The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Cache_Stash on May 01, 2017, 12:52:05 PM
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I've been reading up on investing for the last 25 years. I never had money in my 20's to invest. I dabbled in the stock market in individual stocks back in early oughts and didn't fair too well but I learned a lot about stock selection. I went into index funds from 2003 through 2006. I then started picking stocks again in 2007. I bought AAPl and GMCR as my main investments. I abide by the thesis that it is impossible to follow more than 5-7 companies and therefore I don't normally hold over 7 or eight stocks. (As Buffet says - "diversity is for protection against ignorant".) I truly follow the companies and have valid reasons for owning them. When those reasons evaporate - I sell. I am normally vested about 70-95% in equities dependent upon market conditions. No index funds, ETFs bond funds or other investment vehicles. Individual stocks only. My CAGR from 2007 until end of last year is 21.5%. I'm currently at 18.5% YTD.
Very little trading. Investments comprise about 80% of my portfolio.
Am I wrong for doing this?
Do you think I will revert to the mean?
Is anyone else doing this?
I feel like I'm on an island sometimes.
BTW, Index ETFs are a great vehicle! It is the best investment if you don't want to take the time to devote to DIY stock investments. I would say 90% of the populace belongs in ETFs.
Updated to fix Warren's Quote (I knew I had it wrong and it read as such)
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I abide by the thesis that it is impossible to follow more than 5-7 companies and therefore I don't normally hold over 7 or eight stocks. (As Buffet says - "diversity is for the ignorant".)
I think having 80% of your invested $$ in 7-8 stocks is crazy and reckless. I'd also suggest that Buffet has a whole lot more than 7-8 different investments in his portfolio. If you think you are special a special snowflake go nuts. Just be aware of the downside to your approach.
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Is anyone else doing this?
If this means "is anyone else invested in individual stocks" ... Yes, I've got some
If this means "is anyone else invested the way I am" ... no... I'm not.
We've probably got about 7% of our net worth in individual stocks.... across about 20 companies. (It started out with fewer, but spin offs have increased that number.) The majority of our holdings are index funds like pretty much everyone else here.
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I abide by the thesis that it is impossible to follow more than 5-7 companies and therefore I don't normally hold over 7 or eight stocks. (As Buffet says - "diversity is for the ignorant".)
I think having 80% of your invested $$ in 7-8 stocks is crazy and reckless. I'd also suggest that Buffet has a whole lot more than 7-8 different investments in his portfolio. If you think you are a special snowflake go nuts. Just be aware of the downside to your approach.
I don't think I'm a special "snowflake". Although, thank you for your kind support. You're a truly nice person.
I follow my stocks. As an example. When I owned GMCR, I would take pictures of Walmart shelving to check on conditions for five straight days and compare restock along with expiration dates of product to ensure GMCR wasn't channel stuffing. I would also check on growth through how the product penetrated market by high end grocers first to low end - not so great a location grocers. I would do inventory counts at Kohls. I spent a lot of time to ensure that product was moving. I subsequently netted a 12X investment over a period of < 7 years.
Knowledge and work is what gets exceptional returns on anything you do in life.
Good luck to you and your "special snowflake" type comments. I'll bet that attitude doesn't pay off for you.
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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.
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I abide by the thesis that it is impossible to follow more than 5-7 companies and therefore I don't normally hold over 7 or eight stocks. (As Buffet says - "diversity is for the ignorant".)
I think having 80% of your invested $$ in 7-8 stocks is crazy and reckless. I'd also suggest that Buffet has a whole lot more than 7-8 different investments in his portfolio. If you think you are a special snowflake go nuts. Just be aware of the downside to your approach.
I don't think I'm a special "snowflake". Although, thank you for your kind support. You're a truly nice person.
I follow my stocks. As an example. When I owned GMCR, I would take pictures of Walmart shelving to check on conditions for five straight days and compare restock along with expiration dates of product to ensure GMCR wasn't channel stuffing. I would also check on growth through how the product penetrated market by high end grocers first to low end - not so great a location grocers. I would do inventory counts at Kohls. I spent a lot of time to ensure that product was moving. I subsequently netted a 12X investment over a period of < 7 years.
Knowledge and work is what gets exceptional returns on anything you do in life.
Good luck to you and your "special snowflake" type comments. I'll bet that attitude doesn't pay off for you.
To answer your question, yes I have about 12% of my portfolio invested in individual stocks (6 companies), which have out performed my index funds over the last 5 years. However, in the long run virtually everyone will be better of investing in index funds or even managed funds than trying to do it themselves.
From what you wrote, it certainly seems like you put in the leg work to justify stock picking (doesn't mean you'll win in the end but you're trading your time for the potential of a higher return) but most people read an article and buy stock then panic and sell when it drops or as it's on the way up. From my experience, panic selling or locking in gains results in most people, even when picking long term winners, to ultimately do worse than the indexes (I bought NFLX when it dropped in 2011, panicked when it dropped more and sold. I would be worth $100k more if I had stayed the course). Now, I buy stocks that I intend to keep for 30+ years whether they're up or down and treat the money like I would gambling or fun money...
Sent from my iPhone using Tapatalk
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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 the being a special snowflake. 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.
I guess I have some data that says otherwise.
As a side note. There are always outliers in every group. I think everyone on this forum is a Special Snowflake. This is because they look at things without bias and go above and beyond in securing their future.
It still doesn't mean that name calling at the 12 year old level is required.
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I guess I have some data that says otherwise.
Since the term special snowflake is throwing you for a loop I have edited my posts to remove that distraction. I apologize if that term offended you deeply. That wasn't my intent.
Please post your data so we can understand the basis for your conclusion.
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I abide by the thesis that it is impossible to follow more than 5-7 companies and therefore I don't normally hold over 7 or eight stocks. (As Buffet says - "diversity is for the ignorant".)
I think having 80% of your invested $$ in 7-8 stocks is crazy and reckless. I'd also suggest that Buffet has a whole lot more than 7-8 different investments in his portfolio. If you think you are a special snowflake go nuts. Just be aware of the downside to your approach.
I don't think I'm a special "snowflake". Although, thank you for your kind support. You're a truly nice person.
I follow my stocks. As an example. When I owned GMCR, I would take pictures of Walmart shelving to check on conditions for five straight days and compare restock along with expiration dates of product to ensure GMCR wasn't channel stuffing. I would also check on growth through how the product penetrated market by high end grocers first to low end - not so great a location grocers. I would do inventory counts at Kohls. I spent a lot of time to ensure that product was moving. I subsequently netted a 12X investment over a period of < 7 years.
Knowledge and work is what gets exceptional returns on anything you do in life.
Good luck to you and your "special snowflake" type comments. I'll bet that attitude doesn't pay off for you.
To answer your question, yes I have about 12% of my portfolio invested in individual stocks (6 companies), which have out performed my index funds over the last 5 years. However, in the long run virtually everyone will be better of investing in index funds or even managed funds than trying to do it themselves.
From what you wrote, it certainly seems like you put in the leg work to justify stock picking (doesn't mean you'll win in the end but you're trading your time for the potential of a higher return) but most people read an article and buy stock then panic and sell when it drops or as it's on the way up. From my experience, panic selling or locking in gains results in most people, even when picking long term winners, to ultimately do worse than the indexes (I bought NFLX when it dropped in 2011, panicked when it dropped more and sold. I would be worth $100k more if I had stayed the course). Now, I buy stocks that I intend to keep for 30+ years whether they're up or down and treat the money like I would gambling or fun money...
Sent from my iPhone using Tapatalk
My experience in my first foray into the stock picking world yielded the same results as far as being disciplined. It isn't for everyone. That is certain. I have learned some discipline over the years, but I always wish I would be more so.
Agree with the 30 year time frame. If you were to invest in IBM, Coke, GE, Walgreens, and other highly valued equities in the 70s you would have done very well up until about 15 years ago. To me the new "Blue chips" are comprised of AAPL, AMZN, FB, and a handful of others. It has been that way for the last ten years and I expect it will be for the next twenty years. This is what Warren Buffet speaks of all the time. I have yet to hear him write or say anything that I would challenge. I'm a mere mortal.
What are some of the stocks do you own and why?
I'll start:
AMZN - Yes I know it is overvalued in respect to its earnings. Jeff Bezos has no inclination to start making money. He takes it and pours it into capital to fund the growth. I was a skeptic until he started Amazon Web Services (AWS). He started it up less than five years ago and now owns the majority of the market. It is putting margin and cash flow into the bank for AMZN and it is growing at 40%. AWS is now 1/3rd of AMZN's revenue stream. I didn't buy it for their retail presence. I bought it because of Jeff Bezos and the win at all costs culture. No other cloud service provider is coming even close. Jeff Bezos wants to own the world. I think he may do it. I'm on board until things change otherwise.
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I guess I have some data that says otherwise.
Since the term special snowflake is throwing you for a loop I have edited my posts to remove that distraction. I apologize if that term offended you deeply. That wasn't my intent.
Please post your data so we can understand the basis for your conclusion.
Thanks! Quite civil of you.
I am starting the journey on how and why I buy the stocks that I buy.
I'm seeing if others see the same thing (risking confirmation bias along the way).
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I'm almost entirely investing in individual picks. So, yeah. I'm a pariah here sometimes. Skeptics are welcome to review the Transparency tab at my blog to determine if my results are worth the trouble.
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I'm almost entirely investing in individual picks. So, yeah. I'm a pariah here sometimes. Skeptics are welcome to review the Transparency tab at my blog to determine if my results are worth the trouble.
Brother in Arms. Glad to see.
I'll check it out.
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I'm almost entirely invested in individual stocks. I've beaten the market handily over the past 10 years. I don't think it's terribly dangerous if you pay attention to what you are doing and treat your stocks as businesses that you own and not "names" to be traded. 7-8 stocks seems like a very small amount to me, though.
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Since the question was asked, i generally pick stocks to buy only if i feel i have an insider level of insight, assuming what i do is not illegal.
One example is a local tech company, leader in their field. My friend, a senior engineering executive complains to me how their wall street analyst hates them and their write up is never favorable, despite huge cash reserves on their balance sheet and new products filling their pipeline that are ahead of competitors. The stock is trading at a low earnings multiple for their industry (close to book value of their cash). It is yielding 2%, so not bad. I buy the company stock.
4 years later the stock had doubled and my friend decides to buy a $100k Tessla. He never spends money on himself and is among the most frugal guys i know (he paid his own tuition by working nearly full time at college to avoid debt). I bought some more.
By end of that year stock is at 10X what i paid for it 4 years ago.
That is the anatomy of a winning stock pick.
Never had that option. All of my picks come from conviction on a company moat, dominance, margin dominance, growth, etc...
Maybe someday....
Thanks for sharing. I'll put those thoughts in the bag of "signs of opportunity".
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I'm almost entirely invested in individual stocks. I've beaten the market handily over the past 10 years. I don't think it's terribly dangerous if you pay attention to what you are doing and treat your stocks as businesses that you own and not "names" to be traded. 7-8 stocks seems like a very small amount to me, though.
I looked back at my past history in investing in equities. My data was very conclusive. My big gains only came from a handful of stocks. Those stocks are the ones that I had the most conviction on and subsequently held the largest positions in my portfolio. I ditched the picking of "unknown" companies" unless it pops up in my day to day living. I'll post more on what and how I "trade" stocks that aren't on my "conviction" list.
Do you have stocks that you hold with "conviction"?
Have you made any decent returns on stocks in which you have no idea in what they do or how they are run?
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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 (https://www.umass.edu/preferen/You%20Must%20Read%20This/Barber-Odean%202011.pdf), mostly because of excessive trading and trading costs. In fact, there is a strong inverse relationship between trading frequency of total returns (https://www.researchgate.net/publication/253934800_Trading_Frequency_Investor_Returns_Behavioral_Biases).
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
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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 (https://www.umass.edu/preferen/You%20Must%20Read%20This/Barber-Odean%202011.pdf), mostly because of excessive trading and trading costs. In fact, there is a strong inverse relationship between trading frequency of total returns (https://www.researchgate.net/publication/253934800_Trading_Frequency_Investor_Returns_Behavioral_Biases).
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).
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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 (https://www.umass.edu/preferen/You%20Must%20Read%20This/Barber-Odean%202011.pdf), mostly because of excessive trading and trading costs. In fact, there is a strong inverse relationship between trading frequency of total returns (https://www.researchgate.net/publication/253934800_Trading_Frequency_Investor_Returns_Behavioral_Biases).
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:
This negative relationship was seen to cause a 0.29% per year reduction in gross
returns for each trade executed per year.
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For myself, I would consider 25-50 as a high number for trading. There are years with our individual stocks that we do 0 trades. I bet our average is 2.
I will also say our individual stocks have outperformed our index funds.
Individual stocks: 16.6% IRR over the past 19.6 years
Mix of index funds: 9.2% IRR over the past 18.8 years
I'll also throw out a caveat. Personally, I think we're mostly just lucky. We did research our buys (or most of them). But a huge amount of our returns were from a few good picks... some of them immaculate and accidental market timing picks. For the most part the individual stocks were to keep things fun and interesting.
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Am I wrong for doing this?
Do you think I will revert to the mean?
I don't think that's the right question to ask. So far you haven't been "wrong." I would ask instead, "what's your return on risk?" and then, "are you comfortable with that risk?" I would do some portfolio analysis to figure out what your beta is (how much do you correlate with the market and how much volatility do you have). Once you know that, run some quick approximate calculations of how you would perform in certain market crashes (stress testing). How much would you lose? Are you comfortable with that?
I held GMCR for periods of time and know it was a very volatile stock. How did you feel when it went from $90 to $20, or $150 to $50?
What % of capital are you using? It's estimated that Buffett has $86 BILLION of cash right now, so he is going to be just fine in a market downturn.
You have to admit that you could have picked almost any big stock around 2007 and held it and you'd be ahead. We've had a huge bull market and of course just recently an even huger upside move.
Is anyone else doing this?
I feel like I'm on an island sometimes.
I dabbled in value investing a few years ago, but it isn't for me. I almost exclusively trade options now, so I'm on my own island ;) But even though I'm in options, that doesn't mean I'm making directional bets on individual companies: I still maintain a diversified portfolio and am sensitive about risk.
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Am I wrong for doing this?
Do you think I will revert to the mean?
I don't think that's the right question to ask. So far you haven't been "wrong." I would ask instead, "what's your return on risk?" and then, "are you comfortable with that risk?" I would do some portfolio analysis to figure out what your beta is (how much do you correlate with the market and how much volatility do you have). Once you know that, run some quick approximate calculations of how you would perform in certain market crashes (stress testing). How much would you lose? Are you comfortable with that?
I held GMCR for periods of time and know it was a very volatile stock. How did you feel when it went from $90 to $20, or $150 to $50?
What % of capital are you using? It's estimated that Buffett has $86 BILLION of cash right now, so he is going to be just fine in a market downturn.
You have to admit that you could have picked almost any big stock around 2007 and held it and you'd be ahead. We've had a huge bull market and of course just recently an even huger upside move.
Is anyone else doing this?
I feel like I'm on an island sometimes.
I dabbled in value investing a few years ago, but it isn't for me. I almost exclusively trade options now, so I'm on my own island ;) But even though I'm in options, that doesn't mean I'm making directional bets on individual companies: I still maintain a diversified portfolio and am sensitive about risk.
GMCR went to 116 before hitting < 20. I got out at 106 because I felt it was ahead of itself. I tried to establish a position a few times and lost 10% each time. Got back in at 29 because it turned (hit a capitulation point) and got back out at 135. It ran to 150 and then down to 70 before being purchase by another company at 90.
Buffet's point was if he had only a million to invest he would do 50% easy every year. His huge holdings puts him at a disadvantage as it does to active money managers.
I am agnostic to risk. At some point I will become more risk adverse, but the moment hasn't come to this point.
