Author Topic: Am I wrong to be invested in individual stocks?  (Read 19775 times)

Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #100 on: September 06, 2018, 01:51:57 PM »
No, you're not wrong to be invested in individual stocks, you've already proven that with your returns.

https://m.youtube.com/watch?v=r2h84TORcJI

I bought an investment "guide" that were booklets.  Probably a series of 16.  It was my first educational endeavor into investments.  That was in 1991.  Peter Lynch was the "author".  It was probably the biggest impression in those first ten years of learning.  Thanks for the link.  It's a great refresher/reminder.


Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #101 on: September 07, 2018, 08:36:09 AM »
Schwab US Broad Market costs 0.03% per year and holds ~2500 stocks.  So rather than $140/yr on $100k, this choice would allow $30/year while owing a more diversified fund than an assortment of manually purchased individual stocks.

I don't understand the 140/yr on 100k or the 30/yr.  Would you please elaborate?

Viking Thor

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Re: Am I wrong to be invested in individual stocks?
« Reply #102 on: September 07, 2018, 09:59:41 PM »
If you consistently beat the market over time as an individual investor, you are either a genius (underpaid, since you should run a hedge fund), lucky, or you've miscalculated returns like the Beardstown ladies and actually underperformed.

Most people with such claims fall into groups 2 and 3.

Dr. Pepper

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Re: Am I wrong to be invested in individual stocks?
« Reply #103 on: September 08, 2018, 10:20:01 PM »
I don't think your wrong at all. I take a similar approach, but I only try to actively manage about 40% of my retirement money. The rest is passive, just a hedge against making a really bad series of decisions and blowing up. Like you I have been reading about investing for 20 yrs, have been actively running my own money for the past 15yrs. I'm more concentrated with the 40% I actively manage , and usually only hold 1-2 stocks at a time. Avg holding time is 1-3 yrs for each one. I basically look for 1 good idea a year, where I have a variant perception of value and there is at least a 50% difference between the market price and what it's worth as a business. I think there really is an advantage to be willing to investigate stuff for yourself, take risk, learn how to manage your emotions and behavior that comes with studying investing.

privatefarmer

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Re: Am I wrong to be invested in individual stocks?
« Reply #104 on: September 08, 2018, 11:26:09 PM »
This is so simple yet so many cannot wrap their head around it.

BEFORE costs an index fund outperforms EXACTLY half the market it is invested in, on an annual basis.

AFTER costs, an index fund outperforms >50% of the market it is invested in, on an annual basis.

If you are in the top half of invested dollars year-after-year for several decades, you will be in the very top percentages of invested dollars over the entire period. The odds of beating that are so miniscule that they're essentially zero. Beating the market over a short time frame is absolutely meaningless and you actually have a 50% chance of doing so, before costs. But it's like flipping a coin and landing heads time and time again, the odds of hitting heads EVERY TIME for 20-30 tosses is essentially zero. The odds of being the top half of invested dollars every year for 20-30 years is essentially zero, and once you factor in trading costs it's even worse.

So, you can GUARANTEE yourself top performance over a very long period of time by simply holding a total market index fund. Or you can be illogical and pick individual stocks. It really isn't more complicated than that.
« Last Edit: September 08, 2018, 11:29:19 PM by privatefarmer »

Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #105 on: September 09, 2018, 06:44:05 AM »
This is so simple yet so many cannot wrap their head around it.

BEFORE costs an index fund outperforms EXACTLY half the market it is invested in, on an annual basis.

AFTER costs, an index fund outperforms >50% of the market it is invested in, on an annual basis.

If you are in the top half of invested dollars year-after-year for several decades, you will be in the very top percentages of invested dollars over the entire period. The odds of beating that are so miniscule that they're essentially zero. Beating the market over a short time frame is absolutely meaningless and you actually have a 50% chance of doing so, before costs. But it's like flipping a coin and landing heads time and time again, the odds of hitting heads EVERY TIME for 20-30 tosses is essentially zero. The odds of being the top half of invested dollars every year for 20-30 years is essentially zero, and once you factor in trading costs it's even worse.

So, you can GUARANTEE yourself top performance over a very long period of time by simply holding a total market index fund. Or you can be illogical and pick individual stocks. It really isn't more complicated than that.

You don't have to be in the top half every year to beat the market over a time period of 10-30 years.  Trades are no $4.95 at Fidelity and there is talk about trades going to $0.  Out of the last 11 years, I've had 3 years in which I didn't do as well as the market (S&P 500).  My underperformance was minimal (2-5%). But there were times (65% annual rate of return) in which I killed the market (12.7% S&P 500).

privatefarmer

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Re: Am I wrong to be invested in individual stocks?
« Reply #106 on: September 10, 2018, 01:57:55 AM »
This is so simple yet so many cannot wrap their head around it.

BEFORE costs an index fund outperforms EXACTLY half the market it is invested in, on an annual basis.

AFTER costs, an index fund outperforms >50% of the market it is invested in, on an annual basis.

If you are in the top half of invested dollars year-after-year for several decades, you will be in the very top percentages of invested dollars over the entire period. The odds of beating that are so miniscule that they're essentially zero. Beating the market over a short time frame is absolutely meaningless and you actually have a 50% chance of doing so, before costs. But it's like flipping a coin and landing heads time and time again, the odds of hitting heads EVERY TIME for 20-30 tosses is essentially zero. The odds of being the top half of invested dollars every year for 20-30 years is essentially zero, and once you factor in trading costs it's even worse.

So, you can GUARANTEE yourself top performance over a very long period of time by simply holding a total market index fund. Or you can be illogical and pick individual stocks. It really isn't more complicated than that.

You don't have to be in the top half every year to beat the market over a time period of 10-30 years.  Trades are no $4.95 at Fidelity and there is talk about trades going to $0.  Out of the last 11 years, I've had 3 years in which I didn't do as well as the market (S&P 500).  My underperformance was minimal (2-5%). But there were times (65% annual rate of return) in which I killed the market (12.7% S&P 500).

I believe it. If you're picking individual stocks, you can get LUCKY and pick the apple or Amazon in the 90's and make a killing. OR you can pick the Enron or one of the thousands of other stocks that have gone to zero.

one fallacy that people commonly make is that if they have some sort of "skill" they can pick the right stocks. This is foolish. the reason why is because you are not competing against the average joe investor, whom MAYBE you get outsmart if you really spend hours upon hours researching one individual company. however, something like 90% of the money invested is invested professionally, by very large firms with millions of dollars to spend on research who employ dozens of phDs and other experts to analyze all the companies. So picking a winner is simply mere luck but you can easily be just as unlucky and pick a stock that goes to zero. only 4% of the stocks over the last 20 years have outperformed T-bills... do you really think it's smart to pick only a handful of stocks knowing that only 1 out of 25 is likely to be in the group?

all this means nothing to many people, they simply don't care and will say "yeah but i am different, I have beat the market and I know that I can continue to pick the right stocks". or they'll say "look at warren buffet". if millions and millions of people flip a coin 30 times in a row, simple statistics are going to say that a tiny fraction of them will hit heads every single time. to beat the market for 30 years like buffet is not a shock, when you consider how many investors out there have tried. it would actually be a shock if nobody out of the millions upon millions of investors were as successful as buffet, just by simple odds. but there are so many others who have gone BANKRUPT by picking stocks.

