Can I beat the Market by picking stocks/individual investments?

Short answer/TLDR: most probably not.

Long answer

Everyone when they start investing wants to maximise how much their money grows/multiplies. It’s in our nature – we chase the fast gains because why not? If a stock goes up 50% in one year- why not just buy those? Why settle for average market returns of 8-10%?
I get it and it sounds like the most logical step in investing.

But how confident are you in picking a winner every single time? How confident are you that past performance will indicate future success?

Let’s try to illustrate this with an example:

Steven has $10,000 to invest. He hears from his friend’s friend that shares in the Australian Tissue Company Limited are going to increase.
He’s a betting man so he buys 10,000 shares at $1 a share – spending $10,000 to acquire these shares.
2 months later – the company sees record sales and the share price goes up to $1.50 per share.

The value of his shares has shot up to $1.50 x 10,000 shares = $15,000

Steven rubs his palms together and cracks a smile – thank god he invested because his value just increased $5000 just by putting in $10,000 dollars.

He saves another $10,000 and here’s from his wife that shares in the Australian Plastic Company Limited are going to increase.
He buys 10,000 shares at $1 a share – spending the full $10,000 to acquire these shares.

3 months later – the Australian Plastic Company Limited’s products are copied by another company and suddenly all their products are worthless. The share price drops to $0.10 and Steven’s $10,000 is now worth $1000.
At the same time, tissue companies are taxed and regulated by the Australian Government and sales free-fall, The Australian Tissue Company Limited’s share price drops to $0.05.
Steven’s initial $10,000, which grew to $15,000 is now worth $500.

All of these things happened that were out of Steven’s control, based on his research, he thought he was going to make money and that these company’s share price would grow – but he was wrong and now from his initial $20,000 investment – he is left with $1,500.

One risk that Steven didn’t calculate was concentration risk.

Concentration Risk

Concentration risk happens when too much of your investment portfolio is invested into one single company, asset, market etc. In laymans terms – having too many eggs in one basket.
We might inherently think that having concentration risk can increase returns – and yes it definitely can, however if that one single company, asset or market goes bad for whatever reasons, it can swing our investments into the negatives very quickly. All it takes is one bad press release, one bad event, one fraud event or one disruption.

The other problem Steven faced was he was competing with full time professionals or computers which are much smarter than him.
When he buys a stock or invests into a company – he’s against: AI computing, hedge funds, investment banks, trading companies who live and breathe investment and can react to changes in the market faster.
He’s not even in the same league and not playing the same game as others.
He aint being the pros.

But.. are the pros beating market returns?

No they’re not. About 84% of active fund managers did not beat the ASX 200 market returns over a 15 year period. It’s worse for large growth funds in the US, less than 1% outperformed the average passive investing rival.

So if you aren’t a professional, and professional’s aren’t beating the market returns – I think it’s safe to say aiming for market returns through investing in an appropriate ETF would likely give you the best returns.

It might be the slow way – but we would rather a slow compounding effect that will likely mean increased investment return compared to something that has the small chance to provides better returns but most times fail at this.