Author Topic: Indexing vs Individual Stocks  (Read 27011 times)

Dodge

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Re: Indexing vs Individual Stocks
« Reply #50 on: February 21, 2015, 06:07:28 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.

If you're looking at one particular year, sure.  But over the long term, you're beating 50% of all invested dollars this year, then beating 50% of all invested dollars next year, and the year after that...every single year for the rest of your life.

If you're trying to beat this, even one bad year can make it almost impossible to catch up. Losing 50% one year, means you need to gain 100% next year just to break even. If you do 10% better than the index one year, then do 10% worse than the index the next year, you will still end up with less money than simply choosing the index.

It seems counterintuitive, but the opposite has the same result. Do 10% worse than the index one year, then 10% better than the index the next year, and you are still behind the index.

When looking at the long term, you're beating significantly more than 50%, you're beating almost everybody. The compounding effects of bad years make it incredibly difficult to beat the index long-term.

RapmasterD

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Re: Indexing vs Individual Stocks
« Reply #51 on: February 21, 2015, 06:10:25 PM »
Thanks Surf. Here is where I sit. Of my stock portfolio I keep 90% indexed and am now 10% in five dividend paying stocks.

I give myself a 30-50% chance of even MEETING the S&P 500 over the long term.

And I don't care. I have a mental disorder, so to speak. And if my 10% bet keeps me 90% in the game, that's what I'll do.

I don't go to Vegas. I don't play golf. I don't ski or snowboard. And I don't think Diageo, BP, McDonald's, Johnson & Johnson, or McCormick Spice Company are going out of business anytime soon.

It sure does feel like this topic, which appears to be represented on at least three active threads in this forum, gets overly cantankerous.

Logic says, "Read 'Random Walk Down Wall Street.'" If you don't get the logic, read it again. Then for dessert read the tail end of Warren's shareholder letter from last year.

My emotion says, that 10% keeps me in the game without blowing my financial shit out the door. I am a monkey. I have a monkey brain.

FFA

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Re: Indexing vs Individual Stocks
« Reply #52 on: February 21, 2015, 07:05:47 PM »
Thanks Surf. Here is where I sit. Of my stock portfolio I keep 90% indexed and am now 10% in five dividend paying stocks.

I give myself a 30-50% chance of even MEETING the S&P 500 over the long term.

And I don't care. I have a mental disorder, so to speak. And if my 10% bet keeps me 90% in the game, that's what I'll do.
I'm also fond of this approach. I first saw it on the motley fool it was called "index plus a few".

IMHO, for at least 90% of people they would be best off indexing. For the other 10% who have an interest and aptitude, the Index plus a few might be the best (and least risky) way to indulge this. Personally I feel only a minority (I'll be more generous than others and say 5%) can succeed long term at active investing.

(Note: These percentages are just my guesstimate views, no source or evidence behind)

hodedofome

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Re: Indexing vs Individual Stocks
« Reply #53 on: February 21, 2015, 07:46:17 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.

If you're looking at one particular year, sure.  But over the long term, you're beating 50% of all invested dollars this year, then beating 50% of all invested dollars next year, and the year after that...every single year for the rest of your life.

If you're trying to beat this, even one bad year can make it almost impossible to catch up. Losing 50% one year, means you need to gain 100% next year just to break even. If you do 10% better than the index one year, then do 10% worse than the index the next year, you will still end up with less money than simply choosing the index.

It seems counterintuitive, but the opposite has the same result. Do 10% worse than the index one year, then 10% better than the index the next year, and you are still behind the index.

When looking at the long term, you're beating significantly more than 50%, you're beating almost everybody. The compounding effects of bad years make it incredibly difficult to beat the index long-term.

This goes both ways. Say you have an edge and your edge works really well in the current environment. You can use that edge to make 100%, 500%, 1000% or more in just a year or two. You could spend the rest of the years indexing and still have handily beaten the market. You wait until your edge comes back in favor, and do it all over again. You end up taking marginally more risk for much more return.

Risk in trading can be defined, whereas in a buy and hold environment it cannot. You don't have to lose 50% as a trader if you don't want to, but a buy and hold guy is at mercy of the market. I will argue that a buy and pray strategy is taking on much more risk than I am. Certainly they are taking on more volatility per unit of return.

surfhb

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Re: Indexing vs Individual Stocks
« Reply #54 on: February 21, 2015, 07:59:09 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.

If you're looking at one particular year, sure.  But over the long term, you're beating 50% of all invested dollars this year, then beating 50% of all invested dollars next year, and the year after that...every single year for the rest of your life.

If you're trying to beat this, even one bad year can make it almost impossible to catch up. Losing 50% one year, means you need to gain 100% next year just to break even. If you do 10% better than the index one year, then do 10% worse than the index the next year, you will still end up with less money than simply choosing the index.

It seems counterintuitive, but the opposite has the same result. Do 10% worse than the index one year, then 10% better than the index the next year, and you are still behind the index.

When looking at the long term, you're beating significantly more than 50%, you're beating almost everybody. The compounding effects of bad years make it incredibly difficult to beat the index long-term.

This goes both ways. Say you have an edge and your edge works really well in the current environment. You can use that edge to make 100%, 500%, 1000% or more in just a year or two. You could spend the rest of the years indexing and still have handily beaten the market. You wait until your edge comes back in favor, and do it all over again. You end up taking marginally more risk for much more return.

Risk in trading can be defined, whereas in a buy and hold environment it cannot. You don't have to lose 50% as a trader if you don't want to, but a buy and hold guy is at mercy of the market. I will argue that a buy and pray strategy is taking on much more risk than I am. Certainly they are taking on more volatility per unit of return.

You make sound soooo easy! :)

hodedofome

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Re: Indexing vs Individual Stocks
« Reply #55 on: February 21, 2015, 09:05:47 PM »
It's certainly the hardest thing you'll ever do. Most aren't willing to do the work which is why most fail at it.

Mutton Chop

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Re: Indexing vs Individual Stocks
« Reply #56 on: February 21, 2015, 10:05:08 PM »
My recommendation is to passively invest and put the extra time you would have spent researching individual stocks into increasing your personal savings rate.

In my opinion, this extra time spent on researching stocks is better spent on family, exercise, and personal development.

If you can't help but scratch the itch I'd make it less than 25% of your portfolio.

phillyvalue

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Re: Indexing vs Individual Stocks
« Reply #57 on: February 21, 2015, 10:24:33 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.

If you're looking at one particular year, sure.  But over the long term, you're beating 50% of all invested dollars this year, then beating 50% of all invested dollars next year, and the year after that...every single year for the rest of your life.