The bottom of the market was in 2009. I got in at the top in 2007. Take a look at that. I was making a point that my returns included the top to bottom back to the top.
I only engage in value investing when a company has a black swan event that I feel is recoverable. If it takes a beating, I'll engage in a short term trade as long as I feel it is undervalued. The market can be very volatile at times and that is where money is to be made. Without volatility, none of us would be making much money. Ignorance and emotion drive the market.
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For myself, I would consider 25-50 as a high number for trading. There are years with our individual stocks that we do 0 trades. I bet our average is 2.
I will also say our individual stocks have outperformed our index funds.
Individual stocks: 16.6% IRR over the past 19.6 years
Mix of index funds: 9.2% IRR over the past 18.8 years
I'll also throw out a caveat. Personally, I think we're mostly just lucky. We did research our buys (or most of them). But a huge amount of our returns were from a few good picks... some of them immaculate and accidental market timing picks. For the most part the individual stocks were to keep things fun and interesting.
I agree the 25 to 50 is too much. That is my lack of discipline. I want to get down to about 10-20.
Did you analyze why you picked those stocks? What were the qualitative reasons for buying them? I bet if you look at that, you may come up with why they did well and that you may well be right not lucky.
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I do hold individual stocks in my portfolio as well. Currently holding 23 which make up around 30% of my overall portfolio. In the nearly 2 years I have held them my IRR is 20.5% with an individual high and low of 45% and -3%. My only position I have ended was DVN which I made with a short term hold goal and doubled my money. For each one I did an evaluation of the company before opening my position, I just wish I had written down and kept my analysis of how I reached my conclusions.
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I've gone from about 80% individual/actively managed stocks by myself in 2012, to about 60% or so today(was down to around 40%, but something caught my full stock picking attention and I think the risk/reward is appropriate), and I plan on lowering that to about 30% hopefully within the next 2-3 years, primarily moving towards around 100k of "fun" money for the stock market, although mostly I just want to buy and hold ~5k positions in many good companies. Finally got around to getting some shares of Berkshire Hathaway in my Roth account!
IMO, as long as you know almost all of the research goes against your actions, and you minimize the damage you can do(by prioritizing passive investing, or long term buy and hold/dividend stocks), it's a poor decision, but not the worst thing you could do, especially as long as you're very careful about playing with falling knives. Knowing that I specifically have significant, measurable exposure to 'x' company, as opposed to "The market" makes me feel much better about what I own, and in my 401k and Roth, I let passive strategies run their course, and forget about them day to day. As a side note, most of my current individual stocks are underpriced compared to the broader stock market, or their specific industry.
I'm not sure what my exact return has been from individual holdings, but I'd venture that during this entire bull market run, on balance I think I'm just a little behind "The market" returns. I remember my mistakes and missteps far better than I do my wins too, almost all of which were me leaving the party too early. And making relatively small ventures into playing with fire(short, options) has scared me off ever doing that again just as surely as taking a $100 to a blackjack table did to Casinos, like a stupidity innoculation, or a moderate "sports car" to understand how expensive that shit can be compared to a later in life "SPORTS CAR!!!!". Losing money sucks, and I know exactly where I stand on paper losses, vs. betting on specific time and share price directions.
I do think that though almost all retail investors fail, and most active management funds fail to beat the market average, a retail investor who doesn't have industry rules on them regarding diversification or have to answer to fund investors can have, not exactly an edge, but has different forces at play. Being able to take a contrarian position on something, and being able to sit on it for 2+ years, can be a different dynamic than a typical actively managed fund can do.
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I've been reading up on investing for the last 25 years. I never had money in my 20's to invest. I dabbled in the stock market in individual stocks back in early oughts and didn't fair too well but I learned a lot about stock selection. I went into index funds from 2003 through 2006. I then started picking stocks again in 2007. I bought AAPl and GMCR as my main investments. I abide by the thesis that it is impossible to follow more than 5-7 companies and therefore I don't normally hold over 7 or eight stocks. (As Buffet says - "diversity is for protection against ignorant".) I truly follow the companies and have valid reasons for owning them. When those reasons evaporate - I sell. I am normally vested about 70-95% in equities dependent upon market conditions. No index funds, ETFs bond funds or other investment vehicles. Individual stocks only. My CAGR from 2007 until end of last year is 21.5%. I'm currently at 18.5% YTD.
Very little trading. Investments comprise about 80% of my portfolio.
Am I wrong for doing this?
Do you think I will revert to the mean?
Is anyone else doing this?
I feel like I'm on an island sometimes.
BTW, Index ETFs are a great vehicle! It is the best investment if you don't want to take the time to devote to DIY stock investments. I would say 90% of the populace belongs in ETFs.
Updated to fix Warren's Quote (I knew I had it wrong and it read as such)
No you're not wrong, you are clearly a stock picking genius so stick with it. Remember though, there is a high chance you have just been lucky (do you really think you have more skill than highly trained professionals who you have outperformed? )
I have to say your method of "researching" GMCR is laughable and shows and incredibly worrying level of hubris.
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I've been reading up on investing for the last 25 years. I never had money in my 20's to invest. I dabbled in the stock market in individual stocks back in early oughts and didn't fair too well but I learned a lot about stock selection. I went into index funds from 2003 through 2006. I then started picking stocks again in 2007. I bought AAPl and GMCR as my main investments. I abide by the thesis that it is impossible to follow more than 5-7 companies and therefore I don't normally hold over 7 or eight stocks. (As Buffet says - "diversity is for protection against ignorant".) I truly follow the companies and have valid reasons for owning them. When those reasons evaporate - I sell. I am normally vested about 70-95% in equities dependent upon market conditions. No index funds, ETFs bond funds or other investment vehicles. Individual stocks only. My CAGR from 2007 until end of last year is 21.5%. I'm currently at 18.5% YTD.
Very little trading. Investments comprise about 80% of my portfolio.
Am I wrong for doing this?
Do you think I will revert to the mean?
Is anyone else doing this?
I feel like I'm on an island sometimes.
BTW, Index ETFs are a great vehicle! It is the best investment if you don't want to take the time to devote to DIY stock investments. I would say 90% of the populace belongs in ETFs.
Updated to fix Warren's Quote (I knew I had it wrong and it read as such)
No you're not wrong, you are clearly a stock picking genius so stick with it. Remember though, there is a high chance you have just been lucky (do you really think you have more skill than highly trained professionals who you have outperformed? )
I have to say your method of "researching" GMCR is laughable and shows and incredibly worrying level of hubris.
If you think that is the only thing I researched on GMCR, I guess I understand your point (laughable). Either that or you missed the point.
About two dozen very savvy investors had a message board devoted to just GMCR. There was an incredible level research available and we discussed ad nauseam. We had a fair share of Bearish people as well. It was a public open board so it wasn't an echo chamber (that is certain).
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Eventually, you'll revert to the mean. What's that mean? That means that if you've been winning, you're going to start losing. I once did like you with trading individual stocks. I stuck with what I knew, saw cycles and rode them up and down taking very small gains and chipping away, making money. I came to the point where I had 2 positions and initially set a limit sell on both, but thought that instead, I'd cancel the sells and "what could possibly go wrong". After my week business trip, I saw that had I kept the limit sell in place, both stocks would have sold and I'd have made a small profit on each. What actually happened is one went into bankruptcy and the other, which was a penny stock had a big investor cut his losses and pull out. Big face punch for me and took 3 years of gains and turned them into a total loss. The good news is that this cured me from thinking that I knew what the hell I was doing.
Remember that guys who pick stocks for a living don't make money by picking winners. They make money by taking a commission from investing other suckers' money and make that money when buying and make money when selling. Whether their customer makes money or not, they make money.
I'm all index funds and savings bonds these days. AAPL......Tim Cook is no Steve Jobs. Sorry, but I wouldn't touch AAPL as an individual stock with a 10 foot pole unless I was shorting it.....and I don't gamble so wouldn't be doing that either.
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I hold the belief that the world is going to change in many ways very rapidly over the next 20 years, as it always has, and the future lies in not only technology currently being worked on (AI, VR, and autonomous driving) but even things that haven't been dreamt up. I also believe the this next batch of blue chip stocks that will be running the world, so to speak, will become mega-corporations sized at numbers we currently believe are unattainable. These few select companies have the current environment and funding to basically destroy their competition. I think the globalization of the world's economy along with the advent of the internet has woven a fabric that independent governments have lost regulatory control. Even if the US government tried to break up some of these companies into smaller pieces, I think they may lose in court based on jurisdiction of where their product is sold (virtually everywhere). Either way, breaking them up may yield an OT bonus a la AT&T into baby bells.
With that said, I also own FB.
I didn't start purchasing FB stock until they figured out how to monetize mobile. It had dropped from the IPO price of low 40s to around 17 and it finally had a quarterly report that showed a real successful monetization of mobile at around 29. That's when I started buying. I have never sold a share and accumulated at times along the way.
This list is qualitative not a quantitative. Although I use numbers in decision making and the list below isn't a complete list as I have many other reasons for holding this stock.
My major reasons for owning (which will cause me to sell if they change):
1. Their "moat" is the incredibly large pool of users. Their Monthly Active User (MAU) numbers are now up to about 1.5 Billion people. If there are around 7-8 Billion people in the world and only half of them have internet access, then that equates to about 33% of the world user pool uses FB on a monthly basis. That is an absolutely incredible number. I think it would be very difficult for any "startup" to overtake their user moat. Any "startup" they view as a threat, they copy their ideas into the FB platform. There is no protection against poaching ideas. They recently have done this with Instagram changes that were made to ensure it remained on the same playing field as SNAP.
2. They have made appropriate purchases of other companies when needed. Instagram and Whatsapp were purchased at a great time and were great defensive plays against threats. For that and other reasons I think the management is solid.
3. They are one of many working on Artificial Intelligence (AI), Virtual Reality (VR), and autonomous driving. APPL, AMZN, GOOG are also working on most of these items. If they all believe this is the future, then I'll follow along. I own 3 of 4 companies listed. I'll cover APPL later and why I don't own GOOG.
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Eventually, you'll revert to the mean. What's that mean? That means that if you've been winning, you're going to start losing. I once did like you with trading individual stocks. I stuck with what I knew, saw cycles and rode them up and down taking very small gains and chipping away, making money. I came to the point where I had 2 positions and initially set a limit sell on both, but thought that instead, I'd cancel the sells and "what could possibly go wrong". After my week business trip, I saw that had I kept the limit sell in place, both stocks would have sold and I'd have made a small profit on each. What actually happened is one went into bankruptcy and the other, which was a penny stock had a big investor cut his losses and pull out. Big face punch for me and took 3 years of gains and turned them into a total loss. The good news is that this cured me from thinking that I knew what the hell I was doing.
Remember that guys who pick stocks for a living don't make money by picking winners. They make money by taking a commission from investing other suckers' money and make that money when buying and make money when selling. Whether their customer makes money or not, they make money.
I'm all index funds and savings bonds these days. AAPL......Tim Cook is no Steve Jobs. Sorry, but I wouldn't touch AAPL as an individual stock with a 10 foot pole unless I was shorting it.....and I don't gamble so wouldn't be doing that either.
You owned penny stocks?
AAPL revenue, operating earnings and earnings margin for 7 years of Tim Cook and Steve Jobs reign:
Tim Cook:
$1,072,000,000,000 - $381,000,000,000 - 35.5%
Steve Jobs:
$211,000,000,000 - $52,000,000,000 - 24.6%
You're right, Tim Cook is no Steve Jobs.
Steve Job's was brilliant and capitalized on simple elegance through his fastidious nature. He took ideas already in the market and improved them to the point where everyone wanted one. He was demanding and ran the ship as though he owned it. He was a good Level 4 Manager. He was smart enough to realize what type of AAPL leader was needed when he would no longer be there.
Tim Cook is an operational genius. He controls his costs and his supply chain costs. He leverages the size of Apple and manages an unbelievable large quantity of complex assembled technology with inventory management beyond compare. He understands his weaknesses which include creativity, design, and hires great management to support him and the staff of AAPL. He surrounds himself with talent and has no fear or weakness of being ousted. These are signs of a great level 5 leader. The company will survive if he were to leave.
They are completely different people. Both of whom held/hold the reins of Apple when they were the proper leader for the company.
Apple's core competency lies in simple elegance. As long as that is the focus, which I believe it still is, then Apple will continue to put out product that is coveted by the materialistic world in which we live.
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.... the other, which was a penny stock
....unless I was shorting it.....and I don't gamble so wouldn't be doing that either.
This does not compute to me. How is shorting a stock a gamble but penny stocks are not?
AAPL revenue, operating earnings and earnings margin for 7 years of Tim Cook and Steve Jobs reign:
Tim Cook:
$1,072,000,000,000 - $381,000,000,000 - 35.5%
Steve Jobs:
$211,000,000,000 - $52,000,000,000 - 24.6%
You're right, Tim Cook is no Steve Jobs.
A different viewpoint - Jobs - ~35% CAGR, $21.94/share to $376.18/share ($1,504.72 split adjusted)
- Cook - ~18% CAGR, $376.18/share to $146.46/share ($1,025.22 split adjusted)
- (Numbers do not account for dividends. Even including them Jobs would win in this metric)
While I am not planning on selling any of my AAPL stock I don't know they will have the same growth under Cook as Jobs. Jobs introduced massive technological advances with the iPad, iPod, and iPhone. It will be interesting to see if Apple can have similar advances with Cook or if they will just seek to optimize production of what Jobs already created.
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.... the other, which was a penny stock
....unless I was shorting it.....and I don't gamble so wouldn't be doing that either.
This does not compute to me. How is shorting a stock a gamble but penny stocks are not?
AAPL revenue, operating earnings and earnings margin for 7 years of Tim Cook and Steve Jobs reign:
Tim Cook:
$1,072,000,000,000 - $381,000,000,000 - 35.5%
Steve Jobs:
$211,000,000,000 - $52,000,000,000 - 24.6%
You're right, Tim Cook is no Steve Jobs.
A different viewpoint - Jobs - ~35% CAGR, $21.94/share to $376.18/share ($1,504.72 split adjusted)
- Cook - ~18% CAGR, $376.18/share to $146.46/share ($1,025.22 split adjusted)
- (Numbers do not account for dividends. Even including them Jobs would win in this metric)
While I am not planning on selling any of my AAPL stock I don't know they will have the same growth under Cook as Jobs. Jobs introduced massive technological advances with the iPad, iPod, and iPhone. It will be interesting to see if Apple can have similar advances with Cook or if they will just seek to optimize production of what Jobs already created.
Growing a 150BUSD market cap company is quite a bit easier than one with 500BUSD.
Completely agree with the Jobs comment. I do want to note the ecosystem wasn't even an embryo under his reign. Next year it will be 20-25% of their revenue. That is more than the revenue when Jobs ran the joint.
Edit to add: I think the comments a few years after Tim Cook retires will be "He's (new CEO) no Tim Cook"
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.... the other, which was a penny stock
....unless I was shorting it.....and I don't gamble so wouldn't be doing that either.
This does not compute to me. How is shorting a stock a gamble but penny stocks are not?
AAPL revenue, operating earnings and earnings margin for 7 years of Tim Cook and Steve Jobs reign:
Tim Cook:
$1,072,000,000,000 - $381,000,000,000 - 35.5%
Steve Jobs:
$211,000,000,000 - $52,000,000,000 - 24.6%
You're right, Tim Cook is no Steve Jobs.
A different viewpoint - Jobs - ~35% CAGR, $21.94/share to $376.18/share ($1,504.72 split adjusted)
- Cook - ~18% CAGR, $376.18/share to $146.46/share ($1,025.22 split adjusted)
- (Numbers do not account for dividends. Even including them Jobs would win in this metric)
While I am not planning on selling any of my AAPL stock I don't know they will have the same growth under Cook as Jobs. Jobs introduced massive technological advances with the iPad, iPod, and iPhone. It will be interesting to see if Apple can have similar advances with Cook or if they will just seek to optimize production of what Jobs already created.
