just fired. Therefore, investing in an individual company is much riskier than investing in the market as a whole. It is difficult to pick stocks that will do better than the market or swim ahead of the market on a consistent basis.

But over time, the market as a whole tends to move in predictable directions and will reward the investors who swim with the current, not against it.