Author Topic: Individual Stocks vs. Stock Indexing  (Read 20068 times)

Dodge

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Re: Individual Stocks vs. Stock Indexing
« Reply #50 on: July 15, 2014, 10:28:56 AM »

1000 hours isn't enough. I said thousands. 10k is usually the magic number.

Doesn't really matter though, the ones that go out and do things that everyone else said was impossible, don't really care what others think.

Can you provide any evidence to support your claims?

Please understand, it's not that it's impossible.  It's that there are no measurable amount of people currently achieving it, and the odds are overwhelmingly against any one person being able to accomplish it, no matter how many hours they put in. If people could actually do it, it would be reflected in the numbers.

The data shows a strong correlation between people who beat the market over any specified period, and random chance.

This isn't a scientist saying, "It is physically impossible for a human to run a faster than 4 minute mile."

This is a scientist saying, "The numbers show that despite millions of people trying, no human has yet run faster than a 4 minute mile."

In light of this, I consider the advice to try anyway to be very dangerous, especially when the alternative (indexing) is significantly less risky, and especially in an early retirement forum.

Psychstache

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Re: Individual Stocks vs. Stock Indexing
« Reply #51 on: July 15, 2014, 10:34:17 AM »
1000 hours isn't enough. I said thousands. 10k is usually the magic number.


Personally, I would rather spend about 30 minutes setting up my preferred AA in index funds, forget about investing, and then spend the remaining 9,999.5 hours doing anything else. Seems like a more reasonable approach to life.

AlanStache

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Re: Individual Stocks vs. Stock Indexing
« Reply #52 on: July 15, 2014, 11:10:12 AM »

I believe this is very dangerous advice, especially for an early retirement forum.  All the evidence I've seen, shows no correlation between the people who beat the market one year, also beating it the next year.  The same goes for any observed time period (5 year winners have no increased chance of being winners in the next 5 years...etc).

If you spent thousands of hours of deliberate practice on beating the market, then you'd know to start out with a small amount of money and work up from there. It's not dangerous if done correctly. Most won't put in this kind of effort however, so it's a moot point.

Let's imagine someone with 1000 hours of study, starting small and working their way up over 5 years. Over those 5 years they do very well, beating the market handily. Based on this, they feel comfortable investing with their whole nest egg, because "Look! I have 1000 hours of experience beating the market, and check out my 5 year returns for proof!"

The problem is, the evidence shows that this person does not have an increased likelihood of beating the market over the *next* 5 years.

I wouldn't recommend this path for anyone, especially in a forum like this where people are planning to live on the money they've saved up.

Plenty of opportunity for the small guy to do things that the pros are not allowed to do, also to do things that would not be worth the effort for the big guys.  Also anyone actually doing much better than the market is NOT going to publish results and methods.  If you have done your homework then you know if you should be more active or just buying the index.  Also it is bad to assume that the strategy would remain static for the next 5 years, one needs to continue to learn and refine methods and even pull profits out. 

For a good while I was looking to be more active till I saw that I just did not have the account balance to justify the time and effort.  If the index gives you 8%, are you going to spend 20hr/wk to make 5% more than that on an account with 50k?  Not worth it in my book.

But yes the vast majority of people should just by the index then go for a jog, but I dont see the problem discussing alternatives.

Current mile record according to Wikipedia: Hicham El Guerrouj with his time of 3:43.13

surfhb

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Re: Individual Stocks vs. Stock Indexing
« Reply #53 on: July 15, 2014, 11:20:50 AM »
1000 hours isn't enough. I said thousands. 10k is usually the magic number.


Personally, I would rather spend about 30 minutes setting up my preferred AA in index funds, forget about investing, and then spend the remaining 9,999.5 hours doing anything else. Seems like a more reasonable approach to life.

Bingo!   

