Do I need to get every stock pick right?

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only.

Roger Federer’s career stats are mindboggling. 20 Grand Slam singles titles, two Olympic medals and 310 weeks as men’s world number one. You could finish the sentence “Federer is the only male player to ever…” in 100 different ways, the next more impressive than the last, such was his sheer dominance.

So, of the points he played over his career, what percentage did he win?

54% doesn’t sound right but, remarkably, it is. What that number doesn’t tell us is that a lot of those points came at key moments and were the difference between another title and going home without the cup. Novak Djokovic and Rafael Nadal have the same hit rate.

The big realisation for most of us is that even success at this level comes with a lot of failure - literally nearly half the time.

As Federer told an audience of Dartmouth College students, “The best in the world are not the best because they win every point. It’s because they know they’ll lose, again and again, and have learned how to deal with it.”

Investing carries a similar flavour. Fidelity legend Peter Lynch put it plainly: “In this business if you're good, you're right six times out of 10.”

Again, it doesn’t feel immediately like the kind of success rate that makes you a world beater but the hidden point is we need to make the winning positions count. That’s where another iconic investor adds nuance to the simplistic notion of an investment going up or down.

“It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong.” George Soros

So, if we reframe the question to “How good are you at running your winners and cutting your losers?” it might be more helpful.

Concentrating on how to get the most out of a winning position, get out of losing trades quickly, and not let emotion creep in, in either situation is the real challenge.

What happens after you buy often tells you much more about yourself as an investor than the decision to invest in a certain asset in the first place.

It’s incredibly tempting to stay glued to the charts of stocks we own. We’ve all been there after making a new investment, cheering on a share and willing it up the page. It’s understandable but really serves no purpose other than maybe some sort of entertainment - and investing should be as far removed from that as possible.

It’s not about divorcing yourself from the stock but what are you really hoping for? Will you instinctively sell if your stock rises? Will you buy more if it falls or cut your position and run for the hills? It doesn’t feel quite as measured to let the chart on the screen prompt rash reactions.

This is where a systematic approach to buying and selling can help.

Focus on developing a repeatable process, with clear signals on when to act. This means having a structure in place to stop yourself shooting from the hip when you get too excited.

In practice, that might mean applying a blanket rule that triggers a review if any stock falls by 10%. That allows you to reassess the situation and maybe add to your position or sell up, depending on stock-specific details. Or you might have a rule to sell increments of a stock as it heads towards, or above, a valuation you think is acceptable.

Limit orders can help in both instances, and while none of this is hardline advice, the point is to have a methodology in place that helps losers stick around in your portfolio while you punish the best performers.

This is where investment firm Man Group sums it up nicely.

“It matters less that a portfolio manager is right or wrong, rather that they know when they are right and wrong, and in both cases act with conviction by running winners and cutting losers.” Man Group

To get closer to this state of investing enlightenment, investors really need to look beyond the gyrating charts to the companies underneath them.

You might notice that the process examples above only use stock prices as prompts to have a look at the underlying businesses. That’s because we need to remember we’re part owners of these companies rather than just followers of lines on screens.

If you look at your portfolio through the lens of a business owner, keeping track of the accounts, corporate strategy and how management is allocating capital, you’ll have a much better idea of what’s actually driving company performance and whether the share price really reflects what’s going on.

If there’s a disconnect between strong business growth and a weakening share price, it could be a good time to increase your holding. Conversely, if shares are zooming up and becoming wildly detached from what the business is delivering, it may be time to bow out.

In both cases, starting at the company level can help increase your conviction in which stocks to keep hold of and which to say goodbye to.

In the end, getting stocks ‘right’ can be more about satisfying our egos than anything else. Once we do our best to get rid of our own biases and emotions, a solid system can help us throughout the life of whatever we own, and help us steadily build a portfolio of winners and shed the laggards when the time is right.

Sources:

• ATP Tour
• Investing in Skill, Man Group

Important information

When you invest your capital is at risk. The value of your investments can go down as well as up and you may get back less than you invest.

This article is meant for educational purposes only and should not be read as personal investment advice. Individual investors should make their own decisions or seek independent advice.