Author Topic: Why is active stock picking so taboo on here ?  (Read 22080 times)

Jamese20

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Why is active stock picking so taboo on here ?
« on: February 25, 2018, 01:05:03 AM »
I get the logic, 98% of normal people who don't care about this stuff should index due to the stats,

But what I would like to challenge is this, how many % of the wider public follow this advice and be financially free decades before anyone else? They are just as rare breed than the people who can successfully pick the stocks that outperform.

Warren buffet states that you should be extremely diversified if you don't have the time or patience to pick the stocks you understand, however he states that it's a terrible mistake to diversify if you bring the intensity and focus to the game and then you should only pick 6-7 stocks that you fully understand and know and you will do very well.

When buffet speaks I listen hard, and I get that at the moment I should just stick to the index fund deal, but are people who find this stuff very interesting making a big mistake by not picking a few winning stocks with the right focus ? Warren Buffet does think so and I don't consider this a man who wants people to lose my money

privatefarmer

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Re: Why is active stock picking so taboo on here ?
« Reply #1 on: February 25, 2018, 03:55:19 AM »
oh man... you are going to get eaten alive on this forum... ;)

okay, where to begin...

1) warren buffett is a great man but not bc of his LUCK with investing. Hes just a great guy. That being said, if you flip 2,000,000 coins 100x each what are the odds that ONE of those coins will turn up heads every flip? If you have millions upon millions of investors, what are the odds that a few are going to do very well? It would be a miracle if there weren't any warren buffets, just by chance alone. But for every warren buffet or anyone who out performs the collective average, there is someone who must, by mathematical law, under perform the collective average by the exact same amount - thus, you have the average. Also, Buffett has invested in "value" stocks and actually started with "Small value". Comparing him to the S/P 500 (which most do) is not accurate. Small value has outperformed the S/P 500 going back as far as 1926. He still has beaten the small value index, but again the 2,000,000 coins thing. Someone is going to do it, guaranteed, given a large enough sample size. it doesn't mean that person had any skill. If enough people buy a lottery ticket someone will win the lottery. It's just sample size.

2) I mentioned this above but the reason why you should not actively pick stocks is because it is a zero-sum game. Jack Bogle explains this very well. It's a closed system. By definition, half the dollars invested will beat the index and half the dollars will lose to the index. Collectively, all the dollars equal the index.

3) Okay, everyone knows #2. So you think you can be in the winning half? Well consider that the vast majority of the actual dollars traded are controlled by institutional investors and hedge funds. the big boys. not you and I, not the average trader. Maybe you do have a strong interest in some individual stocks and you do know more than the "average joe" when it pertains to those specific stocks. But do you know more than the hedge fund manager who's job it is to research these companies and who has all the computing power in the world to analyze them? Chances are very high (like 80-90%) that you are trading against an institutional manager or a hedge fund manager.

4) Okay but you spend all your time researching 1-2 companies and you feel like, yes, you know them better than even the hedge fund manager or others who are PAID to research these companies (and who have teams of analysts to help them out). Maybe so (it's technically possible I'll give you that). But then how the hell can you have any diversification? You can either bet on your knowledge of these companies and put a sizable chunk of your portfolio into them or just put a small slice in. If you do the latter its really not going to make a difference one way or the other, your total return over many decades will probably suffer some but hopefully you'll still reach your goals. if you throw a sizable chunk in then you are at serious risk of going broke. But, going back to the larger point, in order for you to even have some "pristine" knowledge of a few companies, more than a team of analysts would, you'd have to spend a vast amount of time researching taking away from either your career or your family. Simply put, you'd probably be better off focusing your time/energy on improving your W2 income vs picking stocks.

5) Lastly, you don't just have to outperform the index. You must outperform the index after costs. Trading is expensive. There's the commissions. There's the bid-ask spread. There's taxes... There's the second-guessing yourself and totally getting out of the stock market after having a few bad runs, thus missing out on future growth....

Anyhow, I hope you don't get torched too badly on this forum, maybe there are even a few who agree with you? But don't take anything as gospel from me or anyone else on here. Read a book by John Bogle. Little book of common sense investing I think is what his is called. If you find it entertaining, kind of like gambling, to pick stocks then do it with 5% or less of your portfolio. But I'd rather go to the casino - at least they'll give you free drinks.

boarder42

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Re: Why is active stock picking so taboo on here ?
« Reply #2 on: February 25, 2018, 04:19:05 AM »
We can play a game. Very few who are stock pickers will name their plays and when they get in and out on here.  And when I say get in and out I mean you post the minute you buy and the minute you sell. In all likelihood you'll lose to the market over the next 30 years. But I'm up for the experiment if you are.

People who get paid to pick stocks as their full time job rarely beat the market.  You should be asking yourself why these guys who manage billions aren't coming out of the woodwork work to take on his 1MM 10year s&p 500 vs your hedge fund bet.  So I'm sure you're just different. Let's play!
« Last Edit: February 25, 2018, 04:21:44 AM by boarder42 »

Jamese20

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Re: Why is active stock picking so taboo on here ?
« Reply #3 on: February 25, 2018, 04:37:24 AM »
oh man... you are going to get eaten alive on this forum... ;)

okay, where to begin...

1) warren buffett is a great man but not bc of his LUCK with investing. Hes just a great guy. That being said, if you flip 2,000,000 coins 100x each what are the odds that ONE of those coins will turn up heads every flip? If you have millions upon millions of investors, what are the odds that a few are going to do very well? It would be a miracle if there weren't any warren buffets, just by chance alone. But for every warren buffet or anyone who out performs the collective average, there is someone who must, by mathematical law, under perform the collective average by the exact same amount - thus, you have the average. Also, Buffett has invested in "value" stocks and actually started with "Small value". Comparing him to the S/P 500 (which most do) is not accurate. Small value has outperformed the S/P 500 going back as far as 1926. He still has beaten the small value index, but again the 2,000,000 coins thing. Someone is going to do it, guaranteed, given a large enough sample size. it doesn't mean that person had any skill. If enough people buy a lottery ticket someone will win the lottery. It's just sample size.

2) I mentioned this above but the reason why you should not actively pick stocks is because it is a zero-sum game. Jack Bogle explains this very well. It's a closed system. By definition, half the dollars invested will beat the index and half the dollars will lose to the index. Collectively, all the dollars equal the index.

3) Okay, everyone knows #2. So you think you can be in the winning half? Well consider that the vast majority of the actual dollars traded are controlled by institutional investors and hedge funds. the big boys. not you and I, not the average trader. Maybe you do have a strong interest in some individual stocks and you do know more than the "average joe" when it pertains to those specific stocks. But do you know more than the hedge fund manager who's job it is to research these companies and who has all the computing power in the world to analyze them? Chances are very high (like 80-90%) that you are trading against an institutional manager or a hedge fund manager.

4) Okay but you spend all your time researching 1-2 companies and you feel like, yes, you know them better than even the hedge fund manager or others who are PAID to research these companies (and who have teams of analysts to help them out). Maybe so (it's technically possible I'll give you that). But then how the hell can you have any diversification? You can either bet on your knowledge of these companies and put a sizable chunk of your portfolio into them or just put a small slice in. If you do the latter its really not going to make a difference one way or the other, your total return over many decades will probably suffer some but hopefully you'll still reach your goals. if you throw a sizable chunk in then you are at serious risk of going broke. But, going back to the larger point, in order for you to even have some "pristine" knowledge of a few companies, more than a team of analysts would, you'd have to spend a vast amount of time researching taking away from either your career or your family. Simply put, you'd probably be better off focusing your time/energy on improving your W2 income vs picking stocks.

5) Lastly, you don't just have to outperform the index. You must outperform the index after costs. Trading is expensive. There's the commissions. There's the bid-ask spread. There's taxes... There's the second-guessing yourself and totally getting out of the stock market after having a few bad runs, thus missing out on future growth....

