Author Topic: Indexing vs Individual Stocks  (Read 27005 times)

ValueIsWhatYouGet

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Indexing vs Individual Stocks
« on: February 19, 2015, 12:47:40 PM »
While I'm sure most here lean towards indexing, I was wondering if there are others who also invest in individual stocks. Value Investing (the approach used by Buffett) seems to have a lot of overlap with FI so I wouldn't be surprised to see some here that search for stocks using that approach.

Personally, I'm 50% indexed and 50% in individual stocks and am trying to build up my cash position to take advantage of any attractive opportunities that present themselves in the future. I've been teaching myself finance, valuation, and accounting over the past year and it's been a really eye opening experience. If you stay disciplined and have a knack for it, I think you can do pretty well. Even if it's just a percent or two above what the S&P does, that could be hundreds of thousands of dollars in compounded gains down the line.

What do you look for with individual stocks, and have you had success?

waltworks

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Re: Indexing vs Individual Stocks
« Reply #1 on: February 19, 2015, 12:56:33 PM »
The fact that you didn't even do a search for this discussed-to-death topic does not bode well for your stock-picking success...

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ValueIsWhatYouGet

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Re: Indexing vs Individual Stocks
« Reply #2 on: February 19, 2015, 01:03:34 PM »
But Warren Buffett doesn't use a computer and therefore wouldn't know how to search either.... ; )

phillyvalue

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Re: Indexing vs Individual Stocks
« Reply #3 on: February 19, 2015, 03:40:28 PM »
I think the idea is to exploit the advantages that you have as a tiny individual investor. Namely, (a) you can have a substantial position in virtually any security, even in the smallest of companies with <$100M market cap, and these securities are little followed by professionals, and (b) you have perfectly sticky capital: there is no need to worry about investors in your fund redeeming, so with the right psychological framework, you can truly think long-term in a way that few investment managers can.

But it certainly isn't for everyone. I think you have to love thinking about the market and reading financials to even consider investing in individual stocks. And I think it also makes a lot of sense to put a substantial portion of your portfolio into an index and/or a security like Berkshire, and then actively invest perhaps 10-20% of your portfolio at first. Beyond reducing the risk that you will make mistakes that substantially impact your net worth, psychologically you are much more likely to be able to think long-term and ignore short term market fluctuations if you know that most of your money is tucked away in an index outside of your control.


thedayisbrave

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Re: Indexing vs Individual Stocks
« Reply #4 on: February 19, 2015, 04:55:02 PM »
But it certainly isn't for everyone. I think you have to love thinking about the market and reading financials to even consider investing in individual stocks. And I think it also makes a lot of sense to put a substantial portion of your portfolio into an index and/or a security like Berkshire, and then actively invest perhaps 10-20% of your portfolio at first. Beyond reducing the risk that you will make mistakes that substantially impact your net worth, psychologically you are much more likely to be able to think long-term and ignore short term market fluctuations if you know that most of your money is tucked away in an index outside of your control.
This is my approach.  I'd like to eventually work up toward maybe 50/50 but right now individual stocks are a tiny portion of my overall portfolio.  I love the indexing strategy but after I switched over to the passive strategy, 100% passive just didn't sit right with me -- and I realized the more I thought about it, was how the index funds are allocated.. namely by market cap.  The fact that I/the fund held more of a company because they cost more and were larger was inherently flawed to me. 

I still have loads more to learn but I enjoy doing it, and I'm finally happy with how things are going.  I look for value plays to buy and hold for the long term.  I've read a lot of Joshua Kennon and the way he's mapped it out has really opened my eyes.

neil

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Re: Indexing vs Individual Stocks
« Reply #5 on: February 19, 2015, 05:26:47 PM »
I managed my taxable account and index the retirement savings.  I didn't really add to it from 2005-2012 because I was working on fueling pretax savings and a downpayment.  So it isn't really a substantial amount.

I like reading financials and I usually dig into a new sector every couple of years.  I don't have a problem spending time on it.  But if someone were to honestly ask me if it was worth it, I'd say no.  The market doesn't really compensate for business risk at all because index funds effectively allow people to ignore it, and prices reflect it.  The further away you get from the S&P500 the better, but at the same time the risk factors grow.

If someone's goal is FIRE on the least amount of work, I would include investing time as work and in that context it really doesn't help.  Faster depends on your stock picking capability and the lost opportunity cost of your time.

Dodge

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Re: Indexing vs Individual Stocks
« Reply #6 on: February 19, 2015, 08:06:51 PM »

hodedofome

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Indexing vs Individual Stocks
« Reply #7 on: February 19, 2015, 08:18:50 PM »
The first few years I spent thousands of hours doing research and reading books, but I've got my system down to where I'm only spending a few minutes a day looking through charts of potential stocks.

Once a month I'll rebalance my index fund momentum strategy if it needs it. I use that for my taxable and retirement accounts, and I'll go on margin in the taxable account if I find a stock I like. If the stock does well, I'll add to it and take away the index funds until the entire account is in stocks. Then once those stocks stop going up, I'll go back to the index funds. So, I could be 100% in index funds (like right now) or I could be 100% in stocks or a mix, depending on the market environment.

The entire process takes just a few minutes to execute each day, but I continue to read and do research in the evenings because I enjoy it.

Doing a strategy like the Magic Formula only takes a few minutes a year to execute and works well, probably better than most stock pickers. I would expect to incorporate the magic formula into my strategies when my account gets big enough one day.
« Last Edit: February 19, 2015, 08:22:22 PM by hodedofome »

Dodge

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Re: Indexing vs Individual Stocks
« Reply #8 on: February 19, 2015, 08:26:29 PM »
Buffet is not a simple investor like the rest of us. He creates his own reality by buying whole companies and running them.  Buffett is a businessman, not an investor. He buys whole companies, hires the managers and ultimately makes business decisions. Investors in stocks almost never get to do this stuff. They cannot influence their investments. At this point in his career, Buffett's reputation gives him other advantages (buying preferred stock before it's publicly available for a below-market price), but the bottom line is that he is lucky and/or good businessman, not an investor.

johnny847

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Re: Indexing vs Individual Stocks
« Reply #9 on: February 19, 2015, 08:57:46 PM »

surfhb

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Re: Indexing vs Individual Stocks
« Reply #10 on: February 19, 2015, 10:14:09 PM »
"Even if it's just a percent or two above what the S&P does, that could be hundreds of thousands of dollars in compounded gains down the line."

