Author Topic: Am I wrong to be invested in individual stocks?  (Read 18647 times)

AdrianC

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Re: Am I wrong to be invested in individual stocks?
« Reply #50 on: May 08, 2017, 08:15:20 AM »
What annoys me is the overly confident and almost arrogant "certain knowledge" that it should be impossible to beat the market. It is very easy to beat the market, it just requires work. For example, in the German DAX there is BMW, but not BMW preferred stocks. Obviously, putting preferred stocks in your DAX portfolio would already outperform the DAX. There you have prove you can beat the index.
Are you sure you've thought that one through?

Why would BMW preferred stock "obviously" outperform the DAX?

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #51 on: May 08, 2017, 09:18:52 AM »
What annoys me is the overly confident and almost arrogant "certain knowledge" that it should be impossible to beat the market. It is very easy to beat the market, it just requires work. For example, in the German DAX there is BMW, but not BMW preferred stocks. Obviously, putting preferred stocks in your DAX portfolio would already outperform the DAX. There you have prove you can beat the index.
Are you sure you've thought that one through?

Why would BMW preferred stock "obviously" outperform the DAX?

Right. Preferred stock is generally more like a debt obligation. The "preferred" part is that if the company is liquidated you get your money before the common shareholders.

I agree that it's possible (though not really easy) to beat the market. After all, the average investor underperforms the index by several percentage points because of their bad behavior. Someone is capturing that missing return and it might as well be us, with better behavior alone.

You are right that we are not forced to buy the worst stocks. It's not always obvious which ones are worse or better but you only have to skew things your way a little, and then avoid panic, let your winners run, don't anchor on a price, have a long term outlook, etc.


DarthCreationist

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Re: Am I wrong to be invested in individual stocks?
« Reply #52 on: May 08, 2017, 09:55:58 AM »
What annoys me is the overly confident and almost arrogant "certain knowledge" that it should be impossible to beat the market. It is very easy to beat the market, it just requires work. For example, in the German DAX there is BMW, but not BMW preferred stocks. Obviously, putting preferred stocks in your DAX portfolio would already outperform the DAX. There you have prove you can beat the index.
Are you sure you've thought that one through?

Why would BMW preferred stock "obviously" outperform the DAX?
Because they pay higher dividends and cost less.
« Last Edit: May 08, 2017, 09:58:10 AM by DarthCreationist »

Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #53 on: May 08, 2017, 03:52:50 PM »
I think it could be a good time to remember why you stashed all this money aside. So far you did your research, and it all worked out fine. However, even if you would not make any bad decisions given the available information, you might get badly burned and loose a considerable amount of your savings for good. Indexes don't go to zero unless the world ends. Individual companies do.

Also, this one line comes into my mind "The market can stay irrational longer than you can stay solvent" :-D

I recently witnessed a 30% decline in my all-time favourite stock, AMD. I am a communications engineer, I did my research. Quarterly earnings were ok, and yet the shares lost tremendously in 2 days. I believe it is because of overbuying by individual investors, big finance cashing in and then overselling. But whatever the cause, I can sit this one out. Anyways, I would not be so confident if I had more money invested in this one stock. I am in my investing learning phase (does it ever end) and realized what my tolerance for downturns is. I am a bit uneasy by now :-D

So, it is possible to increase your diversification by adding more companies, but:

1. Takes much time to observe 20 or more companies/stocks
2. Most of the combined index gain comes from few excessive individual gains by the underdogs, and the median stocks give worse than mean returns. Unless you own the complete index, you have a high probability on missing out on those outperformers.

So if you own 20 "good" stocks, you are most likely to make a bit less than the index in the long run, but still have higher risk and spend more time on it.
Personally, I get why you like to trade individual stocks, but the majority of your saving(s) might be better invested with semi-automation.

Maybe you could just set 80% of your equities money on indexing, and split the rest between few "fun" or research stocks?
True.  I think the timing is the toughest part.  Ive made some great calls and stuck with winners for years only to 'get greedy'  when they finally started their moves.  Seeing a stock you believe in double in price can create an almost irresistable urge to 'guarantee a win' by selling half, for example.  My current rule is never sell unless i need the money.  For me that us the most mustacian wsy to hold individual stocks.

Completely agree. Trading stocks is a sure way to lose money.  Investing and holding long term produces the wins.  It takes a lot of discipline (more than I have at times for certain).  I've learned a lot of lessons in trading in and out of stocks.  All lessons came with a significant loss.

Of course, we have had a few stock gurus on these forums in the past.  It becomes apparent after a while they are only buying very small sums of money, like 500 - 1000 per stock.

With bigger chunks of money the risks and rewards of stock picking increase.

The amount of risk one takes on can only be assessed through comparison to total assets available for investment.  Risks do not increase because the capital outlay goes up when comparing amongst those with different asset levels.

Within the same portfolio, it is rather obvious risk increases as "chunks of money" are invested.
« Last Edit: May 08, 2017, 03:55:03 PM by Cache Stash »

Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #54 on: May 08, 2017, 04:31:40 PM »
When you bet your financial future on your ability to pick 7-8 stocks despite the enormous volume of research that says this will under perform the market most of the time you cannot avoid being a special snowflake special. You would otherwise be saying all the rest of the professional investors with far more, education, skill, time and resources behind them simply don't want to succeed badly enough to beat someone like you.

Actually, there's a lot less literature on individual investor returns than funds.  Although research generally shows that on average individual investors underperform the market, mostly because of excessive trading and trading costs.  In fact, there is a strong inverse relationship between trading frequency of total returns.

However, unlike mutual funds, where past performance is not predictive of future success, a number of studies has demonstrated that an individual who has outperformed in the past is more likely to outperform in the future:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1004454
https://www.psychologytoday.com/files/attachments/5123/sept-2005-distributed-version.pdf
http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2007-Austria/papers/0327.pdf

That is exactly my experience.  Every year in which I didn't do "so well", I found that I traded way, way, way too often.  I now only make about 25-50 trades per year.  I was over 200 at one point (back when I first "tried" my hand at stock picking).