Growing a 150BUSD market cap company is quite a bit easier than one with 500BUSD.
Completely agree with the Jobs comment. I do want to note the ecosystem wasn't even an embryo under his reign. Next year it will be 20-25% of their revenue. That is more than the revenue when Jobs ran the joint.
Edit to add: I think the comments a few years after Tim Cook retires will be "He's (new CEO) no Tim Cook"
I think many are giving Tim Cook a hard time forgetting that the iPhone is the most successful consumer product in the history of the world. Literally 1 billion have been sold at an average price of ~$600. It's entirely possible that Tim Cook or Steve Jobs or even Jesus will not be able to create a new product that is as successful as the iPhone. Steve Job's iPhone is a product of some amount of luck, being in the right place at the right time.
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[quote author=PizzaSteve link=topic=72768.msg1538154#msg1538154 date=1493834071
Of course execution in a way to win, via branding, marketing and supply chain domination is another much more complicated story, but the seeds there go way back as well.
[/quote]
I have a pretty good understanding as well. Most of Apple's undertakings were being carved from the ideas of others. This includes the GUI, Mouse, MP3 Player, Smart Phone, Tablet, etc... Jobs was a genius in putting things together in a simple, elegant form factor that was easy to use.
True innovation at Apple includes:
1. The thumb scroller on the iPod (huge navigation improvement - put MP3 players in the backseat)
2. A true smart phone that included an APP store where independent developers could add to the "ecosystem"
3. Ditching the 3-1/2" floppy drive
4. Ditching the CD drive
5. Ditching the speaker output connection
6. Ditching anything that was not truly needed. They are the best at ditching shit - That is actually a good thing.
7. Simplifying and flattening all user experience (no need to go 6 layers deep to change a setting)
8. Simplifying end user configuration inputs (some people don't like this, but the mass market does).
9. "It just works"
Now I know there will be a long list of other things seemingly more important than the list above and I made this list a little "tongue-in-cheek". My point is that Apple was never truly an innovator. They were/are the best at integration of ideas and simplification of end user experience. Some may say that is innovative. I say it is more evolution than revolution.
As far as the iPhone - That was no doubt the best integration of ideas into a first generation product that every happened and probably will ever happen.
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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?
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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.
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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.
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7-8 stocks seems really low for good diversification.
I think standard teaching is 15-25 stocks for large-cap, blue-chip stocks and as many as 50 stocks if you're buying small-cap, growth stocks.
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I think it depends on your efforts how many different stocks you need. If you do your homework, research about companies, read annual reports and balance sheets, have a close look at their products and competitive advantage, why should you invest in your "500th best" company? In that case 10 stocks should be enough.
If you are fully content with average returns and don't want to have a lot of work, you buy S&P, of course.
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I think it depends on your efforts how many different stocks you need. If you do your homework, research about companies, read annual reports and balance sheets, have a close look at their products and competitive advantage, why should you invest in your "500th best" company? In that case 10 stocks should be enough.
If you are fully content with average returns and don't want to have a lot of work, you buy S&P, of course.
When index funds outperform most active managers Those are "average" returns I'm happy to have. :)
https://www.bloomberg.com/news/articles/2017-04-09/lopsided-stocks-and-the-math-explaining-active-manager-futility
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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.
Yes and yes. I own 105 of those, which is approx. $1100 by now. This 300$ downturn will look bad in book keeping for May, but other than that, I stick to my personal trading rules. Also, trading fees are relatively high until you reach at least €2000 per transaction. Which makes you reconsider every transacation once more.
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.
Yes, the timing is what keeps you busy and can make it stressful.
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.
As I started trading last year, I traded in a bull market. I made some money, but it could have been more if had just bought my 2 companies in March and not touched them for a year.
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I think it depends on your efforts how many different stocks you need. If you do your homework, research about companies, read annual reports and balance sheets, have a close look at their products and competitive advantage, why should you invest in your "500th best" company? In that case 10 stocks should be enough.
If you are fully content with average returns and don't want to have a lot of work, you buy S&P, of course.
When index funds outperform most active managers Those are "average" returns I'm happy to have. :)
https://www.bloomberg.com/news/articles/2017-04-09/lopsided-stocks-and-the-math-explaining-active-manager-futility
Yeah that's true for professional money managers that have large expenses and are forced to manage for the most recent quarter and can't stray to far from the mainstream. Individual investors have a much better chance of outperforming, IMHO.
- We don't have to worry about moving the market when we buy underfollowed small cap stocks.
- We don't pay anyone any expense ratios - just our stock commissions which can be as low as $1.
- We can hold on to investments even if they have a bad quarter or year (no need to window dress for us)
Index funds are great. Most people I talk to I suggest an asset allocation strategy using Index funds and annual rebalancing. It's so much better than high cost finds and AUM fees.
But if you are interested and take some time (and possibly find a good source of stock research to amplify your efforts) you can actually beat the market as an individual. You have lots of advantages over those professional money managers. And if it's not working out for you, then fall back on index funds. The financial rewards of doing this can be significant.
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But if you are interested and take some time (and possibly find a good source of stock research to amplify your efforts) you can actually beat the market as an individual. You have lots of advantages over those professional money managers. And if it's not working out for you, then fall back on index funds. The financial rewards of doing this can be significant.
Feel free to post your stock trades in real time so we can follow along and validate your claims.
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I invested in individual stocks for about 10 years. Never a significant amount of money. I still have probably $100,000 in individual stocks. I have done better than the market, not every year but over the ten years. People here will swear I didn't because according to them it's impossible. It's not. It's just not worth the work. Furthermore, the market can be irrational in sense an undervalued stock can be seriously under priced for a long while. So you can be correct identifying a undervalued stock but it can stay undervalued for years before it corrects. It's impossible to know what triggers share price to rise. In my experience that's what hurts performance. These days I just don't care and have moved most money to index funds. That said I learned a tremendous amount investing and what moves a business and share price. So no regrets but at the same time I wouldn't recommend to anyone else and I probably would not do it again if I magically turned 25 years old again.
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But if you are interested and take some time (and possibly find a good source of stock research to amplify your efforts) you can actually beat the market as an individual. You have lots of advantages over those professional money managers. And if it's not working out for you, then fall back on index funds. The financial rewards of doing this can be significant.
Feel free to post your stock trades in real time so we can follow along and validate your claims.
I'm happy to post my historical graph of my returns vs the market over the past 10 years. If you choose not to believe me that's fine.
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But if you are interested and take some time (and possibly find a good source of stock research to amplify your efforts) you can actually beat the market as an individual. You have lots of advantages over those professional money managers. And if it's not working out for you, then fall back on index funds. The financial rewards of doing this can be significant.
Feel free to post your stock trades in real time so we can follow along and validate your claims.
I'm happy to post my historical graph of my returns vs the market over the past 10 years. If you choose not to believe me that's fine.
How about for 20 or 30? The reason I ask is that for a full 8 years now it would have been hard to pick a loser unless it was a highly speculative pick. I say this as someone who holds multiple stocks bought over the last 10 years that are up 5x or more versus the market being up 3x. Also sold a couple that are up 10x or more and lost out in a lot of gains.
Individual stock picking is fine as part of a well diversified portfolio but really long term won't work out any better than a corresponding index for the vast majority of investors. We all look like geniuses during this 8 year bull market...
Sent from my iPhone using Tapatalk
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I'm happy to post my historical graph of my returns vs the market over the past 10 years. If you choose not to believe me that's fine.
How about for 20 or 30? The reason I ask is that for a full 8 years now it would have been hard to pick a loser unless it was a highly speculative pick. I say this as someone who holds multiple stocks bought over the last 10 years that are up 5x or more versus the market being up 3x. Also sold a couple that are up 10x or more and lost out in a lot of gains.
Individual stock picking is fine as part of a well diversified portfolio but really long term won't work out any better than a corresponding index for the vast majority of investors. We all look like geniuses during this 8 year bull market...
Sent from my iPhone using Tapatalk
Unfortunately I only have detailed records starting in 2007. Which includes the ~50% haircut I took in 2008. And sure, since 2009 the market has been up up up but that doesn't make it any easier to outperform, necessarily. Anyway, my one anecdotal result doesn't really mean anything. I could just be lucky and that very well may be true.
But even the average mutual fund investor underperforms their own mutual funds.
https://www.fool.com/investing/general/2015/11/01/the-average-americans-investment-returns-and-how-y.aspx
So the fact that I've been able to ourperform the S&P 500 Total return index by 4% per year is probably partly luck and partly that I've learned, over a 30+ year investing career how to manage my behavior and emotions.
It's harder to do that with indivudual stocks than it is with index funds, so IMHO that's the key to why for many people Index investing is the best choice. It's hard to watch a stock drop by 80% but still hold on because you know it's actually a good business. It's also hard to not sell when something increases by 10X over your original investment but the prospects are still good so you hold on or even add more. I have one investment that is 51X my original purchase. It wasn't easy to hang on to it for all this time.
IF you can control your behavior, I believe that individual stock investing is superior to index funds. That also implies that it is something you are interested in and that you are willing to spend the required time and effort. The payoff can be large.
Index fund investing is no panacea though. Behavior outweighs low fees and broad diversification. If you can control your emotions you will outperform most professional investors by doing it this way, so great.
Me posting my stock trades in real time would be really boring, since I tend to buy and hardly ever sell. My longest stock position is 18 years old. I plan on holding it forever.
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Based on the original post and the replies, this should have been titled
"I think well-researched stock picking is better than index or mutual fund investing".
There is no question you have done better than the market based on your information.
And there is no question that you believe you are right no matter what and will continue on as before.
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Normally I wouldn't think this is a good idea but you have an approach that makes sense to me. You also have the results to back it up. I think if you can stick with high quality stocks you will do well in the long run. If the research to identify that group of stocks is such that you can only find 6 or 7 then so be it.
In general, I think if you are going to invest in individual stocks you should limit yourself to a small number of high quality companies that you understand and have researched. Otherwise it is index funds. Investing in larger numbers of individual stocks doesn't make sense to me. I personally hedge and do mostly index funds with a small allocation (15-20%) to a small number of stocks (currently I have 6). I have found I can beat the market by a small amount but certainly nothing like what you have seen.
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I'm happy to post my historical graph of my returns vs the market over the past 10 years. If you choose not to believe me that's fine.
How about for 20 or 30? The reason I ask is that for a full 8 years now it would have been hard to pick a loser unless it was a highly speculative pick. I say this as someone who holds multiple stocks bought over the last 10 years that are up 5x or more versus the market being up 3x. Also sold a couple that are up 10x or more and lost out in a lot of gains.
Individual stock picking is fine as part of a well diversified portfolio but really long term won't work out any better than a corresponding index for the vast majority of investors. We all look like geniuses during this 8 year bull market...
Sent from my iPhone using Tapatalk
Unfortunately I only have detailed records starting in 2007. Which includes the ~50% haircut I took in 2008. And sure, since 2009 the market has been up up up but that doesn't make it any easier to outperform, necessarily. Anyway, my one anecdotal result doesn't really mean anything. I could just be lucky and that very well may be true.
But even the average mutual fund investor underperforms their own mutual funds.
https://www.fool.com/investing/general/2015/11/01/the-average-americans-investment-returns-and-how-y.aspx
So the fact that I've been able to ourperform the S&P 500 Total return index by 4% per year is probably partly luck and partly that I've learned, over a 30+ year investing career how to manage my behavior and emotions.
It's harder to do that with indivudual stocks than it is with index funds, so IMHO that's the key to why for many people Index investing is the best choice. It's hard to watch a stock drop by 80% but still hold on because you know it's actually a good business. It's also hard to not sell when something increases by 10X over your original investment but the prospects are still good so you hold on or even add more. I have one investment that is 51X my original purchase. It wasn't easy to hang on to it for all this time.
IF you can control your behavior, I believe that individual stock investing is superior to index funds. That also implies that it is something you are interested in and that you are willing to spend the required time and effort. The payoff can be large.
Index fund investing is no panacea though. Behavior outweighs low fees and broad diversification. If you can control your emotions you will outperform most professional investors by doing it this way, so great.
Me posting my stock trades in real time would be really boring, since I tend to buy and hardly ever sell. My longest stock position is 18 years old. I plan on holding it forever.
You pretty much mirror my experience. I agree with everything above. It can be done, but most people don't have the risk appetite nor do they invest enough time. I would say only about 1 in 100 people ought to be doing it. It takes a toll, as well.
Money managers, as stated in other posts above, have quite a bar to get over. Additional items in which they have to contend and individual investors don't:
- They normally can't utilize more than 5% of the fund value to invest in any individual stock. If this is exceeded they have no choice but to sell some shares to get back under. This can hurt their allocation on their true winners with the added impact of selling some of it too soon.
- They normally can't buy more than a 5% stake in a company. This keeps them out of the small cap market because most of those stocks could do really well but won't move the needle on 10 BUSD in investments. Just a waste of time to even try.
- Because of the enormity of they capital they have to invest, they are sometimes faced with deciding between the lesser of two evil stocks (which one is not as bad as the other). I know I didn't phrase this quite right, but my point is they are purchasing so many stocks that they are dipping into the lesser quality companies and taking more risk exposure than the individual investor would.
I'm sure there are many more, but the bar set for them is too high (weighing in against an index).
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I think it is perfectly valid to be happy with average market returns, have no work with that and basically no real long-term risks. I can understand everyone who only invests in index funds.
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.
You can fare even better if you do your research and invest in only the "better" 15 of the 30 DAX companies. Why would you invest in your 30th-favorite stock? Some companies obviously have problems, for example the ones that produce power from coal. In Germany, it's not quite likely we will get a government that promises to bring back the glory of coal. Just by leaving out the obvious misfits, you can outperform the market. The more knowledgeable you are, the more you can focus. I prefer to be on the more diversified side for now.
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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?
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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.
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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.
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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.
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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 (https://www.umass.edu/preferen/You%20Must%20Read%20This/Barber-Odean%202011.pdf), mostly because of excessive trading and trading costs. In fact, there is a strong inverse relationship between trading frequency of total returns (https://www.researchgate.net/publication/253934800_Trading_Frequency_Investor_Returns_Behavioral_Biases).
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:
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.
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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?
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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.
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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.
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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.
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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.
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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:
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?
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And we can easily see how BMW preferred has done against the DAX:
https://www.bmwgroup.com/en/investor-relations/bmw-%20shares.html
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Yup. Over last 3 years, common is flat, preferred done well (tracking bond values increasing during falling rate environment).
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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.
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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.
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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 (https://en.wikipedia.org/wiki/Preferred_stock#Germany).
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.
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Thank you for clarifying. I was not aware of the difference.
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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...
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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.
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I don't even know where to start with this.
Maybe by reading the explanation from Ursus Major. He cleared it all up.
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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.
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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.
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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.
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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.
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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.
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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.
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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:
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.
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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."
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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.
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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!
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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!
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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!
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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.
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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.
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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?
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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/ (http://247wallst.com/investing/2017/02/06/just-14-stocks-have-created-20-of-all-stock-market-gains-since-1924/)
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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/ (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.
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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.
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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?
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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.
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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.
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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.
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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...
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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).
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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.
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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.
(http://i64.tinypic.com/14473fc.jpg)
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.
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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.
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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.
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Is this luck? Who's to say.
I wouldn't bet my retirement on the answer to that question.
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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.
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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
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No, you're not wrong to be invested in individual stocks, you've already proven that with your returns.
https://m.youtube.com/watch?v=r2h84TORcJI
I bought an investment "guide" that were booklets. Probably a series of 16. It was my first educational endeavor into investments. That was in 1991. Peter Lynch was the "author". It was probably the biggest impression in those first ten years of learning. Thanks for the link. It's a great refresher/reminder.