Pretty ballsy statement to think you could beat the S&P index.     A VAST MAJORITY of  the best and brightest financial minds on Wall St cant do it....whats makes you think you can?     

YoungInvestor

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Re: Indexing vs Individual Stocks
« Reply #11 on: February 20, 2015, 05:06:58 AM »
"Even if it's just a percent or two above what the S&P does, that could be hundreds of thousands of dollars in compounded gains down the line."

Pretty ballsy statement to think you could beat the S&P index.     A VAST MAJORITY of  the best and brightest financial minds on Wall St cant do it....whats makes you think you can?   

If I remember correctly, most studies on the topic include fees, which he wouldn't have.

Most fund managers also need to buy the "popular" names, reduce volatility and address many suboptimal conditions to deal with what fund holders want. He wouldn't need to.

Buffet is not a stock picker, and I wish people stopped referring to him as such. His genius was in the structure of his holdings.

hodedofome

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Re: Indexing vs Individual Stocks
« Reply #12 on: February 20, 2015, 07:41:33 AM »
Buffet is not a simple investor like the rest of us. He creates his own reality by buying whole companies and running them.  Buffett is a businessman, not an investor. He buys whole companies, hires the managers and ultimately makes business decisions. Investors in stocks almost never get to do this stuff. They cannot influence their investments. At this point in his career, Buffett's reputation gives him other advantages (buying preferred stock before it's publicly available for a below-market price), but the bottom line is that he is lucky and/or good businessman, not an investor.

He may not be simple today, but in his early days he was much closer to an individual investor than what he is now. He did ~30%/yr after large fees for his partnership investors using a mixture of value, special situations, arbitrage and growth investing.

Buffett can be used as an example but there are many ways to make money in the market. The key is to find out what your edge is and what works for you as an individual. If you don't have an edge, then you won't do well. And if you're trying to be someone else, you won't do well either.

phillyvalue

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Re: Indexing vs Individual Stocks
« Reply #13 on: February 20, 2015, 10:20:49 AM »
"Even if it's just a percent or two above what the S&P does, that could be hundreds of thousands of dollars in compounded gains down the line."

Pretty ballsy statement to think you could beat the S&P index.     A VAST MAJORITY of  the best and brightest financial minds on Wall St cant do it....whats makes you think you can?   

Several points:
(1) You as a small individual investor have serious advantages over anyone running a large amount of money for clients. As I noted above, you can (a) invest in virtually any security, whereas large managers are confined to big, well-known companies, and (b) you can truly think long-term, whereas most managers have to think about short-term results because their clients are obsessed about short-term results. These points are especially true of large mutual funds.

(2) Professionals have to deliver strong returns net of fees, which can be substantial. If the S&P does 10% per year, a hedge fund charging 2/20 has to do 15%/yr just to equal the S&P net of fees. A fund doing, say, 12%/yr gross would be delivering 7.6%/yr to investors, and would be substantially under performing despite beating the market. Viewed in this context, it's not at all surprising that in good times, most hedge funds will underperform the index even if their managers are in fact skilled.

(3) You have to evaluate returns in the context of risk. From 2009 to the present, in hindsight it's always been best to be 100%+ invested in U.S. equities. For many hedge funds, maximizing returns in frothy times is not their objective. The objective is earning a good absolute return over long periods of time. Hedge funds that fall into this category [Baupost Group is the perfect example] fared significantly better than the index in 2008 and also fared very well during the previous market crash in 2000-2002. Even if you look at all hedge funds lumped together, they fell much less than the market in 2008. Low cost index funds are one of the greatest inventions of all time, but I think it's prudent to remember that while being 100% invested in equity indexes has been an incredible strategy since 2009, you have to evaluate that performance in light of 2009-2014 being one of the greatest 5 year bull markets in history.

And for what it's worth, on the Bogle quote; it's damn easy to copy Buffett, just buy BRK.

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Re: Indexing vs Individual Stocks
« Reply #14 on: February 20, 2015, 10:28:27 AM »
Personally, I'm 50% indexed and 50% in individual stocks and am trying to build up my cash position to take advantage of any attractive opportunities that present themselves in the future.

Be sure to count your cash position (losing against inflation) in your overall self-picked portfolio returns. You'll have to outperform the market with negative leverage (due to your cash position) for your self-picked portfolio to make any sense other than providing you with entertainment.

GoCubsGo

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Re: Indexing vs Individual Stocks
« Reply #15 on: February 20, 2015, 10:32:21 AM »
hodedofome- your posts are pretty succint and makes sense.  You said you read a lot of books to help define your system/edge, any of those books stick out that you would recommend?

Even within this forum there are a myriad of investing styles advocated for and the arguments for/against certain styles are great to read and I have learned greatly from them.  Stock screeners and analysis tools are so easily accessed now, however, they are useless if you don't have a base "starting point strategy".  Trying to define my investing mission statement is something I'm focused on this year so any thoughts would help.

KBecks2

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Re: Indexing vs Individual Stocks
« Reply #16 on: February 20, 2015, 10:36:43 AM »
I invest in individual stocks and I use a specific portfolio recommendations service that outperformed the S&P 500 last year.  I am also learning to use options under the guidance of a paid service that makes conservative recommendations and has an 90% accuracy rate.



