Individual stocks, Funds, or ETF's

[gdgyva]

Long time investor

I realize what most experts say is to buy low cost funds, or etf's and let them grow.

I disagree.....i think you get too many lemons in the mix, and it takes away from the top stocks

I have my own personal portfolio of 10 equities (usually runs from 9-12)

All S&P 500 stocks, and 9 of the 10 are good dividend payers

I buy and usually hold equities, unless there is a reason to sell (think BP a few years back)

I am NOT a trader.....more of a Buffett investor

I love what i call kmart specials (blue chip stocks @ sale prices) ie...my avg price per share of GE is a little over $ 14.xx

anyone else here a holder of individual equities?

and if so, what is your system/determination for purchase?

[Scandium]

Long time investor

I realize what most experts say is to buy low cost funds, or etf's and let them grow.

I disagree.....i think you get too many lemons in the mix, and it takes away from the top stocks

I don't disagree with this, and neither do any experts. But I don't know which are lemons and which are "top stocks" over the next 20-30 years (and I'd be willing to bet you don't either). Therefore> index.

And 10 large cap domestic companies sounds not very diversified to me, but that's personal preference.

[hodedofome]

Yeah most would consider 10 stocks pretty concentrated. I think 30-50 is considered 'diversified' for individual investors, although most funds have hundreds or more.

I don't doubt that the market can be beat at all, it's just not easy. Buffett tells students that it's simple but it's not easy: just read hundreds of pages of material a day and eventually you'll figure it out. Most can't/won't do that however.

For me, I buy individual stocks but I'd consider myself more of a trader than an investor. My holding time could be 1 day to 1 year. I buy momentum stocks hitting all time highs with a fairly tight stop. I could have several stocks or just 1 or none, depending on the stock and the market environment. I covered my last short (FLDM) today, and I have no stocks left. Current market environment is not conducive to my method so I'm just sitting around waiting for the next bull run.

[trailrated]

Good luck.

[rmendpara]

I invest in index funds through my 401k up to the annual maximum $17.5k. Right now, I have ~40% in individual stocks. In general, I've bought into companies which I believe were oversold and which I believe had upside and relative safety.

A few examples are:

- AAPL at $440 in 2013
- INTC at $22 in 2013
- BP at $43 in 2013
- GM at $35 in 2014

At the prices I bought into these, they were near their 52-week lows, and were being beaten down in the news/media. I disagreed, and found these to be good buying opportunities  by seeing greater upside than downside.

Regarding your holding of 9-10 stocks in the S&P, this is likely a decent strategy as you should share in most of the gains and your downside risk is also somewhat mitigated.

GE is something I wish I would have gotten into around $20, but I passed at the time and  regret it now.

Generally, I see decent value in industrials and large-cap tech.

Good luck

[RapmasterD]

Long time investor

I realize what most experts say is to buy low cost funds, or etf's and let them grow.

I disagree.....i think you get too many lemons in the mix, and it takes away from the top stocks

I don't disagree with this, and neither do any experts. But I don't know which are lemons and which are "top stocks" over the next 20-30 years (and I'd be willing to bet you don't either). Therefore> index.

And 10 large cap domestic companies sounds not very diversified to me, but that's personal preference.

Scandium -- Your words are like poetry. Seriously, you are spot on IMHO.

[SDREMNGR]

10 stocks are way too concentrated.  That is 10% of your stash in 1 bet.  Borrowing from gambling language, your probability of ruin is too high with such a concentrated portfolio.  The standard maximum bet is 5% of stash per bet.  Modern portfolio management theory says that you gain true portfolio risk reduction benefits at around 20+ stocks (Malkiel, Random Walk Down Wallstreet).

[gdgyva]

it used to be in the 18-25 equity range...... but i found that i couldnt keep that many companies covered the way i need to

i read everything that comes out on every company i own

limiting it to no more than 12, makes that more manageable

however...i do understand the issue

because i am not really well diversified, one equity can ruin my entire year

and i have had a few that underperformed the rest.....

but i understand what these companies do.....what products and services they offer

where their growth areas are.....and even a bad quarter or two isnt going to dissuade me from where i THINK they are going

i dont care what the price of the stock is today, tomorrow, or even next year

i care about where it will be in 15-20 years.....

again....this is my way.....i realize it wont work for all.....just throwing it out there so you can get to know how i invest and think

[Scandium]

I see you're heavily invested in a company that makes enter keys..