Anyhow, I hope you don't get torched too badly on this forum, maybe there are even a few who agree with you? But don't take anything as gospel from me or anyone else on here. Read a book by John Bogle. Little book of common sense investing I think is what his is called. If you find it entertaining, kind of like gambling, to pick stocks then do it with 5% or less of your portfolio. But I'd rather go to the casino - at least they'll give you free drinks.

Thanks man and thanks for the getting eaten bit lol...the reality is though stock winners are as rare breed as mustachians are they not ? And yet people think this stuff is doable for anyone who is willing to learn it? Isn't that the case in point for picking 6-7 stocks for the long term?

I also mean not active day trading I mean doing literally what buffet suggests and stick to picking a few stocks and hold if you believe they will do well, like he did with coke for example.

In 12 month's time when I finally get rid of my debt for good I will 99.9% be investing in the index, but I also have a new found passion for investing as a whole and feel like I should be listening to the sensible investors. I feel like I enjoy this whole investing world way too much to only be sitting in indexes ?

I don't think warren is just lucky in the sense he gambled his way to one of the wealthiest guys on the planet, I don't buy that theory, a gambler always loses in the end and warren just keeps getting richer year after year

He even made money with the wrong long term strategy - I do also believe that he is just a genius when it comes to this stuff but he thinks others can be better than average if they apply themselves in the right way and don't go into wall Street essentially..

While I am sitting on the sidelines for 12 months it can't hurt to explore without losing anything - I just wanted people's opinions out side of the 98% of people can't do it argument..which can be applied to any one of us looking to FI. Early 

misterhorsey

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Re: Why is active stock picking so taboo on here ?
« Reply #4 on: February 25, 2018, 04:45:10 AM »
Warren buffet states that you should be extremely diversified if you don't have the time or patience to pick the stocks you understand, however he states that it's a terrible mistake to diversify if you bring the intensity and focus to the game and then you should only pick 6-7 stocks that you fully understand and know and you will do very well.

When buffet speaks I listen hard, and I get that at the moment I should just stick to the index fund deal, but are people who find this stuff very interesting making a big mistake by not picking a few winning stocks with the right focus ? Warren Buffet does think so and I don't consider this a man who wants people to lose my money

I'm a big Buffett fan.

But although he looks like a normal human he really isn't.

Read the biography by Roger Lowenstein if you haven't.

https://www.goodreads.com/book/show/1155.Buffett

Or if you are short on time, watch this doco.

https://www.youtube.com/watch?v=PB5krSvFAPY

The coin toss scenario that Privatefarmer mentioned can explain his success, or someone's success.

But putting that aside, Buffett is also someone who basically doesn't have a life outside of investing.  It's not a few hours a day. It's not his job. It's his entire existence.  If someone was going to outperform the market over more than half a century he's certainly done the groundwork.  So I admire him but no way would I want anything like his life.

misterhorsey

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Re: Why is active stock picking so taboo on here ?
« Reply #5 on: February 25, 2018, 04:52:31 AM »
I might also recommend The Intelligent Investor by Buffett's mentor, Benjamin Graham, if you haven't already.

https://www.goodreads.com/book/show/106835.The_Intelligent_Investor

It sets the framework for value investing. I found it really interesting, but after reading the principles and methodology behind value investing, I decided that I had better uses of my time.

One last thing, not long before Buffett started investing he had access not just to publicly traded shares, but meeting with the actual Boards and owners of the businesses he was investing in. And so he could base investment decisions on a far greater level of due diligence. This is a far cry from reading analyst reports, stock tip newsletters, annual reports or the level of info that Joe and Jenny Public get access to. This doesn't guarantee success obviously, but it's probably instrumental to reducing his failures.




privatefarmer

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Re: Why is active stock picking so taboo on here ?
« Reply #6 on: February 25, 2018, 05:34:55 AM »
oh man... you are going to get eaten alive on this forum... ;)

okay, where to begin...

1) warren buffett is a great man but not bc of his LUCK with investing. Hes just a great guy. That being said, if you flip 2,000,000 coins 100x each what are the odds that ONE of those coins will turn up heads every flip? If you have millions upon millions of investors, what are the odds that a few are going to do very well? It would be a miracle if there weren't any warren buffets, just by chance alone. But for every warren buffet or anyone who out performs the collective average, there is someone who must, by mathematical law, under perform the collective average by the exact same amount - thus, you have the average. Also, Buffett has invested in "value" stocks and actually started with "Small value". Comparing him to the S/P 500 (which most do) is not accurate. Small value has outperformed the S/P 500 going back as far as 1926. He still has beaten the small value index, but again the 2,000,000 coins thing. Someone is going to do it, guaranteed, given a large enough sample size. it doesn't mean that person had any skill. If enough people buy a lottery ticket someone will win the lottery. It's just sample size.

2) I mentioned this above but the reason why you should not actively pick stocks is because it is a zero-sum game. Jack Bogle explains this very well. It's a closed system. By definition, half the dollars invested will beat the index and half the dollars will lose to the index. Collectively, all the dollars equal the index.

3) Okay, everyone knows #2. So you think you can be in the winning half? Well consider that the vast majority of the actual dollars traded are controlled by institutional investors and hedge funds. the big boys. not you and I, not the average trader. Maybe you do have a strong interest in some individual stocks and you do know more than the "average joe" when it pertains to those specific stocks. But do you know more than the hedge fund manager who's job it is to research these companies and who has all the computing power in the world to analyze them? Chances are very high (like 80-90%) that you are trading against an institutional manager or a hedge fund manager.

4) Okay but you spend all your time researching 1-2 companies and you feel like, yes, you know them better than even the hedge fund manager or others who are PAID to research these companies (and who have teams of analysts to help them out). Maybe so (it's technically possible I'll give you that). But then how the hell can you have any diversification? You can either bet on your knowledge of these companies and put a sizable chunk of your portfolio into them or just put a small slice in. If you do the latter its really not going to make a difference one way or the other, your total return over many decades will probably suffer some but hopefully you'll still reach your goals. if you throw a sizable chunk in then you are at serious risk of going broke. But, going back to the larger point, in order for you to even have some "pristine" knowledge of a few companies, more than a team of analysts would, you'd have to spend a vast amount of time researching taking away from either your career or your family. Simply put, you'd probably be better off focusing your time/energy on improving your W2 income vs picking stocks.

5) Lastly, you don't just have to outperform the index. You must outperform the index after costs. Trading is expensive. There's the commissions. There's the bid-ask spread. There's taxes... There's the second-guessing yourself and totally getting out of the stock market after having a few bad runs, thus missing out on future growth....

Anyhow, I hope you don't get torched too badly on this forum, maybe there are even a few who agree with you? But don't take anything as gospel from me or anyone else on here. Read a book by John Bogle. Little book of common sense investing I think is what his is called. If you find it entertaining, kind of like gambling, to pick stocks then do it with 5% or less of your portfolio. But I'd rather go to the casino - at least they'll give you free drinks.

Thanks man and thanks for the getting eaten bit lol...the reality is though stock winners are as rare breed as mustachians are they not ? And yet people think this stuff is doable for anyone who is willing to learn it? Isn't that the case in point for picking 6-7 stocks for the long term?

I also mean not active day trading I mean doing literally what buffet suggests and stick to picking a few stocks and hold if you believe they will do well, like he did with coke for example.

In 12 month's time when I finally get rid of my debt for good I will 99.9% be investing in the index, but I also have a new found passion for investing as a whole and feel like I should be listening to the sensible investors. I feel like I enjoy this whole investing world way too much to only be sitting in indexes ?

I don't think warren is just lucky in the sense he gambled his way to one of the wealthiest guys on the planet, I don't buy that theory, a gambler always loses in the end and warren just keeps getting richer year after year

He even made money with the wrong long term strategy - I do also believe that he is just a genius when it comes to this stuff but he thinks others can be better than average if they apply themselves in the right way and don't go into wall Street essentially..