ValueIsWhatYouGet

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Re: Indexing vs Individual Stocks
« Reply #17 on: February 20, 2015, 01:05:26 PM »
But it certainly isn't for everyone. I think you have to love thinking about the market and reading financials to even consider investing in individual stocks. And I think it also makes a lot of sense to put a substantial portion of your portfolio into an index and/or a security like Berkshire, and then actively invest perhaps 10-20% of your portfolio at first. Beyond reducing the risk that you will make mistakes that substantially impact your net worth, psychologically you are much more likely to be able to think long-term and ignore short term market fluctuations if you know that most of your money is tucked away in an index outside of your control.
This is my approach.  I'd like to eventually work up toward maybe 50/50 but right now individual stocks are a tiny portion of my overall portfolio.  I love the indexing strategy but after I switched over to the passive strategy, 100% passive just didn't sit right with me -- and I realized the more I thought about it, was how the index funds are allocated.. namely by market cap.  The fact that I/the fund held more of a company because they cost more and were larger was inherently flawed to me. 

I still have loads more to learn but I enjoy doing it, and I'm finally happy with how things are going.  I look for value plays to buy and hold for the long term.  I've read a lot of Joshua Kennon and the way he's mapped it out has really opened my eyes.

I've heard very good things about Joshua Kennon's blog. I need to check it out more regularly

hodedofome

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Re: Indexing vs Individual Stocks
« Reply #18 on: February 20, 2015, 02:23:42 PM »
hodedofome- your posts are pretty succint and makes sense.  You said you read a lot of books to help define your system/edge, any of those books stick out that you would recommend?

Even within this forum there are a myriad of investing styles advocated for and the arguments for/against certain styles are great to read and I have learned greatly from them.  Stock screeners and analysis tools are so easily accessed now, however, they are useless if you don't have a base "starting point strategy".  Trying to define my investing mission statement is something I'm focused on this year so any thoughts would help.

Yeah I made a list here: https://docs.google.com/spreadsheets/d/1Eqoa0AS0Vll5mSyCqSsU7TsBKwjMI9Jl-LNwRqwTW5A/edit?usp=sharing

You read enough, follow enough guys on twitter, read enough blogs, watch enough videos, do enough thinking...eventually, if you keep at it, you'll start coming up with your own ideas. You'll never make any money following someone else's ideas, you have to figure out what works for you. There is no holy grail unfortunately.

ValueIsWhatYouGet

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Re: Indexing vs Individual Stocks
« Reply #19 on: February 20, 2015, 02:26:49 PM »


Believe me, I'm a huge proponent of indexing and for 99.9% of people it's the obvious best choice. But to say that it's impossible to beat the market is a bit hard for me to believe. As Buffett has said, it's much easier to win at a game where your opponents have been taught that it's futile to even try to play.

surfhb

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Re: Indexing vs Individual Stocks
« Reply #20 on: February 20, 2015, 02:27:26 PM »
Can we be clear on one thing?   

Very few beat the indexes over their investing lifetime (40+ years).   That's just a cold hard fact.    This is the entire point of passive investing.   Many things in this world are possible and many of those same things aren't likely....make sense?

 If you want to play with the laws of math and statistics then be my guest but my passive investment portfolio just about guarantees me to beat your individual stocks at the finish line.   All this without me doing anything......I'd rather be out surfing or playing a good game of golf.
« Last Edit: February 20, 2015, 02:32:47 PM by surfhb »

ValueIsWhatYouGet

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Re: Indexing vs Individual Stocks
« Reply #21 on: February 20, 2015, 02:28:04 PM »
The first few years I spent thousands of hours doing research and reading books, but I've got my system down to where I'm only spending a few minutes a day looking through charts of potential stocks.

Once a month I'll rebalance my index fund momentum strategy if it needs it. I use that for my taxable and retirement accounts, and I'll go on margin in the taxable account if I find a stock I like. If the stock does well, I'll add to it and take away the index funds until the entire account is in stocks. Then once those stocks stop going up, I'll go back to the index funds. So, I could be 100% in index funds (like right now) or I could be 100% in stocks or a mix, depending on the market environment.

The entire process takes just a few minutes to execute each day, but I continue to read and do research in the evenings because I enjoy it.

Doing a strategy like the Magic Formula only takes a few minutes a year to execute and works well, probably better than most stock pickers. I would expect to incorporate the magic formula into my strategies when my account gets big enough one day.

Do you index specifically when you feel the market is overheated and there are fewer value opportunities? Also, how do you account for transaction costs because it sounds like those might be high for you.

ValueIsWhatYouGet

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Re: Indexing vs Individual Stocks
« Reply #22 on: February 20, 2015, 02:29:09 PM »
Buffet is not a simple investor like the rest of us. He creates his own reality by buying whole companies and running them.  Buffett is a businessman, not an investor. He buys whole companies, hires the managers and ultimately makes business decisions. Investors in stocks almost never get to do this stuff. They cannot influence their investments. At this point in his career, Buffett's reputation gives him other advantages (buying preferred stock before it's publicly available for a below-market price), but the bottom line is that he is lucky and/or good businessman, not an investor.

Yes and no. His earlier investments, which actually performed a lot better than his current ones, were when he just took a position in the stock rather than in ownership.

Additionally, he's a notoriously hands-off manager, and leaves most day-to-day decisions up to the leadership of the company.

beltim

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Re: Indexing vs Individual Stocks
« Reply #23 on: February 20, 2015, 02:32:10 PM »
Can we be clear on one thing?   

Very few beat the indexes over their investing lifetime (40+ years).   That's just a cold hard fact.    This is the entire point of passive investing.   Many things in this world are possible and many of those same things aren't likely....make sense?

 If you want to play with the laws a of math and statistics then be my guest but my passive investment portfolio just about garuntees me to beat your individual stocks at the finish line.   All this without me doing anything......I'd rather be out surfing or playing a good game of golf.

Is there any actual data on individual investors for this?  Sure, there's plenty of data on mutual fund managers, but most of what I've seen on individual investors is that the average investor (no distribution data) of a mutual fund underperforms the mutual fund they invest in due to bad timing.

ValueIsWhatYouGet

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Re: Indexing vs Individual Stocks
« Reply #24 on: February 20, 2015, 02:33:08 PM »
"Even if it's just a percent or two above what the S&P does, that could be hundreds of thousands of dollars in compounded gains down the line."

Pretty ballsy statement to think you could beat the S&P index.     A VAST MAJORITY of  the best and brightest financial minds on Wall St cant do it....whats makes you think you can?   