If you're trying to beat this, even one bad year can make it almost impossible to catch up. Losing 50% one year, means you need to gain 100% next year just to break even. If you do 10% better than the index one year, then do 10% worse than the index the next year, you will still end up with less money than simply choosing the index.

It seems counterintuitive, but the opposite has the same result. Do 10% worse than the index one year, then 10% better than the index the next year, and you are still behind the index.

When looking at the long term, you're beating significantly more than 50%, you're beating almost everybody. The compounding effects of bad years make it incredibly difficult to beat the index long-term.

This goes both ways. Say you have an edge and your edge works really well in the current environment. You can use that edge to make 100%, 500%, 1000% or more in just a year or two. You could spend the rest of the years indexing and still have handily beaten the market. You wait until your edge comes back in favor, and do it all over again. You end up taking marginally more risk for much more return.

Risk in trading can be defined, whereas in a buy and hold environment it cannot. You don't have to lose 50% as a trader if you don't want to, but a buy and hold guy is at mercy of the market. I will argue that a buy and pray strategy is taking on much more risk than I am. Certainly they are taking on more volatility per unit of return.

I've been and will be a big defender of active investing, but this is a bit crazy - talking about making returns of 500% or 1000% in the timeframe of a year and simultaneously arguing that such a strategy can be accomplished with lower risk than investing in a diversified index. You mentioned TSLA earlier in the thread, and that's a clear example of a situation where in hindsight you made a 10X return in 2 years, but you invested in a company that could have easily ended up in failure and worth $0, and where the majority of the run up in stock price is because of speculation. There's a big difference between that and buying Apple in mid-2013 when you were able to buy an incredible, proven business at 5-6X cash flow. The former has to be summed up as incredibly speculative whereas the latter was one of the most obvious things I've ever seen.

Personally, one of the key things I admire about value investors is that there is never a promise of spectacular returns. The goal is always to earn a reasonable return over time without taking significant risk. If you can earn 15% per year, you will be incredibly rich over a lifetime. For that matter, given the environment we are in today with 2% interest rates, I think anyone who ends up earning 10%/yr from now through the next few decades will be hailed as a genius.
« Last Edit: February 21, 2015, 10:28:10 PM by phillyvalue »

surfhb

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Re: Indexing vs Individual Stocks
« Reply #58 on: February 21, 2015, 11:44:21 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.

If you're looking at one particular year, sure.  But over the long term, you're beating 50% of all invested dollars this year, then beating 50% of all invested dollars next year, and the year after that...every single year for the rest of your life.

If you're trying to beat this, even one bad year can make it almost impossible to catch up. Losing 50% one year, means you need to gain 100% next year just to break even. If you do 10% better than the index one year, then do 10% worse than the index the next year, you will still end up with less money than simply choosing the index.

It seems counterintuitive, but the opposite has the same result. Do 10% worse than the index one year, then 10% better than the index the next year, and you are still behind the index.

When looking at the long term, you're beating significantly more than 50%, you're beating almost everybody. The compounding effects of bad years make it incredibly difficult to beat the index long-term.

This goes both ways. Say you have an edge and your edge works really well in the current environment. You can use that edge to make 100%, 500%, 1000% or more in just a year or two. You could spend the rest of the years indexing and still have handily beaten the market. You wait until your edge comes back in favor, and do it all over again. You end up taking marginally more risk for much more return.

Risk in trading can be defined, whereas in a buy and hold environment it cannot. You don't have to lose 50% as a trader if you don't want to, but a buy and hold guy is at mercy of the market. I will argue that a buy and pray strategy is taking on much more risk than I am. Certainly they are taking on more volatility per unit of return.

I've been and will be a big defender of active investing, but this is a bit crazy - talking about making returns of 500% or 1000% in the timeframe of a year and simultaneously arguing that such a strategy can be accomplished with lower risk than investing in a diversified index. You mentioned TSLA earlier in the thread, and that's a clear example of a situation where in hindsight you made a 10X return in 2 years, but you invested in a company that could have easily ended up in failure and worth $0, and where the majority of the run up in stock price is because of speculation. There's a big difference between that and buying Apple in mid-2013 when you were able to buy an incredible, proven business at 5-6X cash flow. The former has to be summed up as incredibly speculative whereas the latter was one of the most obvious things I've ever seen.

Personally, one of the key things I admire about value investors is that there is never a promise of spectacular returns. The goal is always to earn a reasonable return over time without taking significant risk. If you can earn 15% per year, you will be incredibly rich over a lifetime. For that matter, given the environment we are in today with 2% interest rates, I think anyone who ends up earning 10%/yr from now through the next few decades will be hailed as a genius.

.....or you could just keep saving and investing in low cost index funds and be in about the same ballpark figure without the hassles, mass amounts of time taken and worries of active investing.   

The U.S. stock market's worst 30 year period was roughly 6% through the Depression into and out of WWII.   It's best period was 12%.    All this while the country went through 2 world wars, countless financial crisises, the Cold War, not to mention we were within a C hair of complete nuclear anailation for a week or so in 1962.

Oh yeah!   Did I mentioned most active investors have never or will never beat the indexes no matter how smart they are or how hard they try?  :).  Hello!?  Red flag!  Whoop. Whoop whoop!
« Last Edit: February 22, 2015, 01:09:19 AM by surfhb »

josstache

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Re: Indexing vs Individual Stocks
« Reply #59 on: February 22, 2015, 05:52:02 AM »
Hey, do whatever makes you happy; no need to pee all over someone else's investing choices.

I have an active trading account and another one which is fairly index-heavy.   On individual stocks, I track them versus VTSAX.  Some have lagged while others have surged vs the index.  Overall, dividends and tax effects included, I'm beating VTSAX over ten years.  I enjoy buying individual stocks - I have a bit of a gambling bug.  I have owned dogs like RIMM and HPQ but also a lot of AAPL and GOOG (which together saved my bacon).  It doesn't cut into my leisure time particularly - I just read Barron's every week at the breakfast table.  It is an outstanding publication which I urge all of you to read.  There is nothing wrong with letting the experts do all the research for you then making up your own mind.

 One of the advantages of individual stocks is that when you sell losers, you get a tax break.  That never happens when the individual stock drops inside an index.

If you don't have a stomach for individual stocks, then go with the index funds.  If you enjoy stock picking, give it a go but with your eyes wide open as to the risks.

It sounds like your individual stocks are focused on the tech sector.  It's worth noting that VGT also handily beat VTSAX over the past 10 years.

