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Stock Picking for Individual Investors?

| | Posted in: Individual Investing

A reader asked: “It seems that the strategies you identify as possibly working for individual investors involve infrequently rebalanced holdings of exchange-traded funds rather than specific stocks. Are there any stock-picking strategies that individuals can use to outperform the market?”

The notion that individuals are at a disadvantage compared to big traders in constructing and maintaining a diversified portfolio of specific stocks seems reasonable. Individuals typically do not have as much time or resources as funds/institutions to research many stocks in depth, and individuals generally bear higher trading frictions than big traders.

It is arguable that knowledgeable individuals have an advantage in trading microcaps, which big traders must avoid for liquidity reasons. However, microcaps tend to be difficult to research and have high bid-ask spreads and volatilities. Individuals with time and a high risk tolerance might consider applying known anomalies (e.g., momentum) to microcaps. Confirming research is hard to come by.

There is research indicating that individuals who trade less tend to do better than those who trade more. For example, see:

“The Advised, the Non-advised and Frequent Traders”

“Recent Evidence on Individual Investor Performance”

“The Lure of Trading?”

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