Their incentivizes are perverse and reward constant trading and taking on more capital, as well as paying for marketing to attract new customers.
While it makes THEM money, their customers lose out due to high fees, which drag down their total returns. They also have little reason to go against the "popular opinion" (i.e. average) lest they bet wrong and wind up unemployed.

I think if you stay disciplined and focused, it is possible. Look at all the "Graham and Doddsville" investors that have consistently done well for themselves. To simply brush them aside as an aberration is a bit crazy.

hodedofome

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Re: Indexing vs Individual Stocks
« Reply #25 on: February 20, 2015, 03:14:57 PM »
Do you index specifically when you feel the market is overheated and there are fewer value opportunities? Also, how do you account for transaction costs because it sounds like those might be high for you.

I am not currently a value investor. Everything I currently do is more momentum/trend following. When my individual stock system is not identifying any opportunities, I'll be 100% in index funds. However even the index funds are based on which asset classes are doing well. If stock funds are down and bond funds are up, I'll be 100% in bonds. If stocks and bonds are down and commodities are up, I'll be 100% in commodities. Or Real Estate, or whatever.

I only buy individual stocks when there are good opportunities and low risk to do so. When I can make a low risk play on an individual stock, and have a payoff of 5, 10 or even 100 times my risk, I'll take it. If I get enough of those opportunities, then I'll lower my allocation to the index fund system because there's no better time to make a ton of money than a rip-roaring bull market.

As far as trading costs go, I use Interactive Brokers and pay about $1/trade. Obviously keeping my costs low is paramount. I may make 0-5 round trip individual stock trades in a year, I try to trade as little as possible and only take the absolute best opportunities. I may only have 20-50% winning trades, depending on the environment, but it only takes 1 stock like TSLA or VIPS or TARO to double or triple my entire account.

You could consider my index fund strategy my consistent/income strategy, I'm looking to make 10-20%/yr off of that. The individual stocks pay off rarely, but doubling or tripling my account 2-3 times in a 10 year period, on top of the index funds, makes for pretty decent returns over the long haul.

LordSquidworth

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Re: Indexing vs Individual Stocks
« Reply #26 on: February 20, 2015, 04:02:41 PM »


Oversimplifies it too much.

People often paint Buffett as a freak of a nature, an oracle... but he's not.

He follows an investment theory that's older than he is, modified from his experience.

Much of the rest comes down to opportunity and being in the right time at the right place. Buffett had access to incredibly cheap, and good companies. Plus, he purchased Geico, which was a pretty big driver for him (he was after the float).

People can be really successful practicing value investing. Too often though the faults of individuals cause their issues but the blame gets placed elsewhere.

surfhb

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Re: Indexing vs Individual Stocks
« Reply #27 on: February 20, 2015, 04:44:52 PM »
"Even if it's just a percent or two above what the S&P does, that could be hundreds of thousands of dollars in compounded gains down the line."

Pretty ballsy statement to think you could beat the S&P index.     A VAST MAJORITY of  the best and brightest financial minds on Wall St cant do it....whats makes you think you can?   

Their incentivizes are perverse and reward constant trading and taking on more capital, as well as paying for marketing to attract new customers.
While it makes THEM money, their customers lose out due to high fees, which drag down their total returns. They also have little reason to go against the "popular opinion" (i.e. average) lest they bet wrong and wind up unemployed.

I think if you stay disciplined and focused, it is possible. Look at all the "Graham and Doddsville" investors that have consistently done well for themselves. To simply brush them aside as an aberration is a bit crazy.

Once again, Im not saying its impossible.    Just more and more unlikely the longer your investing timeline continues.   

If investing and financials are your hobby and you are willing to take the extra risk along with the hours spent reading reports, then go for it.     

   

goodrookie

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Re: Indexing vs Individual Stocks
« Reply #28 on: February 20, 2015, 10:58:51 PM »
Shhh....you have broken the forbidden code.

People here do not believe in thinking. Apparently, you can never the difference between Netflix vs. Apple, or know that the oil sector is in trouble.

KD

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Re: Indexing vs Individual Stocks
« Reply #29 on: February 21, 2015, 04:18:09 AM »

Very few beat the indexes over their investing lifetime (40+ years).   That's just a cold hard fact.    This is the entire point of passive investing.  Many things in this world are possible and many of those same things aren't likely....make sense?

 If you want to play with the laws of math and statistics then be my guest but my passive investment portfolio just about guarantees me to beat your individual stocks at the finish line.   All this without me doing anything......I'd rather be out surfing or playing a good game of golf.

+1

However, I LIKE trying to pick so a small part of my portfolio is made up of hand picked stocks.  May prove to be a drag on overall performance but it's less than 5% of my assets and is my 'fun money'.  Some years a drag, some years not. 

Dodge

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Re: Indexing vs Individual Stocks
« Reply #30 on: February 21, 2015, 12:59:07 PM »
I think if you stay disciplined and focused, it is possible. Look at all the "Graham and Doddsville" investors that have consistently done well for themselves. To simply brush them aside as an aberration is a bit crazy.

If you acknowledge the Graham and Doddsville's of the world, make up a tiny percentage of the people actively trading, then yes, they are an aberration.

This post is a perfect example of the traps people fall into.  They see people achieving things that seem impossible, then when they see the statistics of how few people are able to beat the market over the long term, they think it's possible for them to do that too!  Things like this don't phase them:

--------------------------------------------------------



"Of the 355 equity funds in 1970, fully 233 of those funds have gone out of business. Only 24 oupaced the market by more than 1% a year. These are terrible odds." Jack Bogle (2007)

Bill Bernstein, author of The Four Pillars of Investing: "Does this (three fund) portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it."