RapmasterD

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Re: Indexing vs Individual Stocks
« Reply #60 on: February 22, 2015, 06:19:37 AM »
My recommendation is to passively invest and put the extra time you would have spent researching individual stocks into increasing your personal savings rate.

In my opinion, this extra time spent on researching stocks is better spent on family, exercise, and personal development.

If you can't help but scratch the itch I'd make it less than 25% of your portfolio.

+1

LordSquidworth

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Re: Indexing vs Individual Stocks
« Reply #61 on: February 22, 2015, 07:58:02 AM »
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!

A misunderstanding of what average is.

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.

Wrong.

It's not 50% above, and 50% below.

It's what the average person can expect for a return.

The stock market is not zero sum.

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.

Honestly, doesn't take a lot of time and effort. I hold only stocks, many of which are boring short term, but have higher than average returns of something like the S&P 500 long term. My fees are lower than if I held index funds, and taking something like the S&P 500, there's 400+ companies in there I wouldn't want to own. Out of the thousands of stocks out there, for the above method which is what my retirement revolves around, there's probably less than 100 companies that I'd allow to be held.

But most people should still index. Human emotion is ones worst enemy investing, it cost me $20,000 at age 22 to tame my emotions.

** I also have a huge risk tolerance, though my risk level isn't terribly high right now. At least for equities. It is in real estate currently. **

hodedofome

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Re: Indexing vs Individual Stocks
« Reply #62 on: February 22, 2015, 03:25:21 PM »


I've been and will be a big defender of active investing, but this is a bit crazy - talking about making returns of 500% or 1000% in the timeframe of a year and simultaneously arguing that such a strategy can be accomplished with lower risk than investing in a diversified index. You mentioned TSLA earlier in the thread, and that's a clear example of a situation where in hindsight you made a 10X return in 2 years, but you invested in a company that could have easily ended up in failure and worth $0, and where the majority of the run up in stock price is because of speculation. There's a big difference between that and buying Apple in mid-2013 when you were able to buy an incredible, proven business at 5-6X cash flow. The former has to be summed up as incredibly speculative whereas the latter was one of the most obvious things I've ever seen.

Personally, one of the key things I admire about value investors is that there is never a promise of spectacular returns. The goal is always to earn a reasonable return over time without taking significant risk. If you can earn 15% per year, you will be incredibly rich over a lifetime. For that matter, given the environment we are in today with 2% interest rates, I think anyone who ends up earning 10%/yr from now through the next few decades will be hailed as a genius.

I wouldn't expect someone who only knows one way to make money in the market (value investing) to understand that there are other ways to make money in the market. There are also ways of structuring trades that increase the payoff and lower or define the risk. Even Buffett has used options and LEAPS/warrants.

And value investing certainly is anything but consistent returns. The returns are lumpy. A few mediocre years followed by a few years of fantastic returns. This is no different than what I do. What I do however is try not to trade at all unless there's a really fat pitch. There are years where value investors will tell you they are giddy. It doesn't happen very often but if you are patient enough to pass up the good deals, and wait for the great deals, then you can certainly have the years where you double or triple your capital.


ChrisLansing

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Re: Indexing vs Individual Stocks
« Reply #63 on: February 22, 2015, 07:05:23 PM »
One good reason to index is that the professional fund managers often can't beat the market, or even keep from loosing money.    My 403b (AXA/Equitable) lost a lot of money the past several years.    The only thing worse than loosing money through your own mistakes is loosing it through someone else's mistakes.     Looking through the investments available to me through my 403b I see a lot of the funds are still loosing YTD, and some that are "up" are making a very small returns.      (As an aside, I've signed up for online management so I can choose investments now rather than just going with what the "advisor" um, advises.   This is not a good thing.   A dummy like me has no business picking his own investments, but when the "pros" are loosing me money, what's the alternative?)

I recently opened a Vanguard Roth and have bought some index funds.   They will go up and down year to year but in the "long run" (10 years for me) they ought to perform reasonably close to their benchmarks.   If I had a longer time line I could be even more certain that the index would perform very close to the benchmark.   This, as far as I can see, is as close as one can get to "locking in" a return over the long haul.   The market -or a selected benchmark sub-portion - historically returns X %, so over the long run, the index will return X %.   To do well, long term, people don't need to beat the market, they just need to keep pace with the market and compound.    Indexing does that.   

That said, since I have no choice but to choose my own funds for my 403b, I'll probably be willing to risk 2-3% of my investment funds on picking my own stocks.   I see this as forcing myself to learn more about the market.    I'm willing to take the small loss if I make bad decisions.   But over all I'm much better off keeping 97% of what I think of as my "Vanguard money" in index funds.   

FFA

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Re: Indexing vs Individual Stocks
« Reply #64 on: February 22, 2015, 07:27:40 PM »
My recommendation is to passively invest and put the extra time you would have spent researching individual stocks into increasing your personal savings rate.

In my opinion, this extra time spent on researching stocks is better spent on family, exercise, and personal development.

If you can't help but scratch the itch I'd make it less than 25% of your portfolio.

+1

+2 . Very well said and I agree fully !

ChrisLansing

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Re: Indexing vs Individual Stocks
« Reply #65 on: February 22, 2015, 07:37:17 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.

It's aiming for the "market" return.    Consider a total (US) stock market index fund.   There is pretty much no mathematical chance of it under (or over) performing the market.   It will perform as the market does.   If the market historically returns X % then you'll likely make X % over a long time line.     In a particularly bad year the market could loose money but most years it will make you something, and some years quite a lot.   It will, over 30+ years, average out to X %.    Couple that almost guaranteed return with compounding and you can scarcely avoid becoming wealthy.      By contrast, you can pick your own stocks and try to beat the market return (X %)  But if your brilliance this year turns out to be nothing more than luck, you may loose next year, and then you'll not only loose actual value from your investment account you'll also loose the opportunity to compound the "market" return.     IOWs, slow and steady, along with low fees and compounding, wins the race.   

hodedofome

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Re: Indexing vs Individual Stocks
« Reply #66 on: February 22, 2015, 08:23:27 PM »
My recommendation is to passively invest and put the extra time you would have spent researching individual stocks into increasing your personal savings rate.

In my opinion, this extra time spent on researching stocks is better spent on family, exercise, and personal development.

If you can't help but scratch the itch I'd make it less than 25% of your portfolio.

That is good advice for most. But for a few of us, we get genuine satisfaction and enjoyment out of mastering an investment process and running an investment operation like a business. It is no different than the guy that wants to manage a real estate portfolio or run a business. This is what I want my full-time job to be and I'm willing to do the work to get to that point. I'll never fully retire, as there will always be something new to learn about a stock or the market in general.

