Poll

What's your investment style for stocks?

Index only
73 (62.9%)
Stock picking only
5 (4.3%)
Mix
38 (32.8%)

Total Members Voted: 111

Author Topic: Index investors vs. stock pickers  (Read 17679 times)

Khan

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Index investors vs. stock pickers
« on: June 08, 2013, 08:34:54 PM »
For me, I mostly choose my stocks, though I'm starting to put some of my excess capital into index funds. I enjoy stock picking, and I search for value oriented, mainly dividend paying stocks primarily. I really don't actually hope to beat the market much on the whole, but I hope my portfolio fares much better during down times and I hope to be happier with my capital allocation then I would otherwise be(and buy more).

Grigory

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Re: Index investors vs. stock pickers
« Reply #1 on: June 08, 2013, 08:59:37 PM »
For me it's 50/50: I put my money in stocks, but my 401(k) is all in mutual funds. I win either way!

Joet

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Re: Index investors vs. stock pickers
« Reply #2 on: June 08, 2013, 09:17:31 PM »
Outside of company stock (not optional, sell as quickly as possible) I am COMPLETELY over individual stock ownership/picking. I learned through .bomb a (relatively) cheap life lesson I believe. Never again. Bogle-ish 3-fund portfolio for me, with a small/value + REIT twist is my plan.
AKA US total market + Foreign total Market+ small/value tilt+REIT + Agg bond Index + Ibonds
Set and forget

davisgang90

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Re: Index investors vs. stock pickers
« Reply #3 on: June 09, 2013, 03:55:03 AM »
All index funds except for a small brokerage account for "playing" at picking stocks.  This is mostly for entertainment value.

Left

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Re: Index investors vs. stock pickers
« Reply #4 on: June 09, 2013, 09:41:08 AM »
I was individual stocks, but I'm slowly learning to buy indexes... but I've only been doing this for about a year and a half

Reepekg

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Re: Index investors vs. stock pickers
« Reply #5 on: June 09, 2013, 10:28:54 AM »
It took about 2 years from when I started investing and picked all individual stocks (with relatively little money) before I gradually came around to indexing.

Now I tell myself I'll only stock pick with 5% of net worth for fun and index the rest, but I get too excited about the Teslas of the world and it usually ends up more like 10%. I find that this is equally fun (feels like my smarts will pay off) and far less stressful than stock picking with 50+%.

GreenGuava

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Re: Index investors vs. stock pickers
« Reply #6 on: June 09, 2013, 10:49:10 AM »
For me, I mostly choose my stocks, though I'm starting to put some of my excess capital into index funds. I enjoy stock picking, and I search for value oriented, mainly dividend paying stocks primarily. I really don't actually hope to beat the market much on the whole, but I hope my portfolio fares much better during down times and I hope to be happier with my capital allocation then I would otherwise be(and buy more).

Look into the often happening "total return vs dividend" discussions that happen here and see if you still want to focus on stocks that pay high dividends.  You might find that you prefer total return.

If you're looking for decreased volatility - that's what your "fares much better during down times" says to me - there are ways to do it other than stock picking.  For example, you could have a portion in stocks and a portion in bonds (the most common way to control risk/volatility in a profile).

PGH

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Re: Index investors vs. stock pickers
« Reply #7 on: June 09, 2013, 11:32:38 AM »
It took about 2 years from when I started investing and picked all individual stocks (with relatively little money) before I gradually came around to indexing.

Now I tell myself I'll only stock pick with 5% of net worth for fun and index the rest, but I get too excited about the Teslas of the world and it usually ends up more like 10%. I find that this is equally fun (feels like my smarts will pay off) and far less stressful than stock picking with 50+%.

I get pretty excited about the Teslas of the world too, and have been having a ball with some play money (maybe 2-3% of net worth). I'm beating market returns right now, but I know that could change tomorrow. I'd never do this with my IRA or even my regular stock fund, but I do find it entertaining as hell.

Khan

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Re: Index investors vs. stock pickers
« Reply #8 on: June 09, 2013, 02:20:02 PM »
For me, I mostly choose my stocks, though I'm starting to put some of my excess capital into index funds. I enjoy stock picking, and I search for value oriented, mainly dividend paying stocks primarily. I really don't actually hope to beat the market much on the whole, but I hope my portfolio fares much better during down times and I hope to be happier with my capital allocation then I would otherwise be(and buy more).

Look into the often happening "total return vs dividend" discussions that happen here and see if you still want to focus on stocks that pay high dividends.  You might find that you prefer total return.

If you're looking for decreased volatility - that's what your "fares much better during down times" says to me - there are ways to do it other than stock picking.  For example, you could have a portion in stocks and a portion in bonds (the most common way to control risk/volatility in a profile).

Yeah, except the bonds of the world are so low yielding right now I can't be brought to care. And it's not that I'm dividend only. I have decent positions in both AIG(low price/book, performing stock buybacks, no dividend right now), BAC(low dividend), and SIRI(only a one off dividend last year, large stock buyback). But I do like dividend companies somewhat more then the alternatives. It's hard to pass up the Intel's of the world when it was yielding 4.5%(with a very decent total return possible if Wall St. is wrong about them 'missing' mobile).

aj_yooper

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Re: Index investors vs. stock pickers
« Reply #9 on: June 09, 2013, 04:33:16 PM »
I am all index funds, split 60 equity/40 bonds.   1/3 foreign equity, 3% REITS, the rest large cap and large value, and small cap and small value.  I play by gardening or riding my bike. 

aclarridge

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Re: Index investors vs. stock pickers
« Reply #10 on: June 09, 2013, 07:08:31 PM »
Outside of company stock (not optional, sell as quickly as possible) I am COMPLETELY over individual stock ownership/picking. I learned through .bomb a (relatively) cheap life lesson I believe. Never again.

This. Especially because I am a bank employee, and therefore am subject to trade restrictions (can't buy/sell anything if the bank is somehow involved with the company, I have actually been burned by this twice). Index ETFs only - they're categorically unrestricted and nicely diversified. Set and forget indeed.

That said, at some point I may play around with like <1% of my portfolio in naked option bets. Only if I really feel like gambling. I would allocate that in my entertainment budget though, I wouldn't call it investing.