Lastly, If you can be GUARANTEED to be in the top percentiles of investors by simply owning an index fund for several decades, w/o any effort of your own, why would you not do that?

privatefarmer

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Re: Am I wrong to be invested in individual stocks?
« Reply #107 on: September 10, 2018, 02:04:09 AM »
This is so simple yet so many cannot wrap their head around it.

BEFORE costs an index fund outperforms EXACTLY half the market it is invested in, on an annual basis.

AFTER costs, an index fund outperforms >50% of the market it is invested in, on an annual basis.

If you are in the top half of invested dollars year-after-year for several decades, you will be in the very top percentages of invested dollars over the entire period. The odds of beating that are so miniscule that they're essentially zero. Beating the market over a short time frame is absolutely meaningless and you actually have a 50% chance of doing so, before costs. But it's like flipping a coin and landing heads time and time again, the odds of hitting heads EVERY TIME for 20-30 tosses is essentially zero. The odds of being the top half of invested dollars every year for 20-30 years is essentially zero, and once you factor in trading costs it's even worse.

So, you can GUARANTEE yourself top performance over a very long period of time by simply holding a total market index fund. Or you can be illogical and pick individual stocks. It really isn't more complicated than that.

You don't have to be in the top half every year to beat the market over a time period of 10-30 years.  Trades are no $4.95 at Fidelity and there is talk about trades going to $0.  Out of the last 11 years, I've had 3 years in which I didn't do as well as the market (S&P 500).  My underperformance was minimal (2-5%). But there were times (65% annual rate of return) in which I killed the market (12.7% S&P 500).

and, no offense, but 11 years is NOTHING. most people have 30-40 years to invest. so you picked the right stock a few times out of those 11 years and got a 65% return, that's awesome. but you have to realize that it is equally as likely that you can UNDERPERFORM by that same amount. picking a stock that has high variance from the general market can cut both ways - you can make a killing or you can get killed, both are equally likely. what everyone has to remember is that all the available data has already been factored into every stock price by millions upon millions of investors, so hitting a winner is 100% luck and 0% skill.

privatefarmer

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Re: Am I wrong to be invested in individual stocks?
« Reply #108 on: September 10, 2018, 02:07:42 AM »
one last post - if holding an index fund is just not "risky" enough for you, you yearn for the POTENTIAL of bigger returns albeit at higher risk, then be smart and simply borrow some money (ie take out a home mortgage) and use that to invest, thus using leverage, in a highly diversified index fund. over the long-haul you should increase your CAGR while still eliminating idiosyncratic stock risk. in other words, ask yourself how much you're willing to lose. know that the general stock market can easily lose 50-60% in a really bad market, an individual stock can lose 100%. if you are okay with temporarily being down say 75%, then simply leverage your portfolio 50% and invest in the total market.

privatefarmer

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Re: Am I wrong to be invested in individual stocks?
« Reply #109 on: September 10, 2018, 02:51:32 AM »
I think that one concept that is often overlooked is COMPENSATED risk. Any risk you take as an investor should be compensated for. For example, if you invest in the stock market vs treasury bills, you are taking the risk of the stock market temporarily declining by 50-60% (or more). However, over a very long period of time, you are compensated for this risk by a much higher CAGR. investing in emerging markets over developed is also a compensated risk. Or, investing in small cap stocks over large caps, you are compensated for the additional risk you take (at least you have been in the past). That's why people invest in small cap stocks, they know the stocks as a group are more volatile however they expect to be compensated for that, and over a long period of time they almost always have been.

Any risk that you are NOT compensated for is a foolish risk to take. Speculating by buying gold, for example, is a non-compensated risk. Gold is more volatile than the stock market yet historically has returned 0% in real returns. an ounce of gold today is worth the same as it was 2000 years ago, in real dollars. Buying individual stocks is also an uncompensated risk. Your EXPECTED return for ANY stock is the same as the index it belongs to. But if you own individual stocks you can obviously lose 100% of your money, whereas an index composed of hundreds or thousands of companies will never lose 100% of it's value unless we have a nuclear holocaust or something of that nature, in which case you're dead so who cares.

If you want increased return you MUST take on increased risk. So, if you really are not satisfied with the return of the market, LEVERAGE your portfolio instead of investing in individual stocks. At least then you should be compensated for the increased risk you are taking.

reeshau

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Re: Am I wrong to be invested in individual stocks?
« Reply #110 on: September 10, 2018, 06:13:18 AM »
@privatefarmer, I have to take exception with a couple of your points.

I think that one concept that is often overlooked is COMPENSATED risk.
...
Any risk that you are NOT compensated for is a foolish risk to take.

True.

Your EXPECTED return for ANY stock is the same as the index it belongs to.

Not at all true.  Stocks certainly have their own potential, and their own risks.  And companies can belong to multiple indexes, which are curated subsections of the market--artificially created.  If the expected return for any stock is the expected return for the index, then by extension it would be the same as the expected return for any other stock.  The expected return for Amazon is not the same as my local electric utility.  Or Barnes & Noble.  The AVERAGE of the expected returns of ALL the stocks in the index would equal the expected return of the index (weighted by the same mechanism) but that does not mean they have the same potential.

But if you own individual stocks you can obviously lose 100% of your money, whereas an index composed of hundreds or thousands of companies will never lose 100% of it's value unless we have a nuclear holocaust or something of that nature, in which case you're dead so who cares.

You also do not need hundreds or thousands of stocks to take advantage of the effects of diversification, which goes back to your point of compensation.  To steal from Investopedia:

"Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks yields the most cost-effective level of risk reduction. Investing in more securities yields further diversification benefits, albeit at a drastically smaller rate."  -- https://www.investopedia.com/terms/d/diversification.asp

While 25 to 30 is larger than a lot of private portfolios, it is entirely achievable by an individual or small investment club.  In the same vein as a broad index, such a portfolio is highly unlikely to go to zero, unless it was improperly balanced, i.e. fully weighted in on sector or one country.

privatefarmer

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Re: Am I wrong to be invested in individual stocks?
« Reply #111 on: September 10, 2018, 06:59:41 AM »
While 25 to 30 is larger than a lot of private portfolios, it is entirely achievable by an individual or small investment club.  In the same vein as a broad index, such a portfolio is highly unlikely to go to zero, unless it was improperly balanced, i.e. fully weighted in on sector or one country.

yes. and this would be a way to own a collection of stocks at basically zero cost, assuming you buy-and-hold. if one would prefer to own 25-30 individual stocks instead of an index fund, I would recommend motif investing. they'll let you buy the stocks all in one transaction for one small fee.

privatefarmer

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Re: Am I wrong to be invested in individual stocks?
« Reply #112 on: September 10, 2018, 07:09:36 AM »
Your EXPECTED return for ANY stock is the same as the index it belongs to.

Not at all true.  Stocks certainly have their own potential, and their own risks.  And companies can belong to multiple indexes, which are curated subsections of the market--artificially created.  If the expected return for any stock is the expected return for the index, then by extension it would be the same as the expected return for any other stock.  The expected return for Amazon is not the same as my local electric utility.  Or Barnes & Noble.  The AVERAGE of the expected returns of ALL the stocks in the index would equal the expected return of the index (weighted by the same mechanism) but that does not mean they have the same potential.

I guess what I was getting at is that the long-term expected return for a stock is simply the growth in earnings + dividend yield. The price of a stock is set according to what the market thinks the future earnings will be, so in an efficient market stocks may have various prices however they should have the same expected return, assuming they have the same risk. So a company like Amazon should have similar expected return as other stocks in its class (ie large-cap growth).