While I am sitting on the sidelines for 12 months it can't hurt to explore without losing anything - I just wanted people's opinions out side of the 98% of people can't do it argument..which can be applied to any one of us looking to FI. Early

Oh okay I misunderstood. If you're talking about taking a small percentage and picking a few stocks to buy-and-hold using basic value-investing principles like Warren then yeah I could see the reasoning behind that. It may beat the index or it may not but if it's a small percentage then it's not really that big of a deal one way or the other. It'd be more like a hobby than anything else and I could see the appeal of learning about individual companies and picking a few to invest in. I would just want to be careful not to give up on passive should a few of your picks work out - I would be sure to leave the vast majority of my equities in low-cost index funds that are globally diversified.

Really, though, the zero-sum game argument cuts both ways. I mean you can argue that you essentially have the exact same odds of beating the index as you do losing to the index, since it's a zero-sum game and the index is the collective average. But that is before costs. If, however, you are buy-and-holding individual stocks and you are still very well diversified, then there is essentially no extra costs involved so I don't see why not. In theory, you could pick maybe 30-50 companies spread out across the globe, buy-and-hold them, and basically be just as well of as if you bought an index fund. You'd have just about as much diversity (I've read that once you hit 30 stocks you essentially are diversified) and the costs would be essentially zero after you've purchased the shares.

privatefarmer

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Re: Why is active stock picking so taboo on here ?
« Reply #7 on: February 25, 2018, 05:41:57 AM »
oh man... you are going to get eaten alive on this forum... ;)

okay, where to begin...

1) warren buffett is a great man but not bc of his LUCK with investing. Hes just a great guy. That being said, if you flip 2,000,000 coins 100x each what are the odds that ONE of those coins will turn up heads every flip? If you have millions upon millions of investors, what are the odds that a few are going to do very well? It would be a miracle if there weren't any warren buffets, just by chance alone. But for every warren buffet or anyone who out performs the collective average, there is someone who must, by mathematical law, under perform the collective average by the exact same amount - thus, you have the average. Also, Buffett has invested in "value" stocks and actually started with "Small value". Comparing him to the S/P 500 (which most do) is not accurate. Small value has outperformed the S/P 500 going back as far as 1926. He still has beaten the small value index, but again the 2,000,000 coins thing. Someone is going to do it, guaranteed, given a large enough sample size. it doesn't mean that person had any skill. If enough people buy a lottery ticket someone will win the lottery. It's just sample size.

2) I mentioned this above but the reason why you should not actively pick stocks is because it is a zero-sum game. Jack Bogle explains this very well. It's a closed system. By definition, half the dollars invested will beat the index and half the dollars will lose to the index. Collectively, all the dollars equal the index.

3) Okay, everyone knows #2. So you think you can be in the winning half? Well consider that the vast majority of the actual dollars traded are controlled by institutional investors and hedge funds. the big boys. not you and I, not the average trader. Maybe you do have a strong interest in some individual stocks and you do know more than the "average joe" when it pertains to those specific stocks. But do you know more than the hedge fund manager who's job it is to research these companies and who has all the computing power in the world to analyze them? Chances are very high (like 80-90%) that you are trading against an institutional manager or a hedge fund manager.

4) Okay but you spend all your time researching 1-2 companies and you feel like, yes, you know them better than even the hedge fund manager or others who are PAID to research these companies (and who have teams of analysts to help them out). Maybe so (it's technically possible I'll give you that). But then how the hell can you have any diversification? You can either bet on your knowledge of these companies and put a sizable chunk of your portfolio into them or just put a small slice in. If you do the latter its really not going to make a difference one way or the other, your total return over many decades will probably suffer some but hopefully you'll still reach your goals. if you throw a sizable chunk in then you are at serious risk of going broke. But, going back to the larger point, in order for you to even have some "pristine" knowledge of a few companies, more than a team of analysts would, you'd have to spend a vast amount of time researching taking away from either your career or your family. Simply put, you'd probably be better off focusing your time/energy on improving your W2 income vs picking stocks.

5) Lastly, you don't just have to outperform the index. You must outperform the index after costs. Trading is expensive. There's the commissions. There's the bid-ask spread. There's taxes... There's the second-guessing yourself and totally getting out of the stock market after having a few bad runs, thus missing out on future growth....

Anyhow, I hope you don't get torched too badly on this forum, maybe there are even a few who agree with you? But don't take anything as gospel from me or anyone else on here. Read a book by John Bogle. Little book of common sense investing I think is what his is called. If you find it entertaining, kind of like gambling, to pick stocks then do it with 5% or less of your portfolio. But I'd rather go to the casino - at least they'll give you free drinks.

I don't think warren is just lucky in the sense he gambled his way to one of the wealthiest guys on the planet, I don't buy that theory, a gambler always loses in the end and warren just keeps getting richer year after year

This I disagree with. He actually has not gotten richer year after year. He has lost to the market from time to time (8 of the last 20 years to be exact). So although his long-term performance is stellar (~20% CAGR) he is not 100% consistent.

The other poster mentioned how much time Warren puts into this. Well I guarantee that there are many other investors who have put just as much time into it and have failed miserably. Hell there are people who spent their wholes lives studying a specific product or idea, developing that into a business, and then failing and going bankrupt. If those people don't know enough about their companies/products to beat the market, or even just stay afloat, how can we possibly invest enough time to?

privatefarmer

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Re: Why is active stock picking so taboo on here ?
« Reply #8 on: February 25, 2018, 05:46:32 AM »
oh man... you are going to get eaten alive on this forum... ;)

okay, where to begin...

1) warren buffett is a great man but not bc of his LUCK with investing. Hes just a great guy. That being said, if you flip 2,000,000 coins 100x each what are the odds that ONE of those coins will turn up heads every flip? If you have millions upon millions of investors, what are the odds that a few are going to do very well? It would be a miracle if there weren't any warren buffets, just by chance alone. But for every warren buffet or anyone who out performs the collective average, there is someone who must, by mathematical law, under perform the collective average by the exact same amount - thus, you have the average. Also, Buffett has invested in "value" stocks and actually started with "Small value". Comparing him to the S/P 500 (which most do) is not accurate. Small value has outperformed the S/P 500 going back as far as 1926. He still has beaten the small value index, but again the 2,000,000 coins thing. Someone is going to do it, guaranteed, given a large enough sample size. it doesn't mean that person had any skill. If enough people buy a lottery ticket someone will win the lottery. It's just sample size.

2) I mentioned this above but the reason why you should not actively pick stocks is because it is a zero-sum game. Jack Bogle explains this very well. It's a closed system. By definition, half the dollars invested will beat the index and half the dollars will lose to the index. Collectively, all the dollars equal the index.

3) Okay, everyone knows #2. So you think you can be in the winning half? Well consider that the vast majority of the actual dollars traded are controlled by institutional investors and hedge funds. the big boys. not you and I, not the average trader. Maybe you do have a strong interest in some individual stocks and you do know more than the "average joe" when it pertains to those specific stocks. But do you know more than the hedge fund manager who's job it is to research these companies and who has all the computing power in the world to analyze them? Chances are very high (like 80-90%) that you are trading against an institutional manager or a hedge fund manager.

4) Okay but you spend all your time researching 1-2 companies and you feel like, yes, you know them better than even the hedge fund manager or others who are PAID to research these companies (and who have teams of analysts to help them out). Maybe so (it's technically possible I'll give you that). But then how the hell can you have any diversification? You can either bet on your knowledge of these companies and put a sizable chunk of your portfolio into them or just put a small slice in. If you do the latter its really not going to make a difference one way or the other, your total return over many decades will probably suffer some but hopefully you'll still reach your goals. if you throw a sizable chunk in then you are at serious risk of going broke. But, going back to the larger point, in order for you to even have some "pristine" knowledge of a few companies, more than a team of analysts would, you'd have to spend a vast amount of time researching taking away from either your career or your family. Simply put, you'd probably be better off focusing your time/energy on improving your W2 income vs picking stocks.