Jamesqf

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Re: Index investors vs. stock pickers
« Reply #11 on: June 10, 2013, 11:13:02 AM »
I think the quiz needs another option.  I don't do individual stocks (bar s bit from a previous employer that pays steady dividends), but I keep only about a third in index funds.  The rest is mostly in mutual funds that do value investing, with a bit in an emerging market fund.

pom

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Re: Index investors vs. stock pickers
« Reply #12 on: June 13, 2013, 10:57:34 AM »
I am about 80% index fund and I play with the other 20%.


Freeyourchains2

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Re: Index investors vs. stock pickers
« Reply #13 on: June 13, 2013, 11:26:42 AM »
Coca-Cola has been around longer than any Index Fund. It has survived 2 World-wars, 1 Great Depression, and many smaller depressions, and crashes.

I look to my left, a coke product. I look to my right, a coke product.

Kind of like Dominion Sugar's monopoly.

I keep seeing advertising for 401k to Roth IRA turnover's from all these bankers that drool over the fee's and commissions with such a switch, as the principal in the new Roth IRA is age restricted plus no withdraw for 5 years else 10% penalty + full ordinary tax incomes.

I like having full control over when i retire, at any time i desire, and at any age. It's my stache that has zero policy restrictions on it (except when the Fed wants to increase taxes on everyone and everything again and again).


Disclaimer: FI Goal between age 35 and 40. Has potential of making $1 Million in a year outside of a 401k account by being creative, risky, and outgoing with no fear.

However i do like these options on Roth-IRA (since sometimes people get free matching dollars from an employer)
http://www.investorguide.com/article/11816/understanding-the-tax-ramifications-of-an-inherited-roth-ira-igu/
« Last Edit: June 13, 2013, 11:51:29 AM by Freeyourchains2 »

matchewed

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Re: Index investors vs. stock pickers
« Reply #14 on: June 13, 2013, 11:51:41 AM »
That's just super that you love one company that has gone through so much. I also have individual stocks but I don't gloss over the fact that any one of those could fail even after all those events. And in fact most of the people here express an open mind about the index vs. individual stocks. It all depends on your tolerance for risk. Individual stocks regardless of their track record are more risky but can offer higher potential returns. Index funds are less risky but offer steadier returns over time.


An aside and I apologize for the mini-tirade -

As for the rest of your post it's the same misinformation you've hashed in every post you've made on this forum handle and your previous one. Keep trying to strike fear in the hearts of 401k and IRA owners everywhere. Keep fighting the good fight and pay the government more in taxes than you need to. It's just an opinion with nothing to hold it up but your paranoia over "The (boogie) Man."

Freeyourchains2

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Re: Index investors vs. stock pickers
« Reply #15 on: June 13, 2013, 12:21:09 PM »


As for the rest of your post it's the same misinformation you've hashed in every post you've made on this forum handle and your previous one. Keep trying to strike fear in the hearts of 401k and IRA owners everywhere. Keep fighting the good fight and pay the government more in taxes than you need to. It's just an opinion with nothing to hold it up but your paranoia over "The (boogie) Man."


What taxes? These 0% taxes on long term dividends/Capital gains at any age dependent on income? Or do you mean the taxes you'll have to pay to withdraw before age 59.5, after they close the early withdraw loop hole on your 401/IRA staches? All it takes is one simple law change. That's their agenda, full force. They want everyone to continue to work and spend until they die, because that's the only way they survive as a big government.

Don't you question the Age restrictions policies? Why must we be 59.5 to retire, or jump through their loopholes to retire extremely young?

Just saying. -End Tiraid






matchewed

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Re: Index investors vs. stock pickers
« Reply #16 on: June 13, 2013, 12:32:03 PM »
It has been covered before. You're paying income tax to invest in a regular account. I get to invest in a tax deferred 401k. Then get taxed later when I'm not working and my income is lower. Thereby having lower taxes. Feel free to get taxed twice it's your call. This has been covered in your other thread when you first started posting which subsequently got locked because of the far fetched claims you are making.

https://forum.mrmoneymustache.com/investor-alley/goal-fi-by-40-and-not-investing-in-401k-till-fi%27d

I apologize to the rest of the community for linking to a bad post and I'll stop here because this is derailing a thread which doesn't deserve it.

workwheniwantto

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Re: Index investors vs. stock pickers
« Reply #17 on: June 14, 2013, 07:47:09 AM »
I am 50% stocks, 25% real estate, 25% real estate loans (high-interest construction loans and non-performing notes made performing).

When it comes to stocks, I always pick individual stocks but never let any individual one represent more than 10% of net work.  I do use ETFs, but only as a quasi-savings account until I get several thousand dollars together to make an individual stock purchase.

As for the Freeyourchains2 tangent - while I am a (un)healty skeptic of the US's trajectory on the path of personal and financial freedoms, I am on the exact opposite end of the spectrum when it comes to government-sanctioned tax savings vehicles.  I have even broached the topic with my employer of becoming self-employed while still working for him, so that I could make the employer's side contributions into my Solo 401k as well. 

Freeyourchains2

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Re: Index investors vs. stock pickers
« Reply #18 on: June 14, 2013, 08:55:29 AM »
It has been covered before. You're paying income tax to invest in a regular account. I get to invest in a tax deferred 401k. Then get taxed later when I'm not working and my income is lower. Thereby having lower taxes. Feel free to get taxed twice it's your call. This has been covered in your other thread when you first started posting which subsequently got locked because of the far fetched claims you are making.

https://forum.mrmoneymustache.com/investor-alley/goal-fi-by-40-and-not-investing-in-401k-till-fi%27d

I apologize to the rest of the community for linking to a bad post and I'll stop here because this is derailing a thread which doesn't deserve it.

That is your opinion. A lot of the community liked my thread actually, and liked the ideas of investing outside of restricted by Government and Fund Managers'  control funds. You can't start a business with 401k/IRA money either. Or buy a Rental property.

Why have so many other threads have been popping up questioning the restrictions of your stache  inside 401k/IRA accounts, for the sake of saving some on Government enforced taxes, when there are many outside of 401k/IRA ways to deduct taxes and save on investment return taxes?

Once they have your money inside another "retirement " fund (like forced social security taxes), they won't give it back. The will take it all. Clean and Simple.
History just repeats itself.