"Only about one out of every four equity funds outperforms the stock market. That's why I'm a firm believer in the power of indexing." Charles Schwab

"The fund industry's dirty little secret: most actively managed funds never do as well as their benchmark." Arthur Levitt, Chairman, SEC

"Over the long-term the superiority of indexing is a mathematical certainty." Jason Zweig, senior writer for "Money"

"Indexing virtually guarantees you superior performance. Bill Bernstein, author, financial adviser

"With the market beating 91% of surviving managers since the beginning of 1982, it looks pretty efficient to me." Bill Miller, portfolio manager

Sources:

http://www.bogleheads.org/forum/viewtopic.php?t=173#p20484
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=88005

--------------------------------------------------------


But there's a big thing they're missing there.  They don't see that it's a competition.  Tell someone they can beat Michael Jordan in a game of basketball, and they will laugh in your face...but give them a sales pitch for "one weird trick" to beat the market, and people will line up to give you money.

For the newbies in the thread, it's important to understand this next point.  When someone claims they can beat that market over the long term, they're saying you can beat over half of all money invested in the market this year, then again next year, and again the year after that...for as long as they live.  All by using a published, widely known strategy, that the other market participants (the people they claim to be beating) are aware of.  This is essentially the claim:

"<Insert Strategy Here> beat over half of all invested dollars in the past.  While this information is public, I do not expect the losers to adopt my published strategy, or change to a better strategy, so I expect it to continue beating over half of all invested dollars in the future."

This isn't just someone saying, "I can beat Lebron James in a 1 on 1 basketball game, you can too!"

It's, "I can beat Lebron James in a 1 on 1 basketball game, every single year, and he knows exactly what I'm going to do each time, and he doesn't copy my strategy or figure out a way to beat me, so I expect I will continue beating him in the future, you can too!"

Compared to:

"Indexing beat or matched half of all invested dollars in the past, I do not expect mathematical laws to change, so I expect it to beat or match half of all invested dollars in the future."

Which one of these statements are you willing to bet your life savings on?

Dodge

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Re: Indexing vs Individual Stocks
« Reply #31 on: February 21, 2015, 01:12:15 PM »


Oversimplifies it too much.

People often paint Buffett as a freak of a nature, an oracle... but he's not.

He follows an investment theory that's older than he is, modified from his experience.

Much of the rest comes down to opportunity and being in the right time at the right place. Buffett had access to incredibly cheap, and good companies. Plus, he purchased Geico, which was a pretty big driver for him (he was after the float).

People can be really successful practicing value investing. Too often though the faults of individuals cause their issues but the blame gets placed elsewhere.

I love it when people use Buffet as evidence that "I too can beat the market!", when apparently it's so rare to beat the market, that when someone does it everyone knows their name!

phillyvalue

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Re: Indexing vs Individual Stocks
« Reply #32 on: February 21, 2015, 01:12:59 PM »
Dodge, you're arguing against a straw man. The fact that the average actively managed mutual fund has not beat the market tells you that investing in a random actively managed mutual fund is a terrible idea. It does not tell you that active investing in and of itself is destined to fail.

I'll quote my previous post in this thread on this subject, which your argument does nothing to respond to. In addition to these points, most active fund managers are not value investors. They are speculators, they are betting as to whether or not somebody else is going to be willing to pay more for the stock tomorrow. They are not value investors. Value investing is the one philosophy where I think the evidence supports that, with the right analysis and psyche, you can do better than average over time. There are many people who will tell you that they are value investors, but few active managers who actually invest in such a way. I don't think anyone betting on guessing next quarter's earnings is going to beat the market.

Quote
(1) You as a small individual investor have serious advantages over anyone running a large amount of money for clients. As I noted above, you can (a) invest in virtually any security, whereas large managers are confined to big, well-known companies, and (b) you can truly think long-term, whereas most managers have to think about short-term results because their clients are obsessed about short-term results. These points are especially true of large mutual funds.

(2) Professionals have to deliver strong returns net of fees, which can be substantial. If the S&P does 10% per year, a hedge fund charging 2/20 has to do 15%/yr just to equal the S&P net of fees. A fund doing, say, 12%/yr gross would be delivering 7.6%/yr to investors, and would be substantially under performing despite beating the market. Viewed in this context, it's not at all surprising that in good times, most hedge funds will underperform the index even if their managers are in fact skilled.

(3) You have to evaluate returns in the context of risk. From 2009 to the present, in hindsight it's always been best to be 100%+ invested in U.S. equities. For many hedge funds, maximizing returns in frothy times is not their objective. The objective is earning a good absolute return over long periods of time. Hedge funds that fall into this category [Baupost Group is the perfect example] fared significantly better than the index in 2008 and also fared very well during the previous market crash in 2000-2002. Even if you look at all hedge funds lumped together, they fell much less than the market in 2008. Low cost index funds are one of the greatest inventions of all time, but I think it's prudent to remember that while being 100% invested in equity indexes has been an incredible strategy since 2009, you have to evaluate that performance in light of 2009-2014 being one of the greatest 5 year bull markets in history.

Dodge

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Re: Indexing vs Individual Stocks
« Reply #33 on: February 21, 2015, 01:59:08 PM »
Dodge, you're arguing against a straw man. The fact that the average actively managed mutual fund has not beat the market tells you that investing in a random actively managed mutual fund is a terrible idea. It does not tell you that active investing in and of itself is destined to fail.

I'll quote my previous post in this thread on this subject, which your argument does nothing to respond to. In addition to these points, most active fund managers are not value investors. They are speculators, they are betting as to whether or not somebody else is going to be willing to pay more for the stock tomorrow. They are not value investors. Value investing is the one philosophy where I think the evidence supports that, with the right analysis and psyche, you can do better than average over time. There are many people who will tell you that they are value investors, but few active managers who actually invest in such a way. I don't think anyone betting on guessing next quarter's earnings is going to beat the market.

Quote
(1) You as a small individual investor have serious advantages over anyone running a large amount of money for clients. As I noted above, you can (a) invest in virtually any security, whereas large managers are confined to big, well-known companies, and (b) you can truly think long-term, whereas most managers have to think about short-term results because their clients are obsessed about short-term results. These points are especially true of large mutual funds.