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Schwab US Broad Market costs 0.03% per year and holds ~2500 stocks. So rather than $140/yr on $100k, this choice would allow $30/year while owing a more diversified fund than an assortment of manually purchased individual stocks.
I don't understand the 140/yr on 100k or the 30/yr. Would you please elaborate?
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If you consistently beat the market over time as an individual investor, you are either a genius (underpaid, since you should run a hedge fund), lucky, or you've miscalculated returns like the Beardstown ladies and actually underperformed.
Most people with such claims fall into groups 2 and 3.
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I don't think your wrong at all. I take a similar approach, but I only try to actively manage about 40% of my retirement money. The rest is passive, just a hedge against making a really bad series of decisions and blowing up. Like you I have been reading about investing for 20 yrs, have been actively running my own money for the past 15yrs. I'm more concentrated with the 40% I actively manage , and usually only hold 1-2 stocks at a time. Avg holding time is 1-3 yrs for each one. I basically look for 1 good idea a year, where I have a variant perception of value and there is at least a 50% difference between the market price and what it's worth as a business. I think there really is an advantage to be willing to investigate stuff for yourself, take risk, learn how to manage your emotions and behavior that comes with studying investing.
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This is so simple yet so many cannot wrap their head around it.
BEFORE costs an index fund outperforms EXACTLY half the market it is invested in, on an annual basis.
AFTER costs, an index fund outperforms >50% of the market it is invested in, on an annual basis.
If you are in the top half of invested dollars year-after-year for several decades, you will be in the very top percentages of invested dollars over the entire period. The odds of beating that are so miniscule that they're essentially zero. Beating the market over a short time frame is absolutely meaningless and you actually have a 50% chance of doing so, before costs. But it's like flipping a coin and landing heads time and time again, the odds of hitting heads EVERY TIME for 20-30 tosses is essentially zero. The odds of being the top half of invested dollars every year for 20-30 years is essentially zero, and once you factor in trading costs it's even worse.
So, you can GUARANTEE yourself top performance over a very long period of time by simply holding a total market index fund. Or you can be illogical and pick individual stocks. It really isn't more complicated than that.
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This is so simple yet so many cannot wrap their head around it.
BEFORE costs an index fund outperforms EXACTLY half the market it is invested in, on an annual basis.
AFTER costs, an index fund outperforms >50% of the market it is invested in, on an annual basis.
If you are in the top half of invested dollars year-after-year for several decades, you will be in the very top percentages of invested dollars over the entire period. The odds of beating that are so miniscule that they're essentially zero. Beating the market over a short time frame is absolutely meaningless and you actually have a 50% chance of doing so, before costs. But it's like flipping a coin and landing heads time and time again, the odds of hitting heads EVERY TIME for 20-30 tosses is essentially zero. The odds of being the top half of invested dollars every year for 20-30 years is essentially zero, and once you factor in trading costs it's even worse.
So, you can GUARANTEE yourself top performance over a very long period of time by simply holding a total market index fund. Or you can be illogical and pick individual stocks. It really isn't more complicated than that.
You don't have to be in the top half every year to beat the market over a time period of 10-30 years. Trades are no $4.95 at Fidelity and there is talk about trades going to $0. Out of the last 11 years, I've had 3 years in which I didn't do as well as the market (S&P 500). My underperformance was minimal (2-5%). But there were times (65% annual rate of return) in which I killed the market (12.7% S&P 500).
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This is so simple yet so many cannot wrap their head around it.
BEFORE costs an index fund outperforms EXACTLY half the market it is invested in, on an annual basis.
AFTER costs, an index fund outperforms >50% of the market it is invested in, on an annual basis.
If you are in the top half of invested dollars year-after-year for several decades, you will be in the very top percentages of invested dollars over the entire period. The odds of beating that are so miniscule that they're essentially zero. Beating the market over a short time frame is absolutely meaningless and you actually have a 50% chance of doing so, before costs. But it's like flipping a coin and landing heads time and time again, the odds of hitting heads EVERY TIME for 20-30 tosses is essentially zero. The odds of being the top half of invested dollars every year for 20-30 years is essentially zero, and once you factor in trading costs it's even worse.
So, you can GUARANTEE yourself top performance over a very long period of time by simply holding a total market index fund. Or you can be illogical and pick individual stocks. It really isn't more complicated than that.
You don't have to be in the top half every year to beat the market over a time period of 10-30 years. Trades are no $4.95 at Fidelity and there is talk about trades going to $0. Out of the last 11 years, I've had 3 years in which I didn't do as well as the market (S&P 500). My underperformance was minimal (2-5%). But there were times (65% annual rate of return) in which I killed the market (12.7% S&P 500).
I believe it. If you're picking individual stocks, you can get LUCKY and pick the apple or Amazon in the 90's and make a killing. OR you can pick the Enron or one of the thousands of other stocks that have gone to zero.
one fallacy that people commonly make is that if they have some sort of "skill" they can pick the right stocks. This is foolish. the reason why is because you are not competing against the average joe investor, whom MAYBE you get outsmart if you really spend hours upon hours researching one individual company. however, something like 90% of the money invested is invested professionally, by very large firms with millions of dollars to spend on research who employ dozens of phDs and other experts to analyze all the companies. So picking a winner is simply mere luck but you can easily be just as unlucky and pick a stock that goes to zero. only 4% of the stocks over the last 20 years have outperformed T-bills... do you really think it's smart to pick only a handful of stocks knowing that only 1 out of 25 is likely to be in the group?
all this means nothing to many people, they simply don't care and will say "yeah but i am different, I have beat the market and I know that I can continue to pick the right stocks". or they'll say "look at warren buffet". if millions and millions of people flip a coin 30 times in a row, simple statistics are going to say that a tiny fraction of them will hit heads every single time. to beat the market for 30 years like buffet is not a shock, when you consider how many investors out there have tried. it would actually be a shock if nobody out of the millions upon millions of investors were as successful as buffet, just by simple odds. but there are so many others who have gone BANKRUPT by picking stocks.
Lastly, If you can be GUARANTEED to be in the top percentiles of investors by simply owning an index fund for several decades, w/o any effort of your own, why would you not do that?
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This is so simple yet so many cannot wrap their head around it.
BEFORE costs an index fund outperforms EXACTLY half the market it is invested in, on an annual basis.
AFTER costs, an index fund outperforms >50% of the market it is invested in, on an annual basis.
If you are in the top half of invested dollars year-after-year for several decades, you will be in the very top percentages of invested dollars over the entire period. The odds of beating that are so miniscule that they're essentially zero. Beating the market over a short time frame is absolutely meaningless and you actually have a 50% chance of doing so, before costs. But it's like flipping a coin and landing heads time and time again, the odds of hitting heads EVERY TIME for 20-30 tosses is essentially zero. The odds of being the top half of invested dollars every year for 20-30 years is essentially zero, and once you factor in trading costs it's even worse.
So, you can GUARANTEE yourself top performance over a very long period of time by simply holding a total market index fund. Or you can be illogical and pick individual stocks. It really isn't more complicated than that.
You don't have to be in the top half every year to beat the market over a time period of 10-30 years. Trades are no $4.95 at Fidelity and there is talk about trades going to $0. Out of the last 11 years, I've had 3 years in which I didn't do as well as the market (S&P 500). My underperformance was minimal (2-5%). But there were times (65% annual rate of return) in which I killed the market (12.7% S&P 500).
and, no offense, but 11 years is NOTHING. most people have 30-40 years to invest. so you picked the right stock a few times out of those 11 years and got a 65% return, that's awesome. but you have to realize that it is equally as likely that you can UNDERPERFORM by that same amount. picking a stock that has high variance from the general market can cut both ways - you can make a killing or you can get killed, both are equally likely. what everyone has to remember is that all the available data has already been factored into every stock price by millions upon millions of investors, so hitting a winner is 100% luck and 0% skill.
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one last post - if holding an index fund is just not "risky" enough for you, you yearn for the POTENTIAL of bigger returns albeit at higher risk, then be smart and simply borrow some money (ie take out a home mortgage) and use that to invest, thus using leverage, in a highly diversified index fund. over the long-haul you should increase your CAGR while still eliminating idiosyncratic stock risk. in other words, ask yourself how much you're willing to lose. know that the general stock market can easily lose 50-60% in a really bad market, an individual stock can lose 100%. if you are okay with temporarily being down say 75%, then simply leverage your portfolio 50% and invest in the total market.
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I think that one concept that is often overlooked is COMPENSATED risk. Any risk you take as an investor should be compensated for. For example, if you invest in the stock market vs treasury bills, you are taking the risk of the stock market temporarily declining by 50-60% (or more). However, over a very long period of time, you are compensated for this risk by a much higher CAGR. investing in emerging markets over developed is also a compensated risk. Or, investing in small cap stocks over large caps, you are compensated for the additional risk you take (at least you have been in the past). That's why people invest in small cap stocks, they know the stocks as a group are more volatile however they expect to be compensated for that, and over a long period of time they almost always have been.
Any risk that you are NOT compensated for is a foolish risk to take. Speculating by buying gold, for example, is a non-compensated risk. Gold is more volatile than the stock market yet historically has returned 0% in real returns. an ounce of gold today is worth the same as it was 2000 years ago, in real dollars. Buying individual stocks is also an uncompensated risk. Your EXPECTED return for ANY stock is the same as the index it belongs to. But if you own individual stocks you can obviously lose 100% of your money, whereas an index composed of hundreds or thousands of companies will never lose 100% of it's value unless we have a nuclear holocaust or something of that nature, in which case you're dead so who cares.
If you want increased return you MUST take on increased risk. So, if you really are not satisfied with the return of the market, LEVERAGE your portfolio instead of investing in individual stocks. At least then you should be compensated for the increased risk you are taking.
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@privatefarmer, I have to take exception with a couple of your points.
I think that one concept that is often overlooked is COMPENSATED risk.
...
Any risk that you are NOT compensated for is a foolish risk to take.
True.
Your EXPECTED return for ANY stock is the same as the index it belongs to.
Not at all true. Stocks certainly have their own potential, and their own risks. And companies can belong to multiple indexes, which are curated subsections of the market--artificially created. If the expected return for any stock is the expected return for the index, then by extension it would be the same as the expected return for any other stock. The expected return for Amazon is not the same as my local electric utility. Or Barnes & Noble. The AVERAGE of the expected returns of ALL the stocks in the index would equal the expected return of the index (weighted by the same mechanism) but that does not mean they have the same potential.
But if you own individual stocks you can obviously lose 100% of your money, whereas an index composed of hundreds or thousands of companies will never lose 100% of it's value unless we have a nuclear holocaust or something of that nature, in which case you're dead so who cares.
You also do not need hundreds or thousands of stocks to take advantage of the effects of diversification, which goes back to your point of compensation. To steal from Investopedia:
"Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks yields the most cost-effective level of risk reduction. Investing in more securities yields further diversification benefits, albeit at a drastically smaller rate." -- https://www.investopedia.com/terms/d/diversification.asp
While 25 to 30 is larger than a lot of private portfolios, it is entirely achievable by an individual or small investment club. In the same vein as a broad index, such a portfolio is highly unlikely to go to zero, unless it was improperly balanced, i.e. fully weighted in on sector or one country.
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While 25 to 30 is larger than a lot of private portfolios, it is entirely achievable by an individual or small investment club. In the same vein as a broad index, such a portfolio is highly unlikely to go to zero, unless it was improperly balanced, i.e. fully weighted in on sector or one country.
yes. and this would be a way to own a collection of stocks at basically zero cost, assuming you buy-and-hold. if one would prefer to own 25-30 individual stocks instead of an index fund, I would recommend motif investing. they'll let you buy the stocks all in one transaction for one small fee.
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Your EXPECTED return for ANY stock is the same as the index it belongs to.
Not at all true. Stocks certainly have their own potential, and their own risks. And companies can belong to multiple indexes, which are curated subsections of the market--artificially created. If the expected return for any stock is the expected return for the index, then by extension it would be the same as the expected return for any other stock. The expected return for Amazon is not the same as my local electric utility. Or Barnes & Noble. The AVERAGE of the expected returns of ALL the stocks in the index would equal the expected return of the index (weighted by the same mechanism) but that does not mean they have the same potential.
I guess what I was getting at is that the long-term expected return for a stock is simply the growth in earnings + dividend yield. The price of a stock is set according to what the market thinks the future earnings will be, so in an efficient market stocks may have various prices however they should have the same expected return, assuming they have the same risk. So a company like Amazon should have similar expected return as other stocks in its class (ie large-cap growth).
Chevrolet and Ford should have the same expected return. They obviously will have different returns going forward, but the market is efficient, has set their prices, and so their long-term expected return should be identical. If chevy had a higher expected return than ford, then the market would correct that by driving up the price of chevy and down the price of ford.
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Your EXPECTED return for ANY stock is the same as the index it belongs to.
Not at all true. Stocks certainly have their own potential, and their own risks. And companies can belong to multiple indexes, which are curated subsections of the market--artificially created. If the expected return for any stock is the expected return for the index, then by extension it would be the same as the expected return for any other stock. The expected return for Amazon is not the same as my local electric utility. Or Barnes & Noble. The AVERAGE of the expected returns of ALL the stocks in the index would equal the expected return of the index (weighted by the same mechanism) but that does not mean they have the same potential.
I guess what I was getting at is that the long-term expected return for a stock is simply the growth in earnings + dividend yield. The price of a stock is set according to what the market thinks the future earnings will be, so in an efficient market stocks may have various prices however they should have the same expected return, assuming they have the same risk. So a company like Amazon should have similar expected return as other stocks in its class (ie large-cap growth).
Chevrolet and Ford should have the same expected return. They obviously will have different returns going forward, but the market is efficient, has set their prices, and so their long-term expected return should be identical. If chevy had a higher expected return than ford, then the market would correct that by driving up the price of chevy and down the price of ford.
This is not totally correct. Earnings are important, but they are really just accounting statements representing a time bounded look at revenues and expenses. Balance sheets matter. Companies can grow assets, such as customers, intellectual property, or their physical assets, such as real estate or reserves can have huge future value.
Also, two auto stocks will not have the same future expected return or risks. Each will have different expectations and hence a different risk premium imputed into their stock price.
Holding and individual stock can have compensated risk or uncompensated risk, depending on the investors individual understanding at the purchase time and the later future performance. Yes, these can look like lottery tickets, mathematically, by analysts, but under it all are real people doing things that an investor can or might not have better insights about.
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I got sucked back into the individual stock game with Alibaba ($BABA).
Four shares, my cost basis is $633
wish me luck!
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I owned BABA for awhile. I struggle with the lack of transparency with Chinese companies. Good luck!
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I owned BABA for awhile.
Me too. Go BABA! Go BABA! ;-)
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These threads are somewhat of a staple here, and always goes the same:
1) Person asks if they should invest in individual stocks, and provide their amazing previous returns.
2) The board provide data and reasons why they should not
3) person gets defensive and argue how well they have done, and that they should keep doing it.
-Bonus; usually they agree that "most people" should index, but they are special/"research"/have a system so it doesn't apply.
4) thread deteriorate and nobody have their mind changed in any way.
I see nothing different here. OP is basically asking for justification to keep doing what they're doing already. And shows no signs of being willing to listen to counterarguments.
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This thread was part of a powerful collage of discussion (some of which was offline, and some of which was via investing podcasts) that moved me to replace positions in individual stocks with a set of small cap value funds. About $8,000 was re-allocated based on the advice here.
And it might seem like I'm kicking sand in the faces of other commentors by expecting to return and celebrate my $600 purchase of Alibaba shares. Perhaps it is. But--proportionally--I am far better off via the reallocation mentioned above, even allowing for the modest $baba position.
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These threads are somewhat of a staple here, and always goes the same:
1) Person asks if they should invest in individual stocks, and provide their amazing previous returns.
2) The board provide data and reasons why they should not
3) person gets defensive and argue how well they have done, and that they should keep doing it.
