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Opinion: Stock-Picking Is A Cult

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Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the Healthcare Innovators and TAZR Trader services.

For over two decades, I have called the stock market "the greatest game on the planet" because its never-ending complexity was a like a 3-D, 24/7 chess match – played on surfboards.

And now I'm calling one of its "arts," known commonly as stock-picking, a cult. Of course, this ispartly in jest and to make a point. But when you watch the video that accompanies this article, you'll see I'm actually pretty serious and enthusiastic about the cult of stock-picking.

I'm not talking specifically about the "cult of FANG" stocks and their worship. I'm talking about the art and science of smart hedge fund managers that is behind the investment dollars that flow into them.

One of my biggest reasons for being so excited to talk about this arcane topicis that our brains were not naturally wired to do what the big and smart money managers do: buy and hold great growth companies for several years in a bull market.

It takes an understanding of what these fund managers are trying to accomplish and what they know about the economics of "creative destruction" and "punctuated equilibrium."(I explain those concepts in the video.)

Franchise Companies And Long-Term Wealth Building

My best examples lately of how "cult" members knew to buy-and-hold excellent growth companies involve what I call "franchise" businesses, those dominating part of an industry and capitalizing on new technology and consumer trends.

Obvious companies that might come to mind would be Amazon.com, Inc. (NASDAQ: AMZN) and Apple Inc. (NASDAQ: AAPL). How many investors let go of these companies too soon, or tried to "trade" them and then they got away? In full disclosure, I'm in that latter group.

But I also call Alibaba Group Holding Ltd (NYSE: BABA), Align Technology, Inc. (NASDAQ: ALGN), and NVIDIA Corporation (NASDAQ: NVDA) franchises that I want to own for a long time.

What about other "FANG" stocks like Facebook and Netflix — are they franchises, or just fads? They definitely are franchises and not just consumer and investment fads. Although I do wonder how easily Netflix could be disrupted by new technology and competitors. There isn't a clear "moat" for them.

Many investors have derided the FANG stocks as a crowded "cult" trade. Well, the smart investors who have made small fortunes off of these franchise companies don't care what acronym anyone uses to describe them. They didn't buy them to be fashionable or safe. They bought them for the growth. And it has paid off beautifully for investors who paid attention.

While many wise and thoughtful analysts, like Rick Santelli on CNBC, are looking for order, logic, and balance in the economy and the markets, that's not actually how those complex systems work. There is much that is hard to predict and this uncertainty demands patience until the investment herd catches on to what you see, that so many doubt.

Disclosure: Kevin Cook own shares of NVDA and BABA for the Zacks TAZR Trader portfolio and ALGN for the Zacks Healthcare Innovators portfolio.

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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: contributorFinancial Advisors News Psychology Opinion Personal Finance Trading Ideas General

 

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