My 85 year old grandfather still spends 4-6 hours a day doing stock research. He wouldn't want to be doing anything else. His mind is as sharp as ever and he has 60+ years of compounded research and knowledge to draw from. Without his stock market operations, he'd probably die in a few years out of boredom. All of us have to decide how we are going to spend our time, and some of us choose to spend it on this kind of stuff. Others want to surf or play golf and that's ok.

I'd argue learning to become a trader has done more for my personal development than just about anything else I've ever attempted in my life. You cannot become a good trader without dealing with your past, overcoming your emotions, learning to think clearly, and make good, consistent decisions. This has spilled over into all aspects of my life, for the better. I can't remember who said it, but a star poker player once said the best way to improve your poker skills is to improve your entire life and let your poker rise with it. Trading is the same.

Mighty-Dollar

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Re: Indexing vs Individual Stocks
« Reply #67 on: February 23, 2015, 12:54:41 AM »
There was a study that found that Jim Cramer's picks are neither good nor bad. If he's an expert and he can't beat the indexes then how would you expect to do any better?

LordSquidworth

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Re: Indexing vs Individual Stocks
« Reply #68 on: February 23, 2015, 07:08:36 AM »
There was a study that found that Jim Cramer's picks are neither good nor bad. If he's an expert and he can't beat the indexes then how would you expect to do any better?

Anyone that knows anything doesn't consider Cramer an expert, he's a tv personality.

ValueIsWhatYouGet

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Re: Indexing vs Individual Stocks
« Reply #69 on: February 23, 2015, 07:15:36 AM »
@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.

Exactly

ValueIsWhatYouGet

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Re: Indexing vs Individual Stocks
« Reply #70 on: February 23, 2015, 07:18:42 AM »
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:

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"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

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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?

I think you're either missing the point I'm making, or we're not speaking the same language. I'm not talking about "actively managed equity funds" as these are not incentivized to outperform the market. As a personal investor, I don't have to worry about people running to pull out their money when the market tanks (but I am putting money in). I'm not trying to predict the next best thing, nor am I following the herd into the next hot IPO. I'm not simply buying stocks based on a screen of "small cap + low P/E" or "large cap + low P/FCF". If you compare strategies like this to indexing, then indexing will win hands down. But again, this isn't what I'm talking about.

ValueIsWhatYouGet

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Re: Indexing vs Individual Stocks
« Reply #71 on: February 23, 2015, 07:24:56 AM »
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.

When did I say "very good chance"? I simply said you can beat the market if you have a specific knowledge, are willing to put in the effort, have the temperament for it, and a slew of other factors. The fact of the matter is that most people do not have the knowledge, will not put in the effort, and cannot escape certain behavioral/psychological traps. The odds are not stacked in these people's favor, and they should undoubtedly be indexing.

ValueIsWhatYouGet

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Re: Indexing vs Individual Stocks
« Reply #72 on: February 23, 2015, 07:28:35 AM »


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.

If you're looking at one particular year, sure.  But over the long term, you're beating 50% of all invested dollars this year, then beating 50% of all invested dollars next year, and the year after that...every single year for the rest of your life.

If you're trying to beat this, even one bad year can make it almost impossible to catch up. Losing 50% one year, means you need to gain 100% next year just to break even. If you do 10% better than the index one year, then do 10% worse than the index the next year, you will still end up with less money than simply choosing the index.

It seems counterintuitive, but the opposite has the same result. Do 10% worse than the index one year, then 10% better than the index the next year, and you are still behind the index.

When looking at the long term, you're beating significantly more than 50%, you're beating almost everybody. The compounding effects of bad years make it incredibly difficult to beat the index long-term.

This goes both ways. Say you have an edge and your edge works really well in the current environment. You can use that edge to make 100%, 500%, 1000% or more in just a year or two. You could spend the rest of the years indexing and still have handily beaten the market. You wait until your edge comes back in favor, and do it all over again. You end up taking marginally more risk for much more return.

Risk in trading can be defined, whereas in a buy and hold environment it cannot. You don't have to lose 50% as a trader if you don't want to, but a buy and hold guy is at mercy of the market. I will argue that a buy and pray strategy is taking on much more risk than I am. Certainly they are taking on more volatility per unit of return.

I've been and will be a big defender of active investing, but this is a bit crazy - talking about making returns of 500% or 1000% in the timeframe of a year and simultaneously arguing that such a strategy can be accomplished with lower risk than investing in a diversified index. You mentioned TSLA earlier in the thread, and that's a clear example of a situation where in hindsight you made a 10X return in 2 years, but you invested in a company that could have easily ended up in failure and worth $0, and where the majority of the run up in stock price is because of speculation. There's a big difference between that and buying Apple in mid-2013 when you were able to buy an incredible, proven business at 5-6X cash flow. The former has to be summed up as incredibly speculative whereas the latter was one of the most obvious things I've ever seen.

Personally, one of the key things I admire about value investors is that there is never a promise of spectacular returns. The goal is always to earn a reasonable return over time without taking significant risk. If you can earn 15% per year, you will be incredibly rich over a lifetime. For that matter, given the environment we are in today with 2% interest rates, I think anyone who ends up earning 10%/yr from now through the next few decades will be hailed as a genius.

.....or you could just keep saving and investing in low cost index funds and be in about the same ballpark figure without the hassles, mass amounts of time taken and worries of active investing.   

The U.S. stock market's worst 30 year period was roughly 6% through the Depression into and out of WWII.   It's best period was 12%.    All this while the country went through 2 world wars, countless financial crisises, the Cold War, not to mention we were within a C hair of complete nuclear anailation for a week or so in 1962.

Oh yeah!   Did I mentioned most active investors have never or will never beat the indexes no matter how smart they are or how hard they try?  :).  Hello!?  Red flag!  Whoop. Whoop whoop!

It's not really the same ballpark figure though. A few extra % points of performance over 40 years can be a HUGE difference in ending net worth. Like 3X more. 

KD

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Re: Indexing vs Individual Stocks
« Reply #73 on: February 23, 2015, 07:33:15 AM »

That is good advice for most. But for a few of us, we get genuine satisfaction and enjoyment out of mastering an investment process and running an investment operation like a business.                                                                                                                                                                                                                                                                                                                                                                 All of us have to decide how we are going to spend our time, and some of us choose to spend it on this kind of stuff. Others want to surf or play golf and that's ok.