Why spend so many hours perfecting a strategy YOU KNOW might work out or it might not in beating the indexes?    Actively managing your own retirement nest egg seems so amateurish  :)

I have other hobbies I want to spend more hours on and the odds are in my favor I will beat your total return at the finish line.    To me it seems like a no brainer.   * shrugs*. :)

Dodge

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Re: Individual Stocks vs. Stock Indexing
« Reply #54 on: July 15, 2014, 11:48:47 AM »

I believe this is very dangerous advice, especially for an early retirement forum.  All the evidence I've seen, shows no correlation between the people who beat the market one year, also beating it the next year.  The same goes for any observed time period (5 year winners have no increased chance of being winners in the next 5 years...etc).

If you spent thousands of hours of deliberate practice on beating the market, then you'd know to start out with a small amount of money and work up from there. It's not dangerous if done correctly. Most won't put in this kind of effort however, so it's a moot point.

Let's imagine someone with 1000 hours of study, starting small and working their way up over 5 years. Over those 5 years they do very well, beating the market handily. Based on this, they feel comfortable investing with their whole nest egg, because "Look! I have 1000 hours of experience beating the market, and check out my 5 year returns for proof!"

The problem is, the evidence shows that this person does not have an increased likelihood of beating the market over the *next* 5 years.

I wouldn't recommend this path for anyone, especially in a forum like this where people are planning to live on the money they've saved up.

Plenty of opportunity for the small guy to do things that the pros are not allowed to do, also to do things that would not be worth the effort for the big guys.  Also anyone actually doing much better than the market is NOT going to publish results and methods.  If you have done your homework then you know if you should be more active or just buying the index.  Also it is bad to assume that the strategy would remain static for the next 5 years, one needs to continue to learn and refine methods and even pull profits out. 

For a good while I was looking to be more active till I saw that I just did not have the account balance to justify the time and effort.  If the index gives you 8%, are you going to spend 20hr/wk to make 5% more than that on an account with 50k?  Not worth it in my book.

But yes the vast majority of people should just by the index then go for a jog, but I dont see the problem discussing alternatives.

Current mile record according to Wikipedia: Hicham El Guerrouj with his time of 3:43.13

The problem with that line of thinking, is that it isn't supported by evidence.  I choose the 4 minute mile example on purpose, because the claims in this thread are akin to someone in 1953 or earlier claiming they've already run a 4 minute mile, without providing any evidence to support it.  If people start consistently beating the market, over a long period of time, in a measurable amount higher than a random distribution would suggest, the data will show it.
« Last Edit: July 15, 2014, 11:51:43 AM by Dodge »

hodedofome

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Re: Individual Stocks vs. Stock Indexing
« Reply #55 on: July 15, 2014, 11:49:22 AM »
What some consider a waste of time, others are fascinated by and get a lot of meaning out of. I think it's a waste of time to spend 4 hours on a golf course every day, but some guys love it.

AlanStache

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Re: Individual Stocks vs. Stock Indexing
« Reply #56 on: July 15, 2014, 12:18:20 PM »
EDIT: post deleted, need to focus on the 9-5 :-)  sorry for stirring it all up.
« Last Edit: July 15, 2014, 12:37:59 PM by AlanStache »

Dodge

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Re: Individual Stocks vs. Stock Indexing
« Reply #57 on: July 15, 2014, 12:46:25 PM »


To continue the 1mile analogy, there is no grand poobah of investing that would authenticate such results.  No, I am not using a lack of evidence as evidence.

We may just have to agree to disagree, I think it is very possible for an individual to purposefully beat the market for a statistically significant amount of time, you dont.  Cool.  I am fully behind the idea that 99.9% of the population should not even be training or thinking about training for a 4min mile (including myself) - they will get hurt.  But to extend that to say that all collegiate runners should not try or even talk about it?  If you have trained up to a 5min/mile you know if you should be taking it further.

There were no black swans until there were.  Because something has not been verified does not mean it has not been done or that it cant be done.  I am not claiming to have beaten the market and I dont recall anyone on this thread to have made that clam, some are just saying that it might be possible and worth an intelligent motivated persons time to try.

Quote
What some consider a waste of time, others are fascinated by and get a lot of meaning out of. I think it's a waste of time to spend 4 hours on a golf course every day, but some guys love it.
+1

Honest question, if attempting a 4 minute mile had the very real possibility of losing your nest egg, would you recommend that in an early retirement forum?

surfhb

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Re: Individual Stocks vs. Stock Indexing
« Reply #58 on: July 15, 2014, 01:22:35 PM »
What some consider a waste of time, others are fascinated by and get a lot of meaning out of. I think it's a waste of time to spend 4 hours on a golf course every day, but some guys love it.

