Why Picking Individual Stocks Is a Fool's Game
It’s a gamble: sometimes you’re right, but oftentimes you’ll be wrong.
Investing in individual stocks is a lot like trying to guess if it’ll rain in a week based on the cloud you see today. Sure, you might get it right once in a while, but if you make a habit of it, you’ll often find yourself standing in the rain without an umbrella. Even the most brilliant minds in finance have been humbled by the market, and yet, there will always be investors who believe they can outsmart it. Why? Because the market is, at its core, just a giant casino. And in a casino, every gambler thinks they have an edge.
There’s always a flavor of the day/week/month stock or asset class. It could be Tesla, Bitcoin, or a collection of AI-driven tech companies that promise to revolutionize every industry from healthcare to agriculture. These flavors are wrapped in narratives that are seductive and, at least for a brief moment, seem undeniable. But that doesn’t make them any less speculative. The thing about individual stock picking is that, after a while, you’ll realize that most of your time is spent chasing after stories rather than profits.
The Market Is a Giant Casino
Tesla short sellers
Let’s talk about Tesla for a moment. It’s a prime example of how the market can defy logic and punish even the most informed investors. Remember when hedge funds were lining up to short Tesla? Some of the smartest, most well-credentialed investors in the world were convinced that the company was overvalued, that Elon Musk’s vision was more pipe dream than reality. These hedge funds weren’t just staffed with amateurs—they were full of MENSA candidates and Ivy League graduates, people who had spent their lives mastering the art of finance. These were people who had made fantastic investment calls in the past. And yet, they got burned.
How badly, you ask? Hedge funds shorting Tesla lost at least $5.2 billion since Donald Trump won the U.S. presidency this year.
And the thing is, these hedge fund managers didn’t lose because they were stupid. They lost because they were too smart. They had seen this story before. They had shorted overhyped companies in the past and made a killing. They had developed pattern recognition skills that had served them well for decades. And they were right—except for one small detail: this time was different.
Tesla wasn’t just another overhyped tech company. It was a cult stock with a visionary leader, a fanatical customer base, and a market that was willing to suspend disbelief. And that was enough to send the stock soaring, despite all the financial models that said it should have crashed.
Going long can be equally value-destroying
But of course, it’s not just the short-sellers who get burned. Going long on individual stocks can be just as perilous, and often in a much more painful way. After all, at least when you short a stock, you know from the start that you’re doing something risky, something contrarian, something that might get you laughed at at cocktail parties. But going long? That’s supposed to be the safe play. You’re betting on growth, on innovation, on the future. You’re betting on the inevitable march of progress.
Or at least, that’s what you tell yourself. But then you wake up one day and realize that you’ve bet on Peloton, Zoom, or Snap, and suddenly it’s not so clear that the future is going to look the way you thought it would. Remember those glory days in 2020 and 2021 when these companies were the darlings of the pandemic trade? Peloton was revolutionizing home fitness, Zoom was going to replace the office, and Snap was... well, Snap was doing whatever Snap does, but investors loved it anyway.
And then? Well, and then the world changed. People went back to gyms, back to offices, and back to ignoring Snap. And the stocks, once flying high, came crashing back to earth, incinerating billions of dollars in market cap along the way.
“I only invest in blue chips”
You might think, fine, avoid the speculative tech nonsense, stick with the blue chips, the stalwarts, the companies that have been around forever and will outlive us all. Surely, those are safe? Well, not quite. Going long on individual stocks, even the supposedly bulletproof ones, can be a one-way ticket to value destruction.
Take a look at 2008, when the Great Recession turned the market into a shredder. AIG, Citigroup, General Motors—household names, pillars of the economy—saw their stock prices collapse like a house of cards in a windstorm. These weren’t fly-by-night startups; these were institutions that had been around for upwards of 100-200 years. And yet, if you were holding those stocks, you were staring at drawdowns of more than 95%. Good luck staying zen through that kind of carnage.
