In the first Finshots Markets edition of the new year, we tell you about the battle between skill and luck in the stock markets.

The Story

Every Saturday*, we pick a stock or a sector and dive into its prospects and what makes them tick. We might explain something complex such as a biosimilar; we could breakdown the nuances of the logistics industry; or it could be a fun story about companies that give tyres their black colour.

So we thought it’d be a fun exercise to see how the stocks that Finshots wrote about would’ve fared if you decided to invest in them.

For starters, we picked all the stocks that featured prominently in our headers. Or those that were the protagonists of the story. We avoided the IPOs — because getting an allotment is a lucky draw. And we skipped those stocks that we wrote about after a negative event rattled them — such as the recent drop in Paytm shares.

This gave us a list of 26 stocks that featured names such as Titagarh Wagons, Divis Labs, KPIT Technologies, Wonderla, and Bajaj Auto.

Next, we decided to invest ₹10,000 in each of these stocks on the day we published their story. So if we wrote about Titagarh on 28th April, that’s when we made the investment too. A story about Titan was published on 25th August, so another ₹10,000 was invested on that date. Mind you, this exercise was done only on a spreadsheet and we didn’t actually wager real money. But either way, we invested a total of ₹2.6 lakhs using the spreadsheet in 2023.

Then we needed to compare our performance against something. Looking at it in isolation doesn’t tell us how well or badly we did. So we needed an appropriate benchmark. We picked the Nifty 500 since it has a bunch of large, mid and small-sized companies. Kind of similar to our story choices. And we ran the same exercise of investing ₹10,000 into the Nifty 500 index on the same days as when we invested into the ‘Finshots Portfolio’.

What do you think happened?

Well, we beat the Nifty 500!!!

Yup, while the investments in the Nifty 500 would’ve grown to ₹3.15 lakhs, the investments in the stocks Finshots picked would’ve yielded ₹3.35 lakhs.

Now you might look at the graph and point out that it was that one standout stock that made all the difference. Sure, we're not refuting that. But even Benjamin Graham,  dubbed the 'father of value investing', made half of his eventual wealth from one stock — Geico. So it's not uncommon to have that one great stock that carries a portfolio.

So do you now agree that Finshots is a genius stock picker? ;)

Yeah, we know you're scoffing at this and we agree.

Because the truth is…you might be a genius stock picker too.

What do we mean?

Well, Stack Wealth, an investment platform, crunched the numbers for 1900 listed stocks from March to December 2023. And it found that nearly 90% of the companies were in the green. In most cases, the returns were quite healthy double digits as well. This means that if you wrote down the names of these 1900 stocks on a board and threw darts at it to decide your portfolio, you might have still beaten the Nifty 500.

And here’s the problem. 2023 was sort of an anomaly where the rising tide lifted all boats. But this sort of performance could create a false sense of bravado among investors. It might lull you into believing that you have the ability to pick stocks year after year in this manner. That you’ll never go wrong and that you’re better than the highly-paid fund managers who’ve been doing this for a living for decades. You might even ditch your day jobs to pursue investing full-time. At Finshots, we might even be led to believe that we should even foray into fund management (we won’t)!

It’s just human nature to attribute things to skill than luck. We like to believe we’re in control even if we’re not. And a decade ago, researchers tried to analyze this behaviour in the context of IPOs in India. Because IPOs are like a lottery. You are allotted shares simply if a chit carrying your name is pulled out of a box. So the researchers wanted to see how investors who got picked in this lottery behaved if the IPO had popped on listing. And they found that those investors who were allotted shares in these IPOs consequently traded more than the ones who applied and didn’t get any allotment.

Why does that happen?

Well, these investors “misinterpret random gains and losses as signals about their own ability. They misconstrue noise as information. They mistake luck for skill.”

That is the problem.

Now let’s assume that the 2024 proves to be a continuation of the bull market. But there’s still no guarantee that luck will favour you.

Just look at the US for example. The US S&P 500 rose by 24% last. On the face of it, it seems like a classic bull market. But, if you dive deeper, you’ll find that a whopping 72% of stocks in this index have underperformed the index. So if you decide to throw darts at the board and create a portfolio, you probably would’ve had a bad year. You need skill, not luck to do well in such a bull market.

Anyway, just in case you were wondering whether your investing strategy in 2024 should revolve around picking stocks that Finshots writes about — Don’t! Because if you want to know how we decided to tell these stories in the first place, here’s the secret — we were just playing a game of ‘eeny meeny money moe’. We’d pick stocks or sectors that was already seeing an uptick or where there were some whispers about future potential. We were not trying to uncover hidden gems. And more importantly we seldom talk about the future. Our job here is to summarize past events and offer lucid explanations. We are in the business of simplifying the news. So don't start getting funny ideas now and ask us for stock tips.

We have no clue.

Until then…

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*Most of these stories were published on Friday evenings, so we've chosen the closing prices on Friday for simplicity.