As for this thread, Stock picking by hand is fun, independent, educational, encourages new investment opportunities, don't need to pay Admin fees for something you learn how to do better yourself over time, etc. It gives you complete control, complete freedom of choices with diversifying. Complete freedom to withdraw at will without excess penalties in index funds.
Plus what do index funds do with the Trillions of "borrowed" money from you? They loan it out to the Government for even greater return rates, and the fund managers' CEO takes the greatest commissions of hundreds of millions.

Vanguard 500 Index Fund VFINX  Asset manager:
Michael Buek (Started: Dec 31, 1991)

Mutual fund manager Michael H. Buek currently manages 20 Mutual funds

Annual Compensation*
There is no Annual Compensation data available.
Stock Options*
There is no Stock Options data available.
Total Compensation*
There is no Total Compensation data available.
« Last Edit: June 14, 2013, 09:04:50 AM by Freeyourchains2 »

arebelspy

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Re: Index investors vs. stock pickers
« Reply #19 on: June 14, 2013, 09:39:53 AM »
[Moderator Hat On]
We're not going to start that again, Freeyourchains.

People have repeatedly told you that what you are saying is wrong (for example, in this last post you said you can't use IRA money to buy rental property, which is flat out false, you absolutely can, it's called a self-directed IRA) and your insistence is merely derailing and distracting.

Please do not detract from this index vs. stock picking thread with 401k/IRA or taxable debates.

Regardless of if you invest in a taxable or tax advantaged account, the topic is index versus individual stock picking.

Thanks.

Everyone else: please do not rise to the bait, let this be the last post in this thread on 401k vs. taxable.  Cheers!
[Moderator Hat Off]
« Last Edit: June 14, 2013, 09:41:36 AM by arebelspy »
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

matchewed

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Re: Index investors vs. stock pickers
« Reply #20 on: June 14, 2013, 09:53:27 AM »
As for this thread, Stock picking by hand is fun, independent, educational, encourages new investment opportunities, don't need to pay Admin fees for something you learn how to do better yourself over time, etc. It gives you complete control, complete freedom of choices with diversifying. Complete freedom to withdraw at will without excess penalties in index funds.
Plus what do index funds do with the Trillions of "borrowed" money from you? They loan it out to the Government for even greater return rates, and the fund managers' CEO takes the greatest commissions of hundreds of millions.

Vanguard 500 Index Fund VFINX  Asset manager:
Michael Buek (Started: Dec 31, 1991)

Mutual fund manager Michael H. Buek currently manages 20 Mutual funds

Annual Compensation*
There is no Annual Compensation data available.
Stock Options*
There is no Stock Options data available.
Total Compensation*
There is no Total Compensation data available.

What excess penalties exist for index funds? Can you actually show that? And what proof do you have that the money in index funds is being borrowed by the government? It is no surprise that the fund manager takes a commission but that commission is a part of the expense ratio. Especially for good funds like Vanguard funds which there are no other fees taken out.

Freeyourchains2

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Re: Index investors vs. stock pickers
« Reply #21 on: June 14, 2013, 11:36:19 AM »
What excess penalties exist for index funds? Can you actually show that? And what proof do you have that the money in index funds is being borrowed by the government? It is no surprise that the fund manager takes a commission but that commission is a part of the expense ratio. Especially for good funds like Vanguard funds which there are no other fees taken out.

"A $20 account service fee, charged annually.*

A $50 processing fee for non-DTC eligible securities (not applicable to American Depositary Receipts) plus commission for each foreign securities trade. If a trade executes over multiple days, the fee plus commission will be charged for each day on which an execution occurs. Additional fees may apply for trades executed directly on local markets.

No-transaction-fee (NTF) funds   
Transaction fee
None
Minimum initial investment
For most funds, $3,000 for non-retirement accounts and $1,000 for IRAs9
Minimum additional investment
$1,000 for any account type9

NTF redemption fee
1% of the proceeds ($50 minimum, $250 maximum), for shares held less than 180 days. The holding period begins on the settlement day—usually the next business day or three business days after the trade date. Whether the NTF redemption fee applies is determined on the trade date of the redemption. The fee is waived for shares transferred from another brokerage firm or financial institution.
Dollar-cost-averaging transactions
No fee; minimum purchase $100; minimum two transactions

Transaction-fee (TF) funds   
Transaction fee
Standard: $35; Voyager® and Voyager Select®: $20; Flagship®, $88.
Fees apply per trade—purchases, sales or exchanges—regardless of order size. Purchase fee is added to order cost. Sales fee is subtracted from order proceeds.
If you exchange shares of a fund for another fund in the same fund family and share class, the transaction fee will be paid from your money market settlement fund.

Dollar-cost-averaging transactions
$3 per transaction; minimum purchase $100; minimum two transactions.

Other securities transaction or maintenance fees may apply. Call us for additional information"

For expense ratios. 0.40% of 2 Trillion dollars = $800,000,000 in revenue. 50% going to the Asset Manager, 30% to Board member officers, 10% to company expenses, and 10% divided out to the crest of the hired employee lower class workers.

Freeyourchains2

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Re: Index investors vs. stock pickers
« Reply #22 on: June 14, 2013, 11:55:53 AM »
[Moderator Hat On]
We're not going to start that again, Freeyourchains.

People have repeatedly told you that what you are saying is wrong (for example, in this last post you said you can't use IRA money to buy rental property, which is flat out false, you absolutely can, it's called a self-directed IRA) and your insistence is merely derailing and distracting.

Please do not detract from this index vs. stock picking thread with 401k/IRA or taxable debates.

Regardless of if you invest in a taxable or tax advantaged account, the topic is index versus individual stock picking.

Thanks.

Everyone else: please do not rise to the bait, let this be the last post in this thread on 401k vs. taxable.  Cheers!
[Moderator Hat Off]

Alright, Moderator is right about self-directed IRA purchasing of rental properties, however be advised of the full truth in this article:

"A self-directed individual retirement account, or IRA, gives its owner the ability to invest in many things other than the usual stocks, bonds, mutual funds and CDs.

Some investors think they offer a great opportunity to get a better return on retirement savings, especially in today's low-interest rate environment. But setting one up and following the rules isn't nearly as easy as setting up a conventional IRA.

For one thing, the Internal Revenue Service requires that either a qualified trustee or a custodian hold these assets on behalf of the IRA owner. That part of the deal adds a layer of costs that will add up quickly and eat up your profits if you're not careful.

While self-directed IRAs can be used for an array of investments, including commodities, commercial paper, tax lien certificates and precious metals, the most popular investment to put in them is real estate.