[Mister Fancypants]

Our retirmement accounts are purely indexed ETF's which are managed by software I wrote to rebalance when there is ineffieciencies in the market, it beats the standard index portfolios every year.

We also have a portfolio of individual stocks in taxable accounts, some we bought opportunistically during the crisis others have been held for a decade or so. At this point the unrealized gains are so high it would be too high a tax burden to sell based on our income even if we wanted to.

The portfolio pays a nice ~2.5% to 3% a year dividend and unless there is a real loss of faith in a company we would not sell one of these stocks until our tax bracket dropped as we have no need for the capital.

-Mister FancyPants

[rmendpara]

it used to be in the 18-25 equity range...... but i found that i couldnt keep that many companies covered the way i need to

i read everything that comes out on every company i own

limiting it to no more than 12, makes that more manageable

however...i do understand the issue

because i am not really well diversified, one equity can ruin my entire year

and i have had a few that underperformed the rest.....

but i understand what these companies do.....what products and services they offer

where their growth areas are.....and even a bad quarter or two isnt going to dissuade me from where i THINK they are going

i dont care what the price of the stock is today, tomorrow, or even next year

i care about where it will be in 15-20 years.....

again....this is my way.....i realize it wont work for all.....just throwing it out there so you can get to know how i invest and think

It's always a good idea to only invest in things you understand. Don't buy telecom because some stock broker says it's going to shoot up (not to say this is what you're doing at all).

It may be a good idea to use ETF's/funds to invest when you don't see any obvious values in the stock market. It was fairly easy in 2010-2012 to find good stocks. In fact, unless you chose a real dog, a lot of picks have had strong gains since then.

For me, I don't really see too many clear values in the market, which is why I haven't bought anything since the beginning of this year. I'll just keep pouring money into my 401k until we go into the next market correction and I can pick up some good names at discounted prices. :)

Happy investing.

[wtjbatman]

and if so, what is your system/determination for purchase?

I'm a buy and hold dividend growth investor. I look at companies with a certain minimum yield, a payout ratio with room to grow, and both solid and stable 1 year/5 year/10 year dividend growth rates. I like the chowder rule (yield + DGR needs to equal 12%+), but more as a start. I would never put my hard earned money into a company that I didn't do as much research as I am able to on.

[RapmasterD]

After having worked at public companies for the past 26 years, including 18 in which I ran public relations...I wonder if you can ever truly 'understand' a company.

I wonder if fundamental analysis ever works.

I no longer purchase individual stocks. If I did, I would look at price charts and ignore the noise coming out of any company, the financial analysts who pontificate about them, or the press reporters who write about them.

[hodedofome]

I no longer purchase individual stocks. If I did, I would look at price charts and ignore the noise coming out of any company, the financial analysts who pontificate about them, or the press reporters who write about them.

“An important feature of our approach is that we work almost exclusively with price, past and current. One reason for this is that to make any progress in the early stages of quantitative investigation you usually have to reduce the relevant factors to one or two crucial variables. Price is definitely the variable traders live and die by, so it is the obvious candidate for investigation. The other reason is that in a system that’s making good use of price information, it is very difficult to add other information without degradation. Pure price systems are close enough to the North Pole that any departure tends to bring you farther south.” - Market Wizard William Eckhardt
Eckhardt's performance here: http://www.managedfutures.com/program_performance.aspx?fundtype=&productId=18631

[butchmonkey]

I agree with rapmaster that any public knowledge is already priced into the stock. So "knowing" about a company is likely not very useful.

I don't discount that skill in valuation works sometimes. (Warren Buffett comes to mind.) The problem is you can't tell who will have the skill in the future, and if you invest actively, your odds of underperforming by a large margin are much greater than your odds of overperforming by small margin (which, in turn, are much greater than your odds of over performing by a large margin!.)

In other words, probability states that stockpicking is a losers strategy.