At 7-8 stocks, that means you hold each stock an average of 2-4 months.  That is a crazy high turnover and falls into the "high trading" category.  From my second link:
Quote
This negative relationship was seen to cause a 0.29% per year reduction in gross
returns for each trade executed per year.

I can see why you surmised the high turnover.  I have 5-8 stocks or so that I am completely invested long term.  They comprise a high percentage of my portfolio.  The high number of trades comes from "trying" out investment theses. I know I should do this in a sandbox, but there is no skin in the game and I have found that option to be meaningless.  I don't really have a high turnover in the majority of my invested capital in stocks.

AdrianC

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Re: Am I wrong to be invested in individual stocks?
« Reply #55 on: May 09, 2017, 05:29:24 AM »
What annoys me is the overly confident and almost arrogant "certain knowledge" that it should be impossible to beat the market. It is very easy to beat the market, it just requires work. For example, in the German DAX there is BMW, but not BMW preferred stocks. Obviously, putting preferred stocks in your DAX portfolio would already outperform the DAX. There you have prove you can beat the index.
Are you sure you've thought that one through?

Why would BMW preferred stock "obviously" outperform the DAX?
Because they pay higher dividends and cost less.
Okay.

Berkshire Hathaway B shares closed at $165.02 and pay no dividend.
Procter & Gamble shares closed at $86.55 and pay a 3.19% dividend.

Is it obvious to you which one is the better buy?

Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #56 on: May 09, 2017, 06:41:08 AM »
What annoys me is the overly confident and almost arrogant "certain knowledge" that it should be impossible to beat the market. It is very easy to beat the market, it just requires work. For example, in the German DAX there is BMW, but not BMW preferred stocks. Obviously, putting preferred stocks in your DAX portfolio would already outperform the DAX. There you have prove you can beat the index.
Are you sure you've thought that one through?

Why would BMW preferred stock "obviously" outperform the DAX?
Because they pay higher dividends and cost less.
Okay.

Berkshire Hathaway B shares closed at $165.02 and pay no dividend.
Procter & Gamble shares closed at $86.55 and pay a 3.19% dividend.

Is it obvious to you which one is the better buy?

Stock price per share is meaningless unless it is compared to something such as earnings per share.

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #57 on: May 09, 2017, 08:50:31 AM »
What annoys me is the overly confident and almost arrogant "certain knowledge" that it should be impossible to beat the market. It is very easy to beat the market, it just requires work. For example, in the German DAX there is BMW, but not BMW preferred stocks. Obviously, putting preferred stocks in your DAX portfolio would already outperform the DAX. There you have prove you can beat the index.
Are you sure you've thought that one through?

Why would BMW preferred stock "obviously" outperform the DAX?
Because they pay higher dividends and cost less.

I think you better go back and learn a bit more about stock investing before you jump in.

If two companies are worth $1B and A has 10 million shares outstanding and B has 20 million shares outstanding, the first company will be $100 per share and the second will be $50

Which one is cheaper? What if I told you that company A made $100 million in profit and B only $10 MM?

What if I told you that sales at company A dropped by 20% and company B doubled its revenue over the past year?

Share price alone doesn't make a good indicator. If it did, then all the low priced stocks would just get bid up until they matched the price of the others.



BreakTheChains

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Re: Am I wrong to be invested in individual stocks?
« Reply #58 on: May 09, 2017, 09:02:38 AM »
I'm a Finance professional that has worked at numerous banks / insurance companies as an investments accounting specialist. These companies employ people who do nothing all day but analyze 1 or 2 stocks or a specific industry. ALL DAY, 5-6 days a week, 50-60+ hours a week. They go to special conferences, discuss products / raw material pricing and supply chain issues at a micro level with experts, visit customers of these companies, etc etc etc. They have access to resources an independent stock picker couldn't dream of and all the time in the world as they are actually PAID to do this.

And guess what? Even WITH all those resources, they STILL can't predict accurately consistently over long periods of time and beat indexes. 

You can't beat them. At best you get lucky and a black swan event occurs or something macro slips past the industry (i.e. Great Recession), or market conditions change after you purchase the stock such that it becomes revalued higher than was previously analyzed.


DarthCreationist

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Re: Am I wrong to be invested in individual stocks?
« Reply #59 on: May 09, 2017, 09:10:49 AM »
Are you sure you've thought that one through?

Why would BMW preferred stock "obviously" outperform the DAX?
Because they pay higher dividends and cost less.

I think you better go back and learn a bit more about stock investing before you jump in.

If two companies are worth $1B and A has 10 million shares outstanding and B has 20 million shares outstanding, the first company will be $100 per share and the second will be $50

Which one is cheaper? What if I told you that company A made $100 million in profit and B only $10 MM?

What if I told you that sales at company A dropped by 20% and company B doubled its revenue over the past year?

Share price alone doesn't make a good indicator. If it did, then all the low priced stocks would just get bid up until they matched the price of the others.

What annoys me is the overly confident and almost arrogant "certain knowledge" that it should be impossible to beat the market. It is very easy to beat the market, it just requires work. For example, in the German DAX there is BMW, but not BMW preferred stocks. Obviously, putting preferred stocks in your DAX portfolio would already outperform the DAX. There you have prove you can beat the index.
Are you sure you've thought that one through?

Why would BMW preferred stock "obviously" outperform the DAX?
Because they pay higher dividends and cost less.
Okay.

Berkshire Hathaway B shares closed at $165.02 and pay no dividend.
Procter & Gamble shares closed at $86.55 and pay a 3.19% dividend.

Is it obvious to you which one is the better buy?

Guys! We are talking about the SAME company here. BMW preffered vs BMW common. Both represent the same ratio of ownership. Preferred stocks pay a higher dividend and come with a lower price (and no voting rights). It is obvious.

I chose this example because the common stock is in the DAX. So a DAX ETF would buy the common stock. The common stock is in the DAX because most BMW stocks are common stocks, for no other reason.

Any argument that compares two different companies doesn't apply here.
« Last Edit: May 09, 2017, 09:14:47 AM by DarthCreationist »

AdrianC

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Re: Am I wrong to be invested in individual stocks?
« Reply #60 on: May 09, 2017, 09:59:56 AM »
Guys! We are talking about the SAME company here. BMW preffered vs BMW common. Both represent the same ratio of ownership. Preferred stocks pay a higher dividend and come with a lower price (and no voting rights). It is obvious.

