Introduction
Cherry-picking refers to the method of picking out the best-performing securities in the market. Though cherry-picking is often not considered the best practice to make investment decisions, it can prove to be quite effective when it comes to generating good returns.
Understanding Cherry Picking
Both individual investors and fund managers can make use of cherry-picking to generate good returns. Individual investors can follow well-performing mutual funds or fund managers and invest in the top-performing stocks they have included in their investment portfolios.
Cherry-picking top-performing stocks lower the time required to identify prospective investments. Also, it does not involve much analysis or research. Hence, cherry-picking, over the years, has become an effective way to identify securities for investments.
Factors to Consider
Consider the scenario where an investor wishes to invest in the pharmaceutical sector. Instead of analysing all the pharmaceutical-related stocks in the exchange, the investor can follow a few mutual funds which predominantly invest in the same sector. This will allow investors to reduce the time required for identifying the best-performing securities.
Fund managers, on the other hand, are generally required to dive deep into the analysis and research of securities when choosing investments. However, in some cases, fund managers may choose to cherry-pick actively-managed investments they believe to be dependable. While this approach does not adhere to the standard procedure, fund managers often merge multiple investments from various funds managed by the same company.
Investing in a basket of stocks of a well-performing sector can generate good returns. However, just because the sector is performing well, it does not mean that all the stocks within the sector are well-performing too. Cherry-picking allows the investor to choose those stocks that outperform the rest within the particular sector.