The point is, even the “safe” stocks can test the resolve of the most patient investor, because the market doesn’t care about your faith in a company’s brand or its storied history. Blue-chip doesn’t mean bulletproof. In 2008, the market didn’t care if you were founded in 1812 or 1919; investors lost trillions of dollars.
The Fallacy of Pattern Matching
This brings us to the core issue with stock picking: it’s often based on pattern matching, the idea that if you’ve seen something before, you can predict what will happen next. In the world of finance, this is seductive logic. After all, financial markets do have patterns, and if you can spot them, you can get rich. Or so the thinking goes.
But here’s the problem: sometimes things really are different. The past is not always prologue, and markets have a tricky way of rewriting the rules just when you think you’ve figured them out. Tesla was different. The rise of cryptocurrencies was different. And the next big thing—whatever it is—will probably be different, too.
Even professional investors, with all their resources and experience, fall into this trap. It’s not a question of intelligence. It’s a question of conviction. Hedge funds didn’t lose billions shorting Tesla because they were dumb. They lost because they believed too strongly in their ability to recognize patterns. They had seen this story before, and they were sure they knew how it would end. They just didn’t count on Tesla rewriting the script.
The Science Behind the Gamble
If you’re still not convinced that stock picking is a fool’s game, let’s talk about the data. A study by Hendrik Bessembinder, a finance professor at Arizona State University, found that only about 4% of stocks have significantly outperformed Treasury bills over their lifetimes. Let that sink in for a moment. Out of all the stocks that have traded on U.S. markets between 1926 and 2016, only 4% accounted for nearly all of the net dollar wealth creation. The other 96%? They were, at best, mediocre investments. Many of them lost money.
So, if you’re picking individual stocks, you’re essentially betting that you’ve found one of the 4% that will outperform over the long term. That’s not investing—that’s gambling. And the odds are not in your favor. The house—just like in a real casino—almost always wins.
Yet investors still believe they can beat the odds. After all, they believe they can recognize patterns and spot opportunities that others miss. But as the Tesla short sellers and countless other examples have shown, pattern recognition isn’t enough.
The S&P 500 Problem
If you’re not convinced by the Tesla example or the Bessembinder study, let’s look at some more sobering statistics. The majority of professional fund managers—who are paid handsomely to pick stocks—failed to beat the S&P 500 in 20 of the last 23 years (87% of the time).
So, if professionals, with all their resources and expertise, can’t consistently beat the market, what hope does the average retail investor have? The answer is: not much.
The Macro Disadvantage
Another issue with picking individual stocks is that it leaves you vulnerable to macro conditions. If you’re holding a portfolio of individual stocks, how do you prepare for a bear market? How do you hedge against inflation, rising interest rates, or geopolitical instability? The reality is that you probably don’t.
You’re too focused on picking the right companies, and you assume that if you’ve chosen well, you’ll be fine in the long run. This is the logic behind the popular investing mantra: “time in the market beats timing the market.” And while there’s some truth to that, it’s not the whole story.
The problem is that when you’re holding individual stocks, it’s psychologically difficult to make adjustments when macro conditions change. You’ve invested so much time and energy into researching and picking these stocks that it’s hard to let go, even when the market is screaming at you to do so.
And let’s be honest: most people who pick individual stocks have a certain amount of unwavering conviction in their picks. Whether you’re long or short, you probably believe that you’ve found something that everyone else has missed. You’re not easily swayed by volatility, because you’re certain that you’re right and the market is wrong. Unfortunately, this kind of thinking can lead to stubbornness, and stubbornness can lead to big losses.
The right investment strategy should shift and be able to benefit when macro conditions worsen, but such a strategy is difficult to implement in a portfolio filled with individual stocks.
The Allure of “Wonderful Companies at Fair Prices”
There’s a certain romance to the idea of finding “wonderful companies at fair prices” and holding them forever. This is the philosophy espoused by Warren Buffett and other value investors, and it has a certain appeal. After all, who wouldn’t want to own a piece of a company like Apple or Google and watch their investment grow over the years?