5) Lastly, you don't just have to outperform the index. You must outperform the index after costs. Trading is expensive. There's the commissions. There's the bid-ask spread. There's taxes... There's the second-guessing yourself and totally getting out of the stock market after having a few bad runs, thus missing out on future growth....

Anyhow, I hope you don't get torched too badly on this forum, maybe there are even a few who agree with you? But don't take anything as gospel from me or anyone else on here. Read a book by John Bogle. Little book of common sense investing I think is what his is called. If you find it entertaining, kind of like gambling, to pick stocks then do it with 5% or less of your portfolio. But I'd rather go to the casino - at least they'll give you free drinks.

Thanks man and thanks for the getting eaten bit lol...the reality is though stock winners are as rare breed as mustachians are they not ? And yet people think this stuff is doable for anyone who is willing to learn it? Isn't that the case in point for picking 6-7 stocks for the long term?

I also mean not active day trading I mean doing literally what buffet suggests and stick to picking a few stocks and hold if you believe they will do well, like he did with coke for example.

In 12 month's time when I finally get rid of my debt for good I will 99.9% be investing in the index, but I also have a new found passion for investing as a whole and feel like I should be listening to the sensible investors. I feel like I enjoy this whole investing world way too much to only be sitting in indexes ?

I don't think warren is just lucky in the sense he gambled his way to one of the wealthiest guys on the planet, I don't buy that theory, a gambler always loses in the end and warren just keeps getting richer year after year

He even made money with the wrong long term strategy - I do also believe that he is just a genius when it comes to this stuff but he thinks others can be better than average if they apply themselves in the right way and don't go into wall Street essentially..

While I am sitting on the sidelines for 12 months it can't hurt to explore without losing anything - I just wanted people's opinions out side of the 98% of people can't do it argument..which can be applied to any one of us looking to FI. Early

sorry for all the replies. But I also don't think you can compare mustachians to successful active stock pickers. Mustachians are rare, yes, but if you wanted to make this comparison you would also have to consider the "anti-mustachians" who have the exact same population size as the mustachians. Because for every successful stock picker there is an unsuccessful one. This is the main point. For every dollar that beats the index there MUST be a dollar that loses to the index. Whereas everyone in the world could become a Mustachian, exactly 50% of the dollars invested in stocks can beat the index they are in, the other 50% by definition must lose.

privatefarmer

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Re: Why is active stock picking so taboo on here ?
« Reply #9 on: February 25, 2018, 05:51:04 AM »
And one more thing (sorry!) - just doing some basic math here, we know that the index fund will get the exact dollar-weighted average return of the stock market before costs. Thus AFTER costs, the index will 100% of the time be in the top 50% of returns... think about it. So if you are in the top 50% of returns Year. After. Year. that is actually a huge deal. The odds of being the top 50% after two years is 25% (50% x 50%), 12.5% after 3 years (50% x 50% x 50%) etc. etc.

So imagine what the odds of being, after costs, in the top 50% of returns for 30+ years are.... I can tell you because I just did it on my calculator : it is 0.00000009%.

My point is that buying an index fund guarantees that, after costs, you will be in the top half of returns each and every year. If you are in the top half year-after-year for many decades, you are going to do verrrrrrry well compared to all the active stock pickers.
« Last Edit: February 25, 2018, 05:58:31 AM by privatefarmer »

harvestbook

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Re: Why is active stock picking so taboo on here ?
« Reply #10 on: February 25, 2018, 07:34:23 AM »
Buffet also slams high fees and is very tax-conscious (thus Berkshire doesn't pay dividends on purpose) and is a critic of Wall Street. Index investing is the cheapest and among the most tax-efficient ways to invest.

Also, those who do outperform over the short term can very rarely sustain that success over a decade or two. So yes, it can be done, but it's not very sensible if early retirement and reasonable financial expectations are the ultimate goal. It's easier to hit singles, make some sacrifice bunts, and steal a base here and there instead of swinging for the fences and risking a strikeout.

tyler2016

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Re: Why is active stock picking so taboo on here ?
« Reply #11 on: February 25, 2018, 07:39:57 AM »
 The indexes hold some poor investments bid up to insane valuations. Consider the insane valuation ratios seen in the .com bust. The P/E, current ratios, P/B and even PEGs were insane. There are some current examples of crazy valuations. Vanguard does have some indexes that are value indexes. I'm not sure what the numbers are compared to the S&P though.

Hedge fund managers spend a lot of time on this, but they aren't experts on the products and services businesses offer. I'd bet that a SW engineer or sysad that has read Ben Graham's books would do a much better job picking tech stocks than a hedge fund manager.

Institutional investors have some disadvantages. Peter Lynch talks about this in his book.

Beating the indexes is tough, but it isn't just luck, professionals have handicaps as well, but I think it is doable by those with a little brains, rationality, and discipline for it. I wouldn't recommend individual securities unless you have read The Intelligent Investor, Security Analysis, and at least 3 other books on the topic.

ampersand

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Re: Why is active stock picking so taboo on here ?
« Reply #12 on: February 25, 2018, 08:38:41 AM »
A couple things that I haven’t seen mentioned yet. I wouldn’t completely discourage active investing. But if you want to do it follow warrens cue. Do the research. The vast majority of the day he reads. He also has a good enough memory to remember all the annual reports he’s read? Is that something you can do?

He also sits and holds cash for when the market truly goes bonkers. He owns businesses that give him free money to invest as well (the float in his insurance empire).

With his reputation, he’s also put himself in the position to have enough money to buy into companies and save them with deals even the rest of Wall st. Doesn’t have access to.

Long and short- it’s a ton of work, and I’d much rather buy index than not have a life for the next 20 years.

Just understand that without that level of work and knowledge you are probably speculating as much as you are investing. (To be fair, index investing could be seen as speculation, just speculation with a very positive long term success schedule).


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bacchi

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Re: Why is active stock picking so taboo on here ?
« Reply #13 on: February 25, 2018, 10:00:49 AM »
He also sits and holds cash for when the market truly goes bonkers. He owns businesses that give him free money to invest as well (the float in his insurance empire).

The float is huge. Even if he bought T-notes with it, he'd be up a few % each year.

Jamese20

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Re: Why is active stock picking so taboo on here ?
« Reply #14 on: February 25, 2018, 10:32:55 AM »
Thanks for the thoughts guys

To summarize my question on this

- decade returns are predicted at very low due to the current situation at 4% real returns according to Bogle who likes to think he has been berry accurate on a decade basis - can we all do a little better than 4% with some sensible picks ?
 
- the buffet mentions above

- I'm not talking about day trading or penny stocks to avoid confusion, I am talking about a type of find like apple in 2009 and holding like buffet would suggest

- I will read a bunch of books on this over the next 12 months

- I will either do one of 2 things, index for a decade and see where that takes me (most likely) then save a bunch of money to try to direct picks of my own, or I will try to pick 6-7 or less of my own picks over the next decade or see where that takes me.

I blame buffet lol, he has caught my attention with his duel answer to this

Telecaster

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Re: Why is active stock picking so taboo on here ?
« Reply #15 on: February 25, 2018, 11:49:58 AM »
Thanks for the thoughts guys

To summarize my question on this

- decade returns are predicted at very low due to the current situation at 4% real returns according to Bogle who likes to think he has been berry accurate on a decade basis - can we all do a little better than 4% with some sensible picks ?
 
- the buffet mentions above

- I'm not talking about day trading or penny stocks to avoid confusion, I am talking about a type of find like apple in 2009 and holding like buffet would suggest

- I will read a bunch of books on this over the next 12 months

- I will either do one of 2 things, index for a decade and see where that takes me (most likely) then save a bunch of money to try to direct picks of my own, or I will try to pick 6-7 or less of my own picks over the next decade or see where that takes me.