-Bonus; usually they agree that "most people" should index, but they are special/"research"/have a system so it doesn't apply.
4) thread deteriorate and nobody have their mind changed in any way.
I see nothing different here. OP is basically asking for justification to keep doing what they're doing already. And shows no signs of being willing to listen to counterarguments.
and vice versa.
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These threads are somewhat of a staple here, and always goes the same:
1) Person asks if they should invest in individual stocks, and provide their amazing previous returns.
2) The board provide data and reasons why they should not
3) person gets defensive and argue how well they have done, and that they should keep doing it.
-Bonus; usually they agree that "most people" should index, but they are special/"research"/have a system so it doesn't apply.
4) thread deteriorate and nobody have their mind changed in any way.
I see nothing different here. OP is basically asking for justification to keep doing what they're doing already. And shows no signs of being willing to listen to counterarguments.
I read the first page, skipped the second and read the recent posts. I think I have new contribution beyond the above..
First, my bias -- I am a believer in index funds, after learning my lessons, and most of this is just a debate between the people that say "can't beat the average market with research" and those that say you can.
Stock Price Movement does not match company performance.
I have found (like BobtheBuilder last May, discussing AMD stock), that the stock price can go up or down over several years, for a given company, and it seems to have nothing to do with the underlying profit / improvement fundamentals. I mean, we all know that a strong, growing company with increasing profits SHOULD go up in value, yet it doesn't. Also, some companies are doing strange things bckstage with mergers and forays into hedging / integration / financing that I find hard to get research on or evaluate.. especially as I typically only look at the operational success / bottom line plus assets. (STERICYCLE, I am looking at you!)
I have found that the market rewards fast growth companies more than stable growth ones, and the stock price drops if earning growth are not as large as projected... even if the returns beat the company's own projections or the prior year. I can take any normal company measurement of success (in their annual financial plan), and find a lot of examples where this is true -- stock price does not seem to correlate with company success.
TAX and ASSET ALLOCATION strategies affect how to invest
Although I am an "indexer", I have started to buy individual stocks lately, in my non-registered account, to try to leverage the tax-advantages of dividends at my income bracket. The combination of being able to get a capital loss to offset the gains (for tax), plus the preferential tax on these dividends (0% or lower for me right now), justifies the (in my mind) increased risk with stock picking. I also can not find very many CDN dividend-returning indexes that are not over weighted with bank stocks and oil. (and CDN companies are needed for my awesome tax dividend rate)... so I need to find them individually or invest huge amounts in my non-registered fund for the small dividend rates on broad index funds.
I am shitty at stock picking
I will admit it. Even when my research finds something to buy (eventually), I am crap when it comes to deciding to sell. Selling at the right time is, at best, mixed success. One can't win at this if you don't know both sides -- when to buy, and when to sell.
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That's the thing, you don't sell, unless the dividend gets cut. Buy the best 30-40 dividend paying stable stocks you can find and never sell a damn thing. A few may loose money or even go out of business, but a few may go up thousands of percent over the long term and will make up for the loosers. Keep buying and reinvest dividends
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That's the thing, you don't sell, unless the dividend gets cut. Buy the best 30-40 dividend paying stable stocks you can find and never sell a damn thing. A few may loose money or even go out of business, but a few may go up thousands of percent over the long term and will make up for the loosers. Keep buying and reinvest dividends
hrmm... much smaller market for CDN dividend stocks.. I am not sure I would find 30-40 that I would WANT to invest in, especially without overweighting oil and bank stocks.
ETA: A bit more thinking and research led me back to this... VDY (Vanguard Cdn high yield Index)
Top 85% of holdings are in about 15 companies -- which are BANKS and ENERGY companies ( out of 63 holdings total)... Dividend yield is 4.2%.
Yep, a Vanguard ETF dividend stock!!! Aparently the research to find the "best" 30-40 dividend stocks in the CDN market is intensive, and you may as well go for a dividend index stock because it has pretty much all the same players in it, only different weights. e.g., the bottom 25 companies in the index are only % of the total holdings.
Oh -- and it is a new fund offering, which is why it was not on my radar when I started my "buy single stocks for dividends" strategy.
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These threads are somewhat of a staple here, and always goes the same:
1) Person asks if they should invest in individual stocks, and provide their amazing previous returns.
2) The board provide data and reasons why they should not
3) person gets defensive and argue how well they have done, and that they should keep doing it.
-Bonus; usually they agree that "most people" should index, but they are special/"research"/have a system so it doesn't apply.
4) thread deteriorate and nobody have their mind changed in any way.
I see nothing different here. OP is basically asking for justification to keep doing what they're doing already. And shows no signs of being willing to listen to counterarguments.
I've addressed all counterarguments at one point or another in this post. So your last comment is false.
Your post provide no value to anyone so why did you post it? To piss on the OP?
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A much more interesting topic to me is understanding the reasons that both actively managed funds and individual investors underperform the market.
It's really much worse for most than the arguments here.
http://thereformedbroker.com/2013/05/22/most-investors-underperform-their-already-underperforming-funds/
According to an investing study from Davis Advisors, the average stock-holding mutual fund returned 9.9% annualized from 1991 to 2010, but the average fund owner earned only 3.8% on average per year.
And there are also reasons why Active managers fail to perform:
https://www.nasdaq.com/article/i-know-why-mutual-funds-fail-to-perform-cm805386
Most people commenting on mutual fund performance haven't actually ever run a fund. But I, after having launched and managed three funds with Motley Fool Funds, have the unique opportunity to look through both lenses. No, good Fool, the problem isn't the portfolio managers -- not all of them, anyway. The things that actually cause mutual fund underperformance are far more pernicious than mere incompetence.
In brief, there are four main factors -- customers , consultants , regulators , and structure -- that force mutual fund managers into conventional thinking, when the key to extraordinary market returns is unconventionality. It's a basic disconnect, and it is really hard to resist.
So all of these studies about performance of active managers don't seem to bother to dive in to the reasons for this and what might be done to correct it. And for Individuals as well, even index fund investors tend to underperform personally by a significant margin.
But the market returns what the market returns. If individuals underperform by such a significant amount the money they are leaving on the table is going in someone's pocket.
If you strive to match the market and don't make the average mistakes you can outperform the average individual by a lot and the average active manager by a little.
I personally want to know how to be in that group that collects that extra 6% (or 1%) that the average individual or institutional investor leaves on the table. That seems to be a worthy pursuit. Even if I can only add an extra 1-2% per year to my returns that means a huge difference in end outcomes as we all know.
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Paul, I've observed that active fund managers tend to be people looking for easy money. They are attracted to the industry out of greed, and not to build a wining portfolio strategy. So I believe they tend to underperform for a variety of reasons, but mostly I feel it is due to cost and marketing reasons.
The mutual fund game requires marketing, scale and fees. All these work against performance. Marketing is a big problem because the fund must tell a story that attracts investors, and I think this tends to create nice sounding strategies which attract assets, but suck as a portfolio, due to churn costs. Slick salesmen and high fees make for a profitable fund, not buy wisely and hold 30 years, selling nothing. Scale means even if you fund a hidden gem, your own need to own it will drive the price up because you need to convince prior investors and owners to sell. So like Buffett, when he has a target acquisition, he still must acquire the good company. Management and investors in a good company know they own something good, since they were there from the start and accordingly will ask a high price, which also can drag performance. So even good research may fail precisely because you need to buy the issue at a good price to make a good return. Transaction fees also drag on performance, but these factors are well understood. But again, marketing the fund require a periodic update and new stories to attract assets under management. I find this generates unneeded churn as the managers feel a newsletter about them not buying or selling anything makes a poor marketing piece, so their fees will seem unnecessary (which is exactly why indexes do so well...buy and hold, low churn works).
Since people are impatient and easily shmoozed, I found the culture of active fund manager teams to be far from what would actually produce good long term results. The drive fast cars and chase short term big wins. Traders suck as investors, precisely because of this typemof personality. Investors must be very patient, like reading balance sheets, checking details out. Just like in real estate.
This does not necessarily mean an individually managed portfolio must always underperform. Some endowments with good management have outperformed the market over long periods. It is just hard. Few have the patience and training to research deeply enough, etc. People that talented make money other ways, like creating Vanguard or BH, or by becoming a CEO themselves, so the pool of active fund managers is actually a bit talent poor. The talented people I met in business school are mostly building companies or working for them as top management, because it,is more challenging. Fund management is actually pretty boring, so I found people into it are doing it for the money, not because it is their passion. They few that are, tend to do ok.
Just my 2 centts.
PS Just as good management matters in real estate, it also matters for individual stock investors. This forum frequently advocates individuals buying investment RE purchases, over REATs, which are much more volatile in returns as well. So why oppose individual stocks so strongly? Data suggest 20 or so stocks will do fine relative to an index so while indexing is better, I dont understand the heavy face punching, personally. Active trading...sure, deserves a facepunch, but a diversified portfolio of well researched individual stocks...why not.
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This sounds like a bad idea. We have almost all of our egg in diversified index funds. There are maybe 2-3 individual stocks in that portfolio. It is a very small amount of the egg. Maybe 1%. Its my gambling money. So far it has been ok. I would never have large chunks in one company. I had a few AMZN stocks. It was up 100%, so I pulled off profit. Now, all I have in that is the original investment to keep my exposure down. That profit has been moved to a safer investment now.
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PS Just as good management matters in real estate, it also matters for individual stock investors. This forum frequently advocates individuals buying investment RE purchases, over REATs, which are much more volatile in returns as well. So why oppose individual stocks so strongly? Data suggest 20 or so stocks will do fine relative to an index so while indexing is better, I dont understand the heavy face punching, personally. Active trading...sure, deserves a facepunch, but a diversified portfolio of well researched individual stocks...why not.
I agree with you. Except for my 401K I don't use Index funds at all. I have a diversified portfolio and have outperformed pretty well (about 6% per year on average) since I've been tracking my performance monthly against the S&P 500 Total Return index since 2007.
But I think the reason for the strong reaction is understandable:
1: People have been burned by bad stock investing or high fee advisors in the past - timing the market, piling in to a few hot "names" etc. Basically all the bad behavioral things that long term buy and hold index investing eliminates. Most people can and should stop here, but just index funds alone aren't the solution because you also have to behave properly which is hard for people.
2: They believe strongly in the Efficient Market Hypothesis. (IMHO the market is too emotional to be completely efficient.)
3: They read studies about how hard it is to outperform while not realizing that the studies don't necessarily apply to well behaved individual investors. The well behaved individual has huge advantages over the institutions, in my view.
4: MMM isn't really about investing per se. It's about pushing your savings rate and living a good life. Rethinking overconsumption and how you live your life. Unless investing is really interesting to you there's no reason to go beyond something that is proven to work for most people.
So unless you are really interested in investing and business it's best to just LTBH index funds. And then things like Asset allocation and "Investor Policy Statements" and the like are the tools that are used to control the natural bad behavior.
When I have friends who ask me about investing my first advice is index funds. Only if they really show interest do I push past that. For most it really is the best advice.
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That's the thing, you don't sell, unless the dividend gets cut. Buy the best 30-40 dividend paying stable stocks you can find and never sell a damn thing. A few may loose money or even go out of business, but a few may go up thousands of percent over the long term and will make up for the loosers. Keep buying and reinvest dividends
hrmm... much smaller market for CDN dividend stocks.. I am not sure I would find 30-40 that I would WANT to invest in, especially without overweighting oil and bank stocks.
I'm in the US and don't know what you have available to you in Canada, but my watch list includes LYB CNI PSX HRL DLR RY TD MCD O UNP MO AFL TROW CLX COST SBSI UTX MKC UL SBUX LMT AAPL SJM HRS CL CVS CB ITW PX DE MCHP GWW GD ADP NEE SHW V UNH. I even have a couple of more risky techy stocks in very small quantities TCEHY BABA SQ AMZN NVDA that mostly don't pay any dividends so thus the small quantity invested. I actually have many other stocks that I own, but probably wouldn't buy them if I had it to do over, although I am not selling any of them either. I am not recommending any of these stocks and you should definitely do all the necessary research on your own. Some of these may actually go completely out of business, loose 100% of your investment, but a few may increase by several thousand percent, more than making up for the losers. I am pretty sure a nice portfolio of quality mostly dividend paying stocks will beat the S&P 500 by 1% to 2% minimum per year averaged over 20 years or even 10 years.
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Chart attached of 4 pretty boring companies mostly. Dividends are included with all. Keep the long term view, very important.
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No, I don't think you're flat out wrong, esp. since my retirement portfolio is about 40% stocks (IRAs) and 60% SP500 (TSP). The stocks (Visa, Costco, Berkshire-Hathaway, Broadridge Financial Services, Apple, and Alaska Airlines) have far outperformed the SP500 over the last 10 years (when I basically started). Originally, it was probably 20% stocks. I'm not active with them (that is, I bought and now mostly hold), esp. now that my family's income doesn't allow us to use the Roth IRA anymore. And I personally wouldn't buy companies like Facebook because there's nothing really to value other than the popularity / user number outlook, but I've obviously missed out on some high earnings with those stocks (and am fine with that). I have, however, decided to set aside $50K to invest in young companies that appeal to me (NIO, e.g. - the Chinese Tesla).
Good luck.
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<snip>
But the market returns what the market returns. If individuals underperform by such a significant amount the money they are leaving on the table is going in someone's pocket.
If you strive to match the market and don't make the average mistakes you can outperform the average individual by a lot and the average active manager by a little.
I personally want to know how to be in that group that collects that extra 6% (or 1%) that the average individual or institutional investor leaves on the table. That seems to be a worthy pursuit. Even if I can only add an extra 1-2% per year to my returns that means a huge difference in end outcomes as we all know.
I was under the impression that your someone is actually the brokerages and exchanges. Most people will see returns below the average market oerformance because of the money lost to trading fees. (Reminds me of that gold-rush saying about tools and services.)
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<snip>
But the market returns what the market returns. If individuals underperform by such a significant amount the money they are leaving on the table is going in someone's pocket.
If you strive to match the market and don't make the average mistakes you can outperform the average individual by a lot and the average active manager by a little.
I personally want to know how to be in that group that collects that extra 6% (or 1%) that the average individual or institutional investor leaves on the table. That seems to be a worthy pursuit. Even if I can only add an extra 1-2% per year to my returns that means a huge difference in end outcomes as we all know.
I was under the impression that your someone is actually the brokerages and exchanges. Most people will see returns below the average market oerformance because of the money lost to trading fees. (Reminds me of that gold-rush saying about tools and services.)
Nope. That's not sufficient. Trading fees and expenses is something like 1-2% maybe. The remaining 5-6% that the average investor underperforms by has to go in someone's pockets.
What you were probably thinking of is that professionals tend to underperform by the fees they charge. Which, in aggregate, is pretty much obvious. What I am talking about is the fact that the average individual investor underperforms the funds they are invested in by approximately 6%. That's money they are giving away by buying and selling at the wrong time or chasing performance or other behavioral mistakes. This is money that is going to someone else, given the overall total return of the market.
Think about it. If you trade on your own you are paying less than 10$ per trade. Bid/Ask spreads tend to be only a few pennies these days. If you have a ripoff financial advisor you might be paying as much as 3% in fees annually. Trading losses don't go the the broker they go to the person on the other side of the trade (which could be the broker I suppose but not generally)
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Brokers do make markets in many stocks (someone has to, the exchanges dont), so there is some scim of value there ive observed, especially on limit orders at market open. I dove pretty deep there once when I was annoyed by a price recieved at the opening initial cross (a very weird practice used to start trading that doesnt necessarily price at the median of bid ask offers...brokers can sneak in offers just before open and snipe old limit orders). If you do buy stocks I suggest buying quality, based on extensive knowledge and holding for decades, and buying liquid stocks during market hours. Eventually the 0% holding costs will make the drain of transaction fees and possible bid ask spreads on purchase and sale very small as a percent of total cost. Holding for decades can approach the efficiency of a vanguard ETF, though as said, an individual portfolio will lack as much diversification
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'I haven't read through the posts, so I may be retreading here.....Anyhoo, I have a 457 plan in which I am exclusively invested in index funds. I also have a Roth IRA which is split between two funds and 8 individual stocks. My thinking is the 457 is more risk averse. I invest 18000 in the 457 yearly. The IRA I am willing to risk some more. Any thoughts on that method?
