67 | In Defense of Actively Picking Companies: Winners and Losers
Actively picking companies is a style of investing in which, instead of owning the entire group of companies available, you decide to intentionally own a subset of companies from a group.
This is how investments have been evaluated since the very first investment opportunity came about - investment opportunity presented, due diligence performed, and decision to own or pass on ownership made.
Actively selecting companies implies a belief that individuals have the ability to evaluate, buy, and hold companies whose value will increase more than the value of other companies over time.
Winners and Losers
If there is one reality with investing, it is that there will always be winners and there will always be losers.
Every investment decision has two parties, one that is buying and becoming an owner and one that is selling and giving up their ownership.
From that point forward, if the value goes up then the new owner "wins" and the old owner "loses".
If the value goes down, then the new owner "loses" and the old owner "wins".
This fact alone would lead you to believe that it's important to know more about the investment than the other party to the transaction.
Like most other things in life, a more experienced, knowledgeable person is more likely to outperform a rookie.
A chef is going to plan a meal, acquire supplies for a meal, and cook a better meal than a rookie cook 100 times out of 100.
A marathon runner is going to prepare more efficiently, have a reduced risk of injury, and outpace a rookie runner 100 times out of 100.
A plumber is going to bring the right tools, access the pipes more effectively, and eliminate a leak more quickly than a rookie homeowner 100 times out of 100.
Understanding the company's financial health, the quality of its employees, the quality of its relationships with stakeholders, its standing within its industry, or the potential future demand for its products and services is integral to making a good decision about whether to own it or not.
Winners and losers are inherent to the system, so spending a little time trying to increase the odds that you can become one of the winners is table stakes for successful investing.