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[Emg03063]

I have held and continue to hold a few individual stocks.  At one time, they represented a large portion of my net worth, now it's ~5% as I've directed all of my new funds into mutuals ever since I was 23.  I started with ~$20k, bought 4/5 stocks recommended by my full service broker ($5k each), caught a 10 bagger in the tech bubble, and watched it pop as I had no sell strategy and figured it would eventually recover (it didn't).  I'm still holding it.  I owned Merck when the Vioxx scandal broke and watched it drop ~35% in short order, and Transocean Offshore when the Deepwater Horizon blew up, causing a ~66% drop in market value.  Shit happens, even to well managed companies with solid track records and financials, and when it does, there are lots of people assessing the impact and trading on the info while I'm busy doing my day job.  My stock holdings are in a full service brokerage account that I never trade in, and I have a broker that occasionally pitches me some occasionally good ideas, but as he is unable to articulate a strategy by which we might hope to outperform the market, I don't trade in the account or add money to it (much to his chagrin :p).  I will most likely liquidate my remaining stock holdings this year to pay off a loan I took out last year to finance my solar panel installation.  I'm sure I could probably generate some alpha with stocks if I devoted lots of time to it, but the risk/reward profile isn't attractive to me.  For the amount of time I'd spend on analysis, I'd rather chase real estate deals, where at least you can profit from imperfections in the market.

[waltworks]

The way I look at it is this: there are a ton of super smart people graduating from Ivy League colleges every year who want to make money like sharks want chum. They are (let's be fair) smarter than you, and smarter than me, and they will work 18 hour days for big investment banks or hedge funds. They have, for all practical purposes, infinite financial resources as well as, in many cases, access to knowledge that I don't (or at the very least, access to information before I can get my hands on it.) Their computers are next door to the exchange so their trades happen instantaneously.

They are my competition if I want to play the stock picking game. And I have to pay quite a bit in fees to play at all.

Index funds, on the other hand, are just a big bet on the USA/world/humanity making things constantly more awesome. I don't have to outsmart anyone in a zero-sum game. I don't have to put in much/any time so I can concentrate on either making money through work, or recreating instead. To me, that's a no-brainer. I guess if you really enjoy gambling/reading about companies online for hours and hours every day, great, start trading stocks. Otherwise, I don't think there's much need to worry about it.

-W

[Franklin]

I also index through my 401k and own about a dozen individual value stocks through my Roth.  I'm a little skeptical of the cap weighting of the S&P indexes, so I balance it with a fundamental weighting as well.  There is no reason to stick to just one methodology.  As a matter of fact it's inefficient.   

It's humorous to read the rationale of a pure S&P index investor.  It's kind of like bragging about an all day ticket to Disney World.  Then again, a pure individual stock investor sounds like an intelligent teenager.

[waltworks]

Maybe I don't know anything about Disney World, but I don't understand your analogy.

-W

[Scandium]

Maybe I don't know anything about Disney World, but I don't understand your analogy.

-W

Yeah I don't follow that either. Need more explanation.

[shotgunwilly]

I see you're heavily invested in a company that makes enter keys..

Hehe.

[gdgyva]

I see you're heavily invested in a company that makes enter keys..

power generation, home appliances, financial services, lighting, aviation(turbo jet engines), Power distribution, Health care(machines used in hospitals for diagnosis),

Equipment for oil & gas exploration.

Railways(locomotive engines), security systems(for home,school,airports,etc.),
waste water treatment equipment

sorry...wasnt able to find "enter keys"

and my stock portfolio comprises about 30% of my total wealth

and GE currently comprises 2.7% of that portfolio

if that is over committed in your opinion...okay

i am fairly confident.....decent dividend and average share purchase price of $ 14.xx

I get it that etf's and funds are much safer.....

Up until 2004, i had almost everything in them

Now i choose which companies i own.....not some fund manager

[Franklin]

Maybe I don't know anything about Disney World, but I don't understand your analogy.

-W

Yeah I don't follow that either. Need more explanation.

Sorry, I stretched it a little thin on that one:) 

My analogy is that a deal is not a deal if it wastes money.  A pure S&P Index investment with no other type of diversity, while being simple and cheap, is an inefficient investment that leaves money on the table.