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People sitting on the same round table may not be on the same page in the investment world.
PaulMaxime and Cache_Stash, would you please recommend some readings about the corporate fundamental analysis? Also what are your favorite value investors' forum?
Thanks you!
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People sitting on the same round table may not be on the same page in the investment world.
PaulMaxime and Cache_Stash, would you please recommend some readings about the corporate fundamental analysis? Also what are your favorite value investors' forum?
Thanks you!
I'm not really a value investor. My success in that area was never really good. I think value stocks (value trap) happens because a lot of those companies don't have any growth. Growth is absolutely necessary for good returns. I'm more of the growth at a reasonable price (GARP) investor. Peter Lynch has written a lot of books in this area. Here are a few:
Learn to Earn:
This book is great for learning about other people's mistakes. Although learning other peoples mistakes helps a lot, sometimes you have to make them yourself before you learn. I've touched the hot stove top many times and each time I kick myself for being so stoopid.
Beating the street:
This is my holy grail of how I learned to invest. If you can't have a simple summation of your investment thesis for a stock, then you don't shouldn't be buying it. You hold on to a stock until your thesis no longer holds together. Modify your thesis as new information becomes available. This is immensely helpful in determining when to sell a stock (you need an exit strategy!).
Hope this helps you.
I could go on forever on mistakes I've personally made (all of them documented thoroughly by the wise ones (Warren Buffet, Peter Lynch, et al). I've also learned a lot of discipline from those mistakes. I think Warren Buffet's level of discipline is what has put him at the pinnacle of the investment world. If only I had 1% of his level of discipline.
Reading definitely helps. If you read enough, you will find out that the same messages are given over and over and over by pretty much all the really smart investors.
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People sitting on the same round table may not be on the same page in the investment world.
PaulMaxime and Cache_Stash, would you please recommend some readings about the corporate fundamental analysis? Also what are your favorite value investors' forum?
Thanks you!
Not a value investor either. I'm more of a long term growth stock kind of guy myself.
I'm a fan of the Motley Fool and think paying for a subscription to one of their inexpensive newsletters like Stock Advisor or Rule Breakers is a good value. They are business focused long term buy and hold investors. The marketing if you've seen it can come across as scammy for sure but the reality is much better than that. They have some free discussion boards that are very good.
I've paid for their advice for years and it's good.
If you are interested in what their investing philosophy is like I recommend listening to David Gardner's Rule Breaker Investing podcast to see if what they are doing is for you. https://www.fool.com/podcasts/rule-breaker-investing/
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People sitting on the same round table may not be on the same page in the investment world.
PaulMaxime and Cache_Stash, would you please recommend some readings about the corporate fundamental analysis? Also what are your favorite value investors' forum?
Thanks you!
Not a value investor either. I'm more of a long term growth stock kind of guy myself.
I'm a fan of the Motley Fool and think paying for a subscription to one of their inexpensive newsletters like Stock Advisor or Rule Breakers is a good value. They are business focused long term buy and hold investors. The marketing if you've seen it can come across as scammy for sure but the reality is much better than that. They have some free discussion boards that are very good.
I've paid for their advice for years and it's good.
If you are interested in what their investing philosophy is like I recommend listening to David Gardner's Rule Breaker Investing podcast to see if what they are doing is for you. https://www.fool.com/podcasts/rule-breaker-investing/
+1 on Motley Fool. I was a fool for a long time back in the 90's. I don't use their site as much anymore as I have a subscription to Investors Business Daily (IBD) and use it to generate stock investing ideas. This has been well worth the money as well (about $350/yr).
I'm going to look at becoming a fool again. I loved their website back in the day, but it has turned quite hokey. I think they need to revamp their approach on customer services. Their investment advice is sound for sure.
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Like @Cache_Stash, I would characterize myself as a GARP investor; as Uncle
Warren says, "Growth and value are joined at the hip." (as opposed to necessarily being opposites) But I have been attracted to occasional turnaround plays--I do sweat those out a lot more, though.
I have subscribed to BetterInvesting since 2005. Their method is perfectly suited to GARP investing, and helps the speed of my research and filtering greatly. They are nonprofit, and the subscription to their magazine and tools is quite cheap compared to other options.
Since the request is for value investing, though, you have to go with The Intelligent Investor, by Benjamin Graham. It is fairly dense, but very approachable. Whether you love it or hate it, understand it *is* the short version! The long version is Security Analysis, by Graham and Dodd.
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@Cache_Stash
Congratulations to your results. Great numbers. I don't think you are doing anything wrong here especially if you are successful and enjoy picking stocks.10 years sounds like a decent track record.
Should the public stick to ETFs? Absolutely!
Does the individual have a good chance to beat the market? Not a very good chance.
However the recent strong public argument against individual stock picks and actively managed funds sounds a bit too much blended to me. Yelling at every single person on the internet who are crazy enough to try buy companies they actually like is like trying to prevent your friend entering a race because /statistically/ he does not have a great chance to win the race. The nice thing in investing is that you don't have to be the winner, it's enough to perform better than the median to see the benefit of your efforts. Maybe your friend has long legs, exercise hard and finally beats the crowd :)
Yes, there is great risk to take but in my opinion anyone who says investing is pure luck clearly lacks the understanding or experience on financial markets.
The same way as a good car dealer is able to correctly price used cars.
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@Cache_Stash
Congratulations to your results. Great numbers. I don't think you are doing anything wrong here especially if you are successful and enjoy picking stocks.10 years sounds like a decent track record.
Should the public stick to ETFs? Absolutely!
Does the individual have a good chance to beat the market? Not a very good chance.
However the recent strong public argument against individual stock picks and actively managed funds sounds a bit too much blended to me. Yelling at every single person on the internet who are crazy enough to try buy companies they actually like is like trying to prevent your friend entering a race because /statistically/ he does not have a great chance to win the race. The nice thing in investing is that you don't have to be the winner, it's enough to perform better than the median to see the benefit of your efforts. Maybe your friend has long legs, exercise hard and finally beats the crowd :)
Yes, there is great risk to take but in my opinion anyone who says investing is pure luck clearly lacks the understanding or experience on financial markets.
The same way as a good car dealer is able to correctly price used cars.
This post repeats some common misconceptions regarding investing in individual stocks. There's a reason people here suggest index funds, and it's not because we think the average person cannot beat the market. It's because even the most seasoned experts cannot beat the market. Being above the median in terms of overall performance is unfortunately still going to put you below the long-term performance of a boring index fund, and it will do so while requiring increasing amounts of your time and energy... all for what?
Yes, you don't have to be the winner, but strangely you can be the winner here, and all it takes is to use ... less effort, not more.
The problem with using the past 10 years as a benchmark is that you're not looking at 10 separate data points. You're essentially looking at one. The performance of most companies over the past 10 years has a very high degree of auto-correlation, meaning that companies that were successful in 2010 have maintained the same level of performance in 2017. That seems like it would be expected, but it's actually a bit rare. There are a large number of people who have placed good bets early in this recovery and properly stuck with them. That's great, but it doesn't suggest that they have the knowledge or ability to beat the market over the next set of cycles any better than someone who got unlucky and picked a loser during this bull market.
Again, it's not about beating the average, because the distribution of performance of stocks across the stock market is highly skewed. This means that a random subsampling of stocks has a high degree of likelihood to underperform the cap-weighted mean, which is what you do get from an index fund without any effort at all. Again, 50% of experienced individual investors do not beat index funds, that is an oft-repeated fallacy.
Again, this is not telling your friend not to exercise because the odds are against him. This is telling your friend not to exercise because that's precisely how he could improve his odds the most.
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This post repeats some common misconceptions regarding investing in individual stocks. There's a reason people here suggest index funds, and it's not because we think the average person cannot beat the market. It's because even the most seasoned experts cannot beat the market. Being above the median in terms of overall performance is unfortunately still going to put you below the long-term performance of a boring index fund, and it will do so while requiring increasing amounts of your time and energy... all for what?
The interesting question is actually WHY the seasoned expert can't beat the market.
It's not because they can't pick winning stocks. Generally professional stock pickers can outperform with their best ideas. It's the structural realities of investing other people's money that kills their ability to perform.
You should read the link I posted much earlier in this discussion from a former Mutual Fund manager. He lays out all the reasons that funds fail to perform. None of this stuff applies to the small individual investor.
You mention that performance is highly skewed. This is true. Which means that most of your portfolio is going to underperform while the gains will be concentrated in a few winners. This has been my experience with individual stocks for many more than 10 years. Hold on and add to those winners - which a fund manager CANNOT do. And many individuals can't either- they sell their winners to rebalance and add to the losers because "Buy low, sell high" and then they get discouraged and go to cash after the market drops 30 percent and don't buy back in until "The dust has settled" and they miss out on 200% of gains.
I've heard the stories and lived through some of that myself.
Professionals can't outperform because their clients have terrible behavior - wanting them to outperform but only to the upside, pulling their money out at the slightest whiff of a selloff, it goes on and on.
All of these things are avoidable if you are a disciplined individual investor. You have no one to answer to but yourself. Many people can't do it and should stick to funds.
But even investing in funds isn't enough because the average fund investor underperforms the funds they invest in by 6%. 6% of bad behavior.
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The interesting question is actually WHY the seasoned expert can't beat the market.
The behavioural issues are one thing the skewed distribution of returns is the other:
https://www.bloomberg.com/news/articles/2017-04-09/lopsided-stocks-and-the-math-explaining-active-manager-futility
https://www.thinkadvisor.com/2017/08/21/study-shows-96-of-stocks-dont-beat-treasuries-in-l/?slreturn=20180820084432
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PaulMaxime-
can I confirm that you mean the Motley Fool Article you posted? I reread the (short) article, and I think these four tips are sound. I also think all four of them could be used to improve the experience of owning broad index funds. So we're back at the question of--if I do these things--then how do I identify a small number of companies to gain a risk-adjusted return above market return?
- Don't try to time the market. Buying a stock or fund because you think it's at the bottom, or selling one because you think it has topped out, is almost always a losing battle. Investors who decided to buy Radio Shack after it dropped below $1 per share, or who sold Amazon.com the first time it surpassed $300, can tell you that. Instead of focusing on the share price, buy stocks that represent a business you'd like to own for the next 10, 20, or 30 years. Or, if you're a mutual fund investor, invest in quality funds regardless of what the market is doing.
- Don't chase hot stocks. Chasing stocks on their way up is too much of a gamble. Sure, a stock that has quadrupled in value over the past year could continue on its upward trajectory -- or it could come crashing down as soon as anything goes wrong.
- Don't panic during crashes. Panic-selling is the worst investment move you can make during tough times. Those investors who sold out of fear in late 2008 simply turned paper losses into real losses, and they also missed the rally that took place over the next several years.
- Use the power of dollar-cost averaging. Dollar-cost averaging is a strategy that involves investing equal dollar amounts at regular time intervals (say, $500 every other month). Not only does this take emotion out of the equation, but it actually gives you a long-term mathematical advantage, since you buy more shares when prices are low and fewer shares when prices are high. For a thorough description of the incredible power of dollar-cost averaging, check out this article.
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People sitting on the same round table may not be on the same page in the investment world.
PaulMaxime and Cache_Stash, would you please recommend some readings about the corporate fundamental analysis? Also what are your favorite value investors' forum?
Thanks you!
I think if you want to try your hand at investing and have a reasonable chance of making money, I would read the Intelligent Investor, which kind of gives the behavioral frame work you need. For a how to book, Value Investing: From Graham to Buffett and Beyond, and the companion text Applied Value Investing are a good start. Next How to be a Stock Market Genius. Those books will give you the framework, but that is just the start. The key is understanding accounting and business valuation. I recommend taking a entry level accounting course so you can see what goes into preparing the financial statements, also read Financial Shenanigans by Howard Schilit . Also the CFA course material is very good, you can get it used on Ebay, it worth reading. There are also online lectures by Bruce Greenwald that are very good. If you get into this, by the time your done with the material I suggested you will find lots of other stuff out there, you will be drawn to it naturally. Finally I would spend about 2 years doing paper trading, before you use real money, it's not the same, but it will let you hone your process , figure out your buy and sell criteria, and most importantly value lots of different businesses. Really it will take you about 2 yrs of study to learn the stuff you need if your doing it on a part time basis, so by the time your ready to use real money your education in this stuff will be more mature. That's the process I used more or less and it's worked out great, hope that helps.
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People sitting on the same round table may not be on the same page in the investment world.
PaulMaxime and Cache_Stash, would you please recommend some readings about the corporate fundamental analysis? Also what are your favorite value investors' forum?
Thanks you!
I think if you want to try your hand at investing and have a reasonable chance of making money, I would read the Intelligent Investor, which kind of gives the behavioral frame work you need. For a how to book, Value Investing: From Graham to Buffett and Beyond, and the companion text Applied Value Investing are a good start. Next How to be a Stock Market Genius. Those books will give you the framework, but that is just the start. The key is understanding accounting and business valuation. I recommend taking a entry level accounting course so you can see what goes into preparing the financial statements, also read Financial Shenanigans by Howard Schilit . Also the CFA course material is very good, you can get it used on Ebay, it worth reading. There are also online lectures by Bruce Greenwald that are very good. If you get into this, by the time your done with the material I suggested you will find lots of other stuff out there, you will be drawn to it naturally. Finally I would spend about 2 years doing paper trading, before you use real money, it's not the same, but it will let you hone your process , figure out your buy and sell criteria, and most importantly value lots of different businesses. Really it will take you about 2 yrs of study to learn the stuff you need if your doing it on a part time basis, so by the time your ready to use real money your education in this stuff will be more mature. That's the process I used more or less and it's worked out great, hope that helps.
Books and training are good ideas. Getting a job at a big 4 audit firm and performing audits is enlightening and pays well, too, if you get your CPA license.
I dont recommend paper trading, largely because trading is a losing game for retail investors. Buy well researched companies and hold for decades is my advice.
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PaulMaxime-
can I confirm that you mean the Motley Fool Article you posted? I reread the (short) article, and I think these four tips are sound. I also think all four of them could be used to improve the experience of owning broad index funds. So we're back at the question of--if I do these things--then how do I identify a small number of companies to gain a risk-adjusted return above market return?
I'm not sure what you mean by "risk." If you mean "volatility" then I can't really help you. The academic definition of risk == volatility is not something that I think much about. I think risk should mean "The probability of having absolute loss"
By that definition holding all your money in a money market account while academically not risky is actually incredibly risky over the long term.
And as far as how to find stocks to buy and hold for the long term that will beat the market there's no simple formula that will work forever. Can't happen almost by definition.
What have I done over my investment career that has helped me do well with individual stocks?
Well, first of all I pay for advice. I don't pay someone to manage my money because that brings about inherent conflicts that can lead to mediocre performance. But good advice can be conflict free because it's up to me whether I listen to it or not. I personally recommend something like a Motley Fool subscription but you can find free places to get stock ideas from.
Second it's important to find like minded folks. Just like here at MMM we benefit from community.
Third, after I have identified what I believe to be good companies, add to my winners over time and hardly ever sell. Those losers tend to fade into insignificance over time. One large winner can wipe out many losers. I expect to be wrong at least 40% of the time and that's OK.
Fourth, keep learning. Things change and there's always something new and interesting going on in the world of business and investing.
Fifth, recognize that my psychology and behavior is a huge influence in how my investments are going to perform. I try to be clear and honest with myself about these things.
