The World’s Simplest Stock Picking Strategy
Why it’s useful but potentially has two deadly flaws
Last week’s mail puzzled some - I suggested that the best place to be a fund manager was in an area which had the weakest performance from active fund managers, rather than the best. I should have made it clearer! There were emails from confused readers, sorry.
I am on vacation and will be reading a mix of fiction and non-fiction. I wanted to share with you some thoughts on a book I recently read. Before that, a word from our sponsor.
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Introduction
I like to read. I know it won’t turn me into Charlie Munger, but it’s a pursuit I have always enjoyed and when at the hedge funds it was something I only managed to do on holiday – I used to read so much during the day and even at weekend, I just couldn’t face reading more for pleasure and certainly no investment books – zero!
Today it’s rather different and I am a voracious reader of investing books in order to pass on nuggets to my students and even to write the occasional book review for the newsletter. I normally stick to books that I liked and found valuable – The Art of Execution was the last one (link at foot1).
This time, I wanted to share with you some comments on a book that I think could be dangerous to your wealth if the advice is followed blindly. The World’s Simplest Stock Picking Strategy by Edward Ryan is published by my publisher, Harriman House, and is based on the premise that:
customers can identify brands that they love
simply buy the shares and
they don’t need to worry about the price they pay.
The book came out in November, 2021, unsurprising given the advice is basically to buy all the big tech stocks –so often this type of book comes out near the peak.
The central tenet of the book is that earnings drive stock prices and that you should therefore look for companies with pricing power - this is spot on, in my view. This works in all types of markets and is a fabulous strategy.
Yet the author uses examples such as Amazon, Uber and Google, none of which in my view have real pricing power:
If Amazon puts its prices up it will lose a lot of customers.
If Uber gets more expensive, I would rather take a black cab.
Google is fighting Meta, TikTok, Amazon and even Walmart for the lowest customer acquisition cost.
Pricing power is really important - it means that Ferrari can put up the price of its latest model without affecting demand; that Hermes can add $5,000 to the price of a Birkin and customers will want one even more, before they put up the price again; and that a premium gin or whisky can sustain a premium because of its perceived value.
The author contends that
“an efficient market takes the burden of financial analysis off your shoulders. You can trust that the numbers are already accounted for and it’s not worth your time crunching them.”
Now I think I know what he means and indeed I know plenty of investors who adopt a similar attitude. Some have been pretty successful in the last 10 years without ever looking at a balance sheet. Good luck if that’s your strategy for the next 10 years.
I could not disagree more with this thesis.
If you don’t understand the finances of the companies you are investing in, I recommend you do one of my courses or you start buying ETFs because in a period of rising rates, it’s essential to understand balance sheets.
I agree with the author’s assertion that individual, non-professional investors will find their edge in their knowledge of products and services. As a customer, of course you have a fantastic insight into the quality of a product and the odds that the company can increase volume and/or price and hence improve profitability.
The author recommends that you create a list of products you love, ones you really like and ones you are indifferent to. You then create a ranking and buy a portfolio of loved products and liked products. The inclusion of the latter at a much lower weight is rather puzzling as it will not give much diversification (even if the liked products were different from the loved products which is unlikely). In any case, he recommends balancing your stock picks with a US or global ETF.
The strategy he espouses is inconsistent with his own portfolio which included companies like Shell and Exxon Mobil – companies whose products he uses but is indifferent to. His portfolio amounted to 9 stocks and Tesla was the strongest performer. He hasn’t ever owned a Tesla but he aspires to own one and aspirational desires are deemed suitable for inclusion.
I was surprised to read the author recommending that you don’t look at price or valuation as the stockmarket is perfect; he suggests that you should only sell if you decide that you no longer like the product or that the stock goes up so much that it is too big a weight in your portfolio.
Obviously, I think ignoring valuation is stupid. And if you don’t understand how to value a stock, you probably should just buy Berkshire or an ETF or something. I don’t mean that you need to be expert, but you need to be able to make sense of valuation, get it broadly right.
But I do think there is a vein of truth in the premise. I ran a competition to this effect last year, asking people to find stock ideas using exactly this process. It’s a sensible first step to finding a great stock idea. I just wouldn’t build a portfolio around it without thinking about valuation and without throwing some other ingredients in the mix – if you are a Brooklyn hipster, a portfolio of products you love – think craft beer and oat milk – might not protect you against an economic downturn, for example.
In contrast to the very simple stock picking strategy, the author suggests market timing for purchases using the stochastics oscillator which he considers helpful for timing top-ups on market setbacks. To be honest, I hadn’t even heard the term although it appears to be a version of the RSI or Relative Strength Indicator. He recommends putting more money to work at levels of 20 – a level that wopudl appear to be pretty rare. But perhaps this is worth revisiting for a future article.
It’s a very easy book to read, it only took me 90 minutes and I don’t want to discourage you from buying it. You can learn something from almost any book about investing even if it’s just understanding that a strategy has weaknesses. This book has useful elements.
I particularly liked Josh Brown’s comment on the book:
Wall Street sells complexity because that's where all the profit is. Edward Ryan takes readers down an alternative path, where straightforward and intuitive investment ideas can lead to great results
The book is reviewed at 4.4 stars with 129 reviews – I was surprised at how well it has sold. Here is a 2 star review which I thought was informative:
“This review comes just days after reading the entire book.
Is it simple? Yes. However, I can't help but feel that it's so simple that it is almost ridiculous.
The gist of the book is that, if you like something and you can't live without it. Then buy a share. If the day comes when you prefer something else, then sell that share and buy a share in the new thing.
There is mention of a chart indicator to show good times to buy. But this is a ridiculous statement. If we could buy because an indicator says so, the entire world will be rich. We all know that it isn't that easy.
I'd also like to say that the book is very repetitive. There are also 10 pages just telling the reader which companies the author likes and dislikes in his own life. Rather than anything to do with it's business fundamentals or any sort of analysis.
I have given two stars because the book is easy to read but unfortunately I think the method given is entirely based on luck. You are essentially gambling rather than making a solid investment decision based on any form of statistical data.”
Source: Amazon
Conclusion
You can learn something from most investing books, even if it’s what NOT to do. This book is worth an hour of your time to understand how you might implement a tool to help in the finding ideas phase of your stock research. Just remember that once you have found the idea, you need to research it.
For more on finding and researching stock ideas, why not check out my course, How to Pick Winning Stocks – readers can get £50 off this month with the code SUB50. As ever, paying subscribers can read on for an even better deal.
1 My review of The Art of Execution