[waltworks]

I'd say that's true in the context of an entire portfolio (ie real estate, cash, precious thingies, whatever) but if we're just talking about stocks - it's hard to argue that an average investor (or even a savvy one) is leaving money on the table by going pure index. Statistically it's by far your best option.

-W

Maybe I don't know anything about Disney World, but I don't understand your analogy.

-W

Yeah I don't follow that either. Need more explanation.

Sorry, I stretched it a little thin on that one:) 

My analogy is that a deal is not a deal if it wastes money.  A pure S&P Index investment with no other type of diversity, while being simple and cheap, is an inefficient investment that leaves money on the table.

[Franklin]

I don't have to outsmart anyone in a zero-sum game.

Here's the thing.  You've already been outsmarted.  Let's look at a scenario in the S&P.  It is a cap-weighted index so everytime it rebalances it buys more of the expensive stocks and sells the cheaper stocks.  That's a flawed buy-high and sell-low approach.  Also, the rebalance schedules are public knowledge so smart money knows where the big money will be going ahead of time.  I'm not knocking it.  I have 25% of my portfolio there.  My point is that if you are going to index then you better know how to diversify against your index's investment strategy.  It's just common sense.  Plus, as an individual investor you do have stealth, and speed, and you don't have to meet quotas, generate commissions, or abide by a prospectus.  So you can use that against the people who are supposedly smarter than you.

[waltworks]

I think we just fundamentally disagree here. My goal is simply to capture the overall trend of the market and put in near-zero effort. I can make money far faster and easier doing "honest" work than I can trying to play the stock market. As I said, if stocks are your thing, great. In 20 years we can compare notes, and see how much you paid yourself by the hour/how much I spent to ride my bike a ton.

-W

[TreeTired]

I own lots of individual stocks.   I like buying them and I like following them and I enjoy watching them go up.  Sometimes I sell calls against them.   It's fun.   I don't mind underperforming the index -  I am pretty good at rationalizing.   I own some real garbage - fun stocks that I bought and watched go down.... and down...    I bought GE in 07 at around 35..... bought BAC around the same time at ... around... 50 ish? 
I own some index funds too,  but the stocks are fun.

[SDREMNGR]

I'm mostly in ETFs and I play with individual stocks here and there.  Played with JCP and got in last year at $7 when people were shitting on it and got out at $9 in April.  Made a bit of cash on that one.  That was a pure speculation on the fact that I believed that the Spring numbers would come in better than expected and the huge short position to be squeezed, which it did.  A bit hairy but glad to have it come out ok.

I also got in on TMUS last year at $33 and have held it until now.  Looking at going to $35 tomorrow and expecting it to get closer to $37 possibly by next month depending on what news comes from FCC.  Not sure if they will get approved but I think I'll head for the exit at around $37.  The deal was announced at $40 today and the actual details are slated to come out in July.

I got out of all my ETF positions on Monday.  Still glad I did.  I know what everyone thinks of market timing, but I am happy with my returns for the last 5 years and am slating a big chunk of it for a real estate purchase that I'm looking at.  Time to move money into a different asset class imho.

I'd say keep most of your money in ETFs and play individual stocks with about 5-10% of your stash for shits and giggles.  That way, you get your thrills without risking your stash.

[Scandium]

I don't have to outsmart anyone in a zero-sum game.

Here's the thing.  You've already been outsmarted.  Let's look at a scenario in the S&P.  It is a cap-weighted index so everytime it rebalances it buys more of the expensive stocks and sells the cheaper stocks.  That's a flawed buy-high and sell-low approach.  Also, the rebalance schedules are public knowledge so smart money knows where the big money will be going ahead of time.  I'm not knocking it.  I have 25% of my portfolio there.  My point is that if you are going to index then you better know how to diversify against your index's investment strategy.  It's just common sense.  Plus, as an individual investor you do have stealth, and speed, and you don't have to meet quotas, generate commissions, or abide by a prospectus.  So you can use that against the people who are supposedly smarter than you.

This sounds like you're assuming stock pickers don't buy high and sell low, which they very clearly do. All the time. In fact probably as much as any index. (chasing the "hot stocks" etc). Per definition the stock pickers will average out to the index anyway. I'm arrogant, but not so arrogant that I think I can do better.

