People often equate stock picking with investing. In many ways, stock picking is a lot more like betting on sports and displays a lot of the same psychological biases.
I’m always excited for the start of the NFL season. On top of playing fantasy football, I (legally) wager a bit of money on a few games every Sunday to help keep things interesting. Even though my parlays almost always lose, I make my picks with conviction every week.
Winning is Skill, Losing is Luck
My mindset after picking winners is always the same: I saw something that the Vegas bookkeepers missed and my football knowledge is superior to that of industry experts. I’d never stop to consider the events that led to the positive outcome (and the role that luck may have played). Wins are solely the result of my own merits. I also have a consistent reaction after losses: I got unlucky. On the rare occasion that I can admit that there was something I missed, it seems so glaringly obvious in retrospect that I know I’ll never make the same mistake again.
I realized that this is the same reaction that I used to have when I would pick stocks. Any success was 100% attributable to my shrewd analysis, while any failure was completely outside of my control and probably the result of someone cheating the system. This is a common ego defence mechanism among stockpickers. On the instances where I identified a flaw in my model, I assured myself that it was an oversight that I could easily correct going forward. Just like sports betting, the mistake seemed glaringly obvious and avoidable.
With both sports betting and stock picking, hindsight was never required when I picked right. This is the textbook definition of resulting – because I experienced a positive outcome – I didn’t consider what caused that outcome to occur. In this way, I actually learned a lot more from my losers than my winners when it came to picking stocks. Part of the reason I decided to pursue my CFA designation was to learn the art of successful stock selection. At the time, I thought stock picking and investing were the same thing. By working through the CFA program, and through my own professional experiences, I learned how much more nuanced investing is than stock picking and how flawed my thought process had been. Portfolio construction is about a lot more than simply piling money into trendy stocks.
Keep Things Interesting
If you want to keep yourself engaged, then there’s nothing wrong with using a small part of your portfolio for more “fun” investing. It may motivate you to stay up to date on relevant financial news and try to develop a methodology for stock selection. Just as with sports betting, this shouldn’t be money that you can’t afford to lose. Make sure that you keep the amounts firmly in the fun range. You shouldn’t be losing sleep over stock picks or football bets. Understand the role that luck plays in both winning and losing.
Opinions are those of the author and may not reflect those of BMO Private Investment Counsel Inc., and are not intended to provide investment, tax, accounting or legal advice. The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the author nor BMO Private Investment Counsel Inc. shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance. BMO Private Investment Counsel Inc. is a wholly-owned subsidiary of Bank of Montreal.