(2) Professionals have to deliver strong returns net of fees, which can be substantial. If the S&P does 10% per year, a hedge fund charging 2/20 has to do 15%/yr just to equal the S&P net of fees. A fund doing, say, 12%/yr gross would be delivering 7.6%/yr to investors, and would be substantially under performing despite beating the market. Viewed in this context, it's not at all surprising that in good times, most hedge funds will underperform the index even if their managers are in fact skilled.

(3) You have to evaluate returns in the context of risk. From 2009 to the present, in hindsight it's always been best to be 100%+ invested in U.S. equities. For many hedge funds, maximizing returns in frothy times is not their objective. The objective is earning a good absolute return over long periods of time. Hedge funds that fall into this category [Baupost Group is the perfect example] fared significantly better than the index in 2008 and also fared very well during the previous market crash in 2000-2002. Even if you look at all hedge funds lumped together, they fell much less than the market in 2008. Low cost index funds are one of the greatest inventions of all time, but I think it's prudent to remember that while being 100% invested in equity indexes has been an incredible strategy since 2009, you have to evaluate that performance in light of 2009-2014 being one of the greatest 5 year bull markets in history.

I find a value tilt to be utter crap, meant to sell people who don't know any better on a more expensive fund that "beats the market".  I wouldn't put my money there if there were no added expense ratio, I'm definitely not paying for that.  Paying extra for a value tilt is utter crap.  Fama himself says it's reasonable to expect the market to adjust:

EFF/KRF (Fama & French): The premise is that until the last couple of decades, individual investors had limited access to diversified portfolios of small stocks and value stocks. As a result, the prices of small and value stocks were lower than they would be if all investors had easy access, and their expected returns were higher. The introduction and growth of mutual funds that invest in small-cap and value stocks would then reduce the expected returns on these securities. Since expected security returns depend on supply and demand, an increase in the average allocation to small and value stocks will reduce the size and value premiums.

Another prominent skeptic regarding the importance of a value tilt is John C. Bogle, as articulated in a 2002 speech and paper, The Telltale Chart.  Bogle looks at the data (section 2. RTM - Value Stocks vs. Growth Stocks), and shows that while the theoretical Fama-French portfolio exhibits a dramatic outperformance, the mutual fund performance of the strategy actually underperformed the market.  "So investors should not ignore the obvious costs of implementing a strategy that rises, pristinely, out of academic studies that cannot be precisely replicated in the real world."  I would prefer not to try to summarize a complicated story, and I don't see any soundbites to cherry-pick that would serve as a short summary. Perhaps it is "This too, shall pass"

Portfolio Constituency Rules and the Value Premium in the Small-Cap Space supports Mr.Bogle's conclusion regarding Value stock performance in actual mutual funds over time, and provides a possible reason.  It seems to imply that when actual mutual-funds (index or otherwise) are implemented, that the most illiquid stocks are often excluded, removing the Value Premium.
 
"...We suggest these results might go a long way in explaining why market-based growth fund returns generally equal those of their value fund counterparts over time..."

LordSquidworth

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Re: Indexing vs Individual Stocks
« Reply #34 on: February 21, 2015, 02:06:41 PM »


Oversimplifies it too much.

People often paint Buffett as a freak of a nature, an oracle... but he's not.

He follows an investment theory that's older than he is, modified from his experience.

Much of the rest comes down to opportunity and being in the right time at the right place. Buffett had access to incredibly cheap, and good companies. Plus, he purchased Geico, which was a pretty big driver for him (he was after the float).

People can be really successful practicing value investing. Too often though the faults of individuals cause their issues but the blame gets placed elsewhere.

I love it when people use Buffet as evidence that "I too can beat the market!", when apparently it's so rare to beat the market, that when someone does it everyone knows their name!

You act as if Buffett is the only one that routinely beats the market. I'll give you a hint... Many people do. The thing with value investing though, is it's in their best interest not to talk about it.

Buffett is the poster child because he's turned his operation into a full fledged holding company.

Dodge, you're arguing against a straw man. The fact that the average actively managed mutual fund has not beat the market tells you that investing in a random actively managed mutual fund is a terrible idea. It does not tell you that active investing in and of itself is destined to fail.

I'll quote my previous post in this thread on this subject, which your argument does nothing to respond to. In addition to these points, most active fund managers are not value investors. They are speculators, they are betting as to whether or not somebody else is going to be willing to pay more for the stock tomorrow. They are not value investors. Value investing is the one philosophy where I think the evidence supports that, with the right analysis and psyche, you can do better than average over time. There are many people who will tell you that they are value investors, but few active managers who actually invest in such a way. I don't think anyone betting on guessing next quarter's earnings is going to beat the market.

A lot of mutual funds are just crowd chasers. Not much different from retail investors. The majority of managers shouldn't be managing money.

Funds that specialize in what they're good at (not the walmarts of funds, where they have one fund for everything) are the funds to look at. The managers > the funds performance. Managers change, funds don't.

Dodge

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Re: Indexing vs Individual Stocks
« Reply #35 on: February 21, 2015, 02:19:30 PM »


Oversimplifies it too much.

People often paint Buffett as a freak of a nature, an oracle... but he's not.

He follows an investment theory that's older than he is, modified from his experience.

Much of the rest comes down to opportunity and being in the right time at the right place. Buffett had access to incredibly cheap, and good companies. Plus, he purchased Geico, which was a pretty big driver for him (he was after the float).

People can be really successful practicing value investing. Too often though the faults of individuals cause their issues but the blame gets placed elsewhere.

I love it when people use Buffet as evidence that "I too can beat the market!", when apparently it's so rare to beat the market, that when someone does it everyone knows their name!

You act as if Buffett is the only one that routinely beats the market. I'll give you a hint... Many people do.

Source?  The typical investment horizon for people here is around 40-50 years.  Can you provide a source, or better yet a list of managers/funds, who have consistently (not just riding high on the first few years of great performance, but consistently, year after year, so it doesn't matter when I got in) beat the market over the last 40-50 years?

phillyvalue

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Re: Indexing vs Individual Stocks
« Reply #36 on: February 21, 2015, 02:20:27 PM »
@Dodge: Again, you're arguing against a very different proposition than what I proposed. You're arguing against quantitative strategies that try to pick out stocks based on things like P/E ratios and so forth. I agree completely that a strategy which relies on screening investments solely on quantitative criteria is not going to work long-term.