I chose this example because the common stock is in the DAX. So a DAX ETF would buy the common stock. The common stock is in the DAX because most BMW stocks are common stocks, for no other reason.

Any argument that compares two different companies doesn't apply here.
Just making sure!

So, back to:
Quote
It is very easy to beat the market, it just requires work. For example, in the German DAX there is BMW, but not BMW preferred stocks. Obviously, putting preferred stocks in your DAX portfolio would already outperform the DAX. There you have prove you can beat the index.
How has BMW preferred done against BMW common?

AdrianC

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Re: Am I wrong to be invested in individual stocks?
« Reply #61 on: May 09, 2017, 10:23:38 AM »
And we can easily see how BMW preferred has done against the DAX:

https://www.bmwgroup.com/en/investor-relations/bmw-%20shares.html

PizzaSteve

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Re: Am I wrong to be invested in individual stocks?
« Reply #62 on: May 09, 2017, 10:38:11 AM »
Yup.  Over last 3 years, common is flat, preferred done well (tracking bond values increasing during falling rate environment).

soupcxan

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Re: Am I wrong to be invested in individual stocks?
« Reply #63 on: May 09, 2017, 11:05:12 AM »
What annoys me is the overly confident and almost arrogant "certain knowledge" that it should be impossible to beat the market. It is very easy to beat the market, it just requires work. For example, in the German DAX there is BMW, but not BMW preferred stocks. Obviously, putting preferred stocks in your DAX portfolio would already outperform the DAX. There you have prove you can beat the index.
Are you sure you've thought that one through?

Why would BMW preferred stock "obviously" outperform the DAX?
Because they pay higher dividends and cost less.

lol that's a fundamentally flawed view of common vs preferred shares. you are essentially comparing a stock to a bond and saying the bond is better because it pays more interest.

DarthCreationist

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Re: Am I wrong to be invested in individual stocks?
« Reply #64 on: May 09, 2017, 11:25:53 AM »
A preferred stock is not a bond.

It represents ownership on the company's equity, like any other stock. Bonds represent ownership of borrowed money.

The difference to common stock is that you forfeit voting rights. If you want to take over a company, you need common stock. If you want to make money you need the preferred stock.

Ursus Major

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Re: Am I wrong to be invested in individual stocks?
« Reply #65 on: May 09, 2017, 11:28:27 AM »
lol that's a fundamentally flawed view of common vs preferred shares. you are essentially comparing a stock to a bond and saying the bond is better because it pays more interest.

That might be a fundamentally flawed view of a U.S. common vs preferred shares, but BMW is a German company and German preferred shares work differently than U.S. preferred shares.

A German preferred share is very similar to a common share, except it has no voting power (on most topics) and it will have a higher dividend than a common share. And just like the common share's dividend will (usually) rise over time, so will the preferred share's dividend. Here's a brief paragraph on this on Wikipedia.

I don't have any stake in the rest of this discussion, but just wanted to point this difference out to help move the discussion forward.

DarthCreationist

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Re: Am I wrong to be invested in individual stocks?
« Reply #66 on: May 09, 2017, 11:31:44 AM »
Thank you for clarifying. I was not aware of the difference.

AdrianC

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Re: Am I wrong to be invested in individual stocks?
« Reply #67 on: May 10, 2017, 06:19:08 AM »
Yup.  Over last 3 years, common is flat, preferred done well (tracking bond values increasing during falling rate environment).

Yeah, but the preferred total return still did not beat the DAX over the last three years.

Beating the index is not so easy...

soupcxan

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Re: Am I wrong to be invested in individual stocks?
« Reply #68 on: May 10, 2017, 09:12:10 AM »
A preferred stock is not a bond.

It represents ownership on the company's equity, like any other stock. Bonds represent ownership of borrowed money.

Preferred stock is a hybrid asset that sits in between debt and common equity, and has features of both. It is definitely not the same as common stock with a higher dividend.

If you want to take over a company, you need common stock. If you want to make money you need the preferred stock.

I don't even know where to start with this.

DarthCreationist

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Re: Am I wrong to be invested in individual stocks?
« Reply #69 on: May 10, 2017, 12:43:04 PM »
I don't even know where to start with this.
Maybe by reading the explanation from Ursus Major. He cleared it all up.

ChpBstrd

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Re: Am I wrong to be invested in individual stocks?
« Reply #70 on: May 10, 2017, 01:58:51 PM »
Beating the S&P 500 isn't hard. Just invest in a small cap (VB) or technology (VGT) portfolio during a bull market, or in cash/bonds during a bear market. ;))

It's all a tradeoff between risk/volatility/beta and upside potential. Of course taking more risk can deliver more rewards. That's why stock pickers concentrate on micro-caps and tech names: they'll usually beat the S&P regardless, just by virtue of buying riskier companies at lower valuations.

Another way to beat the index is to trade options on it. E.g. sell puts on SPY. Get assigned at a lower cost basis. Sell calls. Repeat.

However, there's a shiton of data that says you are highly unlikely to consistently pick a portfolio of stocks within an index that will beat that index. If you cannot explain modern portfolio theory or the efficient frontier, I'm sorry but I must be blunt: you are unqualified to trade or even hold equities. These are classic fundamentals.

https://en.m.wikipedia.org/wiki/Modern_portfolio_theory

If you are actually comparing a micro-cap strategy with a large-cap strategy, and ignoring the higher risk associated with that strategy, sorry again, but you are bragging about taking more risk. Might as well bet on black at the roulette wheel and brag about your 49% one minute ROI. No one would actually do that silly example, but change the casino to the stock market and we often convince ourselves that our picking reflects some hidden talent.

Stock-picking is a high-risk strategy that pays off for some winners, just like the lottery. But it's an apples/oranges comparison to passive approaches.

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #71 on: May 10, 2017, 07:25:03 PM »

It's all a tradeoff between risk/volatility/beta and upside potential. Of course taking more risk can deliver more rewards. That's why stock pickers concentrate on micro-caps and tech names: they'll usually beat the S&P regardless, just by virtue of buying riskier companies at lower valuations.