OP mentioned GE so I had to take a look. In last 10 years S&P up 60%, and GE is up....  -13%. Now I'm sure you'll say you entered/exited at exactly the right time blah blah. We'll good luck doing that consistently for 30 years

edit: Found a point where GE was $14 (OP's price). Since then it's done pretty much exactly as well as the S&P. Congrats.

[Franklin]

This sounds like you're assuming stock pickers don't buy high and sell low, which they very clearly do. All the time.

Only the ones who want to get slaughtered.

In last 10 years S&P up 60%

Actually it's up 72%, giving it a CAGR of 5.5% in that timeframe.

and GE is up....  -13%.

Ummm...do you know about stock splits, dividends, and adjusted prices?

[butchmonkey]

I don't have to outsmart anyone in a zero-sum game.

Here's the thing.  You've already been outsmarted.  Let's look at a scenario in the S&P.  It is a cap-weighted index so everytime it rebalances it buys more of the expensive stocks and sells the cheaper stocks.  That's a flawed buy-high and sell-low approach.  Also, the rebalance schedules are public knowledge so smart money knows where the big money will be going ahead of time.  I'm not knocking it.  I have 25% of my portfolio there.  My point is that if you are going to index then you better know how to diversify against your index's investment strategy.  It's just common sense.  Plus, as an individual investor you do have stealth, and speed, and you don't have to meet quotas, generate commissions, or abide by a prospectus.  So you can use that against the people who are supposedly smarter than you.

This is just wrong.

The main reason that cap weighted  index funds are cheaper than active funds is that the only time the cap weighted mutual fund must rebalance is when the composition of the index itself changes.


Imagine a 2 stock index of apple and GE.

On day 1, the 2 stocks are of equivalent value and the passive fund buys both in equal measure.

On day 2 apple goes up and GE goes down.

Apple now comprises 75% of the index, while GE comprises 25%. And these new valuations are automatically reflected in the composition of the index fund.

Compare that to a more active strategy like an equal weighted index.

On day 2 the equal weighted index must sell 1/2 of its apple position and buy more GE. In other words it must incur transaction costs/capital gains, whereas the capital weighted index incurs none.

There is no buying high in the passive fund, but there are big costs to maintaining the composition of an active fund.



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[Franklin]

the only time the cap weighted mutual fund must rebalance is when the composition of the index itself changes.

Correct, and the composition has been changed 37 times in the past two years.

Here's a great read:   https://economics.stanford.edu/files/Theses/Theses_2004/Campbell.pdf

[TreeTired]

Thanks for that article.   It is 10 yrs old, but still interesting.  I have played a little bit with the re-balancing trade.   I think most true index funds (or ETFs) wait until the close to execute their re-balancing trades.  They are paid to match the index, not outperform it.   If they execute trades early, the risk of underperforming far outweighs any benefit they would gain from a slight outperformance.  The index is calculated based on closing prices.  I also think (I have no evidence to confirm this)  large brokers probably offer to execute these trades and guarantee the fund the day's closing price.  That way the broker can accumulate shares and drive up the price and turn around and sell the shares to the ETF at the higher closing price.  Here is a screenshot I took of the close 4/29/11,  a day the NASDAQ was rebalanced that required large purchases of these 4 stocks. 

[Scandium]

This sounds like you're assuming stock pickers don't buy high and sell low, which they very clearly do. All the time.

Only the ones who want to get slaughtered.

oooh. So it's that easy huh? Well duh! now that the secret is out everyone will get rich picking stocks.

Only problem is I don't know if price X is the top (sell!) or the bottom of a 200% rise. And vice versa.

[butchmonkey]

the only time the cap weighted mutual fund must rebalance is when the composition of the index itself changes.

Correct, and the composition has been changed 37 times in the past two years.

Here's a great read:   https://economics.stanford.edu/files/Theses/Theses_2004/Campbell.pdf

I fail to see your point here.

Find me an active fund with less than 1 transaction per 20 days or an expense ratio less than the vanguard 500.

The article is interesting and almost completely irrelevant to the topic at hand (which is certainly not how to strategize around index fund composition changes as an index fund manager. )



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[gdgyva]

This sounds like you're assuming stock pickers don't buy high and sell low, which they very clearly do. All the time.