+1

FarmerPete

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Re: Indexing vs Individual Stocks
« Reply #74 on: February 23, 2015, 08:11:30 AM »
It's certainly possible that any investor can beat the market in a year.  It's certainly possible that any investor can beat the market consistently, year after year, for 50 years straight.  It's also possible that I could win the next powerball +100 million jackpot.  Statistically, I don't know which has a higher rate of success, but it really doesn't make a difference, as they would both lose to the index investor the vast vast majority of the time.

surfhb

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Re: Indexing vs Individual Stocks
« Reply #75 on: February 23, 2015, 09:59:07 AM »
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.

When did I say "very good chance"? I simply said you can beat the market if you have a specific knowledge, are willing to put in the effort, have the temperament for it, and a slew of other factors. The fact of the matter is that most people do not have the knowledge, will not put in the effort, and cannot escape certain behavioral/psychological traps. The odds are not stacked in these people's favor, and they should undoubtedly be indexing.

I guess you're not reading my responses.    I've said over and over that's is possible to beat the indexes.....just not likely

Actually, the odds are stacked against you as an active investor.    Passive portfolios  outperform active portfolios by a huge margin.  What part of this are you not understanding?   
« Last Edit: February 23, 2015, 10:05:15 AM by surfhb »

beltim

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Re: Indexing vs Individual Stocks
« Reply #76 on: February 23, 2015, 10:05:30 AM »
I guess you're not reading my responses.    I've said over and over that's is possible to beat the indexes.....just not likely

Actually, the odds are stacked against you as an active investor.    Passive portfolios beat active portfolios by a huge margin.  What part of this are you not understanding?   

I know you're not replying to me, but I would point out that no one has posted any data about individual investors long term returns.  There has been data on active fund managers, but nothing on individual investors.

surfhb

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Re: Indexing vs Individual Stocks
« Reply #77 on: February 23, 2015, 10:14:35 AM »
I guess you're not reading my responses.    I've said over and over that's is possible to beat the indexes.....just not likely

Actually, the odds are stacked against you as an active investor.    Passive portfolios beat active portfolios by a huge margin.  What part of this are you not understanding?   

I know you're not replying to me, but I would point out that no one has posted any data about individual investors long term returns.  There has been data on active fund managers, but nothing on individual investors.

Lol
Ok, Fair enough.    You got me on a technicality;)

waltworks

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Re: Indexing vs Individual Stocks
« Reply #78 on: February 23, 2015, 10:27:11 AM »
I think it would be a bit of a stretch to think that the advantages a small individual investor has (ie, not answerable to anyone but themselves, small trades, etc) are big enough to overcome the resources available to a professional fund manager.

-W

I guess you're not reading my responses.    I've said over and over that's is possible to beat the indexes.....just not likely

Actually, the odds are stacked against you as an active investor.    Passive portfolios beat active portfolios by a huge margin.  What part of this are you not understanding?   

I know you're not replying to me, but I would point out that no one has posted any data about individual investors long term returns.  There has been data on active fund managers, but nothing on individual investors.

skyrefuge

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Re: Indexing vs Individual Stocks
« Reply #79 on: February 23, 2015, 11:33:30 AM »
I think it would be a bit of a stretch to think that the advantages a small individual investor has (ie, not answerable to anyone but themselves, small trades, etc) are big enough to overcome the resources available to a professional fund manager.

Perhaps, though I find it frustrating that the logical, data-driven commentators on this forum resort to this sort of hand-waving and assumption. Heck, Dodge isn't even hand-waving. When repeatedly called-out for arguing against straw-men, he continues to simply ignore the matter at hand ("what is the likelihood of an individual investor beating an index?") and addresses a different topic (the value of value-investing, mutual funds vs. index, etc.)

I understand that collecting data on individual investors (particularly investors of a certain temperament following a particular strategy) is difficult, but then I think this lack-of-data should at least be acknowledged. "Yes, we know active mutual funds won't beat the index, but since we don't have data on individual-investors vs. the index, we simply can't make any statements there. Maybe they can easily beat the index, maybe they can't; we simply don't have enough information to know".

beltim

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Re: Indexing vs Individual Stocks
« Reply #80 on: February 23, 2015, 11:39:09 AM »
I think it would be a bit of a stretch to think that the advantages a small individual investor has (ie, not answerable to anyone but themselves, small trades, etc) are big enough to overcome the resources available to a professional fund manager.

-W

I guess you're not reading my responses.    I've said over and over that's is possible to beat the indexes.....just not likely

Actually, the odds are stacked against you as an active investor.    Passive portfolios beat active portfolios by a huge margin.  What part of this are you not understanding?   

I know you're not replying to me, but I would point out that no one has posted any data about individual investors long term returns.  There has been data on active fund managers, but nothing on individual investors.

I agree with skyrefuge: it seems shocking to me that so many people post what they perceive as certainties without a shred of relevant proof.

And no one has addressed the best evidence on this issue, which philly posted earlier in this thread, with a PDF showing that hedge fund managers actually did add significantly alpha. 

waltworks

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Re: Indexing vs Individual Stocks
« Reply #81 on: February 23, 2015, 11:43:56 AM »
No, there's lots of data:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=219228
http://www.qaib.com/public/default.aspx
http://www.sciencedirect.com/science/article/pii/S0378426608002720

etc, etc. That's probably one of the most studied questions in finance!

And of course if you want to keep digging:
https://scholar.google.com/scholar?q=individual+investor+performance&hl=en&as_sdt=0&as_vis=1&oi=scholart&sa=X&ei=U3TrVKX0Ho_UoATItYDoDg&ved=0CB0QgQMwAA

None of them that I have read says anything about whether some sophisticated, smart folks can do better. But *in general* we do pretty well know that stock picking by individual investors decreases returns, in fact by quite a bit.

-W
« Last Edit: February 23, 2015, 11:45:57 AM by waltworks »

frugledoc

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Re: Indexing vs Individual Stocks
« Reply #82 on: February 23, 2015, 11:44:53 AM »
I think the desire to "outperform" the market is very strong in the early days of an investors path. There is not much capital and growing it is a priority.  I made a lot of mistakes in those days and would have a significantly higher total net wealth today had I invested as I do today.

Once you have a large stash built up small increases cause large upticks in net wealth and steady as she goes becomes much more attractive as you don't feel such a strong urge to rush and beat the market. 


Dodge

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Re: Indexing vs Individual Stocks
« Reply #83 on: February 23, 2015, 12:08:50 PM »
I think it would be a bit of a stretch to think that the advantages a small individual investor has (ie, not answerable to anyone but themselves, small trades, etc) are big enough to overcome the resources available to a professional fund manager.