But here’s the thing: even Buffett has admitted that he’s made mistakes. And for every Apple or Google that you successfully pick, there are dozens of other companies that will disappoint you. The problem is that the world changes, industries evolve, and what seems like a wonderful company today might not look so wonderful in a few years.
The Case for Index Funds
So, if picking individual stocks is a fool’s game, what’s the alternative? The answer is simple: index funds. Rather than trying to beat the market, index funds allow you to be the market. By investing in a broad, diversified portfolio of stocks, you can capture the market’s overall returns without having to worry about picking winners and losers.
Yes, index funds are boring. They don’t offer the thrill of picking the next Tesla or Bitcoin. But they also don’t offer the heartbreak of losing your nest egg on a bad bet. And over the long term, they’ve consistently outperformed the vast majority of active investors.
One reason indexes are so devilishly hard to beat is that they're inherently momentum-driven, in a way that's actually pretty sensible. As great companies overperform, their portfolio weight grows larger, while underperformers get quietly removed from the index. It's like the index is constantly rebalancing itself, adding to winners and cutting losers. Peter Lynch once quipped that some investors "pull out the flowers and water the weeds" by selling their winners and holding onto their losers. Indexes, on the other hand, do the opposite: they water the flowers and cut the weeds. They're not emotional, they're not sentimental, and they're not trying to be clever. They just follow the momentum, and over time, that tends to work out pretty well.
So, the next time someone tells you about the hot stock they just bought, remember: the stock market is a giant casino, and in a casino, the house almost always wins in the end. Instead of trying to beat the odds, why not join the house?
You Don’t Need to Pick Stocks to Beat the Market (Seriously)
Here’s a fun thing: you can generate market-beating returns without playing stock market bingo. That’s right. No need to divine the perfect entry point for Palantir or to pretend your DCF model for Nvidia is anything more than spreadsheet fan fiction.
Consider this: a simple algorithmic strategy—composed of a VIX ETF (for mean reversion corrections when the bull market is overbought), a 3x leveraged Nasdaq-100 ETF (for bull markets), and a plain old S&P 500 ETF (for bear markets)—produced a 63% annualized return over 13.5 years. That’s not a typo. That’s one-thousand-five-hundred-eighty-one times your money. 1581x. If you started with $100,000, you’d now be staring down the barrel of $158 million and wondering whether “yacht” is too cliché.
Now, yes, yes, yes—past performance is no guarantee of future returns. Of course. Backtesting has its flaws, but there's a reason why the most successful hedge fund manager of all time, Jim Simons, swore by it, mandating that no one could override the computer’s decision.
"The only rule is we never override the computer. No one ever comes in any day says, 'The computer wants to do this. That's crazy. We shouldn't do it.' You don't do that because you can't simulate that. You can't study the past and wonder whether the boss was gonna come in and change his mind about something." - Jim Simons
Your flesh and blood brain simply does not have the historical patterns and data that the computer does. What seems crazy to you may be exactly the right thing to do given certain conditions. Conversely, what seems right to you might be precisely the wrong thing to do.
To be clear: this isn’t magic. It’s not free money. But it is a reminder that the real game isn’t about predicting which stock will become the next Tesla. It’s about using tools that are already in front of you, wrapping them in some logic, and letting compounding do the heavy lifting.
So no, you don’t need to pick stocks. You just need to stop pretending you're Buffett with a Robinhood account and start thinking like a quant with a backtested methodology you thoroughly understand.
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Inverteum Limited (HK) is a trading firm that specializes in long-short algorithmic strategies to generate returns in both bull and bear markets.
We have generated 52% annualized returns (39% after fees) since inception and are currently closed to new investors.
OK, Dart thrower. Good luck!
I disagree with your point of view but I understand your points