I blame buffet lol, he has caught my attention with his duel answer to this

A couple things:   

--There is a reason Buffett is famous.  That's because he's the only guy who has had that type of performance over his career.   Do you anybody who picked just six or seven stocks and got really wealthy that way?  Have you even heard of anybody like that?   

--The reason that stock picking is hard, is because is contrary to human nature.  That means all humans start off with a disadvantage.

--If you are going to beat the market, you must do things differently than the market.  Which means you can expect periods of under performance.  During those times, you will question your strategy, and be tempted to switch, which is one reason why most investors don't beat the market. 

--Buffett is not just an investor, he is also a businessman and has access to business deals that you or I will never have. 

--Since about 1998, Buffett's outperformance has mostly gone away.   

--If you admire Buffett, you can simply buy BRK and have him manage your money!   

PDXTabs

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Re: Why is active stock picking so taboo on here ?
« Reply #16 on: February 25, 2018, 11:53:27 AM »
1 in 200 professional money managers can consistently pick stocks. I don't like those odds, but if you do, it's your money.

Jamese20

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Re: Why is active stock picking so taboo on here ?
« Reply #17 on: February 25, 2018, 12:19:30 PM »
1 in 200 professional money managers can consistently pick stocks. I don't like those odds, but if you do, it's your money.

I counter that with how many early fi people are there 1 in 200? Maybe more but yet everyone is saying it can be done so why is this so different? I still haven't really seen any response other than a stat I already know? And money managers are always taking away fees which hinders the performance. Aren't these people always messing about with stocks far too much anyway because they feel they have to do something every day? Buffet also talks about this also

As regarding buying Berkshire...I would definitely do this but buffet and Munger's age is a real concern and the likelihood of them both being around over the next decade is rather slim...such a shame

Travis

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Re: Why is active stock picking so taboo on here ?
« Reply #18 on: February 25, 2018, 12:36:24 PM »
1 in 200 professional money managers can consistently pick stocks. I don't like those odds, but if you do, it's your money.

I counter that with how many early fi people are there 1 in 200? Maybe more but yet everyone is saying it can be done so why is this so different? I still haven't really seen any response other than a stat I already know? And money managers are always taking away fees which hinders the performance. Aren't these people always messing about with stocks far too much anyway because they feel they have to do something every day? Buffet also talks about this also

As regarding buying Berkshire...I would definitely do this but buffet and Munger's age is a real concern and the likelihood of them both being around over the next decade is rather slim...such a shame

Comparing the small populations of Mustachians to the small population of successful stock pickers is not comparable for this simple reason: to be a successful Mustachian you only need to know yourself.  Stock picking depends on being an expert in each individual company, tax law, trading schedules, predicting the future of those companies, predicting the future of market and natural forces that may affect that company, and a dash of luck.  To be Mustachian you just need to understand your own income, expenses, and personality.  One is orders of magnitude more simple to achieve than the other.

Telecaster

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Re: Why is active stock picking so taboo on here ?
« Reply #19 on: February 25, 2018, 01:03:26 PM »
1 in 200 professional money managers can consistently pick stocks. I don't like those odds, but if you do, it's your money.

I counter that with how many early fi people are there 1 in 200? Maybe more but yet everyone is saying it can be done so why is this so different? I still haven't really seen any response other than a stat I already know? And money managers are always taking away fees which hinders the performance. Aren't these people always messing about with stocks far too much anyway because they feel they have to do something every day? Buffet also talks about this also


The path to FI is dead simple.  Save more than you spend, and once you are 25x annual expenses you're done.  Yes, there are a few tweaks around the edges, Roth vs. Trad, etc. but that's really about it.

Now let's talk about stocks.  Here is Microsoft's 10k:

https://www.microsoft.com/investor/reports/ar17/index.html

Read through and conclude if the stock is a good buy or not.  But even that's not enough, because you have to look at Microsoft's competitors and see what they are doing as well. 

By the way, Buffett read IBM's 10k every year for 50 years before deciding to buy.  He didn't set it aside and revisit it every four or five years.  Every year for 50 years. 

And he still (likely) made a bad decision. 




doneby35

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Re: Why is active stock picking so taboo on here ?
« Reply #20 on: February 25, 2018, 01:15:05 PM »
I think I read the following in an investing book:
"Are you Warren Buffet? If the answer is no, stick to low cost index funds".

PDXTabs

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Re: Why is active stock picking so taboo on here ?
« Reply #21 on: February 25, 2018, 01:23:24 PM »
1 in 200 professional money managers can consistently pick stocks. I don't like those odds, but if you do, it's your money.

I counter that with how many early fi people are there 1 in 200? Maybe more but yet everyone is saying it can be done so why is this so different? I still haven't really seen any response other than a stat I already know? And money managers are always taking away fees which hinders the performance. Aren't these people always messing about with stocks far too much anyway because they feel they have to do something every day? Buffet also talks about this also

I have personally lost money on Apple, BP, and Verizon stock. If you want to stock pick, be my guest. I'll be buying globally diverse index funds.

Also, I have a full time job. How can I expect to compete with professionally trained money managers while working my engineering job?

privatefarmer

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Re: Why is active stock picking so taboo on here ?
« Reply #22 on: February 25, 2018, 11:50:29 PM »
1 in 200 professional money managers can consistently pick stocks. I don't like those odds, but if you do, it's your money.

I counter that with how many early fi people are there 1 in 200? Maybe more but yet everyone is saying it can be done so why is this so different? I still haven't really seen any response other than a stat I already know?

being FI vs being a successful stock picker are not comparable:

Everyone in the world can become FI w/o impeding the ability of others to become FI. Only half the dollars invested can beat the index, the other half MUST lose to the index. There's no way around that. It's a closed system, in order to be above average someone else must be below average. So while it may be rare to be FI, you being FI does not impede anyone else from being FI, the two are not related. Me beating the market with $100k means that another $100k HAD to have lost to the market.

privatefarmer

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Re: Why is active stock picking so taboo on here ?
« Reply #23 on: February 25, 2018, 11:52:33 PM »
Thanks for the thoughts guys

To summarize my question on this

- decade returns are predicted at very low due to the current situation at 4% real returns according to Bogle who likes to think he has been berry accurate on a decade basis - can we all do a little better than 4% with some sensible picks ?
 
- the buffet mentions above

- I'm not talking about day trading or penny stocks to avoid confusion, I am talking about a type of find like apple in 2009 and holding like buffet would suggest

- I will read a bunch of books on this over the next 12 months

- I will either do one of 2 things, index for a decade and see where that takes me (most likely) then save a bunch of money to try to direct picks of my own, or I will try to pick 6-7 or less of my own picks over the next decade or see where that takes me.

I blame buffet lol, he has caught my attention with his duel answer to this
--Buffett is not just an investor, he is also a businessman and has access to business deals that you or I will never have. 

This. Buffett does not simply buy companies and passively share their profits. He helps run these companies. He becomes a partner in them and sits on their boards. He ACTIVELY manages companies. This is COMPLETELY different than passively buying shares of a company w/o any say of how the company is ran.

privatefarmer

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Re: Why is active stock picking so taboo on here ?
« Reply #24 on: February 25, 2018, 11:55:35 PM »
1 in 200 professional money managers can consistently pick stocks. I don't like those odds, but if you do, it's your money.

Is this even a true statistic? Where'd you get it from? I wouldn't think it'd be even that high. And is that before or after trading costs and fees? AND, it is impossible to predict who is going to be that 1:200 ahead of time.

Jamese20

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Re: Why is active stock picking so taboo on here ?
« Reply #25 on: February 26, 2018, 12:00:08 AM »
1 in 200 professional money managers can consistently pick stocks. I don't like those odds, but if you do, it's your money.

