The Untold Truth of Individual Stockpicking

You did the research.

Spent hours looking at Annual Reports (10K’s), Quarterly Reports (10Q’s), and Investor Presentations.

Created multiple discounted cash flow models using different scenarios to value a particular company.

Bought the company you KNOW is undervalued.

Only to come up short.

Sound familiar?

Don’t worry. I understand your pain.

The goal of investing is to grow your wealth. The main question is how quickly you want to do so. If you’re happy with a market return, investing in thematic ETF’s and major index funds is the way to go. But, if you want to generate alpha (excess return), constructing a concentrated portfolio of a few equities is a better solution.

How does one generate alpha? By taking a contrarian position that you know has credibility. You’re essentially trying to buy into a company way before the other market participants realize its true value and send the stock sky high.

Here’s the issue.

What if the other market participants continue to view the company with pessimism? That stock will go nowhere. Because after all, the stock market is simple economics — Supply and Demand. All that hard work could be of no use. It is definitely no fun watching the overall market continue to rise while you are stuck in a stagnant position.

I can’t help you with the current positions you have in this situation, but what I can do is offer some insight to prevent this from happening again.

Step 1: Avoid companies that are subject to macroeconomic headwinds. This could be regulatory pressure from the government of the country they are operating / based in. Investors do not like instability.

Step 2: Look at the particular company’s stock price over the years. Yes… I mean that. You want to see a stock chart that is in harmony with the operating performance. Go back 5–10 years and look at both.

Step 3: Invest 2% of your portfolio at the beginning. By doing so, you are reducing your risk exposure. A 2% loss won’t keep you up at night. And if you do find yourself with more conviction in your idea, Dollar Cost Average… both upward and downward.

That’s all I have for you folks.

Good luck!

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