If you choose to buy real estate in a self-directed IRA, the legal title of the property you buy must be in the name of the IRA. The owner of the IRA must be strictly hands-off, which means that if you own property in your IRA, you generally can't do any of the chores associated with real estate ownership such as collecting rents and mowing the grass. Under most interpretations of these rules, you can't even pay the bill yourself when you hire somebody else to do the work. The custodian or trustee has to handle all those duties.

Those fees add up. Every time you authorize the custodian of your self-directed IRA to pay the guy who mows the grass or the plumber who unplugs the commode, he'll tack on a service charge of, say, $25 -- on top of what you pay for the service.

Checkbook control
Nilssen of Guidant Financial advocates a solution using a limited liability company, called a self-directed IRA LLC. In this arrangement, an IRA owner sets up a limited liability company to be owned solely by the IRA. He directs his IRA custodian -- in this case, Guidant -- to invest his IRA in his limited liability company, which he manages himself. That way the IRA account holder can have what is known as "checkbook control" over his self-directed IRA, handling all the practical details himself.

A supporter of the LLC self-directed IRA approach is C. Diana Webb, assistant professor of finance at the Midland, Mich., branch of Northwood University. "As the owner of the IRA LLC, you have complete control over that checkbook," she says. "You can't compensate yourself, but you aren't having out-of-pocket fees every time you make a transaction."

The IRS has never ruled directly on the legality of these IRA LLCs, although proponents point to related decisions and private letters as proof that the IRS approves. But Bill Smith, an attorney who is managing director of the CBIZ MHM National Tax Office, is dubious. He says that even approaches that appear to meet IRS approval have pitfalls.

"If the IRS audits you and disallows it, there is no administrative appeal. The only way to fight it is to go to court. So the amount of the transaction better merit the $200,000 it will take to slug it out with the IRS," Smith says. "My advice is, don't do it."

The fine print
The cost of setting up an IRA LLC ranges from a low of $600, Webb says, to as much as $10,000. You also can find the paperwork and do it yourself, she says, although she doesn't advise it. "This is only for people who understand the tax laws."

Guidant charges $3,800 to set up one of its IRA LLCs. Its set-up fee includes two consultations with an attorney. After that, there is an annual renewal fee.

More conventional self-directed IRA custodians have lower-cost initial structures. For instance, the initial set-up fee for a self-directed IRA through Sterling Trust, one of the better-known custodial companies, is $50. The ongoing costs vary, but can add up. Here's a sampling from the company's rate sheet:

One-time establishment fee: $50.
First-year annual fee: $75.
Annual renewal for an account holding $100,000 to $249,000: $300.
Pay bills with cashier's check, certified mail or overnight mail service: $25 each.
Pay bills via wire transfer: $30 each check.
If you decide to give a self-directed IRA a try, here's some advice for minimizing the fees. Most of these tips are from Laura Stover, an investment adviser and president of Laura H. Stover Financial Group.

Shop around for a custodian who handles the kind of investment you plan to pursue. Make sure you understand all the fees associated with that investment type before you sign up.
If you're planning to invest in rental real estate, find out how the custodian handles rent collection and the other duties of being a landlord.
If the custodian charges a percentage of your total investment, a commission or a wrap fee, make sure you understand what's included and negotiate.
Ask about cash-management options within the IRA. Find out what the interest rate will be and if there are cash-management fees.
Do the math. Sometimes self-directed IRAs sound like a much better deal than they turn out to be once you figure out the costs compared to more conventional arrangements."

 http://www.bankrate.com/finance/retirement/accounting-for-fees-self-directed-ira.aspx#ixzz2WDIYEtVj

And I will honor his "this be the last post in this thread on 401k vs. taxable.  Cheers!"    though mustachians don't just fool heartedly fall for government's savings on government taxes within "retirement tax-advantage funds", because you do give up control your staches for early retirement until their appointed time for your retirement, or a their controlled 5 year Roth IRA time period is meet to sell your positions of your initial principal investments. My final thought on the matter!

Ok, onward for constructive investment advise and threads!

Undecided

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Re: Index investors vs. stock pickers
« Reply #23 on: June 14, 2013, 03:15:14 PM »
And I will honor his "this be the last post in this thread on 401k vs. taxable.  Cheers!"

!

Mr Mark

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Re: Index investors vs. stock pickers
« Reply #24 on: June 14, 2013, 09:21:24 PM »
I think the quiz needs another option.  I don't do individual stocks (bar s bit from a previous employer that pays steady dividends), but I keep only about a third in index funds.  The rest is mostly in mutual funds that do value investing, with a bit in an emerging market fund.

+1

Is it just me, or since WaPo there are a lot more tinhat types about?

zunachy

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Re: Index investors vs. stock pickers
« Reply #25 on: June 17, 2013, 07:36:08 PM »
I keep 100% in individual stocks.  Four to be exact until this week -- it was three before that for a very long time.

When you buy an index you give some of your money to some really bad companies, a whole lot of mediocre ones, and some really amazing ones.  You also really can't tell what will happen to most of the companies in your index.

There are definite advantages with an index, but in my opinion, the advantages do not outweigh the two negatives mentioned above. 

http://en.wikipedia.org/wiki/List_of_S%26P_500_companies

Take the list of companies in the S&P 500.  I bet most can look through the list, find two companies they know about, and thereafter honestly say that one is better than the other.

matchewed

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Re: Index investors vs. stock pickers
« Reply #26 on: June 17, 2013, 09:16:55 PM »
I keep 100% in individual stocks.  Four to be exact until this week -- it was three before that for a very long time.

When you buy an index you give some of your money to some really bad companies, a whole lot of mediocre ones, and some really amazing ones.  You also really can't tell what will happen to most of the companies in your index.

There are definite advantages with an index, but in my opinion, the advantages do not outweigh the two negatives mentioned above. 

http://en.wikipedia.org/wiki/List_of_S%26P_500_companies

Take the list of companies in the S&P 500.  I bet most can look through the list, find two companies they know about, and thereafter honestly say that one is better than the other.


What do you mean by better? And what does the comparison of one stock to another mean in the discussion between individual stocks and index funds? Are you able to tell me how your three or four stocks will perform over the next 30-60 years? Barring some cataclysmic event I've got much more confidence on how the S&P will perform over the next 30-60 years.

