Stock Picking is Hard

Damon GonzalezInvesting Leave a Comment

A lot of people, including me, felt some serious FOMO in the last couple of years.  The Federal Reserve had gone hog wild printing money and it seemed like Cryptos and Stonks were making everybody rich.  Service at brokerage firms backed up as they couldn’t hire enough people to open all the new accounts.  People who had no idea what they were doing seemed to be making fortunes.  With the casino paying out so much, it was tough to stick with the time-tested and admittedly boring strategy of holding a diversified portfolio.  Now that some of the bubble has burst and new traders have blown up their accounts and are back to focusing on their day jobs, it feels like the right time to point out how hard it is to make and keep wealth by picking individual stocks.

Example number one is Zoom Video Communications, Inc.  It was pretty obvious that as governments abandoned science and locked people up that Zoom would grow a ton and be a great stock to own.  You can see below from the March 2020 lows that it soared over 240%!

How many people actually bought close to the bottom?  How many knew to sell when the stock approached $588 per share in October of 2020?  Can you believe that what was such an *obvious trade has now done worse than owning a boring diversified index?

Example two is Meta, formerly known as Face Book.  With Whats app, Instagram, and the new Metaverse, *everybody knew FB was a can’t lose stock.  For years it was doing better than the Nasdaq 100 (below) until they just announced earnings and it lost more market capital than any other stock had ever done on a single day in history!  It was *common knowledge that the FAANG stocks were eating everyone’s lunch and would continue to outperform the overall market.  You can see below that the FB, the red line was a much better investment than the Nasdaq from September of 2013 until February 2022.  They now have the same excellent performance of 400% gains in eight and one half years.  If you bought FB in July of 2018, you have a 0% return.  Unfortunately, many paid a lot more than $206 per share and are licking their wounds wandering if they should buy more or throw in the towel.

Example three is the streaming device company Roku that has recently completed a three-year round-trip from $112 to $490 back to $112.  How many ROKU fans realized this stock was a sell in the $300 to $400 range?  You can see in the Tweet below that the company has grown a ton in the last few years, but for whatever reason investors are now willing to pay a much smaller multiple for ROKU’s sales, earnings, and growth rate.


Example four is the Ark innovation ETF ARKK run by portfolio manager, Cathie Wood.  The late 90s had their Munder NetNet fund, Janus, and Firsthand Funds.  These funds could do no wrong and “got” the new world we were going into.  The Goldman Sachs Non-profitable Tech era has the Ark funds.  You can see below that ARKK had a great run of almost 500% in four years.  Cathie was on fire and she was investing in the hottest parts of the market.  Unfortunately many investors hadn’t heard of her until her great performance in 2020 and loaded up the fund towards its peak.  Some unfortunate sole bought the peak at $159.70 and is now sitting on a loss of 59% in only one year.  Did the team at Ark have skill and get dumb?  Did they get lucky and then unlucky?  Were they in the right place at the right time?  All of that huge out performance over the Nasdaq evaporated fast.  Picking stocks is even difficult for full time professionals.


While there are some skilled and lucky people that bought right and sold right, many people are sitting on huge losses in cryptos and former tech darlings wandering what to do.  While boring, owning a broadly diversified ETF is a lot easier and reliable for almost everyone to achieve their financial goals.  The large U.S. stock ETF that I invest client money in is the Avantis U.S. Equity (AVUS) fund.  It’s 7th largest position is Meta (Face Book) at .93% of the fund.  On February 3, when FB lost about 26% in a day, AVUS was down about 2%.  Investors in AVUS barely noticed.

Markets are in a battle right now.  The days of the Goldman Sachs Non Profitable Technology Index trouncing all other sectors is over.  It appears to me that even though many of these former darlings are down more than 50%, there is still more damage to be had in bubble land.  Foreign markets and the real economy stocks (banks, industrials, mining, energy) are still  cheap compared to the broad U.S. Market.  The “great rotation” from Ape NFTs, crypto, and tech could certainly accelerate over the next few years.

The bears feel that the Federal Reserve can’t stop printing money (much less raise interest rates) without bringing on the next Great Depression.  U.S. stocks are expensive and we could stay in stagflation now that it is clear the inflation was not transitory.  If the Fed doesn’t take the punch bowl away, higher prices for all commodities will eventually bring the economy to a screeching halt.  Remember $150 oil and higher interest rates in 2008?

The bulls point toward Covid restrictions ending all over the world and all the prior stimulus that is still out there.  The job market is extremely tight and raises have been plentiful.  There is also a lot of wealth that has been built up in homes and stocks over the last decade.  With so much going on and such divergent opinions, the only thing that seems certain is higher volatility.

And finally; congratulations to the people of Boston.  After only six weeks, the B-Together Vaccine Mandate for the city has been lifted.  Perhaps newly appointed Mayor Wu’s Instagram Live had something to do with it.


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