I counter that with how many early fi people are there 1 in 200? Maybe more but yet everyone is saying it can be done so why is this so different? I still haven't really seen any response other than a stat I already know?

being FI vs being a successful stock picker are not comparable:

Everyone in the world can become FI w/o impeding the ability of others to become FI. Only half the dollars invested can beat the index, the other half MUST lose to the index. There's no way around that. It's a closed system, in order to be above average someone else must be below average. So while it may be rare to be FI, you being FI does not impede anyone else from being FI, the two are not related. Me beating the market with $100k means that another $100k HAD to have lost to the market.

Very valid point, I just wonder why buffet would have 2 answers to my question if it was so impossible - he says a no nothing Investor should index but not necessarily for someone who is willing to be more focused - also he thinks it's way easier to be the average using modest sums.

I personally thinks it is really hard due to to emotional reason not ability reasons - that is probably why I will stick to indexing

privatefarmer

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Re: Why is active stock picking so taboo on here ?
« Reply #26 on: February 26, 2018, 12:01:24 AM »
The indexes hold some poor investments bid up to insane valuations. Consider the insane valuation ratios seen in the .com bust. The P/E, current ratios, P/B and even PEGs were insane. There are some current examples of crazy valuations. Vanguard does have some indexes that are value indexes.

Define "insane". the problem is that you or me or someone else may think a stock price is "insane" but the MARKET does not. The Market thinks the price is the price. Millions of investors have COLLECTIVELY decided that XYZ company is worth whatever it is currently priced at. It may be wrong (probably is), but you and I have NO WAY of knowing whether the market has over or under-valued it. You have to remember that all available information is priced into the stock.

Going down your rabbit hole, a counter argument would be that bond yields are historically low and thus investors must seek return elsewhere, driving up stock prices. So everything is "over valued" in this scenario, bonds and stocks (and real estate too). Okay, so what can we do? If everything is over valued you still have to invest or else make a real negative return in cash. But again, nobody knows nothin'. The price is the price and you or I or Warren Buffett honestly have no better insight over the millions of investors who have set the price at what it is.

privatefarmer

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Re: Why is active stock picking so taboo on here ?
« Reply #27 on: February 26, 2018, 12:04:19 AM »
1 in 200 professional money managers can consistently pick stocks. I don't like those odds, but if you do, it's your money.

I counter that with how many early fi people are there 1 in 200? Maybe more but yet everyone is saying it can be done so why is this so different? I still haven't really seen any response other than a stat I already know?

being FI vs being a successful stock picker are not comparable:

Everyone in the world can become FI w/o impeding the ability of others to become FI. Only half the dollars invested can beat the index, the other half MUST lose to the index. There's no way around that. It's a closed system, in order to be above average someone else must be below average. So while it may be rare to be FI, you being FI does not impede anyone else from being FI, the two are not related. Me beating the market with $100k means that another $100k HAD to have lost to the market.

Very valid point, I just wonder why buffet would have 2 answers to my question if it was so impossible - he says a no nothing Investor should index but not necessarily for someone who is willing to be more focused - also he thinks it's way easier to be the average using modest sums.

I personally thinks it is really hard due to to emotional reason not ability reasons - that is probably why I will stick to indexing

I don't know Warren personally but I believe that when he is positive towards people taking an active role in investing he is just being an optimist and a likeable person. I would bet that deep down he is very skeptical that anyone can consistently beat the market like he has had the fortune of doing. I would bet that he would tell anyone he truly cares about to just index and not get involved w/ all the noise. He is being humble saying that others can do what he has done or at least come close. What else is he to say? "No, you cannot be successful like me so don't even try"? He's too nice a guy for that.

privatefarmer

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Re: Why is active stock picking so taboo on here ?
« Reply #28 on: February 26, 2018, 12:09:17 AM »
Hedge fund managers spend a lot of time on this, but they aren't experts on the products and services businesses offer. I'd bet that a SW engineer or sysad that has read Ben Graham's books would do a much better job picking tech stocks than a hedge fund manager.

Yeah, I respectfully disagree here. Hedge funds already employ PhDs, engineers, software geeks, other insiders, etc. etc. They employ anyone they think will give them an edge. The fact is, if someone actually had insight into what the market would do they would be the richest person in the world (by far). If anyone had even a 51% chance of beating the market, they'd be getting paid millions working for a hedge fund and all of that "out performance" would be sucked up by the 2/20 fee.

privatefarmer

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Re: Why is active stock picking so taboo on here ?
« Reply #29 on: February 26, 2018, 12:12:47 AM »
one more point, sorry for all the posts :

I would think you'd be far more profitable to focus on the asset classes you'd like to invest in vs individual stocks. Markowitz came up w/ the efficient frontier and won a noble prize for it. Basically, in order to get higher long-term returns you need to take on more risk. You can do this by using leverage or you can simply invest in riskier assets. But you want to remove the risk of picking the wrong individual stocks. You only want to be exposed to the market risk and other factors (ie small, value) to the extent that you are comfortable.

So, if you really want to make more money in the long-term, learn about the volatility of the different segments of the stock market (ie small cap vs large cap, emerging markets vs developed etc), figure out how much volatility you can stomach and then invest accordingly.

triangle

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Re: Why is active stock picking so taboo on here ?
« Reply #30 on: February 26, 2018, 02:05:34 AM »
If you read Berkshires shareholder letter from last weekend http://www.berkshirehathaway.com/letters/2017ltr.pdf   I think you might find that Warren and associates are finding it difficult to find even 2 or 3 companies to invest in (for a concentrated purchase much less 6 or 7 companies). I state that based on news reporting of the meeting as I have not read the letter.

But I believe there is some mixing up between index buying vs buy-and-hold vs active trading vs hedge funds.  If I had some spare cash to deploy I would rather buy a small basket of value names for a long term hold rather than some index that may be concentrated too much in Amazon, Facebook, etc.  AMZN and FB are "good" companies but their valuations are at a point where it seems a lot of their future profits are factored into their current price. I may be totally wrong but I am not a willing buyer of these individual names...though my retirement savings are entirely in various indexes that include them. :).

Jamese20

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Re: Why is active stock picking so taboo on here ?
« Reply #31 on: February 26, 2018, 02:48:42 AM »
If you read Berkshires shareholder letter from last weekend http://www.berkshirehathaway.com/letters/2017ltr.pdf   I think you might find that Warren and associates are finding it difficult to find even 2 or 3 companies to invest in (for a concentrated purchase much less 6 or 7 companies). I state that based on news reporting of the meeting as I have not read the letter.

But I believe there is some mixing up between index buying vs buy-and-hold vs active trading vs hedge funds.  If I had some spare cash to deploy I would rather buy a small basket of value names for a long term hold rather than some index that may be concentrated too much in Amazon, Facebook, etc.  AMZN and FB are "good" companies but their valuations are at a point where it seems a lot of their future profits are factored into their current price. I may be totally wrong but I am not a willing buyer of these individual names...though my retirement savings are entirely in various indexes that include them. :).

hi buddy, thanks for joining in - i believe its hard for buffet due to scale, he states very clearly that if he were to only use modest sums he could get 50% returns with the graham approach and be able to find loads of companies to put his money to work, but he advises on paying a fair price for a wonderful company - fascinating really when you sit and think about it, hence why it prompted me to post this thought process.


Jamese20

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Re: Why is active stock picking so taboo on here ?
« Reply #32 on: February 26, 2018, 03:00:39 AM »
one more point, sorry for all the posts :

I would think you'd be far more profitable to focus on the asset classes you'd like to invest in vs individual stocks. Markowitz came up w/ the efficient frontier and won a noble prize for it. Basically, in order to get higher long-term returns you need to take on more risk. You can do this by using leverage or you can simply invest in riskier assets. But you want to remove the risk of picking the wrong individual stocks. You only want to be exposed to the market risk and other factors (ie small, value) to the extent that you are comfortable.