Perhaps, though I find it frustrating that the logical, data-driven commentators on this forum resort to this sort of hand-waving and assumption. Heck, Dodge isn't even hand-waving. When repeatedly called-out for arguing against straw-men, he continues to simply ignore the matter at hand ("what is the likelihood of an individual investor beating an index?") and addresses a different topic (the value of value-investing, mutual funds vs. index, etc.)

I understand that collecting data on individual investors (particularly investors of a certain temperament following a particular strategy) is difficult, but then I think this lack-of-data should at least be acknowledged. "Yes, we know active mutual funds won't beat the index, but since we don't have data on individual-investors vs. the index, we simply can't make any statements there. Maybe they can easily beat the index, maybe they can't; we simply don't have enough information to know".

The available evidence, and the crux of my argument, apply to all active investors.  If the individual investors in this forum think they don't apply, the onus is on them to show it.

Dodge

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Re: Indexing vs Individual Stocks
« Reply #84 on: February 23, 2015, 12:12:16 PM »
I think it would be a bit of a stretch to think that the advantages a small individual investor has (ie, not answerable to anyone but themselves, small trades, etc) are big enough to overcome the resources available to a professional fund manager.

-W

I guess you're not reading my responses.    I've said over and over that's is possible to beat the indexes.....just not likely

Actually, the odds are stacked against you as an active investor.    Passive portfolios beat active portfolios by a huge margin.  What part of this are you not understanding?   

I know you're not replying to me, but I would point out that no one has posted any data about individual investors long term returns.  There has been data on active fund managers, but nothing on individual investors.

I agree with skyrefuge: it seems shocking to me that so many people post what they perceive as certainties without a shred of relevant proof.

And no one has addressed the best evidence on this issue, which philly posted earlier in this thread, with a PDF showing that hedge fund managers actually did add significantly alpha.

Every report I've seen on individual investor performance, always looks like this:



If the individual investors in this forum think they don't apply, the onus is on them to show it.

johnny847

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Re: Indexing vs Individual Stocks
« Reply #85 on: February 23, 2015, 12:18:14 PM »
I think it would be a bit of a stretch to think that the advantages a small individual investor has (ie, not answerable to anyone but themselves, small trades, etc) are big enough to overcome the resources available to a professional fund manager.

-W

I guess you're not reading my responses.    I've said over and over that's is possible to beat the indexes.....just not likely

Actually, the odds are stacked against you as an active investor.    Passive portfolios beat active portfolios by a huge margin.  What part of this are you not understanding?   

I know you're not replying to me, but I would point out that no one has posted any data about individual investors long term returns.  There has been data on active fund managers, but nothing on individual investors.

I agree with skyrefuge: it seems shocking to me that so many people post what they perceive as certainties without a shred of relevant proof.

And no one has addressed the best evidence on this issue, which philly posted earlier in this thread, with a PDF showing that hedge fund managers actually did add significantly alpha.

Every report I've seen on individual investor performance, always looks like this:



If the individual investors in this forum think they don't apply, the onus is on them to show it.
Just to clarify, when they say profitable, they mean made money, not made money in excess of an appropriate index?

Dodge

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Re: Indexing vs Individual Stocks
« Reply #86 on: February 23, 2015, 12:22:36 PM »
I think it would be a bit of a stretch to think that the advantages a small individual investor has (ie, not answerable to anyone but themselves, small trades, etc) are big enough to overcome the resources available to a professional fund manager.

-W

I guess you're not reading my responses.    I've said over and over that's is possible to beat the indexes.....just not likely

Actually, the odds are stacked against you as an active investor.    Passive portfolios beat active portfolios by a huge margin.  What part of this are you not understanding?   

I know you're not replying to me, but I would point out that no one has posted any data about individual investors long term returns.  There has been data on active fund managers, but nothing on individual investors.

I agree with skyrefuge: it seems shocking to me that so many people post what they perceive as certainties without a shred of relevant proof.

And no one has addressed the best evidence on this issue, which philly posted earlier in this thread, with a PDF showing that hedge fund managers actually did add significantly alpha.

Every report I've seen on individual investor performance, always looks like this:



If the individual investors in this forum think they don't apply, the onus is on them to show it.
Just to clarify, when they say profitable, they mean made money, not made money in excess of an appropriate index?

Correct.  This is not a comparison to an index.

johnny847

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Re: Indexing vs Individual Stocks
« Reply #87 on: February 23, 2015, 12:29:09 PM »
I think it would be a bit of a stretch to think that the advantages a small individual investor has (ie, not answerable to anyone but themselves, small trades, etc) are big enough to overcome the resources available to a professional fund manager.

-W

I guess you're not reading my responses.    I've said over and over that's is possible to beat the indexes.....just not likely

Actually, the odds are stacked against you as an active investor.    Passive portfolios beat active portfolios by a huge margin.  What part of this are you not understanding?   

I know you're not replying to me, but I would point out that no one has posted any data about individual investors long term returns.  There has been data on active fund managers, but nothing on individual investors.

I agree with skyrefuge: it seems shocking to me that so many people post what they perceive as certainties without a shred of relevant proof.

And no one has addressed the best evidence on this issue, which philly posted earlier in this thread, with a PDF showing that hedge fund managers actually did add significantly alpha.

Every report I've seen on individual investor performance, always looks like this:



If the individual investors in this forum think they don't apply, the onus is on them to show it.
Just to clarify, when they say profitable, they mean made money, not made money in excess of an appropriate index?

Correct.  This is not a comparison to an index.
If this data is indeed a representative sample of all individual investors...this is just plain sad.

beltim

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Re: Indexing vs Individual Stocks
« Reply #88 on: February 23, 2015, 12:46:41 PM »
No, there's lots of data:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=219228
http://www.qaib.com/public/default.aspx
http://www.sciencedirect.com/science/article/pii/S0378426608002720

etc, etc. That's probably one of the most studied questions in finance!

And of course if you want to keep digging:
https://scholar.google.com/scholar?q=individual+investor+performance&hl=en&as_sdt=0&as_vis=1&oi=scholart&sa=X&ei=U3TrVKX0Ho_UoATItYDoDg&ved=0CB0QgQMwAA

None of them that I have read says anything about whether some sophisticated, smart folks can do better. But *in general* we do pretty well know that stock picking by individual investors decreases returns, in fact by quite a bit.