Chevrolet and Ford should have the same expected return. They obviously will have different returns going forward, but the market is efficient, has set their prices, and so their long-term expected return should be identical. If chevy had a higher expected return than ford, then the market would correct that by driving up the price of chevy and down the price of ford.

PizzaSteve

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Re: Am I wrong to be invested in individual stocks?
« Reply #113 on: September 10, 2018, 02:20:04 PM »
Your EXPECTED return for ANY stock is the same as the index it belongs to.

Not at all true.  Stocks certainly have their own potential, and their own risks.  And companies can belong to multiple indexes, which are curated subsections of the market--artificially created.  If the expected return for any stock is the expected return for the index, then by extension it would be the same as the expected return for any other stock.  The expected return for Amazon is not the same as my local electric utility.  Or Barnes & Noble.  The AVERAGE of the expected returns of ALL the stocks in the index would equal the expected return of the index (weighted by the same mechanism) but that does not mean they have the same potential.

I guess what I was getting at is that the long-term expected return for a stock is simply the growth in earnings + dividend yield. The price of a stock is set according to what the market thinks the future earnings will be, so in an efficient market stocks may have various prices however they should have the same expected return, assuming they have the same risk. So a company like Amazon should have similar expected return as other stocks in its class (ie large-cap growth).

Chevrolet and Ford should have the same expected return. They obviously will have different returns going forward, but the market is efficient, has set their prices, and so their long-term expected return should be identical. If chevy had a higher expected return than ford, then the market would correct that by driving up the price of chevy and down the price of ford.
This is not totally correct.  Earnings are important, but they are really just accounting statements representing a time bounded look at revenues and expenses.   Balance sheets matter.  Companies can grow assets, such as customers, intellectual property, or their physical assets, such as real estate or reserves can have huge future value.

Also, two auto stocks will not have the same future expected return or risks.  Each will have different expectations and hence a different risk premium imputed into their stock price.

Holding and individual stock can have compensated risk or uncompensated risk, depending on the investors individual understanding at the purchase time and the later future performance.  Yes, these can look like lottery tickets, mathematically, by analysts, but under it all are real people doing things that an investor can or might not have better insights about.

talltexan

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Re: Am I wrong to be invested in individual stocks?
« Reply #114 on: September 12, 2018, 11:18:33 AM »
I got sucked back into the individual stock game with Alibaba ($BABA).

Four shares, my cost basis is $633

wish me luck!

Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #115 on: September 12, 2018, 01:30:18 PM »
I owned BABA for awhile.  I struggle with the lack of transparency with Chinese companies.  Good luck!

Retire-Canada

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Re: Am I wrong to be invested in individual stocks?
« Reply #116 on: September 12, 2018, 01:57:02 PM »
I owned BABA for awhile.

Me too. Go BABA! Go BABA! ;-)

Scandium

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Re: Am I wrong to be invested in individual stocks?
« Reply #117 on: September 13, 2018, 07:12:51 AM »
These threads are somewhat of a staple here, and always goes the same:

1) Person asks if they should invest in individual stocks, and provide their amazing previous returns.
2) The board provide data and reasons why they should not
3) person gets defensive and argue how well they have done, and that they should keep doing it.
          -Bonus; usually they agree that "most people" should index, but they are special/"research"/have a system so it doesn't apply.
4) thread deteriorate and nobody have their mind changed in any way.

I see nothing different here. OP is basically asking for justification to keep doing what they're doing already. And shows no signs of being willing to listen to counterarguments.
« Last Edit: September 13, 2018, 10:07:47 AM by Scandium »

talltexan

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Re: Am I wrong to be invested in individual stocks?
« Reply #118 on: September 13, 2018, 09:15:34 AM »
This thread was part of a powerful collage of discussion (some of which was offline, and some of which was via investing podcasts) that moved me to replace positions in individual stocks with a set of small cap value funds. About $8,000 was re-allocated based on the advice here.

And it might seem like I'm kicking sand in the faces of other commentors by expecting to return and celebrate my $600 purchase of Alibaba shares. Perhaps it is. But--proportionally--I am far better off via the reallocation mentioned above, even allowing for the modest $baba position.

Panly

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Re: Am I wrong to be invested in individual stocks?
« Reply #119 on: September 13, 2018, 01:24:08 PM »
These threads are somewhat of a staple here, and always goes the same:

1) Person asks if they should invest in individual stocks, and provide their amazing previous returns.
2) The board provide data and reasons why they should not
3) person gets defensive and argue how well they have done, and that they should keep doing it.
          -Bonus; usually they agree that "most people" should index, but they are special/"research"/have a system so it doesn't apply.
4) thread deteriorate and nobody have their mind changed in any way.

I see nothing different here. OP is basically asking for justification to keep doing what they're doing already. And shows no signs of being willing to listen to counterarguments.

and vice versa. 

Goldielocks

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Re: Am I wrong to be invested in individual stocks?
« Reply #120 on: September 13, 2018, 05:06:57 PM »
These threads are somewhat of a staple here, and always goes the same:

1) Person asks if they should invest in individual stocks, and provide their amazing previous returns.
2) The board provide data and reasons why they should not
3) person gets defensive and argue how well they have done, and that they should keep doing it.
          -Bonus; usually they agree that "most people" should index, but they are special/"research"/have a system so it doesn't apply.
4) thread deteriorate and nobody have their mind changed in any way.

I see nothing different here. OP is basically asking for justification to keep doing what they're doing already. And shows no signs of being willing to listen to counterarguments.

I read the first page, skipped the second and read the recent posts.   I think I have new contribution beyond the above..


First, my bias -- I am a believer in index funds, after learning my lessons, and most of this is just a debate between the people that say "can't beat the average market with research" and those that say you can.

Stock Price Movement does not match company performance.

I have found (like BobtheBuilder last May, discussing AMD stock), that the stock price can go up or down over several years, for a given company, and it seems to have nothing to do with the underlying profit / improvement fundamentals.   I mean, we all know that a strong, growing company with increasing profits SHOULD go up in value, yet it doesn't.     Also, some companies are doing strange things bckstage with mergers and forays into hedging / integration / financing that I find hard to get research on or evaluate.. especially as I typically only look at the operational success / bottom line plus assets.   (STERICYCLE, I am looking at you!)

I have found that the market rewards fast growth companies more than stable growth ones, and the stock price drops if earning growth are not as large as projected... even if the returns beat the company's own projections or the prior year.   I can take any normal company measurement of success (in their annual financial plan), and find a lot of examples where this is true -- stock price does not seem to correlate with company success.

TAX and ASSET ALLOCATION strategies affect how to invest

Although I am an "indexer", I have started to buy individual stocks lately, in my non-registered account, to try to leverage the tax-advantages of dividends at my income bracket.   The combination of being able to get a capital loss to offset the gains (for tax), plus the preferential tax on these dividends (0% or lower for me right now), justifies the (in my mind) increased risk with stock picking.  I also can not find very many CDN dividend-returning indexes that are not over weighted with bank stocks and oil.  (and CDN companies are needed for my awesome tax dividend rate)... so I need to find them individually or invest huge amounts in my non-registered fund for the small dividend rates on broad index funds.