So, if you really want to make more money in the long-term, learn about the volatility of the different segments of the stock market (ie small cap vs large cap, emerging markets vs developed etc), figure out how much volatility you can stomach and then invest accordingly.

no need to apologise for posting mate - I have alot of researching to do i think, but i am not sure i buy into "only warren buffet can pick stock" he is famous because he has built an empire with his own hands doing it- but if you were making 30% returns on modest sums you wouldnt be on anyones radar to become famous due to scale?

if it really is that hard and hardly anyone can do it, fair enough seems to make no sense

privatefarmer

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Re: Why is active stock picking so taboo on here ?
« Reply #33 on: February 26, 2018, 04:01:47 AM »
But I believe there is some mixing up between index buying vs buy-and-hold vs active trading vs hedge funds.  If I had some spare cash to deploy I would rather buy a small basket of value names for a long term hold rather than some index that may be concentrated too much in Amazon, Facebook, etc.  AMZN and FB are "good" companies but their valuations are at a point where it seems a lot of their future profits are factored into their current price.

This I agree with. I think there are better ways to invest vs buying a total market fund. Buying a value index fund or even a small-cap value fund, for example, may offer higher long-term returns albeit with more volatility (the risk-adjusted return should be the same).

Dicey

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Re: Why is active stock picking so taboo on here ?
« Reply #34 on: February 26, 2018, 05:24:59 AM »
As regarding buying Berkshire...I would definitely do this but uffet and Munger's age is a real concern and the likelihood of them both being around over the next decade is rather slim...such a shame
Why is this a shame, exactly? Are you saying they somehow deserve to live longer than everyone else?

Jamese20

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Re: Why is active stock picking so taboo on here ?
« Reply #35 on: February 26, 2018, 06:13:12 AM »
As regarding buying Berkshire...I would definitely do this but uffet and Munger's age is a real concern and the likelihood of them both being around over the next decade is rather slim...such a shame
Why is this a shame, exactly? Are you saying they somehow deserve to live longer than everyone else?

shame for us younger investors who dont really see any new buffet and mungers coming through who we can learn from - not sure why you question this the way you have but whatever

Cpa Cat

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Re: Why is active stock picking so taboo on here ?
« Reply #36 on: February 26, 2018, 06:51:16 AM »
I just want to point out that Warren Buffett did not get rich by working a day job and investing all his savings in 6 well-researched publicly traded stocks. He got rich by creating and running investment entities that took money from outside investors and then used it to buy controlling/influencial interests in well-positioned companies.

Can you buy enough Coke shares to be influential? No? Then you aren't really in the same league as Warren Buffett. The best you can do is buy what he does and hope that he will represent your interests well. Unfortunately, he's old, and there won't be many more opportunities.

Warren Buffett is the perfect example of, "If he's good at stock-picking, then why isn't he running a hedge fund?" Well, he was. Because he was good at it. So if you're good at it, why aren't you running one?

Imagine you're back in 1950, when Warren Buffett was graduating from Fancy Business School, and he came to you and asked, "Hey man, I think I might be good at this. Should I become a day trader, or should I partner with my Fancy Business School Buddy and become an investment manager, investing other people's money?" Would you have told him to become a day trader? Would you have said "You're brilliant, just choose 6 stocks and hold them long term. Can't lose." No, you would have said, "Go convince other people to hand you money and make a six figure management fee 'cause it's 1950 and the future is BRIGHT for dudes graduating from Fancy Business Schools in 1950."

Anyway - to answer your question - What this guy said:

Active stock picking is taboo here because, with some exceptions, this is place where empiricism lives and evidence matters. And the evidence seems to indicate that passive investing works much better for nearly everyone.

ooeei

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Re: Why is active stock picking so taboo on here ?
« Reply #37 on: February 26, 2018, 07:14:57 AM »
You can bet on individual companies to do better than average, but the fact is there are 1000 reasons they may fail that no analysis can take into account. Maybe the CEO gets caught sexually assaulting his secretary. Maybe someone records conditions at a foreign contractor's plant and they get pinned with it. Maybe a new fad/company starts up that takes a lot of their market share, or new regulations get passed that make it hard for them to succeed. Maybe scientists discover their products cause long term health problems. Maybe their batteries spontaneously combust in their latest product.

Warren Buffet has done a great job over the years, but his strategy was definitely not fool proof. He made a lot of money on some big bets over the years, and virtually all of them worked out for him. Just a few of those risky bets being failures instead of successes early in his career would have torched him. He is smart, he is dedicated, but he's not omniscient. He put himself in a position to take advantage of luck when he got it, and it worked out for him. Later in his career he got special deals where he gets a quantity discount on stocks of certain companies, and other special treatment.

If you want to be Warren Buffet, you have to take somewhat risky investments and hope the luck works out. It's like if you want to be a movie star like Brad Pitt, who most likely gives speeches about "always following your dreams and ignoring the haters" as most Hollywood A-listers do. If you want to be him, you have to do it, but be aware that level of success is not the only outcome to that strategy. You can do everything right and have it not work out for you. I guarantee you there are people who followed Brad Pitt's acting strategy the exact way he did who are now 57 year old waiters at restaurants. There are also people who followed Buffet's investment strategies who underperformed the market. You can't only listen to the success stories, because they always find a way to rationalize that it's due to something they did that they succeeded, and luck wasn't a large factor. I'm sure there are lottery winners out there who think their number picking strategy is their reason for success, but that doesn't make it true, even if they describe it in very fancy complicated terms.

You can be the best poker player in the world, but if the cards aren't working for you you can still lose, especially if you're playing against people with billion dollar companies constantly analyzing the game for them and you just play a few days a week after work and on weekends.

If you absolutely have to outperform the market, you have to get riskier than the market. Maybe it'll work out for you, then again, maybe it won't. Is the risk worth it to you?
« Last Edit: February 26, 2018, 07:21:18 AM by ooeei »

CorpRaider

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Re: Why is active stock picking so taboo on here ?
« Reply #38 on: February 26, 2018, 08:01:33 AM »
Did you read his letter this weekend?  He's pretty much recommending indexing for all ("small and large") investors now. 

If you want to invest some of your money and time in selecting companies to see how you do (or as a hobby), you could just allocate a small percentage of your investable assets to that "bucket." 

You should also probably measure your performance against index funds to limit the risk you will delude yourself.  Finally, if you have a good run be cognizant of the potential to confuse luck and skill.

I could envision people who are better able to avoid/minimize the behavior gap (underperformance due to market timing/panics) by holding individual companies which they have researched and in which they have developed strong confidence.  In that (probably unusual) scenario, returns might be improved by active security selection. 
« Last Edit: February 26, 2018, 08:06:42 AM by CorpRaider »

TheAnonOne

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Re: Why is active stock picking so taboo on here ?
« Reply #39 on: February 26, 2018, 09:06:36 AM »
Even Buffet barely beat the SP500 this year (by maybe 1-2). I'd like to think I could vastly beat Buffet (and thus the market) but, honestly I can make better returns by simply working overtime, gaining new skills and taking on extra projects.

It wouldn't be until my stash was more like 25 times my INCOME (read: not expenses) before stock picking would even be worth it, and even then only if it was successful, which is questionable.

Jamese20

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Re: Why is active stock picking so taboo on here ?
« Reply #40 on: February 26, 2018, 09:44:38 AM »
Thanks for the insight guys

Honestly, I think it seems safer to save hard and index and then only risk any difference once I achieve FI

Starting at 40-43 once FI is still fairly young and I don't have to risk my well being to do it either

yachi

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Re: Why is active stock picking so taboo on here ?
« Reply #41 on: February 26, 2018, 10:03:07 AM »
I get the logic, 98% of normal people who don't care about this stuff should index due to the stats,

But what I would like to challenge is this, how many % of the wider public follow this advice and be financially free decades before anyone else? They are just as rare breed than the people who can successfully pick the stocks that outperform.

