by Guest Blogger on 2009-04-28 24

The following guest post is brought to us by Manshu from OneMint. Please check out his site and his RSS feed if you havent already!

Ive chosen to pick individual stocks and have decided to invest in commodities as well. Also, rather than investing in GLD. I have opted to buy gold coins on my own. Rather than buying an infrastructure fund, Ive purchased the stocks of steel mining companies myself.

Why I Pick Stocks Rather Than Invest In Mutual Funds

The conventional wisdom recommends that the average investor should go for the diversified approach and invest in mutual funds; this allows the investor to manage their risk and spread it across many stocks and asset classes. But I prefer a different approach to investing and creating a diversified portfolio, which I explain below.

Im a stock picker. and heres why. I like to pick stocks because I prefer to be able to manage my own stocks and know exactly where my money is invested. I dont feel comfortable about buying mutual funds or ETFs because I dont have any control over what the fund manager may do and which companies he or she will buy at any given time. Its like being one level away from my investments.

So as you can expect, I have never considered looking into a fund of funds because with such financial vehicles, not only would I worry about what the fund manager would do, but Id also have to keep tabs on what his or her fund manager would do. Lets look at how this works: if I buy a fund for the purpose of outsourcing the job of stock picking to an expert, and the fund manager of this aggregate fund does the same thing and simply buys other funds to participate in his portfolio, then what would I be paying him to do?

Im also not keen about buying a fund of funds that invests in futures contracts. Because then, on top of worrying about my fund manager, plus the fund manager of my fund manager (it gets confusing) I also have to keep on top of the underlying assets upon which the futures contracts are based. Unfortunately, I am about three levels away from my investments this way.

How I Choose Individual Stocks

Im one of those investors who bases my investing decisions on how much I trust a financial institution or a particular company. One of the main factors that influences my investing decisions is what I call the will this guy screw me factor (pardon the french). I look at the track record of the management of a particular company and try to determine how much damage they could potentially do to my investments, whether it be through their incompetence or their dishonesty.

This is a purely qualitative and subjective measure, and is based on what I know about the management through its history and actions. If they dont pass this criterion or if the management doesnt have enough history, then I pass on the stock. Applying this criterion and analysis upon a fund of funds is almost impossible, and I believe that this is pretty much difficult to do for regular mutual funds as well, apart from a few established companies.

Then there is the issue of complexity. Looking at a steel company and understanding how they are going to make money is far simpler than looking at a fund that invests in numerous asset classes such as T-bills, futures, options, SWAPS, ETFs. mutual funds, commodities, stocks etc. and deciding how they are going to make money.

If you read a prospectus of a fund and you cant figure out how they are making their money, then you are essentially putting your trust in the fund manager. That makes it all the more important for your fund manager to pass the I wont screw you test.

For me, Im most comfortable with picking my own stocks and staying really close to my investments. I make it a point to know where exactly my money is going and to understand what it is Im buying. In order to sleep at night, I prefer to control and select my own investments, placing the full responsibility of managing these investments upon my own shoulders. So far its worked out for me.

Categorized under: Investment