Sorry I can't package this into a simple formula. Is it repeatable for everyone, probably not. Is there a guarantee of performance. Definitely not. Is it worthwhile to try. Oh yes it has been for me.
If Index funds are for you, great. Way better than most other alternatives. Do I believe that it's possible to do better. Yes.
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PaulMaxime-
can I confirm that you mean the Motley Fool Article you posted? I reread the (short) article, and I think these four tips are sound. I also think all four of them could be used to improve the experience of owning broad index funds. So we're back at the question of--if I do these things--then how do I identify a small number of companies to gain a risk-adjusted return above market return?
- Don't try to time the market. Buying a stock or fund because you think it's at the bottom, or selling one because you think it has topped out, is almost always a losing battle. Investors who decided to buy Radio Shack after it dropped below $1 per share, or who sold Amazon.com the first time it surpassed $300, can tell you that. Instead of focusing on the share price, buy stocks that represent a business you'd like to own for the next 10, 20, or 30 years. Or, if you're a mutual fund investor, invest in quality funds regardless of what the market is doing.
- Don't chase hot stocks. Chasing stocks on their way up is too much of a gamble. Sure, a stock that has quadrupled in value over the past year could continue on its upward trajectory -- or it could come crashing down as soon as anything goes wrong.
- Don't panic during crashes. Panic-selling is the worst investment move you can make during tough times. Those investors who sold out of fear in late 2008 simply turned paper losses into real losses, and they also missed the rally that took place over the next several years.
- Use the power of dollar-cost averaging. Dollar-cost averaging is a strategy that involves investing equal dollar amounts at regular time intervals (say, $500 every other month). Not only does this take emotion out of the equation, but it actually gives you a long-term mathematical advantage, since you buy more shares when prices are low and fewer shares when prices are high. For a thorough description of the incredible power of dollar-cost averaging, check out this article.
The only way to make above average market returns is to identify where the market is valuing companies incorrectly and that starts with understanding risk. I started investing in Apple in 2007. Up through and continuing through 2010, the company had a PE of 8-12. It was valued as a hardware manufacturing company and growth was never evaluated properly for upside risk in my estimation. As it grew earnings and cash flow they eventually reached about 50BUSD in cash on their balance sheet yet it was never considered in the valuation nor was it when it reached 200BUSD (another missed evaluation in determing valuation in my estimation). The company is a cash cow - a veritable ATM machine. Over the last year or so, its valuation has grown for it to be priced as more than a hardware electronics manufacturer. The market is now considering the growth in its services sector. This is recurring revenue which is highly valued by investors. Has it been fully valued for this? Their services company is 18% of their revenue now and is still growing over 30% annually. My estimation is that their services revenue will surpass their cell phone revenue within a few years. I still don't think their valuation is low for the risks involved. Especially considering their eco system and the moat that it creates, etc... (This is a condensed writeup, there is much more to the evaluation. It's only to point out a thought process for valuation)
If the market was 100% efficient then there would be no Warren Buffets, Peter Lynches et al. The market is right, for the most part, for most of the companies. So the difficult part of finding the right company to invest in when the market is wrong.
Finding those companies takes time and a lot of energy. It's not easy to find something in which you'll have a really strong conviction.
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Finding those companies takes time and a lot of energy.
I'm not a fan of stock picking at all. The reality is that this comment might not even be true. You could spend a lot of time and energy and think you have it right but you don't. You might even be right but you don't get the returns that you expected to get. I view picking stocks as akin to picking the future. You might get it right sometimes but you will also get it wrong. The problem comes when people think they have an ability at it or that hard work makes it possible. It doesn't work like that.
It's very easy to convince yourself that you are doing it right when you aren't.
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If you consistently beat the market over time as an individual investor, you are either a genius (underpaid, since you should run a hedge fund), lucky, or you've miscalculated returns like the Beardstown ladies and actually underperformed.
Most people with such claims fall into groups 2 and 3.
Exactly.
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I view picking stocks as akin to picking the future.
I feel like this is true of any investment.
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I view picking stocks as akin to picking the future.
I feel like this is true of any investment.
100% true. You are paying money now in expectation that it will pay you back more in the future. That's not guaranteed to anyone.
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Nothing wrong active investing. It is not because I believe I can beat the market consistently without lots of work. It is because I just like the challenge, have the time and desire to do it. Of course, I only risk 5-10 % of my capital to do it . People who only want to become rich quickly through speculating in the market should stick with index funds or mutual funds.
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I view picking stocks as akin to picking the future.
I feel like this is true of any investment.
100% true. You are paying money now in expectation that it will pay you back more in the future. That's not guaranteed to anyone.
That's actually the theoretical stock price. "Expected value of future cash flow"
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So I will say this...I kept my money in CDs for about 5 years and stable funds.
I read dozens of books on value investing/stock picking at the local library. About 8 years ago I started investing.Picking companies that I believed were innovating and undervalued. For long periods my money sat in cash and then I would go all in.
I went Marvel (which got bought by Disney), Sprint, Clearwire, IBM and Nokia and AMD, Kroger. All of whom had some underlying technology or item undervalued. In total I had a roughly 30x rate of return in 8 years total (not sure what it is annually because it varies dramatically I only look at what I started with and where it is now). Yes roughly 30x (I am an engineer by training so this math is correct and not a calculation error). Some of it is luck some of it is recognizing trends. I will give an example. Look at GE or F or even FB or IBM. your average fund manager if the stock falls 15-20% must sell to maintain the balance of his portfolio/returns. So when the going gets bad due to some recent news the stock overreacts as virtually all fund managers pile on the selling. This is where the individual investor has a chance in my opinion by going against the grain. I can't beat computers at volume or day trading but I have time on my side. Average fund manager has to make a quarterly or annual report and can't risk a large component (FB, APPL, GE, IBM) falling dramatically so you get a chance. Case in point Amazon buys Whole Foods and Krogers falls like crazy within a few months it's up 50%. I believe there are some advantages that smaller money/individuals have if they are willing to do two things. Sit on their money waiting for an opportunity (this is much harder than it sounds). Go in for large percentages when the opportunity presents itself because it doesn't present itself often. I have also been lucky I recognize that. I made a few bad investments but in all of those it was when I hadn't done enough research. The ones where I went all in I recognized that there was a lost opportunity cost but it doesn't matter. I bought AMD at $4 in 2014. It fell to $1.80. I kept adding and never sold. It went back up to 15 didn't sell went to 10 didn't sell and now it's at 30. I may sell as the thesis has changed but I never lost sleep over it. That said I kept maxing out a 401k in extended market funds for a while but I knew that the investments were sound --they had a moat or were disruptive. Once you do your research be firm in your convictions. Also do your research, and that can mean hanging out at JCP and Macys to see does anyone still shop here?, to reading everythign there is to know about them. You occasionally get a slight advantage that the big funds don't quite get and can make the trade a little in advance. I have missed out on some big deals (I followed a stock for a year trying to understand all the potential and risks behind it went from 6 to $60 in the next two years). Don't invest in a business if you don't understand all the risks in it.
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You are either trolling or delusional. The stocks that you mention would not have delivered anywhere near a 30x return in 8 years.
If you are going to make things up at least research some stocks that could have delivered that return and then claim you owned them.
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So I will say this...I kept my money in CDs for about 5 years and stable funds.
I read dozens of books on value investing/stock picking at the local library. About 8 years ago I started investing.Picking companies that I believed were innovating and undervalued. For long periods my money sat in cash and then I would go all in.
I went Marvel (which got bought by Disney), Sprint, Clearwire, IBM and Nokia and AMD, Kroger. All of whom had some underlying technology or item undervalued. In total I had a roughly 30x rate of return in 8 years total (not sure what it is annually because it varies dramatically I only look at what I started with and where it is now). Yes roughly 30x (I am an engineer by training so this math is correct and not a calculation error). Some of it is luck some of it is recognizing trends. I will give an example. Look at GE or F or even FB or IBM. your average fund manager if the stock falls 15-20% must sell to maintain the balance of his portfolio/returns. So when the going gets bad due to some recent news the stock overreacts as virtually all fund managers pile on the selling. This is where the individual investor has a chance in my opinion by going against the grain. I can't beat computers at volume or day trading but I have time on my side. Average fund manager has to make a quarterly or annual report and can't risk a large component (FB, APPL, GE, IBM) falling dramatically so you get a chance. Case in point Amazon buys Whole Foods and Krogers falls like crazy within a few months it's up 50%. I believe there are some advantages that smaller money/individuals have if they are willing to do two things. Sit on their money waiting for an opportunity (this is much harder than it sounds). Go in for large percentages when the opportunity presents itself because it doesn't present itself often. I have also been lucky I recognize that. I made a few bad investments but in all of those it was when I hadn't done enough research. The ones where I went all in I recognized that there was a lost opportunity cost but it doesn't matter. I bought AMD at $4 in 2014. It fell to $1.80. I kept adding and never sold. It went back up to 15 didn't sell went to 10 didn't sell and now it's at 30. I may sell as the thesis has changed but I never lost sleep over it. That said I kept maxing out a 401k in extended market funds for a while but I knew that the investments were sound --they had a moat or were disruptive. Once you do your research be firm in your convictions. Also do your research, and that can mean hanging out at JCP and Macys to see does anyone still shop here?, to reading everythign there is to know about them. You occasionally get a slight advantage that the big funds don't quite get and can make the trade a little in advance. I have missed out on some big deals (I followed a stock for a year trying to understand all the potential and risks behind it went from 6 to $60 in the next two years). Don't invest in a business if you don't understand all the risks in it.
I don't care about your 30X statement and whether or not it is true. Your outline of of your method is similar to mine in a lot of respects. Enough so, I believe you are doing well.
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So I will say this...I kept my money in CDs for about 5 years and stable funds.
I read dozens of books on value investing/stock picking at the local library. About 8 years ago I started investing.Picking companies that I believed were innovating and undervalued. For long periods my money sat in cash and then I would go all in.
I went Marvel (which got bought by Disney), Sprint, Clearwire, IBM and Nokia and AMD, Kroger. All of whom had some underlying technology or item undervalued. In total I had a roughly 30x rate of return in 8 years total (not sure what it is annually because it varies dramatically I only look at what I started with and where it is now). Yes roughly 30x (I am an engineer by training so this math is correct and not a calculation error). Some of it is luck some of it is recognizing trends. I will give an example. Look at GE or F or even FB or IBM. your average fund manager if the stock falls 15-20% must sell to maintain the balance of his portfolio/returns. So when the going gets bad due to some recent news the stock overreacts as virtually all fund managers pile on the selling. This is where the individual investor has a chance in my opinion by going against the grain. I can't beat computers at volume or day trading but I have time on my side. Average fund manager has to make a quarterly or annual report and can't risk a large component (FB, APPL, GE, IBM) falling dramatically so you get a chance. Case in point Amazon buys Whole Foods and Krogers falls like crazy within a few months it's up 50%. I believe there are some advantages that smaller money/individuals have if they are willing to do two things. Sit on their money waiting for an opportunity (this is much harder than it sounds). Go in for large percentages when the opportunity presents itself because it doesn't present itself often. I have also been lucky I recognize that. I made a few bad investments but in all of those it was when I hadn't done enough research. The ones where I went all in I recognized that there was a lost opportunity cost but it doesn't matter. I bought AMD at $4 in 2014. It fell to $1.80. I kept adding and never sold. It went back up to 15 didn't sell went to 10 didn't sell and now it's at 30. I may sell as the thesis has changed but I never lost sleep over it. That said I kept maxing out a 401k in extended market funds for a while but I knew that the investments were sound --they had a moat or were disruptive. Once you do your research be firm in your convictions. Also do your research, and that can mean hanging out at JCP and Macys to see does anyone still shop here?, to reading everythign there is to know about them. You occasionally get a slight advantage that the big funds don't quite get and can make the trade a little in advance. I have missed out on some big deals (I followed a stock for a year trying to understand all the potential and risks behind it went from 6 to $60 in the next two years). Don't invest in a business if you don't understand all the risks in it.
I don't care about your 30X statement and whether or not it is true. Your outline of of your method is similar to mine in a lot of respects. Enough so, I believe you are doing well.
Translation: I don't care if you're lying, your claims back up my current beliefs. High five!
I'm not suggesting your method is wrong, but you might want to disregard leebuckeye's post as confirmation of it. Perhaps they can add some detail to clarify their rate of return?
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Simple:
The time spent picking stocks, even if it results in 100% outsized gains over ten years, is not EVER worth it. It's a complete, ridiculous waste of time. I cannot even imagine a net worth for which it would make sense to spend the time to do this.
It's a hobby that should not interfere in good decision-making.
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So I will say this...I kept my money in CDs for about 5 years and stable funds.
I read dozens of books on value investing/stock picking at the local library. About 8 years ago I started investing.Picking companies that I believed were innovating and undervalued. For long periods my money sat in cash and then I would go all in.
I went Marvel (which got bought by Disney), Sprint, Clearwire, IBM and Nokia and AMD, Kroger. All of whom had some underlying technology or item undervalued. In total I had a roughly 30x rate of return in 8 years total (not sure what it is annually because it varies dramatically I only look at what I started with and where it is now). Yes roughly 30x (I am an engineer by training so this math is correct and not a calculation error). Some of it is luck some of it is recognizing trends. I will give an example. Look at GE or F or even FB or IBM. your average fund manager if the stock falls 15-20% must sell to maintain the balance of his portfolio/returns. So when the going gets bad due to some recent news the stock overreacts as virtually all fund managers pile on the selling. This is where the individual investor has a chance in my opinion by going against the grain. I can't beat computers at volume or day trading but I have time on my side. Average fund manager has to make a quarterly or annual report and can't risk a large component (FB, APPL, GE, IBM) falling dramatically so you get a chance. Case in point Amazon buys Whole Foods and Krogers falls like crazy within a few months it's up 50%. I believe there are some advantages that smaller money/individuals have if they are willing to do two things. Sit on their money waiting for an opportunity (this is much harder than it sounds). Go in for large percentages when the opportunity presents itself because it doesn't present itself often. I have also been lucky I recognize that. I made a few bad investments but in all of those it was when I hadn't done enough research. The ones where I went all in I recognized that there was a lost opportunity cost but it doesn't matter. I bought AMD at $4 in 2014. It fell to $1.80. I kept adding and never sold. It went back up to 15 didn't sell went to 10 didn't sell and now it's at 30. I may sell as the thesis has changed but I never lost sleep over it. That said I kept maxing out a 401k in extended market funds for a while but I knew that the investments were sound --they had a moat or were disruptive. Once you do your research be firm in your convictions. Also do your research, and that can mean hanging out at JCP and Macys to see does anyone still shop here?, to reading everythign there is to know about them. You occasionally get a slight advantage that the big funds don't quite get and can make the trade a little in advance. I have missed out on some big deals (I followed a stock for a year trying to understand all the potential and risks behind it went from 6 to $60 in the next two years). Don't invest in a business if you don't understand all the risks in it.
I don't care about your 30X statement and whether or not it is true. Your outline of of your method is similar to mine in a lot of respects. Enough so, I believe you are doing well.
Translation: I don't care if you're lying, your claims back up my current beliefs. High five!
I'm not suggesting your method is wrong, but you might want to disregard leebuckeye's post as confirmation of it. Perhaps they can add some detail to clarify their rate of return?
You did a complete hack job an mischaracterized what I said showing your bias. You can call my post confirmation bias or whatever. I don't really care.e
Like I said, I don't care about whether it is 30X, 20X, 10x or whateverx.
Are you asking me to clarify? How would I know?
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So I will say this...I kept my money in CDs for about 5 years and stable funds.
I read dozens of books on value investing/stock picking at the local library. About 8 years ago I started investing.Picking companies that I believed were innovating and undervalued. For long periods my money sat in cash and then I would go all in.