Nords

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Re: Index investors vs. stock pickers
« Reply #27 on: June 17, 2013, 09:42:25 PM »
I keep 100% in individual stocks.  Four to be exact until this week -- it was three before that for a very long time.
When you buy an index you give some of your money to some really bad companies, a whole lot of mediocre ones, and some really amazing ones.  You also really can't tell what will happen to most of the companies in your index.
There are definite advantages with an index, but in my opinion, the advantages do not outweigh the two negatives mentioned above. 
I think there's a diversification balance between "really good stocks" and "good stocks". 

But I think it's a number much higher than "four".  Maybe 30.  Maybe 50.

zunachy

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Re: Index investors vs. stock pickers
« Reply #28 on: June 17, 2013, 10:32:27 PM »
I keep 100% in individual stocks.  Four to be exact until this week -- it was three before that for a very long time.

When you buy an index you give some of your money to some really bad companies, a whole lot of mediocre ones, and some really amazing ones.  You also really can't tell what will happen to most of the companies in your index.

There are definite advantages with an index, but in my opinion, the advantages do not outweigh the two negatives mentioned above. 

http://en.wikipedia.org/wiki/List_of_S%26P_500_companies

Take the list of companies in the S&P 500.  I bet most can look through the list, find two companies they know about, and thereafter honestly say that one is better than the other.


What do you mean by better? And what does the comparison of one stock to another mean in the discussion between individual stocks and index funds? Are you able to tell me how your three or four stocks will perform over the next 30-60 years? Barring some cataclysmic event I've got much more confidence on how the S&P will perform over the next 30-60 years.


Let's say you have two companies with identical assets and liabilities.  And identical equity -- or money put up front to start things up.  Let's say it's year one even -- the companies just opened up.  At the end of the year, with the same exact capital working in the business one company sold more stuff, kept expenses lower, and had more profit.

Then you can say that one company is better than the other.

It's really fun -- for me at least -- to try to look at companies this way.   You can say it's the management, location, luck, some powerful intangible, some weird government rule, so weird monopoly, legal or not.  Sometimes you can understand what is going on, a lot of time you cannot (I can't at least) -- but that is OK -- you don't need to understand all of them...just a few will do.

Well OK, the company did well for one year, but will it continue to do so in the next 10 (30 to 60 is too much probably) ? Standard economic theory says that "if there is good profit others will come and try to imitate...profits will go down yadda yadda..."  This is true also... but not in all cases.  Sometimes that "special something" that allows the company to extract great profit and not lose it to competition remains in tact for years on end.

So to answer the seconds question... using the above framework I can make a reasonably intelligent and confident guess about some of the companies.  I know that they use the capital invested in them well, and I at least understand their business and their economic advantage and why they don't lose it to competition. 

You cannot apply this framework to all the companies, so obviously it won't work for the S&P as a whole. 

When you buy the S&P as a whole, you are really betting on US.  That is a good bet. I think that is the confidence that you are talking about.  I totally agree that the standard of living in US will be higher 10 years from now.  And, the market value of US companies, which play a huge role in the higher living standard, as whole will be higher as well. 

But that whole market value will contain in it all the companies... including the ones that don't use capital well, or those that can't obtain great profitability because they sell commodity like products.  Their market value will of course be less, and that will be seen in the price of the index as well. 




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Re: Index investors vs. stock pickers
« Reply #29 on: June 17, 2013, 10:48:32 PM »
I think there's a diversification balance between "really good stocks" and "good stocks". 

But I think it's a number much higher than "four".  Maybe 30.  Maybe 50.

While I agree in general, it is sort of a fun game made of constraints.  Only individual stocks allowed, no index funds, you get 4 picks.

Berkshire Hathaway is my first pick.  ;)
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zunachy

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Re: Index investors vs. stock pickers
« Reply #30 on: June 17, 2013, 10:49:34 PM »
I keep 100% in individual stocks.  Four to be exact until this week -- it was three before that for a very long time.
When you buy an index you give some of your money to some really bad companies, a whole lot of mediocre ones, and some really amazing ones.  You also really can't tell what will happen to most of the companies in your index.
There are definite advantages with an index, but in my opinion, the advantages do not outweigh the two negatives mentioned above. 
I think there's a diversification balance between "really good stocks" and "good stocks". 

But I think it's a number much higher than "four".  Maybe 30.  Maybe 50.


Sorry but I don't understand what you mean by "diversification balance between "really good stocks" and "good stocks""

Yes, if you hold 30 to 50 stocks, your portfolio will be diversified. 

If you are saying that you don't quite know how the 30 to 50 will fare, and if you hold 30 to 50 you will be OK on average.  Then that is that, but why not hold an index instead?

If you are saying that you analysed a lot of companies and found 30 to 50 good ones -- then I have to ask what methods of analysis you used.


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Re: Index investors vs. stock pickers
« Reply #31 on: June 17, 2013, 11:03:28 PM »
zunachy - I assume you are simplifying your position a bit, since you haven't mentioned anything about the stock pricing of your companies. It won't be enough for you to identify "good" companies/stocks - you also need to be able to determine if the value of the company exceeds the pricing of the stock that is currently set by the market. That is the real trick, innit?

Personally, I don't feel that I can do so better than the majority of other players in the market. It may be possible with effort, study, time and practice. I'd rather just stick with an index fund.

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Re: Index investors vs. stock pickers
« Reply #32 on: June 17, 2013, 11:11:09 PM »
We need to start a 'let's bet the farm on my awesome skills as a stock picker, cos after all it's just my entire life I'm gambling with, so what the heck' thread.


zunachy

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Re: Index investors vs. stock pickers
« Reply #33 on: June 17, 2013, 11:16:27 PM »
zunachy - I assume you are simplifying your position a bit, since you haven't mentioned anything about the stock pricing of your companies. It won't be enough for you to identify "good" companies/stocks - you also need to be able to determine if the value of the company exceeds the pricing of the stock that is currently set by the market. That is the real trick, innit?

Personally, I don't feel that I can do so better than the majority of other players in the market. It may be possible with effort, study, time and practice. I'd rather just stick with an index fund.

I thought that too for awhile... that the hard part was determining the price at which to buy. 

But when you have a reasonable view of what something is worth 10 years from now, then that decisions becomes much easier.