Only the ones who want to get slaughtered.

oooh. So it's that easy huh? Well duh! now that the secret is out everyone will get rich picking stocks.

Only problem is I don't know if price X is the top (sell!) or the bottom of a 200% rise. And vice versa.

if you are trading, and not long term investing....that would be a concern

but take a stock like Sysco (syy)

It also is in my portfolio, and has been for over 10 years

A lot of stocks have gone up more over that 10 year period.....

But i'll trade that for the safety of the giant food company

After splits, my adjusted buy price is around $ 19.xx (curr prob in the 36.xx range)

And it has one of the best dividend payout records in existence

I dont usually go for the "high flyers"

I buy value companies....that grow and throw off dividends

Buying the ETF's, or mutual funds lowers risk....

But if something happens on one of my equities, i can get out fast (BP from a few years back)

[Franklin]

the only time the cap weighted mutual fund must rebalance is when the composition of the index itself changes.

Correct, and the composition has been changed 37 times in the past two years.

Here's a great read:   https://economics.stanford.edu/files/Theses/Theses_2004/Campbell.pdf

I fail to see your point here.

Find me an active fund with less than 1 transaction per 20 days or an expense ratio less than the vanguard 500.

The article is interesting and almost completely irrelevant to the topic at hand (which is certainly not how to strategize around index fund composition changes as an index fund manager. )

Butch, you seem to be debating the merits of a passive fund over an active fund and that is not at all the topic at hand.  My position has been that a pure S&P index portfolio is an inefficient investment by its very nature.  It goes much further than fund overhead.  The rebalancing process alone creates upward and downward pressure on the individual stocks that are added and dropped.  It also creates an opportunity for others to front-run those trades since they are announced 3 to 6 days ahead of time.   Finally, the objective of the index in its simplest form is momentum trading.  This is not conducive to efficient investing, and that is why the index performs at historical 7%.  Do you really think our 500 finest companies are only growing at 7% per year?  I think you are much better off supplementing your index with other more efficient investments.

Your Apple and GE analogy is a little too simplistic and doesn't take any of the variables I described into account, but the article does.

[waltworks]

Yeah, 7% sucks.

Wait, what? No, 7% for basically doing nothing does not suck. It *might* suck in the long run if capital keeps outrunning the pace of overall growth until we have some kind of violent rebalancing or something (ie, Marx, Piketty), but from an individual perspective, IMO it is not too shabby.

-W

[Franklin]

Yeah, 7% sucks.

Wait, what? No, 7% for basically doing nothing does not suck. It *might* suck in the long run if capital keeps outrunning the pace of overall growth until we have some kind of violent rebalancing or something (ie, Marx, Piketty), but from an individual perspective, IMO it is not too shabby.

-W

That's fine.  It's easy money.  I'm with you with 25% of my portfolio because it's better than a bank.

[butchmonkey]

the only time the cap weighted mutual fund must rebalance is when the composition of the index itself changes.

Correct, and the composition has been changed 37 times in the past two years.

Here's a great read:   https://economics.stanford.edu/files/Theses/Theses_2004/Campbell.pdf

I fail to see your point here.

Find me an active fund with less than 1 transaction per 20 days or an expense ratio less than the vanguard 500.

The article is interesting and almost completely irrelevant to the topic at hand (which is certainly not how to strategize around index fund composition changes as an index fund manager. )

Butch, you seem to be debating the merits of a passive fund over an active fund and that is not at all the topic at hand.  My position has been that a pure S&P index portfolio is an inefficient investment by its very nature.  It goes much further than fund overhead.  The rebalancing process alone creates upward and downward pressure on the individual stocks that are added and dropped.  It also creates an opportunity for others to front-run those trades since they are announced 3 to 6 days ahead of time.   Finally, the objective of the index in its simplest form is momentum trading.  This is not conducive to efficient investing, and that is why the index performs at historical 7%.  Do you really think our 500 finest companies are only growing at 7% per year?  I think you are much better off supplementing your index with other more efficient investments.

Your Apple and GE analogy is a little too simplistic and doesn't take any of the variables I described into account, but the article does.