I went Marvel (which got bought by Disney), Sprint, Clearwire, IBM and Nokia and AMD, Kroger. All of whom had some underlying technology or item undervalued. In total I had a roughly 30x rate of return in 8 years total (not sure what it is annually because it varies dramatically I only look at what I started with and where it is now). Yes roughly 30x (I am an engineer by training so this math is correct and not a calculation error). Some of it is luck some of it is recognizing trends. I will give an example. Look at GE or F or even FB or IBM. your average fund manager if the stock falls 15-20% must sell to maintain the balance of his portfolio/returns. So when the going gets bad due to some recent news the stock overreacts as virtually all fund managers pile on the selling. This is where the individual investor has a chance in my opinion by going against the grain. I can't beat computers at volume or day trading but I have time on my side. Average fund manager has to make a quarterly or annual report and can't risk a large component (FB, APPL, GE, IBM) falling dramatically so you get a chance. Case in point Amazon buys Whole Foods and Krogers falls like crazy within a few months it's up 50%. I believe there are some advantages that smaller money/individuals have if they are willing to do two things. Sit on their money waiting for an opportunity (this is much harder than it sounds). Go in for large percentages when the opportunity presents itself because it doesn't present itself often. I have also been lucky I recognize that. I made a few bad investments but in all of those it was when I hadn't done enough research. The ones where I went all in I recognized that there was a lost opportunity cost but it doesn't matter. I bought AMD at $4 in 2014. It fell to $1.80. I kept adding and never sold. It went back up to 15 didn't sell went to 10 didn't sell and now it's at 30. I may sell as the thesis has changed but I never lost sleep over it. That said I kept maxing out a 401k in extended market funds for a while but I knew that the investments were sound --they had a moat or were disruptive. Once you do your research be firm in your convictions. Also do your research, and that can mean hanging out at JCP and Macys to see does anyone still shop here?, to reading everythign there is to know about them. You occasionally get a slight advantage that the big funds don't quite get and can make the trade a little in advance. I have missed out on some big deals (I followed a stock for a year trying to understand all the potential and risks behind it went from 6 to $60 in the next two years). Don't invest in a business if you don't understand all the risks in it.
I don't care about your 30X statement and whether or not it is true. Your outline of of your method is similar to mine in a lot of respects. Enough so, I believe you are doing well.
Translation: I don't care if you're lying, your claims back up my current beliefs. High five!
I'm not suggesting your method is wrong, but you might want to disregard leebuckeye's post as confirmation of it. Perhaps they can add some detail to clarify their rate of return?
You did a complete hack job an mischaracterized what I said showing your bias. You can call my post confirmation bias or whatever. I don't really care.e
Like I said, I don't care about whether it is 30X, 20X, 10x or whateverx.
Are you asking me to clarify? How would I know?
I really don't know enough to confidently argue the efficacy of the method and I don't have a dog in the fight. We all harbor some little bits of bias but I don't think I have much in this discussion.
All I'm pointing out is that you readily back up their method and likely (I'm making an assumption here) will use it to reinforce your confidence in the method despite the lack of evidence for their claims.
I'm not asking you to clarify, I'm asking leebuckeye. Someone called them out as a liar and I'm curious if they can show more detail.
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I dont think it is wise to post financial details for strangers around the world, and hesitate to call anyone a liar, just because we may not believe people on the internet can pick sticks, a priori.
With enough patience and at least 20 'bets' there is quite a decent chance that a well thought out portfolio, with 0 churn, no transaction fees and a few decades of patience could outperform indexing. Even low cost ETFs have costs. The data supports that the drag of marketing and transaction costs are what shrinks active fund performance, not a lack of smart research. I get the skeptics about day trading and churning on advice from organizations like M Fool, as data suggests that fails more often than succeeds.
That said, its also likely the difference in your life style will be negligible. Say you end up with 6M instead of 2M. Your life is likely no different, hence the good advice to focus on your life and savings, not chasing risk premium returns (this is also why I advise caution about advising using leverage for everyone).
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So I will say this...I kept my money in CDs for about 5 years and stable funds.
I read dozens of books on value investing/stock picking at the local library. About 8 years ago I started investing.Picking companies that I believed were innovating and undervalued. For long periods my money sat in cash and then I would go all in.
I went Marvel (which got bought by Disney), Sprint, Clearwire, IBM and Nokia and AMD, Kroger. All of whom had some underlying technology or item undervalued. In total I had a roughly 30x rate of return in 8 years total (not sure what it is annually because it varies dramatically I only look at what I started with and where it is now). Yes roughly 30x (I am an engineer by training so this math is correct and not a calculation error). Some of it is luck some of it is recognizing trends. I will give an example. Look at GE or F or even FB or IBM. your average fund manager if the stock falls 15-20% must sell to maintain the balance of his portfolio/returns. So when the going gets bad due to some recent news the stock overreacts as virtually all fund managers pile on the selling. This is where the individual investor has a chance in my opinion by going against the grain. I can't beat computers at volume or day trading but I have time on my side. Average fund manager has to make a quarterly or annual report and can't risk a large component (FB, APPL, GE, IBM) falling dramatically so you get a chance. Case in point Amazon buys Whole Foods and Krogers falls like crazy within a few months it's up 50%. I believe there are some advantages that smaller money/individuals have if they are willing to do two things. Sit on their money waiting for an opportunity (this is much harder than it sounds). Go in for large percentages when the opportunity presents itself because it doesn't present itself often. I have also been lucky I recognize that. I made a few bad investments but in all of those it was when I hadn't done enough research. The ones where I went all in I recognized that there was a lost opportunity cost but it doesn't matter. I bought AMD at $4 in 2014. It fell to $1.80. I kept adding and never sold. It went back up to 15 didn't sell went to 10 didn't sell and now it's at 30. I may sell as the thesis has changed but I never lost sleep over it. That said I kept maxing out a 401k in extended market funds for a while but I knew that the investments were sound --they had a moat or were disruptive. Once you do your research be firm in your convictions. Also do your research, and that can mean hanging out at JCP and Macys to see does anyone still shop here?, to reading everythign there is to know about them. You occasionally get a slight advantage that the big funds don't quite get and can make the trade a little in advance. I have missed out on some big deals (I followed a stock for a year trying to understand all the potential and risks behind it went from 6 to $60 in the next two years). Don't invest in a business if you don't understand all the risks in it.
I don't care about your 30X statement and whether or not it is true. Your outline of of your method is similar to mine in a lot of respects. Enough so, I believe you are doing well.
Translation: I don't care if you're lying, your claims back up my current beliefs. High five!
I'm not suggesting your method is wrong, but you might want to disregard leebuckeye's post as confirmation of it. Perhaps they can add some detail to clarify their rate of return?
You did a complete hack job an mischaracterized what I said showing your bias. You can call my post confirmation bias or whatever. I don't really care.e
Like I said, I don't care about whether it is 30X, 20X, 10x or whateverx.
Are you asking me to clarify? How would I know?
I really don't know enough to confidently argue the efficacy of the method and I don't have a dog in the fight. We all harbor some little bits of bias but I don't think I have much in this discussion.
All I'm pointing out is that you readily back up their method and likely (I'm making an assumption here) will use it to reinforce your confidence in the method despite the lack of evidence for their claims.
I'm not asking you to clarify, I'm asking leebuckeye. Someone called them out as a liar and I'm curious if they can show more detail.
I didn't back up their method. I only stated that the method was similar to mine. That's not backing up their method, I stated I believed they have had some success. I will not use it to reinforce my method. I only use the data I have to evolve my methods.
You twist what others say on a whim, don't you? You read, take it in and the regurgitate what you believe I'm saying and it's not even close. That's your bias, not mine.
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Just to clarify i never said anyone is lying, I said trolling or delusional. I said this because the stocks referenced have not gone up anywhere near that much, so the only way to get 30x return would be to do something weird like buying heavily on margin. As an example IBM was.At 113 8 years ago and 153 now, that's actually very bad performance considering the S&P 500 has almost tripled during that time. Some of the other stocks have done well but nowhere near 30x return.
Trolling in my view would be exaggerating on purpose and delusional would be just not understanding your own performance. It's probably the later.
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Simple:
The time spent picking stocks, even if it results in 100% outsized gains over ten years, is not EVER worth it. It's a complete, ridiculous waste of time. I cannot even imagine a net worth for which it would make sense to spend the time to do this.
It's a hobby that should not interfere in good decision-making.
Really? 100% extra gains over 10 years is doubling your returns. That's totally worth it - it might be the difference between FIRE in 10 years and having to work another 10. The difference is real money.
Even an extra 1% per year over an investing career is a lot of cash.
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I think it's all personal preference and what you feel is best for you. I have about 25% of my portfolio in individual stocks. I started in individual stocks about 15 years ago and didn't know much about index funds. But I did have T Rowe funds as the core of my portfolio (I started there because Vanguard had too high of a minimum to start). But the last couple of years, I have since started to shift my money into Vanguard. The reason why I've stuck with individual stocks at 25% is because I have some solid companies that pay a nice dividend. I've held these for years. However, I do a little more speculating with part of that stock portfolio. I find that individual stocks keeps me more engaged and makes my work day more interesting.
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To the original question, "Are you wrong to be invested in individual stocks?" Absolutely not, there are some great opportunities out there and if you have the means and the motivation, why not take advantage of it? On the other hand, the original post indicates that you have little or no investment in index funds or any mutual funds. That is a mistake in my opinion, since as stated in the original post, it is very difficult for any single individual to closely follow more than 7-8 companies.
The bottom line, is that with only 7-8 companies, you are not very diversified, so a significant downturn or period of extended malaise in just a few of these stocks could have quite a negative impact on your overall returns, in which case, you would have been better off with an index fund. Now, there's no question that there will be periods where a 7-8 company portfolio will beat the market. The real question is whether your research and decision making is sufficient to avoid a major mistake for decades? I think the answer to this question is that the odds are not in your favor. Most market research tends to suggest that the odds of beating the market are on the order of 10% or less, however, mostly this applies to institutional investors. I suspect a disciplined small investor can probably increase these odds, perhaps even to the 30-40% level, in which case you do have a significant chance of beating the market long term, but the odds are still against you.
Now having said that, I want to repeat that to me, it makes a lot of sense to keep a portion of investments in stocks and even higher risk investments. I originally started investing in individual stocks through an Employee Purchase program at work, which gave extremely favorable terms. At some point, about ten years ago, the IRS cracked down on such programs, so when I changed employers I enrolled in the new program, but the terms were only marginally favorable and I'm not sure I really beat the market with the stock from this second employer.
Finally, in 2012, I struck out on my own and invested in individual stocks. Mostly, I picked banking stocks, as some had book values that far exceeded the share price and we seemed to be well into a recovery. I also started learning about and investing in options. I bought AMZN, which certainly didn't hurt, either. My returns have been phenomenal:
Portfolio S&P500
2012: 64.8% 15.9%
2013: 67.3% 32.4%
2014: 24.2% 13.8%
2015: 6.3% 1.3%
2016: -8.6% 11.9%
2017: 66.2% 21.9%
2018: 45.0% 9.3%
Now I'm under no illusion that I will be able to maintain such returns long-term. There's no question that I have taken on significant risk and have been rewarded handsomely. My approach to mitigating this risk is to remove a portion of the proceeds and roll it into index funds and bonds. Also, as market conditions become less favorable, I will need to be more aggressive about unwinding some of these investments. I particularly struggle with what to do with AMZN. Last year, when it topped $1K/share, I unloaded ~40%. In hindsight that was a mistake, although I would do it again just to reduce my market exposure.
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That's a very logical and measured description of why some people could benefit by having a portion of their portfolio in individual stocks.
You clearly understand the risks and that it's not easy to beat the market long term.
However I think not all individual stock investors have the same realization, not realizing the odds are against them outperforming over time or realizing the level of risk they are taking on. For this reason in my view its not a good idea for most people but maybe for a subset who are disciplined, smart, diversify, and put in the work.
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I've been reading up on investing for the last 25 years. I never had money in my 20's to invest. I dabbled in the stock market in individual stocks back in early oughts and didn't fair too well but I learned a lot about stock selection. I went into index funds from 2003 through 2006. I then started picking stocks again in 2007. I bought AAPl and GMCR as my main investments. I abide by the thesis that it is impossible to follow more than 5-7 companies and therefore I don't normally hold over 7 or eight stocks. (As Buffet says - "diversity is for protection against ignorant".) I truly follow the companies and have valid reasons for owning them. When those reasons evaporate - I sell. I am normally vested about 70-95% in equities dependent upon market conditions. No index funds, ETFs bond funds or other investment vehicles. Individual stocks only. My CAGR from 2007 until end of last year is 21.5%. I'm currently at 18.5% YTD.
Very little trading. Investments comprise about 80% of my portfolio.
Am I wrong for doing this?
Do you think I will revert to the mean?
Is anyone else doing this?
I feel like I'm on an island sometimes.
BTW, Index ETFs are a great vehicle! It is the best investment if you don't want to take the time to devote to DIY stock investments. I would say 90% of the populace belongs in ETFs.
Updated to fix Warren's Quote (I knew I had it wrong and it read as such)
No you're not wrong, you are clearly a stock picking genius so stick with it. Remember though, there is a high chance you have just been lucky (do you really think you have more skill than highly trained professionals who you have outperformed? )
I have to say your method of "researching" GMCR is laughable and shows and incredibly worrying level of hubris.
i honestly hope he doesn't have children to provide for. otherwise, this investing style is reckless.
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I've been reading up on investing for the last 25 years. I never had money in my 20's to invest. I dabbled in the stock market in individual stocks back in early oughts and didn't fair too well but I learned a lot about stock selection. I went into index funds from 2003 through 2006. I then started picking stocks again in 2007. I bought AAPl and GMCR as my main investments. I abide by the thesis that it is impossible to follow more than 5-7 companies and therefore I don't normally hold over 7 or eight stocks. (As Buffet says - "diversity is for protection against ignorant".) I truly follow the companies and have valid reasons for owning them. When those reasons evaporate - I sell. I am normally vested about 70-95% in equities dependent upon market conditions. No index funds, ETFs bond funds or other investment vehicles. Individual stocks only. My CAGR from 2007 until end of last year is 21.5%. I'm currently at 18.5% YTD.
Very little trading. Investments comprise about 80% of my portfolio.
Am I wrong for doing this?
Do you think I will revert to the mean?
Is anyone else doing this?
I feel like I'm on an island sometimes.
BTW, Index ETFs are a great vehicle! It is the best investment if you don't want to take the time to devote to DIY stock investments. I would say 90% of the populace belongs in ETFs.
Updated to fix Warren's Quote (I knew I had it wrong and it read as such)
No you're not wrong, you are clearly a stock picking genius so stick with it. Remember though, there is a high chance you have just been lucky (do you really think you have more skill than highly trained professionals who you have outperformed? )
I have to say your method of "researching" GMCR is laughable and shows and incredibly worrying level of hubris.
i honestly hope he doesn't have children to provide for. otherwise, this investing style is reckless.
I’m retired. Great children. They’re independent and haven’t asked for a dime since they moved out over ten years ago. Thanks for worrying about my family and me!
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30x return in 8 years is 53% annual return.
Perhaps the poster forgot to mention that this included annual contributions, too.
Picking stocks versus an ETF will get you either higher or lower returns than the ETF (or the index). Buying an index is like buying the average. Less Diversity = more changes to make larger returns, for increased volatility and risk of loss.
Note:
Less than 10% of Active managers, net of fees, beat their index over 10 years. BUT 30% of them did it over a short timeframe, like 3 years.
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I'm not sure what all the commotion is about. Modern Portfolio Theory came out decades ago, and basically says there is a linear relationship between risk and expected return. Build a high-risk portfolio comprised of hand-picked money-losing lotto-ticket stocks and you'll probably outperform the index. Either that or experience the difference high beta makes during a downturn.
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Yes, you can pick individual stocks and beat the market; it requires a few psychological skills that you can learn and it requires a plan. It isn't easy and it doesn't happen overnight, but it can be done.