So, basically you assume that MPT and the efficient market hypothesis are true, and therefore there's no room for individual outperformance on any other reason than more volatility == more risk == more returns?

I don't agree that market participants are all rational (which these theories assume) and I don't agree that risk == volatility.

To me, like Warren Buffet, risk is the chance of permanent loss of capital. Cash is a risky position because of inflation. Volatility clearly does not equal risk because nobody complains when the volatility is to the upside. Even the creators of this model have said that volatility isn't a good measurement of risk.

There is this new field called behavioral finance that tries to take into account the irrational, emotional nature of humans.

http://www.investopedia.com/university/behavioral_finance/

I contend that by controlling your behavior, you can capture the some of the excess returns that most investors leave on the table.

By far the easiest way to control behavior is to consistently buy and hold broad market index funds and forget about them for a long time. Most index investors fail at this, however, and still underperform.
« Last Edit: May 10, 2017, 07:29:03 PM by PaulMaxime »

ChpBstrd

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Re: Am I wrong to be invested in individual stocks?
« Reply #72 on: May 10, 2017, 08:27:11 PM »

It's all a tradeoff between risk/volatility/beta and upside potential. Of course taking more risk can deliver more rewards. That's why stock pickers concentrate on micro-caps and tech names: they'll usually beat the S&P regardless, just by virtue of buying riskier companies at lower valuations.


So, basically you assume that MPT and the efficient market hypothesis are true, and therefore there's no room for individual outperformance on any other reason than more volatility == more risk == more returns?

I don't agree that market participants are all rational (which these theories assume) and I don't agree that risk == volatility.

To me, like Warren Buffet, risk is the chance of permanent loss of capital. Cash is a risky position because of inflation. Volatility clearly does not equal risk because nobody complains when the volatility is to the upside. Even the creators of this model have said that volatility isn't a good measurement of risk.

There is this new field called behavioral finance that tries to take into account the irrational, emotional nature of humans.

http://www.investopedia.com/university/behavioral_finance/

I contend that by controlling your behavior, you can capture the some of the excess returns that most investors leave on the table.

By far the easiest way to control behavior is to consistently buy and hold broad market index funds and forget about them for a long time. Most index investors fail at this, however, and still underperform.

I would say an individual could outperform the market year after year without taking on more beta/volatility - due to luck. Then, we would hear from that individual on the internet, which would not be a chance event. Only the monte carlo studies that support MPT reveal how many losers there are to that game. The theory is not that 7-stock portfolios underperform every time. It's that they are less likely to perform well. Dots on a plot.

I'm sympathetic to the argument that beta =/= risk. Companies with obsolete product lines, companies that borrow to finance dividends, and companies with poor quality products are subjectively risky to me for reasons that seem objective. Yet, I know better than to try my hand as a fund manager. For example, companies doing a bad job have this tendancy to replace their leadership and suddenly start doing well again. Also, the market can stay irrational/uninformed for years.

Stock picking is like playing five dimensional-chess against computers. Good luck at that casino. Index investing is more like playing based on a century of probability. You'll still get rich, but at roughly the same pace as your peers.

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #73 on: May 10, 2017, 09:23:18 PM »

Stock picking is like playing five dimensional-chess against computers. Good luck at that casino. Index investing is more like playing based on a century of probability. You'll still get rich, but at roughly the same pace as your peers.

Except it's not a casino. You don't have to play the same game as the "professionals." Individual investors have a lot of advantages over wall street. Chiefly among those is a longer time frame and no need to answer to others.

You can buy a great company and hold on to it for years and years. You only need a few 10 baggers to make up for a bunch of losers.

DarthCreationist

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Re: Am I wrong to be invested in individual stocks?
« Reply #74 on: May 11, 2017, 01:44:32 PM »
Poker is a nice comparison imho. Most unknowing people think it is a game of chance.

If you play Poker for a living, and I know people who do, it becomes clear that this is not the case. If you have skill, you can consistently beat the mass. Not every day and not every week, but always in the long-term, because good and bad luck evens out. And being emotionless is absolutely vital.

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #75 on: May 11, 2017, 04:43:57 PM »
Poker is a nice comparison imho. Most unknowing people think it is a game of chance.

If you play Poker for a living, and I know people who do, it becomes clear that this is not the case. If you have skill, you can consistently beat the mass. Not every day and not every week, but always in the long-term, because good and bad luck evens out. And being emotionless is absolutely vital.

I'd agree with this assessment over the others. Poker is a game of skill. Lucky beginners can win but over time those that play well and control their emotions will do better.

It's by no means a guarantee, of course.

And importantly, you only have to shift the advantage slightly in your favor to win in the long term. I expect to be wrong close to half the time, and 80% of my returns to come from only 20% of my investments.

If I don't prematurely cut those off and don't obsess over the losers (after all they become a smaller and smaller problem over time) I believe that I will win.

If I'm just average I'll approximately match the market. The few hours a week I spend will be learning and entertainment, and I'm not paying anyone an expense ratio, not even 0.05% if I keep my commissions low and don't trade much.

triangle

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Re: Am I wrong to be invested in individual stocks?
« Reply #76 on: May 12, 2017, 12:21:13 AM »
I think it is good to invest in individual stocks. But I disagree that trying to closely track 5-7 is a pathway to success for most investors. Since as an individual investor you have no detailed information about your companies inventories, future product plans, corporate politics, etc. Or how outside influences like the government policy changes, federal reserve actions, a competitors technical innovations, etc will impact your companies valuation. That is better to have more stocks and worry less about them individually and accept more market-average returns.

The flipside is that if one is so certain of their stock picking ability, they could buy the best one and achieve the largest return possible.  On a somewhat related note I saw this reported on ZeroHedge on April 30, originally reported by Goldman Sachs:
Quote
Year to date the top 10 contributors have combined to account for 37% of the S&P 500 index return (more than double their market cap representation of 17%). The concentration among the top five is even greater, with those firms – AAPL, FB, AMZN, GOOGL, and MSFT – accounting for 28% of the return and 12% of market cap.