Your article only documents that there are inefficiencies in index investing.  Duh.

What it does not suggest is that active investing is less inefficient. It isn't.

I would bet dollars to donuts that your costs of trading have been higher than the cost of buying and holding  a simple S&P 500 index. (It is tough to keep transaction costs below .05%) I would also bet your returns are less robust. Odds are stacked in my favor.  4:1 that I am right on both counts over 20-30 years.

If you have your own index of 25 or 30 stocks with decent diversification, you will have a greater probability of both over performing and underperforming the market by a lot. Your portfolio will have "fat tails."

Whereas if you buy the whole market and rebalance, odds are you will beat 80% of all investors.

You discussing one stock that did well for you is a mere anecdote. It proves nothing.

It is important, I think, to note that the greatest investor of all time, Warren Buffett has directed that upon his death all of his money be invested in the S&P 500 fund from Vanguard with 10% in short-term treasuries.

It seems he is not so scared by the inefficiencies.


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[lano]

This is exactly what I complained about in the other thread.  Person asks about individual stocks and in response gets assumption layered advice that he or she should not even bother trying. 



"...The way I look at it is this: there are a ton of super smart people graduating from Ivy League colleges every year who want to make money like sharks want chum. They are (let's be fair) smarter than you, and smarter than me, and they will work 18 hour days for big investment banks or hedge funds. They have, for all practical purposes, infinite financial resources as well as, in many cases, access to knowledge that I don't (or at the very least, access to information before I can get my hands on it.) Their computers are next door to the exchange so their trades happen instantaneously.

They are my competition if I want to play the stock picking game. And I have to pay quite a bit in fees to play at all."


"...If you have your own index of 25 or 30 stocks with decent diversification, you will have a greater probability of both over performing and underperforming the market by a lot. Your portfolio will have "fat tails." "


I mean, if you go to a real estate forum and tell people that you want to buy a house or an apartment to rent out... for a certain price and you expect to get certain amount of rent for it... and ask for further advice people would go over the details of your investment -- no one would dare say something silly like:  "Don't bother, just sell the place and buy a super REIT that will cover all housing in the world, you don't want fat tails."

Index funds are great -- I advise all my friends and family who are not interested in learning about common stock investment, or are not interested in real estate, but still want to invest to hold low cost index funds. 

However, the theory behind how they were sold to the public really did poisoned a big chunk of the truth about common stocks.

So here is my attempt to un-poison:

1. Risk of a common stock or a businesses is not volatility.  Its not the standard deviation of the price movement of a stock.  Risk of a common stock or a businesses is the certainty or uncertainty that a businesses can continue to perform and thrive in the future years.

2. Given this definition of risk, diversification useless if not detrimental.  You can eliminate true businesses risk by only investing in a businesses which, bases on your analysis, you are confident will perform well and thrive in future years.

3. Given this, and assuming that you buy and hold shares for purposes of growing your investment with the value of the businesses over time,  the fees of owning a few well understood businesses are much lower then even the lowest cost index funds.

4.  The fact that someone else has computers located in NYSE bathrooms or works 23 hours a day is irrelevant.  The 2 cent difference in price is meaningless as long as you  (to repeat the key phrase): buy and hold shares for purposes of growing your investment with the value of the businesses over time.  And the extra hours and resources are meaningless as well, since you don't need all of them to understand the future of a some businesses for the next five years or so.

The only thing left then is to discuss the interesting details of how any one business uses capital and labor to create earnings and value.

[electriceagle]

it used to be in the 18-25 equity range...... but i found that i couldnt keep that many companies covered the way i need to

i read everything that comes out on every company i own

limiting it to no more than 12, makes that more manageable

however...i do understand the issue

because i am not really well diversified, one equity can ruin my entire year

and i have had a few that underperformed the rest.....

but i understand what these companies do.....what products and services they offer

where their growth areas are.....and even a bad quarter or two isnt going to dissuade me from where i THINK they are going

i dont care what the price of the stock is today, tomorrow, or even next year

i care about where it will be in 15-20 years.....

again....this is my way.....i realize it wont work for all.....just throwing it out there so you can get to know how i invest and think

I did this (and other things) in my misspent youth.