I am shitty at stock picking

I will admit it.  Even when my research finds something to buy (eventually), I am crap when it comes to deciding to sell.  Selling at the right time is, at best, mixed success.   One can't win at this if you don't know both sides -- when to buy, and when to sell.




 

rhstache

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Re: Am I wrong to be invested in individual stocks?
« Reply #121 on: September 13, 2018, 08:48:07 PM »
That's the thing, you don't sell, unless the dividend gets cut. Buy the best 30-40 dividend paying stable stocks you can find and never sell a damn thing. A few may loose money or even go out of business, but a few may go up thousands of percent over the long term and will make up for the loosers. Keep buying and reinvest dividends

Goldielocks

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Re: Am I wrong to be invested in individual stocks?
« Reply #122 on: September 13, 2018, 10:10:44 PM »
That's the thing, you don't sell, unless the dividend gets cut. Buy the best 30-40 dividend paying stable stocks you can find and never sell a damn thing. A few may loose money or even go out of business, but a few may go up thousands of percent over the long term and will make up for the loosers. Keep buying and reinvest dividends

hrmm...   much smaller market for CDN dividend stocks.. I am not sure I would find 30-40 that I would WANT to invest in, especially without overweighting oil and bank stocks.

ETA:  A bit more thinking and research led me back to this...  VDY  (Vanguard Cdn high yield Index)

Top 85% of holdings are in about 15 companies -- which are BANKS and ENERGY companies ( out of 63 holdings total)...  Dividend yield is 4.2%.   

Yep, a Vanguard ETF dividend stock!!!   Aparently the research to find the "best" 30-40 dividend stocks in the CDN market is intensive, and you may as well go for a dividend index stock because it has pretty much all the same players in it, only different weights.   e.g., the bottom 25 companies in the index are only % of the total holdings.

Oh -- and it is a new fund offering, which is why it was not on my radar when I started my "buy single stocks for dividends" strategy.
« Last Edit: September 14, 2018, 03:11:00 PM by Goldielocks »

Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #123 on: September 14, 2018, 03:05:01 AM »
These threads are somewhat of a staple here, and always goes the same:

1) Person asks if they should invest in individual stocks, and provide their amazing previous returns.
2) The board provide data and reasons why they should not
3) person gets defensive and argue how well they have done, and that they should keep doing it.
          -Bonus; usually they agree that "most people" should index, but they are special/"research"/have a system so it doesn't apply.
4) thread deteriorate and nobody have their mind changed in any way.

I see nothing different here. OP is basically asking for justification to keep doing what they're doing already. And shows no signs of being willing to listen to counterarguments.

I've addressed all counterarguments at one point or another in this post.  So your last comment is false.

Your post provide no value to anyone so why did you post it?  To piss on the OP? 

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #124 on: September 14, 2018, 09:19:52 AM »
A much more interesting topic to me is understanding the reasons that both actively managed funds and individual investors underperform the market.

It's really much worse for most than the arguments here.

http://thereformedbroker.com/2013/05/22/most-investors-underperform-their-already-underperforming-funds/

According to an investing study from Davis Advisors, the average stock-holding mutual fund returned 9.9% annualized from 1991 to 2010, but the average fund owner earned only 3.8% on average per year.

And there are also reasons why Active managers fail to perform:

https://www.nasdaq.com/article/i-know-why-mutual-funds-fail-to-perform-cm805386

Most people commenting on mutual fund performance haven't actually ever run a fund. But I, after having launched and managed three funds with Motley Fool Funds, have the unique opportunity to look through both lenses. No, good Fool, the problem isn't the portfolio managers -- not all of them, anyway. The things that actually cause mutual fund underperformance are far more pernicious than mere incompetence.

In brief, there are four main factors -- customers , consultants , regulators , and structure -- that force mutual fund managers into conventional thinking, when the key to extraordinary market returns is unconventionality. It's a basic disconnect, and it is really hard to resist.


So all of these studies about performance of active managers don't seem to bother to dive in to the reasons for this and what might be done to correct it. And for Individuals as well, even index fund investors tend to underperform personally by a significant margin.

But the market returns what the market returns. If individuals underperform by such a significant amount the money they are leaving on the table is going in someone's pocket.

If you strive to match the market and don't make the average mistakes you can outperform the average individual by a lot and the average active manager by a little.

I personally want to know how to be in that group that collects that extra 6% (or 1%) that the average individual or institutional investor leaves on the table. That seems to be a worthy pursuit. Even if I can only add an extra 1-2% per year to my returns that means a huge difference in end outcomes as we all know.
« Last Edit: September 14, 2018, 09:22:00 AM by PaulMaxime »

PizzaSteve

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Re: Am I wrong to be invested in individual stocks?
« Reply #125 on: September 14, 2018, 09:53:48 AM »
Paul, I've observed that active fund managers tend to be people looking for easy money. They are attracted to the industry out of greed, and not to build a wining portfolio strategy.  So I believe they tend to underperform for a variety of reasons, but mostly I feel it is due to cost and marketing reasons.

The mutual fund game requires marketing, scale and fees.  All these work against performance. Marketing is a big problem because the fund must tell a story that attracts investors, and I think this tends to create nice sounding strategies which attract assets, but suck as a portfolio, due to churn costs.  Slick salesmen and high fees make for a profitable fund, not buy wisely and hold 30 years, selling nothing.  Scale means even if you fund a hidden gem, your own need to own it will drive the price up because you need to convince prior investors and owners to sell.  So like Buffett, when he has a target acquisition, he still must acquire the good company.  Management and investors in a good company know they own something good, since they were there from the start and accordingly will ask a high price, which also can drag performance. So even good research may fail precisely because you need to buy the issue at a good price to make a good return.  Transaction fees also drag on performance, but these factors are well understood.   But again, marketing the fund require a periodic update and new stories to attract assets under management. I find this generates unneeded churn as the managers feel a newsletter about them not buying or selling anything makes a poor marketing piece, so their fees will seem unnecessary (which is exactly why indexes do so well...buy and hold, low churn works).

Since people are impatient and easily shmoozed, I found the culture of active fund manager teams to be far from what would actually produce good long term results.  The drive fast cars and chase short term big wins.  Traders suck as investors, precisely because of this typemof personality.  Investors must be very patient, like reading balance sheets, checking details out.  Just like in real estate. 

This does not necessarily mean an individually managed portfolio must always underperform. Some endowments with good management have outperformed the market over long periods.  It is just hard.  Few have the patience and training to research deeply enough, etc.  People that talented make money other ways, like creating Vanguard or BH, or by becoming a CEO themselves, so the pool of active fund managers is actually a bit talent poor.  The talented people I met in business school are mostly building companies or working for them as top management, because it,is more challenging.  Fund management is actually pretty boring, so I found people into it are doing it for the money, not because it is their passion.  They few that are, tend to do ok.

Just my 2 centts.

PS  Just as good management matters in real estate, it also matters for individual stock investors. This forum frequently advocates individuals buying investment RE purchases,  over REATs, which are much more volatile in returns as well.  So why oppose individual stocks so strongly?  Data suggest 20 or so stocks will do fine relative to an index so while indexing is better, I dont understand the heavy face punching, personally. Active trading...sure, deserves a facepunch, but a diversified portfolio of well researched individual stocks...why not.
« Last Edit: September 14, 2018, 10:07:38 AM by PizzaSteve »

ACyclist

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Re: Am I wrong to be invested in individual stocks?
« Reply #126 on: September 14, 2018, 10:10:00 AM »
This sounds like a bad idea.  We have almost all of our egg in diversified index funds.  There are maybe 2-3 individual stocks in that portfolio.  It is a very small amount of the egg.  Maybe 1%.  Its my gambling money.  So far it has been ok.  I would never have large chunks in one company.  I had a few AMZN stocks.  It was up 100%, so I pulled off profit. Now, all I have in that is the original investment to keep my exposure down.  That profit has been moved to a safer investment now.