ChpBstrd

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Re: Am I wrong to be invested in individual stocks?
« Reply #77 on: May 12, 2017, 03:12:22 PM »
Also, to closely track 5-7 companies, you would have to also closely track each of their 5-7 competitors. Corporate publications will never inform you that "competitors' new products and processes are about to leave us in the dust."

JJ

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Re: Am I wrong to be invested in individual stocks?
« Reply #78 on: May 14, 2017, 11:44:51 PM »
Here's another perspective. It is actually quite common for a person to have a large percentage of his or her wealth tied up in a single stock. One that they live and breathe every day, and that they know inside out. It is the life of a small business owner/operator. It's somewhat risky, but it isn't "special". Spreading the risk across 7-8 businesses that you know inside out seems quite reasonable in this context, and if you aren't working in the business it is quite feasible to keep abreast of what's going on across them all.

I'm happy to pick stocks - one that goes to the moon offsets a lot of mishaps, and if you are looking at small, relatively simple businesses you don't need an army of analysts to understand their workings. However, I have also run small businesses myself and advised many others so I do have a handle on the mechanics. I probably would never go for such a concentrated portfolio as the OP, but I'm happy with 20-50 individual stocks from micro-caps to mid-caps and I enjoy spending the time needed to keep on top of them. If you aren't, then stock-picking isn't for you. And it isn't "retirement" - you have flexibility in when you work, but it is still work to keep on top of things.

Father Dougal

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Re: Am I wrong to be invested in individual stocks?
« Reply #79 on: May 15, 2017, 07:17:23 AM »
What annoys me is the overly confident and almost arrogant "certain knowledge" that it should be impossible to beat the market. It is very easy to beat the market, it just requires work. For example, in the German DAX there is BMW, but not BMW preferred stocks. Obviously, putting preferred stocks in your DAX portfolio would already outperform the DAX. There you have prove you can beat the index.
Are you sure you've thought that one through?

Why would BMW preferred stock "obviously" outperform the DAX?
Because they pay higher dividends and cost less.

Darth,

So logically, you'd say the preferred would outperform the ordinaries?

Well, if you look at 2007, that was not the case. The ords were down 3.3% and the prefs down 17.1% (from Jan-Dec).  Dividend was only 2 euro cents different, so that does not explain the difference.  It has also underperformed over the last 12 months to today.

Therefore if you had owned the DAX plus BMW prefs (your scenario), you would have underperformed the DAX over those time periods.

Sorry to be the bearer of bad news.  You know what they say about something that sounds too good to be true...

PS, I'm assuming you're not just trolling us!

DarthCreationist

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Re: Am I wrong to be invested in individual stocks?
« Reply #80 on: May 15, 2017, 08:31:36 AM »
Why would I be trolling you? If you look at a small time frame, you can of course find counter-examples. Imho, everything short-term is meaningless random fluctuations.

If you look for example at the 5-year performance of BMW, you'll see that the common stock had a return of 52.2% (including dividends) and the preferred stock a return of 66.4%. That is a significant difference!

Father Dougal

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Re: Am I wrong to be invested in individual stocks?
« Reply #81 on: May 15, 2017, 09:00:29 AM »
Why would I be trolling you? If you look at a small time frame, you can of course find counter-examples. Imho, everything short-term is meaningless random fluctuations.

If you look for example at the 5-year performance of BMW, you'll see that the common stock had a return of 52.2% (including dividends) and the preferred stock a return of 66.4%. That is a significant difference!

Ahh!  One year periods are not long enough!

What about the five years ending 31 Dec 2011 (18% rise for ords versus 17% fall for prefs)?  The dividend difference doesn't account for it.

If you want a longer period, how about from Jan 2007 until today?  Ords are up 99%, prefs are up 72%.

If you think about it, if adding BMW prefs would guarantee DAX outperformance, every fund manager could sell an ETF DAX tracker, put 90% in DAX and 10% in BMW prefs, and then pocket the outperformance. And they would, too, the scoundrels.

Viel Glück!
« Last Edit: May 15, 2017, 09:44:04 AM by Father Dougal »

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #82 on: May 15, 2017, 09:09:54 AM »

I'm happy to pick stocks - one that goes to the moon offsets a lot of mishaps, and if you are looking at small, relatively simple businesses you don't need an army of analysts to understand their workings. However, I have also run small businesses myself and advised many others so I do have a handle on the mechanics. I probably would never go for such a concentrated portfolio as the OP, but I'm happy with 20-50 individual stocks from micro-caps to mid-caps and I enjoy spending the time needed to keep on top of them. If you aren't, then stock-picking isn't for you. And it isn't "retirement" - you have flexibility in when you work, but it is still work to keep on top of things.

JJ-

I can't agree with that first sentence more. It's been said that the pain of loss is three times worse than the pleasure of gain. Therefore people tend to fear and hate losses way more than they should.

Any one investment can only lose 100%. It's possible with long time frames and some luck to find businesses that gain many many more times than that. My best investment is currently 54X the amount I originally invested. Those dot com bombs I lost everything on back in the day are maybe embarrassing, but the few relative dollars don't hurt me at all at this point. I'm willing to hold on to
good companies and even add to the winners over time, while the losers become less and less significant to me.

It's not just stock picking. It's portfolio management too. Deciding to press your advantage when you find a winner and forgetting about losers as they fade into the distance.

Panly

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Re: Am I wrong to be invested in individual stocks?
« Reply #83 on: May 15, 2017, 09:46:43 AM »

If you're not sure you're right to invest in individual stocks, you're probably wrong to invest in them.


I invest in individual stocks, in a very concentrated way, but I am pretty sure it makes more sense to invest in a carefully selected portfolio of lowly valuated, unleveraged, wonderful businesses than in a market cap weighted selection of leveraged, higly valuated businesses.


And to be honest, I don't care what anybody thinks about it. It's my money.


I do wonder why none of the (in total $55B) investors in vanguards (!) VWO come to boast on these forums that they beat the shit out of individual stock pickers.

Because they haven't?  they must be really stupid to have invested in that index, right?


BreakTheChains

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Re: Am I wrong to be invested in individual stocks?
« Reply #84 on: May 15, 2017, 09:53:24 AM »

If you're not sure you're right to invest in individual stocks, you're probably wrong to invest in them.