I recently mustered the courage to figure out whether I made or lost money relative to performance of the S&P 500. It turns out that over a decade, I would have made $100k more had I simply put the money in an S&P fund. I also would have had time to learn (another) new language.

[Scandium]

This is exactly what I complained about in the other thread.  Person asks about individual stocks and in response gets assumption layered advice that he or she should not even bother trying. 

I mean, if you go to a real estate forum and tell people that you want to buy a house or an apartment to rent out... for a certain price and you expect to get certain amount of rent for it... and ask for further advice people would go over the details of your investment -- no one would dare say something silly like:  "Don't bother, just sell the place and buy a super REIT that will cover all housing in the world, you don't want fat tails."

I don't think that is analogous since REITs and owning houses are so different. Presumably people invest in stocks to make the most money. Statistically the best way to do it is to invest in index funds. There's no argument about this, decades of statistics show it again and again.

It would be more like going to a car forum and asking if you should steer the car with out ass. No, the hands is the better way so that's what people are going to recommend to achieve your goals (making the most money and not crashing respectively)

Nobody is arguing it's not possible to make more money with individual stocks, just that nobody has really done so consistently over a long period of time, including people who does it full time! Some people here seem to argue that theoretically stock picking is better because this or that. Sure. But again; decades or research shows that in practice it does not work out. Do you really think you're different? The only one that can do it?  (or before people drag out Buffet as usual: one of the few that can do it)

[Franklin]

Well said lano!  But you brushed over analysis and I think that is always the point of contention.  If you don't know how to, or don't want to, fundamentally analyze a company then of course the index is the the best alternative.  But to hide behind that fear or lack of desire and portray it as anything else is defeatism and insecurity.  What's odd is that there are so many Mustachians that are self-starters and capitalists.  But yet they avoid long term, individual stock ownership like the plague.  Instead they wheel out Yahoo Finance blanket statistics, and completely ignore the individualism that has gotten them to where they are.

[AJDZee]

I don't think there is anything wrong with doing both - individual stocks & ETFs. That's what I do.
I love researching and investing in individual stocks. But in times where I don't see any 'deals' in my watch list, I put my money into an ETFs.
This way I get the benefit of my holdings seeing average market growth rather than sitting in my account earning nothing.

At any point in time, I usually hold about 1/3 of my portfolio in ETFs.

Another point, as your portfolio inevitably gets massive it makes sense to transition from ETFs to buying a diversified collection of the underlying stocks within those ETFs - it will cost you less over time.

[gdgyva]

Why General Electric Is In My Retirement Portfolio
Summary

I have put the past issues in the rear view mirror and continue to focus on a bright future.
Perhaps the largest conglomerate in the world, which is in just about every business sector with an enormous global footprint.
This former dividend champion is becoming one once again.

Today I am going to focus on General Electric (GE), which happens to be a key component within all of my retirement portfolios, including our newest one, BTDP, or "Buy The Dips Portfolio". Before I get into the reasons I have large positions in each portfolio, let me touch on the sore subject that affected shareholders dramatically: The company cut its dividend, when Jeff Immelt promised it wouldn't.

http://seekingalpha.com/article/2255523-why-general-electric-is-in-my-retirement-portfolio?uprof=45

interesting article.....and sums up my feeling on this company perfectly

[waltworks]

Exactly! Even if you're beating the S&P - how much time are you putting in? Investing in an index fund requires *maybe* 5 minutes of my time per month (most of that concentrated around tax time when I have to download a few forms). I don't have to read the Dunder Mifflin 500 page quarterly report from beginning to end, or hover in front of my computer all day looking up boring crap about GE. Instead I can post here! :)

Even if I thought I could do considerably better picking stocks, I have to consider the time and effort it would take - which is considerable. IMO you are basically just talking about getting a second job and that's the *opposite* of how I want to live my life. It's like managing your own rental properties to save $100/month but spending 20 hours of your time to do it... that's not an extra $100 return on your RE investment, that's a $5/hour job.

-W

I did this (and other things) in my misspent youth.

I recently mustered the courage to figure out whether I made or lost money relative to performance of the S&P 500. It turns out that over a decade, I would have made $100k more had I simply put the money in an S&P fund. I also would have had time to learn (another) new language.