art vs. science, asset allocation, bottom-up stock picking, concentration risk, diversification, growth vs. value, home bias, Margin of Safety, stock picking, stock selection, stock valuation
Continued from here.
OK, time for a more in-depth look at stock selection. [NB: We’re presuming you’re already comfortable with the rigour & consistency of your stock valuation process]. While I’m happy to acknowledge stock selection may (ultimately) be art, here I’m going to illustrate & argue why it should be mostly grounded in science. So yes, I’m sorry – I don’t have any magic tricks up my sleeve to avoid, for example, a situation we all abhor…you know the one I mean:
You dutifully winnow a list of stocks down to two finalists, do a fine job of valuing them side-by-side, and make your final/fateful selection…only to see one stock double in three months, while you ponder the 35% loss on the stock you actually bought!?
But this can & does happen to the best of us! Unfortunately, it comes with the territory… You have to remember buyer’s regret & remorse are really just symptoms of Fear & Greed. Which can be tackled in two ways:
– Ignore the Problem: As tempting as self-flagellation is, why indulge in such a pointless exercise? Don’t forget, we’ve already assumed you’re doing a bang-up job with your stock valuation process – so you obviously shouldn’t be buying dud stocks, or forsaking a decent margin of safety! What you’re dealing with here is really just Lady Luck…and her rough edges tend to get smoothed out over time.
– Systemise Your Process: Stock selection is an independent, but equally important, part of your investment process – and as I’ve argued before, formalising & systemising every single component of that process is the best way to subdue and kill your fear & greed. Like I said, stock selection is mostly a science..!
And as I wrote in my last post:
‘Stock valuation must be absolute, but stock selection is usually relative.’