If you think that in 10 years

company A = x
company B = 1.5X
company C = .75X

Then, when you saved up some cash and it's time to buy, you simply plug in the current market prices, add a conservative guess for dividends, and you get your return for each investment.

If you don't like the return for any, if the current price is too high, that is OK too. Don't buy.

The hard part is figuring x though.


Mr Mark

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Re: Index investors vs. stock pickers
« Reply #34 on: June 17, 2013, 11:33:22 PM »

If you think that in 10 years

company A = x
company B = 1.5X
company C = .75X

(edit)

The hard part is figuring x though.

And don't forget all those guestimates on the arbitrary constants either.

JamesAt15

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Re: Index investors vs. stock pickers
« Reply #35 on: June 17, 2013, 11:41:15 PM »
Zunachy, have you done any reading on efficient market theory? And have you read "A Random Walk Down Wall Street" by Burton Malkiel? I think you should, if you have not already.

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Re: Index investors vs. stock pickers
« Reply #36 on: June 18, 2013, 02:14:35 AM »
Zunachy, have you done any reading on efficient market theory? And have you read "A Random Walk Down Wall Street" by Burton Malkiel? I think you should, if you have not already.

Wherever people are involved, there is bound to be inefficiencies. The market is not some clockwork machine, it's an abstract idea created by thousands of participants with thousands of ideologies, levels of information, involvement, etc. Not saying that there isn't some merit to efficient market theory, and that we shouldn't think on it's implications, but to say that 100% of the time all information is baked into the price of a stock is absurd, and trends happen.

Look at Tesla, the height of inefficiency(and a short squeeze).

Zunachy, the problem with your assumptions are that their is more information baked into a stock price, such as growth rates.

Let's take two companies... comparative companies... How about Under Armor and Nike? We'll just compare market cap, P/E, and thoughts on the matter

UA: $5B market cap, 55 P/E ratio
NKE: $55B market cap, 24 P/E ratio

With a earnings growth of about ~20-25% for UA for the last 5 years, and earnings growth of about 11% for NKE we start realizing it's suddenly a lot harder to tell which one of these two companies is "better". Nike is established, pays a dividend, etc. UA is growing rapidly and is highly visible, but pays no dividend, and carries much of that future growth already baked into the stock price. If you were to ask me on my thoughts, I'd say UA could be the next Nike, but then Nike does something like the fuel band and I just don't know anymore. Who's to say I should pick one over the other?
(Sauce: http://www.nasdaq.com/symbol/ua/earnings-growth http://www.nasdaq.com/symbol/nke/earnings-growth )

These are two comparative companies.

As for your comment Mr Mark, I'm quite happy to put my money where it's at. I honestly sleep better at night knowing I own concentrated Intel stock over the S&P 500, because there's a lot of companies in such indexes that I don't want to be anywhere near, and because of it's structure, changes in companies such as AAPL when it was at it's ridiculous peak have an outsized effect on it. So I might miss out on things like Apple's rise? I'm quite fine with that.

There's thousands of ways to invest, and most of them are completely viable, whether it be self directed value investing, index investing, bonds, etc. The only guarantee is there is no easy path to quick riches. But there are many paths to long term wealth.
« Last Edit: June 18, 2013, 02:16:21 AM by Khanjar »

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Re: Index investors vs. stock pickers
« Reply #37 on: June 18, 2013, 04:58:30 AM »
Zunachy, have you done any reading on efficient market theory? And have you read "A Random Walk Down Wall Street" by Burton Malkiel? I think you should, if you have not already.

Wherever people are involved, there is bound to be inefficiencies. The market is not some clockwork machine, it's an abstract idea created by thousands of participants with thousands of ideologies, levels of information, involvement, etc. Not saying that there isn't some merit to efficient market theory, and that we shouldn't think on it's implications, but to say that 100% of the time all information is baked into the price of a stock is absurd, and trends happen.


But what makes you think you can pick up on those inefficiencies faster than say computer algorithms or the guys who actually do this for a living?

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Re: Index investors vs. stock pickers
« Reply #38 on: June 18, 2013, 05:24:34 AM »
Zunachy, have you done any reading on efficient market theory? And have you read "A Random Walk Down Wall Street" by Burton Malkiel? I think you should, if you have not already.

Wherever people are involved, there is bound to be inefficiencies. The market is not some clockwork machine, it's an abstract idea created by thousands of participants with thousands of ideologies, levels of information, involvement, etc. Not saying that there isn't some merit to efficient market theory, and that we shouldn't think on it's implications, but to say that 100% of the time all information is baked into the price of a stock is absurd, and trends happen.


But what makes you think you can pick up on those inefficiencies faster than say computer algorithms or the guys who actually do this for a living?

I don't honestly care. At the end of the day, the stocks I own aren't a black box from whence cometh profits(which is my primary problem with the S&P 500 gold standard and it's 2% yield and 500 companies each going every which way), I know my reasons for owning them and where I expect my profits to come from(whether it is buybacks, dividends, improved investor sentiment, I know what I'm expecting). Whether that lags the overall market or outperforms I do not care much. I know there are value index funds, reits, and dividend ones and in time I will add to positions of all of those as well, but I prefer the control that knowing I own x shares of a specific company.

And I'm not competing with HFT's, that's for traders to fight over. If I'm competing with anyone, it's wall st.'s sentiment, but only if I disagree(which isn't often). In some cases, I do disagree(INTC[PC is dead!1!11, late to mobile], in others I think the stock is being unduly punished for past issues(AIG, BAC, GE[Oh no, these companies cut the dividend, now I can never own the stock until they've proven for arbitrary amount of years that sounds nice that they are reformed!]), in others I don't really care one way or the other what I think Wall Streets pulse on the matter is, I'm happy to park my money(Csco, F, SIRI, INTC).

Like I said before, I'm not trying to beat the market and make 20 bazillion dollars in the next year, but I'm just finding my own happy place with my investments. For some people that's Indexes, for some it's real estate(and you couldn't hold a gun to my head to get me to go there), for some it's value/dividend/growth investing, for some they just crave the safety of bonds, and to each their own. In the end I'm socking away somewhere north of 40% of my take home pay(currently variable while dealing with home buying) and I hope that I don't get into a dick measuring contest in 10 years with someone on portfolio growth, hopefully both the alternate me that went index or the me that went mixed both end at about the same place.