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #127 on: September 14, 2018, 10:43:52 AM »
PS  Just as good management matters in real estate, it also matters for individual stock investors. This forum frequently advocates individuals buying investment RE purchases,  over REATs, which are much more volatile in returns as well.  So why oppose individual stocks so strongly?  Data suggest 20 or so stocks will do fine relative to an index so while indexing is better, I dont understand the heavy face punching, personally. Active trading...sure, deserves a facepunch, but a diversified portfolio of well researched individual stocks...why not.

I agree with you. Except for my 401K I don't use Index funds at all. I have a diversified portfolio and have outperformed pretty well (about 6% per year on average) since I've been tracking my performance monthly against the S&P 500 Total Return index since 2007.

But I think the reason for the strong reaction is understandable:

1: People have been burned by bad stock investing or high fee advisors in the past - timing the market, piling in to a few hot "names" etc. Basically all the bad behavioral things that long term buy and hold index investing eliminates. Most people can and should stop here, but just index funds alone aren't the solution because you also have to behave properly which is hard for people.

2: They believe strongly in the Efficient Market Hypothesis. (IMHO the market is too emotional to be completely efficient.)

3: They read studies about how hard it is to outperform while not realizing that the studies don't necessarily apply to well behaved individual investors. The well behaved individual has huge advantages over the institutions, in my view.

4: MMM isn't really about investing per se. It's about pushing your savings rate and living a good life. Rethinking overconsumption and how you live your life. Unless investing is really interesting to you there's no reason to go beyond something that is proven to work for most people.

So unless you are really interested in investing and business it's best to just LTBH index funds. And then things like Asset allocation and "Investor Policy Statements" and the like are the tools that are used to control the natural bad behavior.

When I have friends who ask me about investing my first advice is index funds. Only if they really show interest do I push past that. For most it really is the best advice.
« Last Edit: September 14, 2018, 12:10:55 PM by PaulMaxime »

rhstache

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Re: Am I wrong to be invested in individual stocks?
« Reply #128 on: September 14, 2018, 12:16:49 PM »
That's the thing, you don't sell, unless the dividend gets cut. Buy the best 30-40 dividend paying stable stocks you can find and never sell a damn thing. A few may loose money or even go out of business, but a few may go up thousands of percent over the long term and will make up for the loosers. Keep buying and reinvest dividends

hrmm...   much smaller market for CDN dividend stocks.. I am not sure I would find 30-40 that I would WANT to invest in, especially without overweighting oil and bank stocks.

I'm in the US and don't know what you have available to you in Canada, but my watch list includes LYB CNI PSX HRL DLR RY TD MCD O UNP MO AFL TROW CLX COST SBSI UTX MKC UL SBUX LMT AAPL SJM HRS CL CVS CB ITW PX DE MCHP GWW GD ADP NEE SHW V UNH. I even have a couple of more risky techy stocks in very small quantities TCEHY BABA SQ AMZN NVDA that mostly don't pay any dividends so thus the small quantity invested.    I actually have many other stocks that I own, but probably wouldn't buy them if I had it to do over, although I am not selling any of them either.  I am not recommending any of these stocks and you should definitely do all the necessary research on your own. Some of these may actually go completely out of business, loose 100% of your investment, but a few may increase by several thousand percent, more than making up for the losers. I am pretty sure a nice portfolio of quality mostly dividend paying stocks will beat the S&P 500 by 1% to 2% minimum per year averaged over 20 years or even 10 years.

rhstache

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Re: Am I wrong to be invested in individual stocks?
« Reply #129 on: September 14, 2018, 12:23:41 PM »
Chart attached of 4 pretty boring companies mostly. Dividends are included with all. Keep the long term view, very important.

Full_Beard

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Re: Am I wrong to be invested in individual stocks?
« Reply #130 on: September 14, 2018, 06:48:02 PM »
No, I don't think you're flat out wrong, esp. since my retirement portfolio is about 40% stocks (IRAs) and 60% SP500 (TSP). The stocks (Visa, Costco, Berkshire-Hathaway, Broadridge Financial Services, Apple, and Alaska Airlines) have far outperformed the SP500 over the last 10 years (when I basically started). Originally, it was probably 20% stocks. I'm not active with them (that is, I bought and now mostly hold), esp. now that my family's income doesn't allow us to use the Roth IRA anymore. And I personally wouldn't buy companies like Facebook because there's nothing really to value other than the popularity / user number outlook, but I've obviously missed out on some high earnings with those stocks (and am fine with that). I have, however, decided to set aside $50K to invest in young companies that appeal to me (NIO, e.g. - the Chinese Tesla).

Good luck.
« Last Edit: September 15, 2018, 05:22:04 PM by Full_Beard »

flipboard

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Re: Am I wrong to be invested in individual stocks?
« Reply #131 on: September 15, 2018, 09:11:16 AM »
<snip>
But the market returns what the market returns. If individuals underperform by such a significant amount the money they are leaving on the table is going in someone's pocket.

If you strive to match the market and don't make the average mistakes you can outperform the average individual by a lot and the average active manager by a little.

I personally want to know how to be in that group that collects that extra 6% (or 1%) that the average individual or institutional investor leaves on the table. That seems to be a worthy pursuit. Even if I can only add an extra 1-2% per year to my returns that means a huge difference in end outcomes as we all know.
I was under the impression that your someone is actually the brokerages and exchanges. Most people will see returns below the average market oerformance because of the money lost to trading fees. (Reminds me of that gold-rush saying about tools and services.)

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #132 on: September 15, 2018, 11:19:01 AM »
<snip>
But the market returns what the market returns. If individuals underperform by such a significant amount the money they are leaving on the table is going in someone's pocket.

If you strive to match the market and don't make the average mistakes you can outperform the average individual by a lot and the average active manager by a little.

I personally want to know how to be in that group that collects that extra 6% (or 1%) that the average individual or institutional investor leaves on the table. That seems to be a worthy pursuit. Even if I can only add an extra 1-2% per year to my returns that means a huge difference in end outcomes as we all know.
I was under the impression that your someone is actually the brokerages and exchanges. Most people will see returns below the average market oerformance because of the money lost to trading fees. (Reminds me of that gold-rush saying about tools and services.)

Nope. That's not sufficient. Trading fees and expenses is something like 1-2% maybe. The remaining 5-6% that the average investor underperforms by has to go in someone's pockets.

What you were probably thinking of is that professionals tend to underperform by the fees they charge. Which, in aggregate, is pretty much obvious. What I am talking about is the fact that the average individual investor underperforms the funds they are invested in by approximately 6%. That's money they are giving away by buying and selling at the wrong time or chasing performance or other behavioral mistakes. This is money that is going to someone else, given the overall total return of the market.

