Why pick stocks when you can buy ETFs

By | CYH

Data has shown that most investors (professional or not) do not beat the market and it also means that the simple act of buying an index ETF would do better than majority of the investors.

Why then, we still have many individuals picking their own stocks? Here’s my attempt to answer this question.

Investing is an intellectual challenge for some people. They love to put their analyses to the test in the real world and see if they can crack the code of the markets. The satisfaction of getting the investment theses right may even outweigh the amount of money made. There’s no challenge if they just buy ETFs.

Investing can be a hobby. Just like some people learn to cook and although they may not cook as well as a hawker or chef, they still do it because they enjoy the process. Same for photography, cycling and other types of hobbies. Investors who treat it as a hobby just like to be involved in the markets. There’s no fun just buying ETFs and sit on them.

Concentrating all the capital on a few stocks can give someone a chance to make big life-changing money. Especially for people who may not have any other means to generate wealth (career or business), they bang on investing to make them rich. Of course the odds are against most investors. But having a glimpse of hope is a powerful thing. Buying ETFs means there’s no chance to get rich in their lifetime.

For some investors, it can be a kind of mastery they pursue. Give a man a fish, he eats for a day. Teach a man to fish and he eats forever. They believe that the mastery of investing is a worthy practical skill where they can generate returns to pay for their living expenses. Buying ETFs builds no mastery.

Some investors can be confident or overconfident. They believe in their abilities to do better than the market or grow their wealth faster. Every year there are stocks that beat the market. Every decade there are super winning stocks. They are confident they can find the next winners. Buying ETFs means you have no confidence, an identity that is the opposite to what they believe.

Internal locus of control means that some investors believe that they have a big influence on their own investment outcome. If they do enough research, think deep enough, analyse extensively, they would be able to achieve better results. They don’t believe investing is about luck. Buying ETFs means giving up that control which they crave or just being lazy.

Some invest for the excitement. They don’t rely on investments as a main way to grow their wealth. They just treat it as a casino with some play money. Most importantly they get the satisfaction when they win, and losing is not going to hurt them. Buying ETFs offers little excitement.

There’s a Chinese saying 一种米养百种人 which means that people behave differently even if we call ourselves investors. Or if you like Thai, a similar phrase would be ‘same same but different’. We have different beliefs, preferences, upbringing, circumstances and experiences but we come together in one place – the stock market. It is only natural that we act differently. What is insane to you is perfectly normal to another person. Buying ETFs is not for everyone. Picking stocks is not for everyone. But understanding why you do what you do, you might create a paradigm shift for yourself.

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