Stock Picking: A Complex and Diverse Approach
Selecting the right stocks is a major challenge and often considered the ultimate investment decision. If one could consistently buy stocks that rise, they would be hailed as a stock market genius. However, most investors lack a systematic approach or clear philosophy in stock selection. Herd mentality, trend-chasing, and being easily influenced are the norm. While the term “misleading” might sound too harsh, the reality is that those who mislead truly believe in their own ideas, just as one might believe that eggs grow on trees.
Stock picking is fundamentally based on investment philosophy, and philosophies differ. I’ve once dismissed others’ views to defend my own beliefs, but looking back, that seems unnecessary. Everyone has their own faith, and as long as you believe in yours, that’s enough.
The Basics: Buy Low, Sell High
The key to buying low lies in market terminology like “mispriced” or “undervalued.” However, the term “mispriced” is not entirely valid. If a stock is genuinely mispriced, others will also notice it. Once some investors catch on, it won’t remain mispriced for long. Typically, “mispricing” occurs in rare events like flash crashes or sudden liquidity crises, but such opportunities are fleeting.
As for “undervalued,” this is also rare. Most of the time, the market is efficient, because smart investors are actively involved.
Investing in the Future
Investing in stocks is about buying into the future. The real reason for buying a stock today is that the company will be significantly better in terms of revenue, profit, and competitive advantage five years from now. The key is that the stock should not be overvalued today.
If a company is currently a market darling, its stock is likely overpriced. The market’s excitement will often push its price to levels that have already priced in years of future growth.
On the other hand, if a company’s stock has fallen by 50% or 80% due to fundamental issues, is the stock now undervalued? Not necessarily. The company is facing real problems, and its stock price reflects that. This means that, broadly speaking, the stock market is often a desert of opportunity—nothing to see.
The Appeal of Problematic Stocks
Despite this, I lean towards buying stocks of companies facing difficulties, betting that they can rise out of the pit.
Would an average company take risks to expand into new businesses or markets? Based on observations, companies that have some accumulated assets are usually conservative when it comes to expansion. They tend to avoid risks, fearing loss. This mindset is common in most businesses—people prefer to stay in their comfort zones, avoiding risks.
However, once a company finds itself in a tough spot, either due to internal or external factors, its survival mode kicks in. This leads to drastic changes, often powered by desperation to survive, injecting vitality into the company. This survival drive can trigger transformations that help a company climb out of its rut. This process presents the investment value, and with market overreactions, the risk is mitigated, offering a potential reward.
Not Every Company Makes It
Of course, not every company that falls into trouble will emerge victorious. Some will simply hit rock bottom, and it becomes clear in hindsight that their value has been permanently damaged. But the good news is that there are many “pits” in the market. Every company will face some form of adversity. Our task is to identify those that have a high probability of crawling out of these pits. This is enough to build a solid investment portfolio. The rest is left to patience and, hopefully, the favor of Lady Luck.
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