Think about it. If you trade on your own you are paying less than 10$ per trade. Bid/Ask spreads tend to be only a few pennies these days. If you have a ripoff financial advisor you might be paying as much as 3% in fees annually. Trading losses don't go the the broker they go to the person on the other side of the trade (which could be the broker I suppose but not generally)
« Last Edit: September 15, 2018, 02:20:27 PM by PaulMaxime »

PizzaSteve

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Re: Am I wrong to be invested in individual stocks?
« Reply #133 on: September 15, 2018, 06:10:06 PM »
Brokers do make markets in many stocks (someone has to, the exchanges dont), so there is some scim of value there ive observed, especially on limit orders at market open.  I dove pretty deep there once when I was annoyed by a price recieved at the opening initial cross (a very weird practice used to start trading that doesnt necessarily price at the median of bid ask offers...brokers can sneak in offers just before open and snipe old limit orders).  If you do buy stocks I suggest buying quality, based on extensive knowledge and holding for decades, and buying liquid stocks during market hours.  Eventually the 0% holding costs will make the drain of transaction fees and possible bid ask spreads on purchase and sale very small as a percent of total cost.  Holding for decades can approach the efficiency of a vanguard ETF, though as said, an individual portfolio will lack as much diversification
« Last Edit: September 15, 2018, 06:12:22 PM by PizzaSteve »

theolympians

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Re: Am I wrong to be invested in individual stocks?
« Reply #134 on: September 15, 2018, 06:50:07 PM »
'I haven't read through the posts, so I may be retreading here.....Anyhoo, I have a 457 plan in which I am exclusively invested in index funds. I also have a Roth IRA which is split between two funds and 8 individual stocks. My thinking is the 457 is more risk averse. I invest 18000 in the 457 yearly. The IRA I am willing to risk some more. Any thoughts on that method?

x8855227

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Re: Am I wrong to be invested in individual stocks?
« Reply #135 on: September 15, 2018, 07:46:14 PM »
People sitting on the same round table may not be on the same page in the investment world.


PaulMaxime and Cache_Stash, would you please recommend some readings about the corporate fundamental analysis? Also what are your favorite value investors' forum?


Thanks you!

Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #136 on: September 16, 2018, 06:27:09 AM »
People sitting on the same round table may not be on the same page in the investment world.


PaulMaxime and Cache_Stash, would you please recommend some readings about the corporate fundamental analysis? Also what are your favorite value investors' forum?


Thanks you!

I'm not really a value investor.  My success in that area was never really good.  I think value stocks (value trap) happens because a lot of those companies don't have any growth.  Growth is absolutely necessary for good returns.  I'm more of the growth at a reasonable price (GARP) investor.  Peter Lynch has written a lot of books in this area.  Here are a few:

Learn to Earn:

This book is great for learning about other people's mistakes.  Although learning other peoples mistakes helps a lot, sometimes you have to make them yourself before you learn.  I've touched the hot stove top many times and each time I kick myself for being so stoopid.

Beating the street:

This is my holy grail of how I learned to invest.  If you can't have a simple summation of your investment thesis for a stock, then you don't shouldn't be buying it.  You hold on to a stock until your thesis no longer holds together.  Modify your thesis as new information becomes available.  This is immensely helpful in determining when to sell a stock (you need an exit strategy!). 

Hope this helps you. 

I could go on forever on mistakes I've personally made (all of them documented thoroughly by the wise ones (Warren Buffet, Peter Lynch, et al).  I've also learned a lot of discipline from those mistakes.  I think Warren Buffet's level of discipline is what has put him at the pinnacle of the investment world.  If only I had 1% of his level of discipline.

Reading definitely helps.  If you read enough, you will find out that the same messages are given over and over and over by pretty much all the really smart investors.
« Last Edit: September 16, 2018, 06:30:14 AM by Cache_Stash »

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #137 on: September 16, 2018, 10:54:04 AM »
People sitting on the same round table may not be on the same page in the investment world.


PaulMaxime and Cache_Stash, would you please recommend some readings about the corporate fundamental analysis? Also what are your favorite value investors' forum?


Thanks you!

Not a value investor either. I'm more of a long term growth stock kind of guy myself.

I'm a fan of the Motley Fool and think paying for a subscription to one of their inexpensive newsletters like Stock Advisor or Rule Breakers is a good value. They are business focused long term buy and hold investors. The marketing if you've seen it can come across as scammy for sure but the reality is much better than that. They have some free discussion boards that are very good.

I've paid for their advice for years and it's good.

If you are interested in what their investing philosophy is like I recommend listening to David Gardner's Rule Breaker Investing podcast to see if what they are doing is for you. https://www.fool.com/podcasts/rule-breaker-investing/

Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #138 on: September 16, 2018, 12:03:50 PM »
People sitting on the same round table may not be on the same page in the investment world.


PaulMaxime and Cache_Stash, would you please recommend some readings about the corporate fundamental analysis? Also what are your favorite value investors' forum?


Thanks you!

Not a value investor either. I'm more of a long term growth stock kind of guy myself.

I'm a fan of the Motley Fool and think paying for a subscription to one of their inexpensive newsletters like Stock Advisor or Rule Breakers is a good value. They are business focused long term buy and hold investors. The marketing if you've seen it can come across as scammy for sure but the reality is much better than that. They have some free discussion boards that are very good.

I've paid for their advice for years and it's good.

If you are interested in what their investing philosophy is like I recommend listening to David Gardner's Rule Breaker Investing podcast to see if what they are doing is for you. https://www.fool.com/podcasts/rule-breaker-investing/

+1 on Motley Fool.  I was a fool for a long time back in the 90's.  I don't use their site as much anymore as I have a subscription to Investors Business Daily (IBD) and use it to generate stock investing ideas.  This has been well worth the money as well (about $350/yr). 

I'm going to look at becoming a fool again.  I loved their website back in the day, but it has turned quite hokey.  I think they need to revamp their approach on customer services.  Their investment advice is sound for sure.

reeshau

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Re: Am I wrong to be invested in individual stocks?
« Reply #139 on: September 16, 2018, 02:59:37 PM »
Like @Cache_Stash, I would characterize myself as a GARP investor; as Uncle
Warren says, "Growth and value are joined at the hip."  (as opposed to necessarily being opposites)  But I have been attracted to occasional turnaround plays--I do sweat those out a lot more, though.

I have subscribed to BetterInvesting since 2005.  Their method is perfectly suited to GARP investing, and helps the speed of my research and filtering greatly.  They are nonprofit, and the subscription to their magazine and tools is quite cheap compared to other options.

Since the request is for value investing, though, you have to go with The Intelligent Investor, by Benjamin Graham.  It is fairly dense, but very approachable.  Whether you love it or hate it, understand it *is* the short version!  The long version is Security Analysis, by Graham and Dodd.

gertitorpe

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Re: Am I wrong to be invested in individual stocks?
« Reply #140 on: September 18, 2018, 01:03:02 PM »
@Cache_Stash
Congratulations to your results. Great numbers. I don't think you are doing anything wrong here especially if you are successful and enjoy picking stocks.10 years sounds like a decent track record.

Should the public stick to ETFs? Absolutely!
Does the individual have a good chance to beat the market? Not a very good chance.

However the recent strong public argument against individual stock picks and actively managed funds sounds a bit too much blended to me. Yelling at every single person on the internet who are crazy enough to try buy companies they actually like is like trying to prevent your friend entering a race because /statistically/ he does not have a great chance to win the race. The nice thing in investing is that you don't have to be the winner, it's enough to perform better than the median to see the benefit of your efforts. Maybe your friend has long legs, exercise hard and finally beats the crowd :)

Yes, there is great risk to take but in my opinion anyone who says investing is pure luck clearly lacks the understanding or experience on financial markets.
The same way as a good car dealer is able to correctly price used cars.