Warren buffet states that you should be extremely diversified if you don't have the time or patience to pick the stocks you understand, however he states that it's a terrible mistake to diversify if you bring the intensity and focus to the game and then you should only pick 6-7 stocks that you fully understand and know and you will do very well.

When buffet speaks I listen hard, and I get that at the moment I should just stick to the index fund deal, but are people who find this stuff very interesting making a big mistake by not picking a few winning stocks with the right focus ? Warren Buffet does think so and I don't consider this a man who wants people to lose my money
Buffet has been encouraging most everyone to invest in index funds while acknowledging the availability of outsized profits for those who understand security valuation.
If you're interested in this, I suggest you read through the entire book list for Columbia University's Value Investing course.  All the ones I've read have been excellent.  I would also suggest you teach yourself lots of accounting.  It's not magic that causes "all available information to be priced into a stock".  It's investors and money managers throwing additional money to stocks that happen to be miss-priced relative to the available information.  The pool is so competitive it looks like a stock adjusts immediately to new information.  If you keep to fishing in ponds that aren't large enough to attract commercial fisherman, you stand a better chance at catching a large fish.

DS

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Re: Why is active stock picking so taboo on here ?
« Reply #42 on: February 26, 2018, 11:44:06 AM »
Because it's the MMM forum, where people arrive after reading and supporting the blog's message.

PDXTabs

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Re: Why is active stock picking so taboo on here ?
« Reply #43 on: February 26, 2018, 12:38:25 PM »
1 in 200 professional money managers can consistently pick stocks. I don't like those odds, but if you do, it's your money.

Is this even a true statistic? Where'd you get it from? I wouldn't think it'd be even that high. And is that before or after trading costs and fees? AND, it is impossible to predict who is going to be that 1:200 ahead of time.

I agree that you can't see the future. The 1:200 is actually from Jack Bogle, but I slightly misquoted him. It's really 1:200 actively managed funds, which I use as a proxy for general investing ability for professional money managers.

If we go back to 1970, we find that there were approximately 400 funds in business and basically 330 or [3]40 have gone out of business. It turns out, in that period, there were two mutual funds who beat the market by more than 2 percent per year. Two! Thatís half of 1 percent of all the funds that started in the business. Those are your odds.  - John "Jack" Bogle, The Stupidest Thing You Can Do With Your Money

EDITed to add: beating the market by 2% per year is important because you need to pay for the fees. I guess if you are managing your own portfolio you only need to beat the market enough to beat a low fee index fund.

talltexan

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Re: Why is active stock picking so taboo on here ?
« Reply #44 on: February 26, 2018, 12:49:12 PM »
Investing in individual stocks grants (on average) market returns with above-market risk. Suppose you have a position that's now down 20%. Are you still confident in it? Do you sell? Was something wrong in how you sized up the business initially? Your friends are all reminding you that you're not Warren Buffet. Perhaps you really aren't.

Even worse, you might have a position that's up 40%. Do you sell then? It could go up more...you might be right but for the wrong reason.

Part of playing the game is being able to handle the emotions of risk, and the risk with stock-picking is far in excess of the risk associated with indexing, where you can DCA fairly worry-free.

PaulMaxime

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Re: Why is active stock picking so taboo on here ?
« Reply #45 on: February 26, 2018, 02:17:38 PM »
I go against the grain on here personally.

I'm primarily an individual stock investor.

My investments have outperformed "the market" by about 2% per year on average. I track myself against the S&P 500 total return index because that includes dividends.

How do I do it?

I subscribe to investment advice from "The Motley Fool" to help me with my research.
I only invest in businesses for the long term (my longest stock holding is currently at 18 years)
I do the occasional options trade for additional income and upside.
I hold a pretty diversified list of investments so my single stock risk is minimized.

Commissions + advice in my case are << than I'd pay to Vanguard for investing in an index fund.

I would maintain that as a part time, business focused, small, individual investor I have lots of advantages over the professional money managers on Wall Street. The main two are my time frame - that I can be focused on the long term and not worry about the next quarter or year, and that I don't have to answer to anyone but myself. The professionals have to perform every day, week and quarter and if they underperform for even a short time, people are withdrawing their money. This is a toxic environment in which to operate.

I'm not going to share my trade history or account balances here. I just want to say that outperformance is not as daunting as most on here would lead you to believe.

Scandium

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Re: Why is active stock picking so taboo on here ?
« Reply #46 on: February 26, 2018, 02:29:25 PM »
For supposedly being "taboo" there sure are a large number of threads on this subject, seems like a new one weekly..

I think you're confusing "taboo" with: people asking if/how to picking winning stocks. Being recommended they shouldn't, insisting that they should and asking why even after being told the reasons over and over.

Indexer

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Re: Why is active stock picking so taboo on here ?
« Reply #47 on: February 26, 2018, 03:48:20 PM »
I'm fine with buying individual stocks if they can pass 2 tests.

1.)  Is it riskier than buying VTSAX?  If yes, go to question 2. This is easy, the answer is always yes.
2.) Do I have reason to believe this stock will grow so much faster than VTSAX that it will compensate me for all of the extra risk I'm taking?

If the answer is no or I don't know, don't buy the stock.

Travis

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Re: Why is active stock picking so taboo on here ?
« Reply #48 on: February 26, 2018, 04:27:09 PM »
Hedge fund managers spend a lot of time on this, but they aren't experts on the products and services businesses offer. I'd bet that a SW engineer or sysad that has read Ben Graham's books would do a much better job picking tech stocks than a hedge fund manager.

Yeah, I respectfully disagree here. Hedge funds already employ PhDs, engineers, software geeks, other insiders, etc. etc. They employ anyone they think will give them an edge. The fact is, if someone actually had insight into what the market would do they would be the richest person in the world (by far). If anyone had even a 51% chance of beating the market, they'd be getting paid millions working for a hedge fund and all of that "out performance" would be sucked up by the 2/20 fee.

Why would a sysadmin have an inside track on picking tech stocks? Working in the industry does not make you automatically more insightful about it.  You'd still have to learn and understand all the financial aspects of that business that everybody else has access to and probably understands them better anyways.  You might be in a better position to know about your own company, but you're still having to learn about the competition.  I am an IT guy and I know the movers and shakers who supply the DoD with all of their toys, but I couldn't tell you with enough certainly to bet money on it which one is going to have significant profitability (better than market average after expenses) next year. Company A is going to sell thousands of computers and radios to the Army next year.  How much will that increase their stock price? No idea.  If I did know that, my experience in IT would not be the reason.  My knowledge top to bottom of how the company operates would be.

lhamo

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Re: Why is active stock picking so taboo on here ?
« Reply #49 on: February 26, 2018, 06:16:40 PM »
When we started our first "real" jobs after grad school, DH and I bought around $10k in individual stocks.  Only one (Ebay) did really well over the long term -- we put around $2k in, and after the PayPal spinoff those two stocks are now worth about 24k.  Microsoft has done ok the last few years -- put about $1500 into that and it is now worth around $5500 (would have been more if I had reinvested the dividend).   The rest of our picks have done virtually nothing or lost money -- Intel is about at what we paid for it, we made a few hundred bucks on buybacks of Dell, Staples and Cable and Wireless, and we lost about $2k on Worldcom and Nokia.

I just looked at a compounding calculator and if we had put the same amount of money in an index fund earning an average 7%/year over that period we would have around $36k at this point, or a bit more than our current balance of around $33k.

At around the same time, we started contributing to retirement funds at work -- not always maxed out, but at a decent level most years.  We were stuck with American Funds at work, but did Vanguard indexes or target retirement funds for our Roths.  I rolled my work 403bs over to Vanguard as soon as I could.  Total balance of retirement funds 18 years later is around $1.25 million.

Individual stocks can be fun to experiment with, but I'll happily take the index route for long-term investments.