-W

Thanks for the data.  I'm in the process of reading the links, but I did want to point out that the first link shows that over a five year period, 43.4% of the individual accounts they looked at beat the market after costs (table IV).  49.3% of accounts beat the market before costs, although interestingly they have a large enough sample size that that's statistically different from 50%.

beltim

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Re: Indexing vs Individual Stocks
« Reply #89 on: February 23, 2015, 12:49:32 PM »
Your other links, though, aren't very good.  The second is a link to purchase one-year investor returns since 1984, which unfortunately tells us nothing about longer time periods.  There's data out there that show that individual investors are much more likely than random to continue their out- or underperformance in investing.  Also, that product is $775.

The third link is about option trading, which no one here has discussed.

beltim

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Re: Indexing vs Individual Stocks
« Reply #90 on: February 23, 2015, 12:55:00 PM »
I think it would be a bit of a stretch to think that the advantages a small individual investor has (ie, not answerable to anyone but themselves, small trades, etc) are big enough to overcome the resources available to a professional fund manager.

Perhaps, though I find it frustrating that the logical, data-driven commentators on this forum resort to this sort of hand-waving and assumption. Heck, Dodge isn't even hand-waving. When repeatedly called-out for arguing against straw-men, he continues to simply ignore the matter at hand ("what is the likelihood of an individual investor beating an index?") and addresses a different topic (the value of value-investing, mutual funds vs. index, etc.)

I understand that collecting data on individual investors (particularly investors of a certain temperament following a particular strategy) is difficult, but then I think this lack-of-data should at least be acknowledged. "Yes, we know active mutual funds won't beat the index, but since we don't have data on individual-investors vs. the index, we simply can't make any statements there. Maybe they can easily beat the index, maybe they can't; we simply don't have enough information to know".

The available evidence, and the crux of my argument, apply to all active investors.  If the individual investors in this forum think they don't apply, the onus is on them to show it.

Well, there's already data showing that individual investors do better than active managers see the first link that walt posted.  And I've posted studies that show that individual investors are more likely to continue their relative performance than active managers.

So, from the data we have, it's clear that a majority of individual investors trail market returns after fees.  But the real question (to me, anyway) - is what is the percentage of investors who can outperform the market long-term.  The first link that walt posted showed that 25% of investors do better than 0.5% better than the market monthly.  That means that over a five year period, depending on how they calculated it, 25% of individual investors did more than 30-35% better than the market.  This is significant!

waltworks

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Re: Indexing vs Individual Stocks
« Reply #91 on: February 23, 2015, 01:00:45 PM »
Sure, sure - there are a gajillion studies. I just posted a few random ones. Did you look at the google search link I posted?

In general, the studies say individual investors suck. Period. There may or may not be some subset of individual investors that do great year in and year out. I don't know of any good research on that.

-W

Your other links, though, aren't very good.  The second is a link to purchase one-year investor returns since 1984, which unfortunately tells us nothing about longer time periods.  There's data out there that show that individual investors are much more likely than random to continue their out- or underperformance in investing.  Also, that product is $775.

The third link is about option trading, which no one here has discussed.

waltworks

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Re: Indexing vs Individual Stocks
« Reply #92 on: February 23, 2015, 01:07:31 PM »
I was surprised by how well the folks in that first study did. To be fair, in the mid-90s you'd generally expect only the most sophisticated folks to be trading stocks (no internet worth talking about yet, so it required quite a bit more effort than it does now) - so those are arguably among the *best* individual investors, at least as compared to a modern sample. And they still trailed the index by a bit, or by a lot if you include the fees they racked up.

AND... they spent their _time_ doing this! To me, that's the worst part. These folks could have just worked more at their regular job, or done something fun, or slept in and lived a decade longer because they were less stressed.

Again, though - there's no evidence presented in anything I've seen that says that NOBODY can consistently beat the market. All this data is just telling us that the average investor is better off with an index fund.

-W

Thanks for the data.  I'm in the process of reading the links, but I did want to point out that the first link shows that over a five year period, 43.4% of the individual accounts they looked at beat the market after costs (table IV).  49.3% of accounts beat the market before costs, although interestingly they have a large enough sample size that that's statistically different from 50%.

beltim

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Re: Indexing vs Individual Stocks
« Reply #93 on: February 23, 2015, 01:15:47 PM »
Sure, sure - there are a gajillion studies. I just posted a few random ones. Did you look at the google search link I posted?

In general, the studies say individual investors suck. Period. There may or may not be some subset of individual investors that do great year in and year out. I don't know of any good research on that.

-W

Your other links, though, aren't very good.  The second is a link to purchase one-year investor returns since 1984, which unfortunately tells us nothing about longer time periods.  There's data out there that show that individual investors are much more likely than random to continue their out- or underperformance in investing.  Also, that product is $775.

The third link is about option trading, which no one here has discussed.

I did, and it's similar to the research I've done before.  There's lot of analysis of individual factors: trading, account size, limit orders, financial advice, mutual fund flows, etc.  Unfortunately, there's not as much about long-term individual performance, which is what really counts.

Look, I agree that >50% of individual investors trail the market, and if someone is asking the question, they should simply index.  But index proponents simply go too far (without sufficient data!) when they say things like, to quote one recent discussion:
As Vanguard mentioned in their study on this, your idea of researching the best companies is inherently riskier than simply owning the full stock market index.  Much riskier.  Off-the-charts riskier.  It is pretty much a statistical certainty that you will underperform/lose money over the long run.  Researching individual stocks, for your retirement portfolio, is quite literally one of the most risky things you can do. 

P.S.  I read what you just posted while I was writing this, and I completely agree that the average investor is better off with an index fund.  And I agree that most people could spend their time more productively.  I personally enjoy investing, but I realize that most people don't.

waltworks

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Re: Indexing vs Individual Stocks
« Reply #94 on: February 23, 2015, 01:20:20 PM »
Yeah, we're in agreement, then - I actually believe there is a subset of people that can beat the market consistently. A few percent of the investing world, maybe? I mean, it's a skill like any other, albeit one in a much more random and stressful environment than learning to knit or something.

That said, yeah, the answer to anyone who bothers to ask the question online should be "hell no". I mean, if you can't even be bothered to do the research for 15 minutes to learn about the basics of the debate... come on!

-W


ValueIsWhatYouGet

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Re: Indexing vs Individual Stocks
« Reply #95 on: February 23, 2015, 04:35:52 PM »
I think the desire to "outperform" the market is very strong in the early days of an investors path. There is not much capital and growing it is a priority.  I made a lot of mistakes in those days and would have a significantly higher total net wealth today had I invested as I do today.

Once you have a large stash built up small increases cause large upticks in net wealth and steady as she goes becomes much more attractive as you don't feel such a strong urge to rush and beat the market.

