Selecting Your Stocks
Learn to Pick Stocks, When to Buy, and When to Sell
Possibly more money is lost in the market by listening to brokers than any other way. Good trading requires intense personal involvement in the selection and timing process. Learn to make your own stock picks. Develop your own system for timing a purchase or sale. Define your own trigger mechanism. Own your own trades..
This writer once sat in on a broker recruitment meeting hosted by PaineWebber. The room had at least 100 prospective brokers (also known as account executives, financial advisers, financial consultants, stockbrokers, customer’s men, or registered representatives). After a few cordial introductory comments, the recruitment officer asked the group how many of them would like to analyze stocks and make a career out of selecting stocks for their clients. Probably eighty percent of the people raised their hands. Then she said that those who raised their hands could go home because they didn’t want stock pickers. They wanted sales people. She said they already had analysts. If they could see themselves as only salesmen or saleswomen, then the company might be interested in hiring them. She said the company would train them to be sales people.
This was a refreshing display of frankness, and it is typical of all mainline brokerages. It is not just a characteristic of PaineWebber. Brokers do not have time to analyze stocks. In fact, management does not want them to do so. They are in the business of contacting prospective clients, gathering assets, and selling. That means they will recommend mutual funds, insurance, and their house-brand products. When thy make a sale, they move on to the next prospect. Periodically, they will meet with clients to assess their level of satisfaction or to sell a product. If the client is not satisfied with performance, the broker will recommend a change. It has been shown repeatedly that brokerage house analysts tend to make many more buy than sell recommendations. Some believe it is because the brokerage firms have an underwriting or investment banking relationship with the firms being analyzed. Those firms often move their business to another investment banker if they get a bad review. Therefore, it is suggested by some that analysts are under pressure to give a glowing report of a client company’s prospects. How does this play out in the performance of the investor’s portfolio?
We are acquainted with one investor who had a position in Qualcomn. The price had run up to $100 (post splits) and had just started down. The individual was prepared to sell when the stock fell below its 50-day moving average. However, the brokerage firm analyst said that investors should buy more because the stock was cheap. A few weeks later the investor was preparing to sell again because the stock had continued to decline. Again, the analyst touted the stock in the media as an outstanding buy and said investors should keep holding. The same scenario was repeated again. Eventually the stock traded between $11 and $12. The investor lost about $800,000 on the position. He thinks that if he had made his own decisions and had not been confused by pronouncements from the analyst, he might have saved about $700,000. The analyst was later barred from the industry on conflict of interest charges.
Brokers and brokerage analysts are not all crooks. However, they are all busy doing what they were hired to do. The traders at stockdisciplines.com use brokers like anybody else who buys and sells in the market. However, our traders do not ask for advice from anyone. They place all their orders over the Internet and very rarely talk to a broker about anything. Because they make their own decisions, they almost never pay more than a $7 brokerage fee for a transaction (unless the trade has to be handled in a special way), regardless of the amount of money involved.
Good trading requires personal involvement in the selection and timing process. If you really care about your money, you must learn to make your own stock picks. Yes, it takes a little time to learn enough to do a decent job, but we are talking about the money it has taken a lifetime to save. Develop your own method for timing a purchase or sale. Define what will cause you to act or “pull the trigger.” You cannot really “own” the contents of your portfolio until you own the process by which they were selected. When you know why you bought when you did, you will have much better insight about when to sell.