The Only Three Questions That Still Count: Investing By Knowing What Others Don't, 2nd Edition

Finally! How to Pick Stocks That Only Win

That heading was there to fool you. I hope it worked! I don’t know how to pick stocks that only rise. Many claim to. But no one does. I’ve never seen anyone do it. Your goals in stock selection are two things and only these two. First, find stocks that are good representations of the categories you’re trying to capture, and second, find stocks you think will most likely do better than those categories. Note I didn’t say, “Find stocks that will go up the most.” I said, “Most likely do better than the category.” Your goal is to get the attributes of the category plus a little, with “most likely” as your goal, knowing some stock picks absolutely can and will lag their categories.

Stock selection is important but amazingly, over time, has the least impact on how your portfolio performs. You may find that shocking and downright sacrilegious. Maybe you bought this book hoping to get an edge in picking stocks, and here I have spent several hundred pages talking about anything but how to pick stocks. There are several reasons—first, it just doesn’t matter as much as many presume. Volumes of scholarly research have been written, and there is general consensus among academics most of your return is driven not by stock selection but by asset allocation—the decision to hold stocks, bonds or cash in any given year, and what types. Scholars quibble about how much that at most translates into. Some studies have shown more than 90% of return comes from ...