The Investment Scientist

Why I Don’t Pick Stocks

Posted on: August 18, 2016


Between 2000 and 2002, I worked as head weather derivative trader at PG&E National Energy Group. On the side, I also traded stocks for my personal account.

By the time the Enron Debacle happened, I had already become the third largest weather derivative trader in the country. Given another year, I am quite sure I would have become #1 in this field. Well, that’s a story for another time.

My stock trading, however, was a lot less successful. All the stocks I picked lost money, except for one. The one exception was PCG, the company I worked for. Granted, the time between 2000 and 2002 was a time of market collapse due to the burst of the dotcom bubble, but there is still an important lesson I learned and that I want to share with you.

The lesson was about  information advantage.

Though I was not in management and therefore was not privy to any material insider information, just from the ambiance noise of the trading floor I know so much more about my company than folks outside of the company.That’s why I was able to make money on PCG. That’s also why I didn’t make money in all those other stocks  – I didn’t  have any information advantage. In fact, by trading those other stocks, I made myself available to be taken advantage of by people who had stronger information.

I highly recommend against stock picking with maybe the exception of the company you work for. Even there I counsel caution. I know a senior exec who worked for MCI Worldcom and all his investment was in MCI Worldcom. When the company went under, all of his wealth was gone like a puff of smoke.

My rule of thump is no more than 20% of your portfolio should be in the company you work for. Even though
you may know your company better than others, let’s face it, you don’t know what you don’t know.

Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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