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How to pick stocks? A modern take on market analysis

  • November 04, 2021
  • Front

Analyzing companies before making stock picks used to be a time-intensive process that involved multiple layers of investigating. You had to sift through business fundamentals, the state of the market as a whole, and even economic or political factors in play. 

All of this is still important, and probably always will be, but the decentralization of stock analysis by way of social media has put stock picking on a much more level playing field than it ever has been. With the advent of the internet, individual investors, like you and me, now have instant access to limitless information from equally unlimited sources, and it’s been said that this has changed market analysis forever

2020: the year of social investing

Doing research for a new potential investment has almost always been a tedious process. Can you imagine having to call your brokerage to place a trade that would’ve likely been submitted later that day? It actually wasn’t that long ago that the markets became immediately accessible from your phone. But, now that we can, we face a different problem. In a relatively short amount of time, we have access to the markets and to information at an unprecedented level. Now, we face information overload and integrity.

And, the markets are facing a flood of new retail investors, which also could be changing the stock market itself. So, do traditional approaches to market analysis hold up? What does this mean about how we should be analyzing the markets today? What strategies and tactics can we trust? We’ve opened up a can of worms, haven’t we?

We’re not the only ones. In fact, a whole new niche of self-proclaimed “analysts” has cropped up too. They’re called… influencers (or, fin-fluencers), and they specialize in giving advice–except, “not financial advice”, because legally they’re not allowed to if they’re not a licensed financial adviser. There’s no shortage of advice, but, keep in mind, the majority of influencers are not certified professionals.

Retail investing has gone BOOM. There’s now an endless amount of investors on social media, each equipped with their own YouTube channel, Discord link, and no shortage of opinions–often, left unvetted and unchecked. Social media favors the dramatic, which is something we have to keep in mind as responsible investors. The more controversial, severe, or outlandish the opinion is, the more attention it can receive, which doesn’t always mean it’s in the best interest of individual investors. 

Market analysis on the fly

Because of this, it no longer takes hours to do your due diligence on a company. Fundamentals are important and necessary, but there are now so many sources of synthesized information that the investment decision-making process looks very different for new or young investors. With “finfluencers” at the forefront of online investing communities, there are plenty of outspoken opinions and investment ideas. The questions are: Who do you follow? Which investment ideas do you choose? How do you identify good advice?

That’s why it’s good to have a few different tools in your toolbelt to make better investment decisions. In fact, the Front app is the only place you can get Front Scores for your portfolio and for stocks–an excellent way to add a data-driven approach to your investing. (Shameless plug, couldn’t help ourselves.)

But, this wave of finfluencers exists because there’s an audience for it. In 2020, retail investing activity doubled. As of mid-2021, there were 22.5 million Robinhood users alone–nearly doubling since 2020. This has also encouraged several other trends in the retail investing space. For example, we can thank a movement toward decentralized market analysis for the $GME squeeze earlier this year, or $AMC Theatres, $NAKD, $SNDL, and countless other examples of trading activity that seemed to have very little to do with fundamentals. (If you’re interested, you can read through the SEC report.)

Meme stocks, momentum plays, and alternative or anecdotal data. These catalysts have driven some of the biggest, albeit possibly irrational, waves in the market over the last 18 months, and it doesn’t seem they’re going away any time soon. 

Picking stocks wisely: How to play this

Don’t shoot the messenger here: there’s no right way to invest. There is no single method that guarantees results.  This is especially true now with volatile markets and new influencers. However, that does not mean you can’t find your way. In fact, it could more about finding your investing style than the right investing style. 

Until then, accept the challenge of staying flexible, trying things out on a small scale, and keeping your portfolio diversified so that experiments gone wrong don’t wreck havoc on your entire stash.. 

That’s the beauty of these emerging trends. While we may not always agree with their sentiment of taking stocks to the moon for no reason, that doesn’t mean we can’t capitalize off of it. The stock market is an emotional, social-sentiment machine that ebbs and flows, so perhaps the best way to play it would be to just flow with it. 

While there may not be a right way to invest, there are many very poor ways to invest. Picking a strategy that works best for you, your financial situation, and your risk tolerance levels is key. Be prudent, and be willing to miss out on gains if you feel like you’re getting in a play on FOMO or just because it’s trending right now. 

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