Should you stop picking stocks?

Sizing is supreme

When a stock looks attractive, how much do you buy? As much as you can afford, as much you want, or another arbitrary number? In a portfolio approach,  the size of each position you hold is as important as the actual stock. A lakh of Infosys is not equal  to a lakh of NTPC or a lakh of Suzlon.  Different stocks have different levels of risk and beta - the sensitivity of price movements in comparison with the market. Unintentionally picking a number of high beta or risky stocks can lead to a portfolio that is very volatile, and can have a rougher than expected ride in a market correction. A portfolio approach quantifies the risk of different stocks, and holds a cross-section of carefully sized stock positions with varying risks, leading to a portfolio that has a risk in line with the market.

Multi-baggers are not a must

Stock pickers often search for multi-baggers, the stocks that will give them two or three or four times return in a year.  While you may chance upon a multi-bagger once in a while, you often end up buying a lot of smaller and risky stocks that can spring unpleasant surprises. A portfolio approach does not look for multi-baggers, in fact, it doesn't aim to make sky high returns.  Rather it focuses on making sustainable and stable returns in a consistent way - doing better than the market when the market is doing well, and minimizing your loss through drawdown control and diversification when the market falls. A stock picking approach may generate 80% in one year and -60% in the next. A portfolio approach aims for 20% in one year and -5% in the next. It is a lower risk approach, that may look like it generates lower returns, but outperforms in the long run on the power of compounding.

So, should you stop picking stocks? Not entirely, but start understanding and managing your equity investments keeping the larger picture - your portfolio - in mind. Re-think about whether popular investment ideas such as profit booking and stock losses really make sense, and whether they help your overall portfolio in coming out ahead. Most importantly, stop the treasure hunt for multi-baggers, and start a journey of meaningful but manageable long term returns.

- Radhika Gupta

The author is co-founder of Forefront Capital Management, a specialized portfolio manager providing equity investment solutions.  She can be contacted on radhika.gupta@forefrontcap.com

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