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Stock picking has proven to be a phenomenal way to build wealth over the last decade, especially when using tax-efficient accounts like an ISA or a Self-Invested Personal Pension (SIPP). The latter’s particularly powerful thanks to its tax relief benefits that grant investors more initial capital.
Of course, a stock-picking strategy’s only as good as an investor’s ability to find quality winning companies. And while there have been plenty of winners since 2015, there’s also a vast collection of losers.
Those who successfully identified the London Stock Exchange Group (LSE:LSEG) as a winner have gone on to earn a phenomenal total return of 380%. That’s an average annualised return of 16.9% and enough to transform a £5,000 initial investment into £23,890.
The gains are even more impressive for investors using a SIPP with a 20% tax relief rate that turned a £5,000 deposit into £6,250 of capital, which then went on to grow to £29,880.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Stock-picking in 2025
With access to information improving drastically in recent years, the stock market’s becoming increasingly efficient. However, despite this, mispricing remains prevalent in the markets as, in the short term, shares are driven by illogical emotions.
Stock pickers can leverage these behavioural biases using a contrarian approach to find high-quality businesses at attractive prices. But how can an investor determine the quality of a business?
Let’s look back at London Stock Exchange Group. Historically, the company’s largely been reliant on transaction fees from IPOs, equity trading volume, and clearinghouse services. But these income streams are highly cyclical. And over the last decade, management’s been diversifying its services into data analytics, particularly with its acquisition of Refinitiv in 2021.
As a result, the company now generates enormous subscription-based recurring revenues that generate a steady stream of predictable and expanding cash flows. Apart from reducing exposure to capital market cyclicality, it enabled the business to expand profit margins while also creating the flexibility to continue investing in its future. And one of its latest ventures includes a partnership with Microsoft in creating artificial intelligence (AI)-powered financial analytic workflows.
Financial strength and prudent leadership are two key traits of a quality company. And while these aren’t the only important factors, a lot of lacklustre businesses can be eliminated from consideration when filtering for these two characteristics.
Risk versus reward
No business is without risk. Even the biggest companies in the world have their weak spots, and investors need to know what they are to make an informed decision.
London Stock Exchange Group’s decision to expand into analytics has been lucrative. But it’s also resulted in much higher operating leverage due to the substantial fixed costs associated with data licensing, compliance, and data centres.
I think the stock’s worth considering but it isn’t the only financial data provider out there. And if the quality of its data services fails to keep up with competitors like Bloomberg and FactSet, customer attrition will chip away its profitability. In an extreme scenario, a mass exodus of customers could trigger enormous earnings volatility that could see the stock take an impressive tumble.
Put simply, carefully considering the risks as well as potential rewards is a critical requirement to successfully build wealth in a SIPP or other type of investment account, especially when using a stock-picking strategy.