I invest in individual stocks, in a very concentrated way, but I am pretty sure it makes more sense to invest in a carefully selected portfolio of lowly valuated, unleveraged, wonderful businesses than in a market cap weighted selection of leveraged, higly valuated businesses.


And to be honest, I don't care what anybody thinks about it. It's my money.


I do wonder why none of the (in total $55B) investors in vanguards (!) VWO come to boast on these forums that they beat the shit out of individual stock pickers.

Because they haven't?  they must be really stupid to have invested in that index, right?

The main concern I have with picking stock is that historically the majority of gains have come from very few stock. Below is the first article I found about this phenomenon, but I know its recently been covered in a number of scholarly studies.

http://247wallst.com/investing/2017/02/06/just-14-stocks-have-created-20-of-all-stock-market-gains-since-1924/
« Last Edit: May 15, 2017, 10:02:22 AM by BreakTheChains »

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #85 on: May 15, 2017, 10:45:21 AM »

If you're not sure you're right to invest in individual stocks, you're probably wrong to invest in them.


I invest in individual stocks, in a very concentrated way, but I am pretty sure it makes more sense to invest in a carefully selected portfolio of lowly valuated, unleveraged, wonderful businesses than in a market cap weighted selection of leveraged, higly valuated businesses.


And to be honest, I don't care what anybody thinks about it. It's my money.


I do wonder why none of the (in total $55B) investors in vanguards (!) VWO come to boast on these forums that they beat the shit out of individual stock pickers.

Because they haven't?  they must be really stupid to have invested in that index, right?

The main concern I have with picking stock is that historically the majority of gains have come from very few stock. Below is the first article I found about this phenomenon, but I know its recently been covered in a number of scholarly studies.

http://247wallst.com/investing/2017/02/06/just-14-stocks-have-created-20-of-all-stock-market-gains-since-1924/

Sure. That's true even if you index. I guess you guarantee that you'll have the winners if you buy all of them. But I fully expect that most of my returns will come from a small number of my positions, and indeed that's been the case. Even if I do a great job picking stocks, I expect that at least half will be disappointing, and only about 20% will do extremely well. It's been enough, though for my overall return to be pretty good.

RangerOne

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Re: Am I wrong to be invested in individual stocks?
« Reply #86 on: May 15, 2017, 12:08:00 PM »
Just to chime in, there is no good argument to select individual stocks for long term investment unless you want to manually do all the leg work of creating a massive diversified portfolio on par with a mutual fund index, but with different company weighting criteria.

If you are investing in only 8 companies you will inevitably be grossly over exposed to market sector bubbles, limiting your growth potential, or placing your fate of a handful of big companies. You are at even greater risk if you are investing in smaller companies in the hopes they become big.

I think in the short term hand picking stocks can appear charming because you can see some tremendous growth by picking one good company. For instance someone who went all in on Tesla as soon as it went public would be rich today... The flip side is often in hindsight picking stocks looks good. I have had at least a few friends talk to me and loath their decision to not invest $50k or $100k in a company like Apple back when the I-Pod first came out. Of course that would have been the best investment of their lives, but there is no way they could have known that.

The conservative advise is boring. Pick a long term investment strategy like index investment or something equally well diversified to build at least 90-95% of your portfolio. Then if you must, play with the last 5-10%. That could be $1k or it could be $100k. Take that extra money and investment in some companies you think may be worth a gamble based on your gut or research.

Other than that do what you wish. But absolutely it is foolish to sacrifice a guarantee of outperforming at least 75% of all professional investors over the long term by creating a simple balanced portfolio holding the total market and a responsible bond allocation on the slim chance that you will beat the odds.

ChpBstrd

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Re: Am I wrong to be invested in individual stocks?
« Reply #87 on: May 16, 2017, 07:53:07 AM »
The mustachian philosophy is a guaranteed path to great wealth. Guaranteed. All you have to do is follow the instructions for several years, and the system will work.

Or, you could add an element of chance to the surefire plan and make it potentially failure-prone. You could attempt to do what virtually no full time mutual fund or hedge fund managers can do and attempt to consistently earn - what? - two percent higher returns than the index funds can earn for a decade.

Is it reasonable to trade surefire prosperity on path A for a roll of the dice on path B? How much shorter would the proposed shortcut to FIRE have to be to make the risk and all the associated time and effort worthwhile? Is a rational decision being made - against all studies and evidence to the contrary - or is hubris driving us?

Would you be OK with working five extra years if you pick the next Enron based on falsified financials or buy BP before their next big oil spill? What if Facebook goes poof one year like MySpace and Yahoo did? What if Tesla hits cash flow troubles or WalMart rolls out same-day delivery before Amazon figures out their little drones? What if a major cyberattack, executive scandal, or lawsuit wipes out 30% of the value of any one company?

Is all this risk worth it when, on the other hand, you have a bulletproof alternative plan that will make you rich within 10 years? What is there to gain? One year? What is there to lose? Five years?

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #88 on: May 16, 2017, 10:29:41 AM »
The mustachian philosophy is a guaranteed path to great wealth. Guaranteed. All you have to do is follow the instructions for several years, and the system will work.

Or, you could add an element of chance to the surefire plan and make it potentially failure-prone. You could attempt to do what virtually no full time mutual fund or hedge fund managers can do and attempt to consistently earn - what? - two percent higher returns than the index funds can earn for a decade.

Is it reasonable to trade surefire prosperity on path A for a roll of the dice on path B? How much shorter would the proposed shortcut to FIRE have to be to make the risk and all the associated time and effort worthwhile? Is a rational decision being made - against all studies and evidence to the contrary - or is hubris driving us?

Would you be OK with working five extra years if you pick the next Enron based on falsified financials or buy BP before their next big oil spill? What if Facebook goes poof one year like MySpace and Yahoo did? What if Tesla hits cash flow troubles or WalMart rolls out same-day delivery before Amazon figures out their little drones? What if a major cyberattack, executive scandal, or lawsuit wipes out 30% of the value of any one company?

Is all this risk worth it when, on the other hand, you have a bulletproof alternative plan that will make you rich within 10 years? What is there to gain? One year? What is there to lose? Five years?

