Upticks: How We Pick Stocks
By Jake Falcon on July 9, 2021
Falcon Wealth Advisors believes in semi-active management. It’s why we select individual stocks and bonds to invest in on behalf of our clients. On this week’s episode of Upticks, Jake dives into the stock selection process to answer some of the questions you may have about how we choose stocks.
Video
Podcast
Recently, a new client asked me “How do you pick the individual stocks you invest in on behalf of your clients?” I thought this was a worthwhile topic – relevant to both our clients and those who are interested in exploring their options.
Why use individual stocks?
When I began my career in 2006, I was taught to use mutual funds and exchange traded funds for my clients. As I gained more experience and knowledge, I became frustrated with client’s portfolios underperforming major benchmarks. Around 70-80% of mutual funds underperform.(1) Additionally, these funds have internal fees, and advisors typically charge fees on top for their services. This makes it difficult for clients to reach their target returns.
Exchange traded funds and index funds are designed to allow investors to make the return of the general market, but advisor fees diminish the return to less than the market.
Around 2014, we began to research into firing these options and investing in individual stocks. We began by looking at top money managers and the companies they invested in. We scrubbed this with research to formulate our decisions.
Back testing was the next step. It is important to note that the past is never a guarantee of future performance.
We then slowly stair-stepped firing mutual funds and adding individual stocks while closely monitoring performance. Clients with individual stocks were outperforming mutual funds. We fully shifted to individual stocks and performance has exceeded our expectations.
How do we pick stocks today?
Falcon Wealth Advisors subscribes to collective wisdom and a study called Weight of the Ox. Many years ago, a town did a study where they asked everyone to guess the weight of an ox. Though the guesses ranged across the board, the average of those guesses was only one pound off the actual weight.
We subscribe to Bloomberg research software. The software feeds us research from analysts all over the place, which we average. This is how we pick stocks on a macro level.
On a smaller scale, there’s two ways we analyze an individual stock. Fundamental analysis and technical analysis. We incorporate both.
Fundamental analysis
-investigates the details of a company, based on reports and filings
-shows us how a company is performing
Technical analysis
-looks at the trading momentum of the stock
-Relative strength index indicates when a stock is overbought or oversold
-shows good exit or entry points
Falcon Wealth Advisors also has a dedicated Research and Trading Group. Abby Stockman is an Accredited Asset Management Specialist®. She focuses on rebalancing client portfolios. Matthew Navickas is also an Accredited Asset Management Specialist® has similar duties to Abby as well as doing options research and individual securities analysis. Brandon Reed is a Chartered Financial Analyst®. This is the highest designation for individual stock and bond picking and requires the completion of a three-year series of tests. Brandon completes the bulk of research for us at Falcon Wealth Advisors.
Weekly committee meetings are held to examine the portfolio, monitor, and make changes.
As a final note, I want to emphasize that the allocation of a portfolio is more important than any single stock. The overall asset allocation is what really drives performance and what we focus on.
Clients choose to work with us to enhance their financial literacy and explain exactly what their financial plan means to them.
Stock picking is not a game and I do encourage you to work with a trained professional and not go at it alone. It could make all the difference in your financial plan.
-Jake Falcon, CRPC®
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