JamesAt15

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Re: Index investors vs. stock pickers
« Reply #39 on: June 18, 2013, 07:20:34 AM »
Zunachy, have you done any reading on efficient market theory? And have you read "A Random Walk Down Wall Street" by Burton Malkiel? I think you should, if you have not already.

Wherever people are involved, there is bound to be inefficiencies. The market is not some clockwork machine, it's an abstract idea created by thousands of participants with thousands of ideologies, levels of information, involvement, etc. Not saying that there isn't some merit to efficient market theory, and that we shouldn't think on it's implications, but to say that 100% of the time all information is baked into the price of a stock is absurd, and trends happen.

That would be absurd, which is why I never said that.

What I would say, though, is that market efficiency suggests that the current price of a stock is going to be at least a pretty good approximation of what it is worth based on all known information. This sets the bar pretty high for being able to identify value by recognizing where your calculation of a stock's worthwhile price is significantly different than what the market has it priced at with enough confidence to bet your money on it.

It also works against the argument that an index fund includes a lot of under-performing companies as well - those companies will naturally be priced lower than the others, so you'll be buying them cheaply based on that valuation.

I'm not saying that it's impossible for investors to identify value where the market prices a stock significantly different than the investor values it at. I just believe that it is quite difficult to do so. I also believe that it is easy for human beings to over-estimate their own levels of ability for various skills, which includes stock valuation.

If you enjoy the process and the challenge of valuing and purchasing individual stocks, please do. Personally I think my efforts are best directed elsewhere, so index funds are more my speed.


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Re: Index investors vs. stock pickers
« Reply #40 on: June 18, 2013, 07:26:31 AM »

While I agree in general, it is sort of a fun game made of constraints.  Only individual stocks allowed, no index funds, you get 4 picks.

Berkshire Hathaway is my first pick.  ;)

I haven't been following this thread, but I just popped in, and all I have to say is:

Cheater. ;-)

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Re: Index investors vs. stock pickers
« Reply #41 on: June 18, 2013, 07:32:30 AM »
I hope that I don't get into a dick measuring contest
There's more to it than that, though. By my calculation, lagging the index by a single percent, which many manage to do by expense ratios alone, is enough to cost an entire year's worth of savings in just the 12 years that it takes a 60% saver to reach FI. For lower savings rates, compounding is even more important, so it could be what makes the difference between retiring at 43 and 46 - that's a huge chunk of your life to give up by investing in a suboptimal way!

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Re: Index investors vs. stock pickers
« Reply #42 on: June 18, 2013, 08:33:53 AM »
Sorry but I don't understand what you mean by "diversification balance between "really good stocks" and "good stocks""

Yes, if you hold 30 to 50 stocks, your portfolio will be diversified. 

If you are saying that you don't quite know how the 30 to 50 will fare, and if you hold 30 to 50 you will be OK on average.  Then that is that, but why not hold an index instead?

If you are saying that you analysed a lot of companies and found 30 to 50 good ones -- then I have to ask what methods of analysis you used.
My point is that you think you're picking the world's best 3-4 companies, yet you're leaving yourself exposed to single-stock risk instead of diversifying.  All that analysis can be wasted by a black swan in that company's moat.  If you have a more diversified portfolio (30-50 stocks) then a few black swans won't ruin your day.  There are enough stocks, and your analysis is presumably good enough, that you'd be able to add more stocks to your portfolio (and diversify away your single-stock risk) without measurably reducing your returns.  Heck, you might even improve your returns.  Your 50th stock pick is probably not the rock star that you think your first pick is going to be, but all of your analysis is still unable to predict the future.

As for "Why not hold an index?", my response would be "Why are you working so hard?"  When you divide your stock-picking alpha by your hours of effort, are you adequately compensated for the extra labor?  If you're hard-wired to enjoy picking stocks then that's what you should do.  However most of us prefer to do other things with our lives, and an index gives us 70% of the results with about 1% of the effort.  I like that reward::labor ratio.

If you want an example of an investor who's picked 30-50 good companies then I'd suggest the Dividend Growth Investor's blog.  But even he agrees that it takes a significant number of stocks to avoid getting ambushed by a dividend cut.

Berkshire Hathaway is my first pick.  ;)
Mine too, but I'm sure glad I sold it out of our daughter's college fund in February 2008.  She would've been halfway through junior year (this spring) before the share price recovered.  Now it's probably time to sell a few more call options...


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Re: Index investors vs. stock pickers
« Reply #43 on: June 18, 2013, 09:06:26 AM »
I don't honestly care. At the end of the day, the stocks I own aren't a black box from whence cometh profits(which is my primary problem with the S&P 500 gold standard and it's 2% yield and 500 companies each going every which way), I know my reasons for owning them and where I expect my profits to come from(whether it is buybacks, dividends, improved investor sentiment, I know what I'm expecting). Whether that lags the overall market or outperforms I do not care much. I know there are value index funds, reits, and dividend ones and in time I will add to positions of all of those as well, but I prefer the control that knowing I own x shares of a specific company.

Two things here:

* Plenty of index investors don't go with S&P 500 index funds.

* The S&P 500 has an average annual yield far above 2% historically.  Any reason you think it's going to drop to 2%?

RaveOregon

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Re: Index investors vs. stock pickers
« Reply #44 on: June 18, 2013, 09:23:04 AM »
My self compromise is max 401k and IRA with index funds and whatever I save and want to invest above that in taxable places I pick stocks with. I get the fact that I probably won't beat the market so to speak, but I want to try.

arebelspy

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Re: Index investors vs. stock pickers
« Reply #45 on: June 18, 2013, 09:25:10 AM »
I hope that I don't get into a dick measuring contest
There's more to it than that, though. By my calculation, lagging the index by a single percent, which many manage to do by expense ratios alone, is enough to cost an entire year's worth of savings in just the 12 years that it takes a 60% saver to reach FI. For lower savings rates, compounding is even more important, so it could be what makes the difference between retiring at 43 and 46 - that's a huge chunk of your life to give up by investing in a suboptimal way!

And how many older investors who finally reach FI have the sentiment "ah, if only I had discovered index funds earlier" (or similar "if only I hadn't been too stubborn in trying to pick my own stocks" or "I'd recommend index funds to someone who is 25, etc. etc.)?

Go to E-R.org.

A hint: a lot.

Very few I see saying they are happy they've done individual stock picking all their lives, and almost none who wish they hadn't done index funds.

