We’ve all thought about it, most of us have done it, some of us have made big gains, many of us have been burned. Many ‘experts’ endorse it as a perfectly sound investment strategy. Not me. Here’s why you should never buy an individual share…
1. Going to Las Vegas
It’s nothing short of legalised gambling. Why? Because picking out a single company share from among thousands makes it a game of chance, not a game of skill. Be honest. Do you really think yours is a skilful choice, made from an in-depth analysis of every aspect of this company’s business (and every aspect of competing businesses, as you are choosing not to buy those shares) and an in-depth analysis of this particular industry versus all the other sectors you could have chosen? Isn’t it time to leave Las Vegas?
2. Known and Unknown Unknowns
Without going all Donald Rumsfeld, when it comes to stock markets there are many knowns, in fact information overload is the problem. I believe that stock market prices are an accurate reflection of all known information. So why do you think you know the unknowns? Do you honestly think you can predict the future for any single company? Did Tullow Oil investors anticipate that oil prices (and their shares) would drop by 60%? Did Tesco investors (including Warren Buffett) expect profits to plummet, resulting in a 50% share price decline? Did Anglo Irish investors expect their bank to go bust?
3. Mind Games
Arguably the biggest single argument against buying individual shares is that in doing so, we invite our flawed emotional brains to play havoc with our money. For example, we often buy a company stock because we prefer the simple story constructed by ourselves (or a friend, or a TV ‘expert’) rather than do the time-consuming analysis that’s required, we seek confirmation of why we are right (and ignore signs we may be wrong), we are overly confident of our own investing abilities, we are over-optimistic about future outcomes, and we are pre-wired to sit on (rather than cut) losses. But apart from that…
4. Basket Case
We know that diversification reduces risk. We know what happens when we cram too many eggs into one basket. We know we cannot predict which companies, or industries, or countries, or currencies will be the winners in any one year. Yet many investors, who should know better, believe in their own ability to stock pick their way to beating the market.
5. Average = Above Average
The final reason not to buy individual shares is that there is a much better alternative – global index funds. These funds track the whole market return by investing, pretty much, in the whole market, rather than taking individual single company risk. So your money earns the long term average equity market return of around 8% versus the average equity investor return of around 4%. Which average return would you prefer?