Scortius

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Re: Am I wrong to be invested in individual stocks?
« Reply #141 on: September 18, 2018, 04:35:33 PM »
@Cache_Stash
Congratulations to your results. Great numbers. I don't think you are doing anything wrong here especially if you are successful and enjoy picking stocks.10 years sounds like a decent track record.

Should the public stick to ETFs? Absolutely!
Does the individual have a good chance to beat the market? Not a very good chance.

However the recent strong public argument against individual stock picks and actively managed funds sounds a bit too much blended to me. Yelling at every single person on the internet who are crazy enough to try buy companies they actually like is like trying to prevent your friend entering a race because /statistically/ he does not have a great chance to win the race. The nice thing in investing is that you don't have to be the winner, it's enough to perform better than the median to see the benefit of your efforts. Maybe your friend has long legs, exercise hard and finally beats the crowd :)

Yes, there is great risk to take but in my opinion anyone who says investing is pure luck clearly lacks the understanding or experience on financial markets.
The same way as a good car dealer is able to correctly price used cars.

This post repeats some common misconceptions regarding investing in individual stocks. There's a reason people here suggest index funds, and it's not because we think the average person cannot beat the market. It's because even the most seasoned experts cannot beat the market. Being above the median in terms of overall performance is unfortunately still going to put you below the long-term performance of a boring index fund, and it will do so while requiring increasing amounts of your time and energy... all for what?

Yes, you don't have to be the winner, but strangely you can be the winner here, and all it takes is to use ... less effort, not more.

The problem with using the past 10 years as a benchmark is that you're not looking at 10 separate data points. You're essentially looking at one. The performance of most companies over the past 10 years has a very high degree of auto-correlation, meaning that companies that were successful in 2010 have maintained the same level of performance in 2017. That seems like it would be expected, but it's actually a bit rare. There are a large number of people who have placed good bets early in this recovery and properly stuck with them. That's great, but it doesn't suggest that they have the knowledge or ability to beat the market over the next set of cycles any better than someone who got unlucky and picked a loser during this bull market.

Again, it's not about beating the average, because the distribution of performance of stocks across the stock market is highly skewed. This means that a random subsampling of stocks has a high degree of likelihood to underperform the cap-weighted mean, which is what you do get from an index fund without any effort at all. Again, 50% of experienced individual investors do not beat index funds, that is an oft-repeated fallacy.

Again, this is not telling your friend not to exercise because the odds are against him. This is telling your friend not to exercise because that's precisely how he could improve his odds the most.

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #142 on: September 19, 2018, 11:07:38 PM »

This post repeats some common misconceptions regarding investing in individual stocks. There's a reason people here suggest index funds, and it's not because we think the average person cannot beat the market. It's because even the most seasoned experts cannot beat the market. Being above the median in terms of overall performance is unfortunately still going to put you below the long-term performance of a boring index fund, and it will do so while requiring increasing amounts of your time and energy... all for what?


The interesting question is actually WHY the seasoned expert can't beat the market.

It's not because they can't pick winning stocks. Generally professional stock pickers can outperform with their best ideas. It's the structural realities of investing other people's money that kills their ability to perform.

You should read the link I posted much earlier in this discussion from a former Mutual Fund manager. He lays out all the reasons that funds fail to perform. None of this stuff applies to the small individual investor.

You mention that performance is highly skewed. This is true. Which means that most of your portfolio is going to underperform while the gains will be concentrated in a few winners. This has been my experience with individual stocks for many more than 10 years. Hold on and add to those winners - which a fund manager CANNOT do. And many individuals can't either-  they sell their winners to rebalance and add to the losers because "Buy low, sell high" and then they get discouraged and go to cash after the market drops 30 percent and don't buy back in until "The dust has settled" and they miss out on 200% of gains.

I've heard the stories and lived through some of that myself.

Professionals can't outperform because their clients have terrible behavior - wanting them to outperform but only to the upside, pulling their money out at the slightest whiff of a selloff, it goes on and on.

All of these things are avoidable if you are a disciplined individual investor. You have no one to answer to but yourself. Many people can't do it and should stick to funds.

But even investing in funds isn't enough because the average fund investor underperforms the funds they invest in by 6%. 6% of bad behavior.


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talltexan

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Re: Am I wrong to be invested in individual stocks?
« Reply #144 on: September 20, 2018, 07:18:43 AM »
PaulMaxime-
can I confirm that you mean the Motley Fool Article you posted? I reread the (short) article, and I think these four tips are sound. I also think all four of them could be used to improve the experience of owning broad index funds. So we're back at the question of--if I do these things--then how do I identify a small number of companies to gain a risk-adjusted return above market return?

  • Don't try to time the market. Buying a stock or fund because you think it's at the bottom, or selling one because you think it has topped out, is almost always a losing battle. Investors who decided to buy Radio Shack after it dropped below $1 per share, or who sold Amazon.com the first time it surpassed $300, can tell you that. Instead of focusing on the share price, buy stocks that represent a business you'd like to own for the next 10, 20, or 30 years. Or, if you're a mutual fund investor, invest in quality funds regardless of what the market is doing.
  • Don't chase hot stocks. Chasing stocks on their way up is too much of a gamble. Sure, a stock that has quadrupled in value over the past year could continue on its upward trajectory -- or it could come crashing down as soon as anything goes wrong.
  • Don't panic during crashes. Panic-selling is the worst investment move you can make during tough times. Those investors who sold out of fear in late 2008 simply turned paper losses into real losses, and they also missed the rally that took place over the next several years.
  • Use the power of dollar-cost averaging. Dollar-cost averaging is a strategy that involves investing equal dollar amounts at regular time intervals (say, $500 every other month). Not only does this take emotion out of the equation, but it actually gives you a long-term mathematical advantage, since you buy more shares when prices are low and fewer shares when prices are high. For a thorough description of the incredible power of dollar-cost averaging, check out this article.

Dr. Pepper

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Re: Am I wrong to be invested in individual stocks?
« Reply #145 on: September 21, 2018, 06:33:46 PM »
People sitting on the same round table may not be on the same page in the investment world.


PaulMaxime and Cache_Stash, would you please recommend some readings about the corporate fundamental analysis? Also what are your favorite value investors' forum?


Thanks you!

I think if you want to try your hand at investing and have a reasonable chance of making money, I would read the Intelligent Investor, which kind of gives the behavioral frame work you need. For a how to book, Value Investing: From Graham to Buffett and Beyond, and the companion text Applied Value Investing are a good start.  Next How to be a Stock Market Genius. Those books will give you the framework, but that is just the start. The key is understanding accounting and business valuation. I recommend taking a entry level accounting course so you can see what goes into preparing the financial statements, also read Financial Shenanigans by Howard Schilit . Also the CFA course material is very good, you can get it used on Ebay, it worth reading. There are also online lectures by Bruce Greenwald that are very good. If you get into this, by the time your done with the material I suggested you will find lots of other stuff out there, you will be drawn to it naturally. Finally I would spend about 2 years doing paper trading, before you use real money, it's not the same, but it will let you hone your process , figure out your buy and sell criteria, and most importantly value lots of different businesses. Really it will take you about 2 yrs of study to learn the stuff you need if your doing it on a part time basis, so by the time your ready to use real money your education in this stuff will be more mature. That's the process I used more or less and it's worked out great, hope that helps.