That's not what value investing is. Value investing is saying "I'd be willing to buy 1/1000th of this business for X, because I think the cash flows the business produces will be worth X. Today the market is offering me the opportunity to buy it today at Y. If Y<X, I'll buy." The value of a business is way too complicated to be encapsulated in a simple number like a P/E ratio, and this makes quantitative screens useless.

Continuing this argument is pointless because we are clearly speaking different languages.

phillyvalue

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Re: Indexing vs Individual Stocks
« Reply #37 on: February 21, 2015, 02:34:03 PM »
On the subject of data that supports outperformance: first of all, there are few funds that have existed for 40-50 years, so that's a tall order. Of those that have, few will be made up of the same managers.

You can find a large number of hedge funds founded in the 80s-90s that have returned in the range of 15-25%/yr over time since inception. For most of these funds, the outperformance has been consistent with the exception being 2010-present, which as I argued above is a very particular period in which anyone who was prudent about risk has lagged the equity averages. Baupost Group / Seth Klarman is the best example IMO. They have returned 17%/yr since the early 1980s, with very low volatility, holding on average ~30% cash.

Mutual funds: Sequoia Fund and Dodge & Cox are the best two examples. The problem w/ mutual funds is that the successful ones grow too quickly, and size reduces returns. Sequoia has been careful about limiting size, and they are closed to new investors. When Buffett closed his partnership around 1970, he recommended his clients invest in the Sequoia fund. Their track record is exceptional: http://www.sequoiafund.com/fp-investment-comparison.htm

For an academic look at whether or not smaller, individual investors who follow a value strategy can beat the market, this is the only quantitative data I've ever seen, but it is encouraging: http://www.retailinvestor.org/pdf/HedgeFund.pdf

^It looks at investment pitches on a site which is mostly made up of individual value investors and smaller fund managers, and finds they have outperformed the market, and moreover that pitches which are highly rated by the community have outperformed low-rated pitches.


Dodge

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Re: Indexing vs Individual Stocks
« Reply #38 on: February 21, 2015, 02:46:15 PM »
On the subject of data that supports outperformance: first of all, there are few funds that have existed for 40-50 years, so that's a tall order.

Indeed.  Funds don't typically last that long.  I suspect the funds mentioned in your post will share the same fate.

phillyvalue

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Re: Indexing vs Individual Stocks
« Reply #39 on: February 21, 2015, 02:54:00 PM »
On the subject of data that supports outperformance: first of all, there are few funds that have existed for 40-50 years, so that's a tall order.

Indeed.  Funds don't typically last that long.  I suspect the funds mentioned in your post will share the same fate.

Well that's a really strong counterargument to all the evidence I brought up :)

The Dodge & Cox stock fund has been around for 50 years, and Sequoia for about the same.

Fund managers are human beings, and even if they are successful, people die and/or retire. So of course they will not on average last 40-50 years, even if they have the skills to beat the market.

Dodge

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Re: Indexing vs Individual Stocks
« Reply #40 on: February 21, 2015, 02:59:01 PM »
@Dodge: Again, you're arguing against a very different proposition than what I proposed. You're arguing against quantitative strategies that try to pick out stocks based on things like P/E ratios and so forth. I agree completely that a strategy which relies on screening investments solely on quantitative criteria is not going to work long-term.

That's not what value investing is. Value investing is saying "I'd be willing to buy 1/1000th of this business for X, because I think the cash flows the business produces will be worth X. Today the market is offering me the opportunity to buy it today at Y. If Y<X, I'll buy." The value of a business is way too complicated to be encapsulated in a simple number like a P/E ratio, and this makes quantitative screens useless.

Continuing this argument is pointless because we are clearly speaking different languages.

I understand you perfectly.  You think you have the ability to look at a piece of paper and predict the future better than at least half of all invested dollars.  This year.  And again next year.  And every year thereafter.

"<Buying stocks I predict will do well in the future> beat over half of all invested dollars in the past.  While the information I'm using for these predictions is public, I do not expect the losers to adopt my published strategy, or change to a better strategy, so I expect to continue beating over half of all invested dollars in the future."

I'm not comfortable putting my life's savings into such a statement.  If you are, good luck!

Dodge

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Re: Indexing vs Individual Stocks
« Reply #41 on: February 21, 2015, 03:02:36 PM »
On the subject of data that supports outperformance: first of all, there are few funds that have existed for 40-50 years, so that's a tall order.

Indeed.  Funds don't typically last that long.  I suspect the funds mentioned in your post will share the same fate.

Well that's a really strong counterargument to all the evidence I brought up :)

The Dodge & Cox stock fund has been around for 50 years, and Sequoia for about the same.

Fund managers are human beings, and even if they are successful, people die and/or retire. So of course they will not on average last 40-50 years, even if they have the skills to beat the market.

For someone who started investing 40-50 years ago, the odds of them choosing one of these two funds, out of all the available funds, is very poor.  This supports my assertion.  Apparently it's so rare to beat the market, that when someone does it everyone knows their name!

surfhb

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Re: Indexing vs Individual Stocks
« Reply #42 on: February 21, 2015, 03:11:09 PM »
Its already been establish in this thread thats its possible to beat the market and that there are funds which have outperformed the indexes.   

The point is that it takes extra time and luck to do something which may or may not happen.

 
« Last Edit: February 21, 2015, 03:24:17 PM by surfhb »

Indexer

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Re: Indexing vs Individual Stocks
« Reply #43 on: February 21, 2015, 04:14:56 PM »
Can you beat the market?  Yes.
Consistently?  Yes, but highly unlikely.
Using stocks?  Yes, but....   Why would you want to?   

Index VS individual stocks for me isn't what can get the best returns, its what can get the best risk adjusted returns.  When you own individual stocks you are taking on a ton of extra risk over owning the index.  Those companies can go belly up, regardless of how much research you do.  RIM(Blackberry) once had a near monopoly on smart phones at the key time smart phones were taking off.  A few dozen people on the entire planet knew about the iPhone[project purple] at that time.  There are always unknowns.