This is a really good point that I completely agree with. James Montier (old school Graham cigar-butt investor) mentioned something like this in one of his books. Where a young manager was working with an old rich client, trying to explain to him how a certain strategy would make him richer. The old man got angry at him and said something to the effect of not caring whether or not he gets richer, as he is already. But rather that he just doesn't want to get poorer because that would be far more painful.

Dodge

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Re: Indexing vs Individual Stocks
« Reply #96 on: February 23, 2015, 11:19:16 PM »
I think it would be a bit of a stretch to think that the advantages a small individual investor has (ie, not answerable to anyone but themselves, small trades, etc) are big enough to overcome the resources available to a professional fund manager.

Perhaps, though I find it frustrating that the logical, data-driven commentators on this forum resort to this sort of hand-waving and assumption. Heck, Dodge isn't even hand-waving. When repeatedly called-out for arguing against straw-men, he continues to simply ignore the matter at hand ("what is the likelihood of an individual investor beating an index?") and addresses a different topic (the value of value-investing, mutual funds vs. index, etc.)

I understand that collecting data on individual investors (particularly investors of a certain temperament following a particular strategy) is difficult, but then I think this lack-of-data should at least be acknowledged. "Yes, we know active mutual funds won't beat the index, but since we don't have data on individual-investors vs. the index, we simply can't make any statements there. Maybe they can easily beat the index, maybe they can't; we simply don't have enough information to know".

The available evidence, and the crux of my argument, apply to all active investors.  If the individual investors in this forum think they don't apply, the onus is on them to show it.

Well, there's already data showing that individual investors do better than active managers see the first link that walt posted.  And I've posted studies that show that individual investors are more likely to continue their relative performance than active managers.

So, from the data we have, it's clear that a majority of individual investors trail market returns after fees.  But the real question (to me, anyway) - is what is the percentage of investors who can outperform the market long-term.  The first link that walt posted showed that 25% of investors do better than 0.5% better than the market monthly.  That means that over a five year period, depending on how they calculated it, 25% of individual investors did more than 30-35% better than the market.  This is significant!

Doesn't surprise me.  For a 5 year period, the 25% figure is in line with the data:



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Re: Indexing vs Individual Stocks
« Reply #97 on: February 25, 2015, 04:08:29 PM »
I think it would be a bit of a stretch to think that the advantages a small individual investor has (ie, not answerable to anyone but themselves, small trades, etc) are big enough to overcome the resources available to a professional fund manager.

Perhaps, though I find it frustrating that the logical, data-driven commentators on this forum resort to this sort of hand-waving and assumption. Heck, Dodge isn't even hand-waving. When repeatedly called-out for arguing against straw-men, he continues to simply ignore the matter at hand ("what is the likelihood of an individual investor beating an index?") and addresses a different topic (the value of value-investing, mutual funds vs. index, etc.)

I understand that collecting data on individual investors (particularly investors of a certain temperament following a particular strategy) is difficult, but then I think this lack-of-data should at least be acknowledged. "Yes, we know active mutual funds won't beat the index, but since we don't have data on individual-investors vs. the index, we simply can't make any statements there. Maybe they can easily beat the index, maybe they can't; we simply don't have enough information to know".

The available evidence, and the crux of my argument, apply to all active investors.  If the individual investors in this forum think they don't apply, the onus is on them to show it.

Well, there's already data showing that individual investors do better than active managers – see the first link that walt posted.  And I've posted studies that show that individual investors are more likely to continue their relative performance than active managers.

So, from the data we have, it's clear that a majority of individual investors trail market returns after fees.  But the real question (to me, anyway) - is what is the percentage of investors who can outperform the market long-term.  The first link that walt posted showed that 25% of investors do better than 0.5% better than the market monthly.  That means that over a five year period, depending on how they calculated it, 25% of individual investors did more than 30-35% better than the market.  This is significant!

Doesn't surprise me.  For a 5 year period, the 25% figure is in line with the data:



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Perhaps I'm recalling this incorrectly, but I remember in Burton Malkiel's "Random Walk Down Wall Street" that he had a chart describing relative risk vs. number of stocks held. The data suggested that, as you would expect, the more stocks held in the investor's basket, the more diffuse the risk was and the closer the basket's performance resembled that of the benchmark index. I think I remember the conclusion being that one encounters diminishing returns in terms of risk reduction once you diversify beyond 50 holdings or so (the difference between holding 50 vs. 250 stocks didn't seem particularly significant). This tied back to Buffett, whose holdings via Berkshire were in around 50-60 places, and in significant enough volume to be a real voice and direct these companies, one might say "holding the cards". This enabled him to hedge his bet - yes, he is picking individual positions based on whatever processes he uses to vet them, but he is also, technically speaking, "indexing" according to Malkiel's definition given in the book. This approach seems to require a lot of capital investment to take a large stake in each position, and I wonder about its scalability to individual investors who don't have the zero's to buy board seats at large companies. Food for thought.

Buffett himself has suggested that for the vast majority of individual investors, a low-cost index fund is the best option, mathematically speaking. This is the option I'm using. YMMV.

What seems clear from this discussion is we are arguing past each other. If you do pursue an active management strategy, keep in mind that actively trading stocks will likely create taxable events, which will further erode your returns in addition to any fees you may incur in the process. If, in the face of these difficult odds, you manage to beat the market over the long term with a strategy that is repeatable, I'd love to read about it. Good luck :-)

KBecks2

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Re: Indexing vs Individual Stocks
« Reply #98 on: February 28, 2015, 06:50:35 AM »
I don't care that much about how all individual investors do.  I care about my portfolio and my family's future.

Our portfolio is doing well and I'm happy with it.   I just completed a first year of learning about and actively using stock options, and it was profitable.  Most of our stocks are up, quite a lot.   Our Apple shares are up 80% over 18 months, and one of our small stocks doubled (and I took the money).

Everybody gets a choice and that is fine. I agree that the easy path for people is to invest in indexes, and that is a great option!  But don't whack at the people who want to try their own thing, or assume they will all fail. 

If you see someone saying they are going to go all in to one stock, then tell them they are ridiculous.  But if someone is investing in a portfolio and taking time to study it and work at it, then mind your own business instead of treating these people like idiots or like they don't have a right to a difference of opinion.




KBecks2

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Re: Indexing vs Individual Stocks
« Reply #99 on: February 28, 2015, 06:53:00 AM »
Also, an individual investor is not the same as an active fund.  An individual has a lot more nimbleness in the market, and they can hold their positions longer without worrying over their returns = low turnover.  If you are talking to individuals, then that individual is responsible for their own rate of return and their own goal-setting. I agree with an earlier post, the goal is not always to beat the market, sometimes it is much more about preserving capital.