Sort of tells you something.
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arebelspy

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Re: Index investors vs. stock pickers
« Reply #46 on: June 18, 2013, 09:26:35 AM »
My self compromise is max 401k and IRA with index funds and whatever I save and want to invest above that in taxable places I pick stocks with. I get the fact that I probably won't beat the market so to speak, but I want to try.

That's the exact sentiment that I nearly always hear the remorse of "I wish I hadn't bothered, and had stuck with Index Funds all along," as above.  But best of luck to you.  I hope you never have that sentiment, but barring the unlikeliness of that, I hope you discover it sooner rather than later. :)
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zunachy

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Re: Index investors vs. stock pickers
« Reply #47 on: June 18, 2013, 11:31:58 PM »
Zunachy, have you done any reading on efficient market theory? And have you read "A Random Walk Down Wall Street" by Burton Malkiel? I think you should, if you have not already.

Wherever people are involved, there is bound to be inefficiencies. The market is not some clockwork machine, it's an abstract idea created by thousands of participants with thousands of ideologies, levels of information, involvement, etc. Not saying that there isn't some merit to efficient market theory, and that we shouldn't think on it's implications, but to say that 100% of the time all information is baked into the price of a stock is absurd, and trends happen.

Look at Tesla, the height of inefficiency(and a short squeeze).

Zunachy, the problem with your assumptions are that their is more information baked into a stock price, such as growth rates.

Let's take two companies... comparative companies... How about Under Armor and Nike? We'll just compare market cap, P/E, and thoughts on the matter

UA: $5B market cap, 55 P/E ratio
NKE: $55B market cap, 24 P/E ratio

With a earnings growth of about ~20-25% for UA for the last 5 years, and earnings growth of about 11% for NKE we start realizing it's suddenly a lot harder to tell which one of these two companies is "better". Nike is established, pays a dividend, etc. UA is growing rapidly and is highly visible, but pays no dividend, and carries much of that future growth already baked into the stock price. If you were to ask me on my thoughts, I'd say UA could be the next Nike, but then Nike does something like the fuel band and I just don't know anymore. Who's to say I should pick one over the other?
(Sauce: http://www.nasdaq.com/symbol/ua/earnings-growth http://www.nasdaq.com/symbol/nke/earnings-growth )

These are two comparative companies.

...


Looking at p/e and past growth is just not enough.  It's also not very interesting IMO.


If you examine the income statements of both companies for the past four years you will see that Nike spent about 55 to 56% of total revenue on COGS, and UA spent 50 to 52%.

Why is that so?  Does UA know of a better and cheaper way to produce goods?  Or are they cutting corners on quality?

At the same time Nike went from spending 35% of total review to 30% on SGA.    UA SGA expense was between 39% to 36% of total revenue.

Why is that so?  Did Nike fire all the corporate people?  Or maybe Nike needs to advertise less due to it's tremendous brand recognition?  Is it's brand name still as superior as when Jordan ruled the court?

UA does not pay a dividend.  It retains all earnings, and has even issues more shares in the past year or so.  It used that capital to grow. 

Growth in an of it self is meaningless also.  You have to try to understand what that growth has accomplished.  Any company can grow.  Retain all earnings, issue shares, issue debt, build more plants, hire more salespeople, etc, etc.  Assuming that your current business has a good return on equity and assets... it only makes sense to "grow"  if you can maintain the same or better level of returns.  If you cannot then your growth, all else equal, made the company worse, and the shareholders poorer.

Nike has maintained better returns on assets and equity over the past five years.  The fact that it choose not to retain all earnings and try to "grow" faster, actually makes it better. 

One way to think of it is this:

Nike Managers:  Hi Mr. Owner, our company has superior brand recognition, and as such the capital deployed in our business returns about 20% per year.  We keep some of those earnings to grow the business, but me make sure that we keep only as much as to maintain the really nice 20% a year return.  The rest we give back to you via divided and stock repurchase.   The stock price is a bit high right now, so stock repurchase is not ideal... but we will do it anyway.

UA Managers:  Hi Mr. Owner, our company has grown a lot in the recent years, and we think that potential to grow is still high.  Our stock is extremely overvalued as well now.  We think that a lot of people don't understand the true value of growth, and are willing to overpay as long as there is a lot of it.  Which is kinda funny, because the high stock price allows us to issue shares and rake in the dough... which we then use for... you guessed it... more growth.  The returns on the capital in the business is OK, about 15%.  We need to spend more on advertising because we don't have the brand power of other companies.  We might one day become well known, or we might not.  Hey come to think of it, the return on equity would be lower still if we sold the stock to the public at a fair price, rather than the extremely overvalued one.  In any case, all the profits, yeah... we are keeping them.  You know why, don't even bother asking.

     








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Re: Index investors vs. stock pickers
« Reply #48 on: June 19, 2013, 10:54:05 AM »
and my personal fave is that auditing practices/standards are open to interpretation if not occasional fraud, I'm hardly an accountant/finance person and can barely wade through a 10K but it's pretty obvious that the game is rigged

We literally have no idea what the true receivables #'s are, earnings are a managed number, no way to pin down the 'goodwill' valuation component. Might as well try and find a well via dowsing

perhaps it's just my ignorance showing but I'm not sure how reduceable to fundamentals [book value, earnings, prospects] a given company is and it is even more difficult to establish trending information or future outlook which is what we really care about.
Perhaps it's easiest just to judge fund managers based on their results--inclusive of survivorship bias [the low performing ones are closed]--they cant do it either.

I think the only real opportunity is with illegal inside information [eg look at the track record of Congress and their stock portfolios---they outpace the market by like 1000+ basis pts over decades----hmm what is going on there I wonder]

eg new drug getting approved through regulators, new invention, big wins, market changing results and of course on the flipside knowing when to get out. AKA insider info
« Last Edit: June 19, 2013, 10:58:35 AM by Joet »

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Re: Index investors vs. stock pickers
« Reply #49 on: June 20, 2013, 10:08:54 AM »
I use a mix of both, with my majority in individual stocks.

This is chiefly due to starting my investments in stocks and not discovering VTSAX until a few years after.  Alas, my stocks are at 33% annualized return and VTSAX is around 11%.  For me, right now, stocks are the better choice.

Of course, stocks are gambling, but I like to think of it as Vegas gambling, but where I can have far better odds by researching the company.