Paying yourself:  I've seen several arguments stating that part of the reason active funds underperform is because of fees, and as an individual you aren't affected by those fees.  That manager is getting paid so much because of his experience/education, to pay his staff of analysts(w/ experience/education) that are doing far more due diligence than you can, and he has the advantage of buying things in bulk likely in the dark pools.  So he pays less per trade for stock.  MMM recommends figuring out what you would pay yourself to manage properties and calculate that into your real estate returns.  Do the same for stock picking and watch any alpha disappear.  If you are managing 20+ companies that is a lot of time dedicated to research not counting any expenses for the research tools[even if its Fidelity's built in tools, those tools are built into their higher costs ;)].  If you aren't doing the research you probably shouldn't be dealing with individual stocks, and having less than 19 companies means you are still pretty exposed to unsystematic risk(company risk... IE you're not diversified).

Buffett:  Would you compare your returns to Bain Capital?  Buffett has more in common with Mitt Romney than the average investor.  He has a huge multinational corporation that pumps money into companies it buys up, and then helps manage those companies.  Buffett by the way also recommended people just index, and when he passes 90% of his money is going into the Vanguard 500 index fund so his wife doesn't have to worry about it.  Buffett and Cramer are both advocates of indexing.  The guy who is known for beating the market, and the guy who tells everyone else they can... both say you should index. 

The secret on Wall Street:  Many active fund managers, analysts, staff, and salespeople.... own index funds in their own accounts.  Just look at a lot of the proponents for indexing.  They are CFPs and CFAs.  The people who are suppose to be able to get you better returns... index!   

Over the past few years I've actually managed to squeeze out 'slightly' better returns than the indexes.  90% of my portfolio is always in big stock index funds, and sometimes its 100%.  If things start to look expensive I put the 10% in what I think looks cheap.  A lot goes into figuring out what I think looks expensive or cheap, but thats the basic idea. 

I could do the same thing with stocks, but it would require a lot more work on my end, entail a whole lot more risk, and the difference in returns probably wouldn't be worth it... and given the risk... I might actually do worse.

As for active funds, a very small few have beaten the markets over a long time period.  There is no guarantee they will continue to do so.  There is no way of knowing today which funds will outperform over the next 20 years. 

goodrookie

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Re: Indexing vs Individual Stocks
« Reply #44 on: February 21, 2015, 04:23:21 PM »
You guys do realize that indexing = aiming for average return. This means you get to look down on 50% of the investors and think you are doing well while forgetting the other 50% who beat your returns handily.

johnny847

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Re: Indexing vs Individual Stocks
« Reply #45 on: February 21, 2015, 04:32:42 PM »
You guys do realize that indexing = aiming for average return. This means you get to look down on 50% of the investors and think you are doing well while forgetting the other 50% who beat your returns handily.
But you're forgetting about fees.

Before fees, 50% of invested dollars do better than the average of the total market, and 50% do worse. But factor in fees, and that bell curve shifts to the left, and a majority of invested dollars do worse than the average. Vanguard illustrates this quite nicely https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-cost

And you make it seem like settling for average is a bad thing. I see it differently. By using a broad market index like Vanguard's Total (US) Stock Market Index, I'm guaranteeing myself just slightly under average performance (slightly under average because VTSAX's fee is 0.05%). But if I were to try to pick individual stocks, or pick an actively managed mutual fund, or some combination in between, I'm no longer guaranteeing myself slightly under average. I might do better, or I might do worse. Nobody really knows.
It may not be satisfying to settle for just under average. And index investing is boring as shit - there's no reading into headlines of what stocks might be hot, or how a possible geopolitical crisis might affect certain sectors of the economy, etc. But guaranteeing myself just under average performance is going to get me exactly where I want to be. Picking stocks or active mutual funds can get me where I want to be as well, but I have no idea if that's going to be faster (probably not), or slower (probably).

surfhb

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Re: Indexing vs Individual Stocks
« Reply #46 on: February 21, 2015, 05:06:02 PM »
You guys do realize that indexing = aiming for average return. This means you get to look down on 50% of the investors and think you are doing well while forgetting the other 50% who beat your returns handily.

Huh?    When did the index become the avg mean return for investors?  LOL!

waltworks

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Re: Indexing vs Individual Stocks
« Reply #47 on: February 21, 2015, 05:07:07 PM »
No, you beat 50% (or more, if you account for fees) ... without lifting a fucking finger.

You can spend you time poring over earnings reports. I'll be out riding my mountain bike, thanks.

-W


You guys do realize that indexing = aiming for average return. This means you get to look down on 50% of the investors and think you are doing well while forgetting the other 50% who beat your returns handily.

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Re: Indexing vs Individual Stocks
« Reply #48 on: February 21, 2015, 05:29:02 PM »
I have re-read this thread multiple times and am still confused. The OP was weighing the merits of index stocks versus individually purchased stocks.

So then why is so much of the rationale presented here raising an argument against actively managed funds?

And again, why does this have to be a VERSUS?

FYI, I like the post by KD, who risks 5% of her/his portfolio on individually purchased stocks and is willing to take the hit. It doesn't have to be a VERSUS.
« Last Edit: February 21, 2015, 05:34:18 PM by RapmasterD »

surfhb

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Re: Indexing vs Individual Stocks
« Reply #49 on: February 21, 2015, 05:38:16 PM »
I have re-read this thread multiple times and am still confused. The OP was weighing the merits of index stocks versus individually purchased stocks.

So then why is so much of the rationale presented here raising an argument against actively managed funds?

And again, why does this have to be a VERSUS?

FYI, I like the post by KD, who risks 5% of her/his portfolio on individually purchased stocks and is willing to take the hit. It doesn't have to be a VERSUS.

Because many people( including the OP)  think there's a VERY GOOD CHANCE of beating the indexes if they are willing to put in the time and effort.    Nothing can be farther from the truth.
« Last Edit: February 21, 2015, 05:40:08 PM by surfhb »