Well, for sure Mustachian philosophy is not really about investing - it's about your whole life and clearly the most important thing is your savings rate. Eventually you'll get there.

Personally, I'm quite diversified even though I don't use index funds very much (my 401K is at Vanguard). Personal examples: my investments in CMG and GILD and UA have TANKED over the past couple years but so what? I still beat the market by nearly 5% per year over the past 10 years. People always focus on the downside. What about the upside of my buying Apple in 1999 and holding it for 18 years? My cost basis is under $3, or FB for $24 or NFLX for $10 or MA for $38? These are certainly outliers but big winners like these can outweigh the inevitable mistakes.

What that means to me personally is that I have over 40% more dollars in my account than I would if I had just invested in an index fund. I track my account value and all cash flows against the same amount invested in the S&P 500 total return index so I'm not guessing. That's the difference between me being basically FI right now vs having to work for quite a few more years. 40%. That includes the 2008-2009 financial crisis.

I'm not saying that everyone should do it. Index funds are great and that's what I generally steer people to when they ask me how to invest. But telling me that it's not worth it when it clearly has been for me isn't going to fly.

It's not THAT much work. I generally buy and hold and don't even check my companies that often. And I find that learning about business is fun and fascinating. It's a very profitable hobby.

Now, the fact that Mutual funds and Hedge funds can't seem to outperform has many causes. They have fickle shareholders that pull their money out every time the market hiccups, the fund consultants that direct the majority of institutional money are very short term focused and ONLY want deviation from the index to the upside (never lose to the market only win) and will pull their money out for very short term deviation from the benchmark, which leads fund managers to closet indexing. It goes on and on.


dreadmoose

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Re: Am I wrong to be invested in individual stocks?
« Reply #89 on: May 16, 2017, 11:28:38 AM »
Is a rational decision being made - against all studies and evidence to the contrary - or is hubris driving us?

+1

I'm surprised at the level of anecdotal evidence used to fight all studies and evidence to the contrary. Add to that our innate ability to lie to ourselves and forget losses in favor of wins (or some combination of confirmation and hindsight bias to "learn" from bad picks).

How do individual stock pickers answer the theorys brought up in this thread?

Also, to closely track 5-7 companies, you would have to also closely track each of their 5-7 competitors. Corporate publications will never inform you that "competitors' new products and processes are about to leave us in the dust."

And:

I'm a Finance professional that has worked at numerous banks / insurance companies as an investments accounting specialist. These companies employ people who do nothing all day but analyze 1 or 2 stocks or a specific industry. ALL DAY, 5-6 days a week, 50-60+ hours a week. They go to special conferences, discuss products / raw material pricing and supply chain issues at a micro level with experts, visit customers of these companies, etc etc etc. They have access to resources an independent stock picker couldn't dream of and all the time in the world as they are actually PAID to do this.

And guess what? Even WITH all those resources, they STILL can't predict accurately consistently over long periods of time and beat indexes. 

You can't beat them. At best you get lucky and a black swan event occurs or something macro slips past the industry (i.e. Great Recession), or market conditions change after you purchase the stock such that it becomes revalued higher than was previously analyzed.

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #90 on: May 16, 2017, 02:47:39 PM »

How do individual stock pickers answer the theories brought up in this thread?


The theories don't always apply. The studies are generally of professional money managers and not small individuals. it's true that most individuals are way worse than professionals, but that doesn't mean that we all are.

Professional money managers have many masters. They are not generally free to just pursue the strategy that they think is best. If they underperform for a quarter, people start pulling out their money. In order to outperform long term you have to be uncorrelated to the rest of the market and they aren't really free to do that.

Most individual investors underperform even the indices by 5-6% per year. Even index fund investors don't generally get the full performance they should out of their investments.

I can only go based on my own experience that I've outperformed on average for 10 years. It doesn't matter that someone says I can't do it because I can and have. And I know plenty of others who have done the same as I.

I don't have the constraint of trying to move large sums into and out of the market.
I'm not judged based on how closely I follow a benchmark
Nobody is going to pull the rug out from under me if I have a bad quarter or year.
I can focus on owning businesses, not "names" or chasing the latest hot thing.
I don't have to window-dress my end of quarter holdings to make sure that my prospectus shows the right names.
I can hold a stock for literally years and years and allow compounding to do its magic and not jump in and out based on the whims of the market.
I don't care about high frequency trading.
I don't pay ANYONE a percentage of my assets, not even Vanguard.

If the average investor underperforms by 5-6% per year, SOMEONE is capturing those dollars. I would like to see if I can do that myself. It's worth the time for me and my own experience tells me it's worth the effort. If I fail it's only on me.

DividendMeter

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Re: Am I wrong to be invested in individual stocks?
« Reply #91 on: May 16, 2017, 03:42:33 PM »

How do individual stock pickers answer the theorys brought up in this thread?

Ignoring differences in returns between index investing and picking individual stocks for the moment, I believe you can actually lower your investing costs substantially with a well-diversified basket of individual stocks vs. even low-cost index funds.  Consider this:  Let's say you have $100k invested in an index mutual fund that charges only .14% - you'll pay about $140 / year in maintenance fees.   Instead, what if you invested in a basket of 40 quality dividend-paying stocks ($2,500 each), and set 'em up for auto-reinvest? (many brokers offer this for free).  With individual stock commissions down to about $5 now, you'll initially pay $200 to set up the portfolio, but after that your ongoing costs are theoretically zero if you just held the shares and didn't do any more trading.   Even if you pool the dividends in cash (and didn't auto-reinvest, as I prefer to do) and made one purchase per quarter, your costs would only be about $20 / year.

I have no idea what the "magic number" of stocks to own is, but if you own enough, you're essentially creating your own "index" - the key is active vs. passive management.  In my experience, the more active I am, the more bone-headed decisions I make...

dreadmoose

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Re: Am I wrong to be invested in individual stocks?
« Reply #92 on: May 16, 2017, 07:32:09 PM »

How do individual stock pickers answer the theorys brought up in this thread?

