Part 6: How to Choose Individual Stocks (Without Getting Wrecked)
You’ve built a portfolio of ETFs. You’re broadly diversified. At this stage, some people become curious: Can I pick individual stocks?
The honest answer is that it’s possible. Whether it makes sense often depends on how large a role stock picking plays within a broader portfolio.
The Truth About Stock Picking
Many professional investors, even with teams of analysts, advanced tools, and decades of experience, have historically struggled to consistently outperform broad market index funds. This observation is widely discussed in investing research and data.
Berkshire Hathaway has frequently emphasized the difficulty of stock picking and has publicly stated that many investors may be better served by owning diversified index funds.
If professionals face challenges, individual investors may also want to approach stock picking cautiously and with realistic expectations. This doesn’t mean picking stocks is impossible. It means expectations, position sizing, and risk awareness matter.
The Framework: Core + Exploration
One commonly discussed educational framework separates investments into two parts:
Core (90% of your portfolio): Index ETFs
This portion is often described as the foundation, providing broad market exposure.
Exploration (10% of your portfolio): Individual stocks
This portion is where some investors choose to learn, experiment, or express specific views.
For example, if someone has $10,000 invested:
- $9,000 in index ETFs
- $1,000 in individual stocks
In this type of framework, losses in individual stock positions do not dominate overall outcomes, while gains, if they occur, can still have a noticeable impact.
What Makes a Stock Worth Picking?
Educational materials often suggest that individual stocks are best chosen when the investor understands the business.
Not:
- “This is a great company”
- “This will be the future of the industry”
- “An analyst said this stock will go up”
But rather:
- “I use this product and understand why customers choose it.”
- “I understand this industry and how this company competes.”
- “The company’s financials and business model make sense to me.”
Understanding does not eliminate risk, but it can reduce reliance on speculation.
How to Research Before Buying
Step 1: Understand the business
Read the company’s earnings reports or public disclosures.
A common test: Can you explain what the company does in one clear paragraph?
If not, it may be too complex to evaluate confidently.
Step 2: Look at financials
Commonly reviewed indicators include revenue growth, earnings, and profit margins. You don’t need advanced accounting expertise. Many investors simply look for:
- Consistent or growing revenue
- Stable or improving margins
Step 3: Understand the moat
A “moat” refers to competitive advantages that make a company difficult to displace.
Examples often cited in investing education include:
- Apple: brand, ecosystem, customer loyalty
- Microsoft: enterprise relationships, switching costs
- Amazon: scale, logistics, customer data
If the competitive advantage is unclear, the investment may rely more on prediction than analysis.
Step 4: Compare to peers
Many investors compare companies using simple valuation metrics such as the P/E (price-to-earnings) ratio.
For example:
- Company A trades at a P/E of 20
- Company B trades at a P/E of 15
All else equal, Company B would be considered cheaper.
Valuation alone does not determine future performance.
The Mistakes Most People Make
Mistake 1: Buying because the stock went up
Seeing a stock rise sharply can create urgency. Buying solely due to recent price movement can increase risk.
Mistake 2: Holding losers too long
If a stock declines, some investors hold indefinitely out of hope. If the original reasoning no longer applies, reassessment may be necessary.
Mistake 3: Concentrating in a few stocks
Large positions in a single company can significantly impact overall outcomes. Many educational frameworks suggest limiting individual stock exposure to a small percentage of a portfolio.
Mistake 4: Emotional investing
Strong personal feelings toward a brand or product can influence decisions. Emotional reactions, especially during market declines, often lead to unfavorable timing.
A Simple Stock-Picking Framework
Some investors use checklists like this when evaluating individual stocks:
The company:
- Solves a real problem
- Has identifiable competitive advantages
- Shows revenue growth
- Maintains healthy margins
- Is understandable to the investor
The price:
- Reasonable relative to peers
- Not driven purely by hype
The position size:
- Small enough that losses are manageable
- Does not materially affect overall financial stability
The time horizon:
- Long-term (3+ years)
- Not intended for short-term trading
This type of framework is meant to support discipline, not guarantee outcomes.
Stocks Worth Considering for Emerging-Market Founders
Technology:
- Apple, Microsoft, Google
- Nvidia, AMD
Consumer:
- Coca-Cola, Nestlé
- Amazon
Finance:
- Visa, Mastercard
Energy:
- Energy companies or clean energy businesses, depending on market views
These examples represent companies frequently referenced in investing discussions. They are not endorsements or recommendations. Do your own research and make decisions based on your individual circumstances.
This content is provided for informational and educational purposes only and does not constitute financial advice. Investments involve risk, including the potential loss of capital, and past performance is not indicative of future results. Any examples or data are for illustrative purposes only. Before making any investment decisions, consult a licensed or qualified financial advisor who can assess your individual financial circumstances and objectives.
