What is a stock picking strategy?

What is stock picking? - Selecting shares individually

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Besides the widely used approach of diversification based on the Markowitz theory, there is also stock picking. Stock is the English word for share and picking for select. Stock picking is about strategically selecting stocks so that the highest possible return can be achieved.

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This is to find the best stocks based on analysis and specific factors. This approach contrasts with the Markowitz theory, which assumes that portfolios must be diversified in order to generate solid profits.

Stock picking is about finding stocks that outperform the market. This is certainly possible. Deutsche Lufthansa is currently such an example. The share has risen by 134 per cent in the past 12 months (as of 6 January 2018), while the DAX has only risen by just under 15 per cent.

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Stock picking - how are stocks selected?

In order to select stocks, a company analysis is generally carried out and attention is paid to earnings performance. Other factors can be dividend yield, degree of uniqueness of the business model, return on equity, thriftiness and expertise of the management.

However, most robo-advisors (see Scalable Capital, Ginmon, vaamo) in https://exnesslatam.com/trading-central-web-tv-de-exness/ rely on a broad diversification when building the portfolio. In addition to equities, bonds, commodities and/or money market products are included in the portfolio for investment.

In the Markowitz strategy, investments are primarily made across countries and sectors, which means that investments in individual positions are independent of each other. The fluctuation range and the risk of loss are thus lower.

Newer robo-advisors, such as Solidvest and Fundamental Capital, on the other hand, use the stock-picking strategy and invest specifically in individual stocks.

In order to be able to invest in 20 to 30 stocks in the end, Solidvest selects from over 68,000 available stocks. Criteria such as:

Stock picking is also supplemented by big data analyses. Today, just one tweet can cause entire share prices to plummet or skyrocket. Crises can also have a massive impact on share prices. It is important to detect these as early as possible.

Fundamental Capital uses what is known as value investing to select individual stocks. Here, it is not the price on the stock exchange that is decisive for the purchase, but the real, actual value of the company (intrinsic value).

If the market value on the stock exchange results from supply and demand, the intrinsic value results from the actually existing company values, which can also be reported in the balance sheet. In value investing, investments are only made in shares that are below the intrinsic value of a company.

Criticism of the stock-picking strategy

Opponents of stock picking - including the robo-advisor Scalable Capital, which we recommend - claim that you can neither predict the market nor can you beat the market. Broad diversification (investing in different markets and asset classes) with solid stocks is much more profitable for an efficient portfolio, they say.

And so numerous studies have also shown time and again that stock picking does not manage to beat the market. In more than 50 percent of cases, broad diversification is more efficient. Which does not mean, however, that bull's-eyes in stock picking are not possible.

However, inexperienced investors in particular should keep their hands off stock picking. A solid investment in at least a dozen stocks from different sectors and markets is the better choice. With ETFs, diversified investments can be made even with small capital.