PizzaSteve

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Re: Am I wrong to be invested in individual stocks?
« Reply #146 on: September 21, 2018, 11:06:46 PM »
People sitting on the same round table may not be on the same page in the investment world.


PaulMaxime and Cache_Stash, would you please recommend some readings about the corporate fundamental analysis? Also what are your favorite value investors' forum?


Thanks you!

I think if you want to try your hand at investing and have a reasonable chance of making money, I would read the Intelligent Investor, which kind of gives the behavioral frame work you need. For a how to book, Value Investing: From Graham to Buffett and Beyond, and the companion text Applied Value Investing are a good start.  Next How to be a Stock Market Genius. Those books will give you the framework, but that is just the start. The key is understanding accounting and business valuation. I recommend taking a entry level accounting course so you can see what goes into preparing the financial statements, also read Financial Shenanigans by Howard Schilit . Also the CFA course material is very good, you can get it used on Ebay, it worth reading. There are also online lectures by Bruce Greenwald that are very good. If you get into this, by the time your done with the material I suggested you will find lots of other stuff out there, you will be drawn to it naturally. Finally I would spend about 2 years doing paper trading, before you use real money, it's not the same, but it will let you hone your process , figure out your buy and sell criteria, and most importantly value lots of different businesses. Really it will take you about 2 yrs of study to learn the stuff you need if your doing it on a part time basis, so by the time your ready to use real money your education in this stuff will be more mature. That's the process I used more or less and it's worked out great, hope that helps.

Books and training are good ideas.  Getting a job at a big 4 audit firm and performing audits is enlightening and pays well, too, if you get your CPA license.

I dont recommend paper trading, largely because trading is a losing game for retail investors.  Buy well researched companies and hold for decades is my advice.

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #147 on: September 22, 2018, 06:20:28 PM »
PaulMaxime-
can I confirm that you mean the Motley Fool Article you posted? I reread the (short) article, and I think these four tips are sound. I also think all four of them could be used to improve the experience of owning broad index funds. So we're back at the question of--if I do these things--then how do I identify a small number of companies to gain a risk-adjusted return above market return?

I'm not sure what you mean by "risk." If you mean "volatility" then I can't really help you. The academic definition of risk == volatility is not something that I think much about. I think risk should mean "The probability of having absolute loss"

By that definition holding all your money in a money market account while academically not risky is actually incredibly risky over the long term.

And as far as how to find stocks to buy and hold for the long term that will beat the market there's no simple formula that will work forever. Can't happen almost by definition.

What have I done over my investment career that has helped me do well with individual stocks?

Well, first of all I pay for advice. I don't pay someone to manage my money because that brings about inherent conflicts that can lead to mediocre performance. But good advice can be conflict free because it's up to me whether I listen to it or not. I personally recommend something like a Motley Fool subscription but you can find free places to get stock ideas from.

Second it's important to find like minded folks. Just like here at MMM we benefit from community.

Third, after I have identified what I believe to be good companies, add to my winners over time and hardly ever sell. Those losers tend to fade into insignificance over time. One large winner can wipe out many losers. I expect to be wrong at least 40% of the time and that's OK.

Fourth, keep learning. Things change and there's always something new and interesting going on in the world of business and investing.

Fifth, recognize that my psychology and behavior is a huge influence in how my investments are going to perform. I try to be clear and honest with myself about these things.

Sorry I can't package this into a simple formula. Is it repeatable for everyone, probably not. Is there a guarantee of performance. Definitely not. Is it worthwhile to try. Oh yes it has been for me.

If Index funds are for you, great. Way better than most other alternatives. Do I believe that it's possible to do better. Yes.

Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #148 on: September 23, 2018, 04:20:26 PM »
PaulMaxime-
can I confirm that you mean the Motley Fool Article you posted? I reread the (short) article, and I think these four tips are sound. I also think all four of them could be used to improve the experience of owning broad index funds. So we're back at the question of--if I do these things--then how do I identify a small number of companies to gain a risk-adjusted return above market return?

  • Don't try to time the market. Buying a stock or fund because you think it's at the bottom, or selling one because you think it has topped out, is almost always a losing battle. Investors who decided to buy Radio Shack after it dropped below $1 per share, or who sold Amazon.com the first time it surpassed $300, can tell you that. Instead of focusing on the share price, buy stocks that represent a business you'd like to own for the next 10, 20, or 30 years. Or, if you're a mutual fund investor, invest in quality funds regardless of what the market is doing.
  • Don't chase hot stocks. Chasing stocks on their way up is too much of a gamble. Sure, a stock that has quadrupled in value over the past year could continue on its upward trajectory -- or it could come crashing down as soon as anything goes wrong.
  • Don't panic during crashes. Panic-selling is the worst investment move you can make during tough times. Those investors who sold out of fear in late 2008 simply turned paper losses into real losses, and they also missed the rally that took place over the next several years.
  • Use the power of dollar-cost averaging. Dollar-cost averaging is a strategy that involves investing equal dollar amounts at regular time intervals (say, $500 every other month). Not only does this take emotion out of the equation, but it actually gives you a long-term mathematical advantage, since you buy more shares when prices are low and fewer shares when prices are high. For a thorough description of the incredible power of dollar-cost averaging, check out this article.

The only way to make above average market returns is to identify where the market is valuing companies incorrectly and that starts with understanding risk.  I started investing in Apple in 2007.  Up through and continuing through 2010, the company had a PE of 8-12.  It was valued as a hardware manufacturing company and growth was never evaluated properly for upside risk in my estimation.  As it grew earnings and cash flow they eventually reached about 50BUSD in cash on their balance sheet yet it was never considered in the valuation nor was it when it reached 200BUSD (another missed evaluation in determing valuation in my estimation).   The company is a cash cow - a veritable ATM machine.  Over the last year or so, its valuation has grown for it to be priced as more than a hardware electronics manufacturer.  The market is now considering the growth in its services sector.  This is recurring revenue which is highly valued by investors.  Has it been fully valued for this?  Their services company is 18% of their revenue now and is still growing over 30% annually.  My estimation is that their services revenue will surpass their cell phone revenue within a few years.  I still don't think their valuation is low for the risks involved.  Especially considering their eco system and the moat that it creates, etc... (This is a condensed writeup, there is much more to the evaluation.  It's only to point out a thought process for valuation)

If the market was 100% efficient then there would be no Warren Buffets, Peter Lynches et al.  The market is right, for the most part, for most of the companies.  So the difficult part of finding the right company to invest in when the market is wrong.

Finding those companies takes time and a lot of energy.  It's not easy to find something in which you'll have a really strong conviction.

steveo

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Re: Am I wrong to be invested in individual stocks?
« Reply #149 on: September 23, 2018, 07:17:10 PM »
Finding those companies takes time and a lot of energy.

I'm not a fan of stock picking at all. The reality is that this comment might not even be true. You could spend a lot of time and energy and think you have it right but you don't. You might even be right but you don't get the returns that you expected to get.  I view picking stocks as akin to picking the future. You might get it right sometimes but you will also get it wrong. The problem comes when people think they have an ability at it or that hard work makes it possible. It doesn't work like that.

It's very easy to convince yourself that you are doing it right when you aren't.