Ignoring differences in returns between index investing and picking individual stocks for the moment, I believe you can actually lower your investing costs substantially with a well-diversified basket of individual stocks vs. even low-cost index funds.  Consider this:  Let's say you have $100k invested in an index mutual fund that charges only .14% - you'll pay about $140 / year in maintenance fees.   Instead, what if you invested in a basket of 40 quality dividend-paying stocks ($2,500 each), and set 'em up for auto-reinvest? (many brokers offer this for free).  With individual stock commissions down to about $5 now, you'll initially pay $200 to set up the portfolio, but after that your ongoing costs are theoretically zero if you just held the shares and didn't do any more trading.   Even if you pool the dividends in cash (and didn't auto-reinvest, as I prefer to do) and made one purchase per quarter, your costs would only be about $20 / year.

I have no idea what the "magic number" of stocks to own is, but if you own enough, you're essentially creating your own "index" - the key is active vs. passive management.  In my experience, the more active I am, the more bone-headed decisions I make...
How does this work with continuous money being input, or is that where it breaks. I invest money 26 times a year at a minimum.

Is that where this breaks from transaction fees? I get free index fund purchases through Questrade right now. So even if I was to buy only one per transaction (and have to research which one each time so I don't invest in the 'wrong' one) that equates to $260 per year with no selling and discounting setup, or a .2 indexed fund around 118K (with my available rates lower than that).

PaulMaxime

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Re: Am I wrong to be invested in individual stocks?
« Reply #93 on: May 16, 2017, 08:19:03 PM »

How do individual stock pickers answer the theorys brought up in this thread?

Ignoring differences in returns between index investing and picking individual stocks for the moment, I believe you can actually lower your investing costs substantially with a well-diversified basket of individual stocks vs. even low-cost index funds.  Consider this:  Let's say you have $100k invested in an index mutual fund that charges only .14% - you'll pay about $140 / year in maintenance fees.   Instead, what if you invested in a basket of 40 quality dividend-paying stocks ($2,500 each), and set 'em up for auto-reinvest? (many brokers offer this for free).  With individual stock commissions down to about $5 now, you'll initially pay $200 to set up the portfolio, but after that your ongoing costs are theoretically zero if you just held the shares and didn't do any more trading.   Even if you pool the dividends in cash (and didn't auto-reinvest, as I prefer to do) and made one purchase per quarter, your costs would only be about $20 / year.

I have no idea what the "magic number" of stocks to own is, but if you own enough, you're essentially creating your own "index" - the key is active vs. passive management.  In my experience, the more active I am, the more bone-headed decisions I make...
How does this work with continuous money being input, or is that where it breaks. I invest money 26 times a year at a minimum.

Is that where this breaks from transaction fees? I get free index fund purchases through Questrade right now. So even if I was to buy only one per transaction (and have to research which one each time so I don't invest in the 'wrong' one) that equates to $260 per year with no selling and discounting setup, or a .2 indexed fund around 118K (with my available rates lower than that).

Interactive brokers charges $1 commissions. If you add to one position every time, that's $26 a year. I use TD Ameritrade which charges $6 (I've been there for a long time and I like their platform and customer service) so that's $156 per year. There's also the bid/ask spread but if you don't transact a lot this only amounts to a few pennies per share, perhaps.

So it might be marginally more expensive depending on the size of your assets and how often you trade. But it's not going to go up as your portfolio grows. If you had $1MM or $10MM you'd be paying $1400 or $14000 per year, but I'd still be at $156.00 + bid/ask

They also offer Vanguard ETFs and some others with no transaction fees, so any index investing I want to do would only have the ongoing %0.0x same as you.
« Last Edit: May 16, 2017, 08:23:37 PM by PaulMaxime »

Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #94 on: September 06, 2018, 07:47:15 AM »
Figured I'd give an update.  It's been over a year.  My current investments are about 96% individual stocks.  Here's a snapshot as of 8/31/2018.



10yr CAGR is 23.5% (up from 21.5%). 

I still believe indexing is best for the vast majority of people.  Most people don't have the time to follow their investments closely, aren't willing to put in the time becoming a student of the market and don't have the discipline.  I still have discipline problems but I've learned to limit their effect.

I retired last August and I now have even more time to spend studying/following the market and a handful of stocks.

The first account above has 2 stocks.  The second has 8 (of which two are the same as the first account).  The third account has 3 stocks (of which 1 is the same as the two accounts).  This is a total of 10 stocks.  That's about the most that I feel comfortable with.  But, with the extra time, it hasn't been a problem yet.
« Last Edit: September 06, 2018, 07:50:58 AM by Cache_Stash »

Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #95 on: September 06, 2018, 08:17:55 AM »
One thing pointed out by @PaulMaxime and @JJ is congruent with my investment experience.  If you take all of the stocks I've purchased over the years (which is significantly north of 500), I would say 10 of those stocks are 80-90% of my portfolio performance.  Some of them were huge winners.  I still own APPL and my first purchase was in 2008 at about $12 split adjusted (now at $225).  Green mountain/Keurig gave me about a 20X return in 5 years.  FB was 4X in <5 years. 

Is this luck?  Who's to say.  I had/have a lot of conviction on most of those 10 stocks and they took up a large percentage of my portfolio over time.  At one point I owned 60% Apple and 35% GMCR (only two stocks for about a 4 year period).  I did have about 2-5% in other stocks.

MustacheAndaHalf

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Re: Am I wrong to be invested in individual stocks?
« Reply #96 on: September 06, 2018, 09:03:47 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.

Retire-Canada

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Re: Am I wrong to be invested in individual stocks?
« Reply #97 on: September 06, 2018, 09:06:35 AM »
Is this luck?  Who's to say.

I wouldn't bet my retirement on the answer to that question.

Cache_Stash

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Re: Am I wrong to be invested in individual stocks?
« Reply #98 on: September 06, 2018, 09:51:20 AM »
Is this luck?  Who's to say.

I wouldn't bet my retirement on the answer to that question.

To each his own.  I've outperformed the market by 100% over ten years.  It's going to be pretty difficult to revert to the mean when I own mostly blue chip stocks.

One

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Re: Am I wrong to be invested in individual stocks?
« Reply #99 on: September 06, 2018, 12:11:56 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