That's cool.   But now where talking about how people prefer to spend their time.....this thread isn't about that. :)

It's well established it's possible to "beat the street"....it's also well established that's it's unlikely when you reach the finish line.   
« Last Edit: July 15, 2014, 01:25:29 PM by surfhb »

johnhenry

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Re: Individual Stocks vs. Stock Indexing
« Reply #59 on: July 15, 2014, 01:22:57 PM »
This thread is funny.  It reminds me of the common dispute among business execs and their accountants about companies owning airplanes for business use.

Executives may tell their colleagues that the plane is a good business investment.  They may even really believe it's a good investment.  They probably even have an accountant who has finally given in and goes along with that story, in front of other people, as he rolls his eyes.  It's being depreciated on an accelerated schedule. We get to write most of it off.  It saves me lots of time and my time is worth a lot.  We've owned this plane 3 years and profits have gone up every year.  Yada, yada, yada.

But the accountant knows that it's a bad investment and warned against it behind closed doors.  He knows the exec likes to keep it around as a hobby, status symbol, or something to chat about.

If you've done all your research and solicited advice and you still want to buy a plane or individual stocks, well, you have something to talk about with your friends.  Just do the right thing and tell them it's your hobby, not an investment.

I'm more inclined to believe someone who says their business makes more because it owns a plane than someone who says their portfolio performs better because they sold their balanced collection of index funds and started buying individual stocks. Either way, I'll need to see the spreadsheet before I believe it.

Until then, forgive me if I roll my eyes along with your accountant :)

Scandium

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Re: Individual Stocks vs. Stock Indexing
« Reply #60 on: July 15, 2014, 02:06:03 PM »
What some consider a waste of time, others are fascinated by and get a lot of meaning out of. I think it's a waste of time to spend 4 hours on a golf course every day, but some guys love it.

If you don't mind making less money than indexing, no that's fine it that's your choice. But usually people invest to have as much money as possible. (And once you have a large enough portfolio it would cost you less to play golf instead). Statistics show that you don't make the same.
Rather it's:
Spend more time > less money
Index, less time > more money

To be fair; I do have a few $k in individual stocks, with the absolute knowledge that I'm 90% certain of making less than the index. But I would not do that with more than a few percent, or less of my portfolio.

Bob W

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Re: Individual Stocks vs. Stock Indexing
« Reply #61 on: July 15, 2014, 03:05:31 PM »
Personally,  I like funds.  You can check your investment screen for funds that have low betas (volatility compared to the market) with above average return and low annual turnover.  I'm talking managed and unmanaged here.   Then you can put together a portfolio of about 10 or 12 funds (stocks, bonds,  REITs, international )with a history of averaging 11%+ when combined and a maximum downside of 4%. 

Um no. Historically, depending on the AA, the maximum drawdown of a balanced strategy like that is more like 30%+

Worldwide Stocks and REITs were killed during '08, and that's where most of the risk is in a typical 50/50 or 60/40 portfolio.

Just to clarify,  I mentioned "low beta."   REITS would make up way less than 30% of a portfolio depending on how much exposure you have to personal and investment real estate.   One might want some Utes, Bonds, Internationals etc.   Probably less than 25% exposed to US stock markets. 

I'm not too hung up on a calendar of rolling annual return as most MMM readers would fall into the buy and never sell category.  We might reallocate when something is overheated.  The whole idea of this strategy is to achieve the greatest long term appreciation with the least short term volatility.  It's a bet it and set course without emotions or supercomputer input.

It works very nicely back pacing historically on paper.   Trouble is that we can't predict the future with significant accuracy. 

hodedofome

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Re: Individual Stocks vs. Stock Indexing
« Reply #62 on: July 15, 2014, 06:03:58 PM »


To continue the 1mile analogy, there is no grand poobah of investing that would authenticate such results.  No, I am not using a lack of evidence as evidence.

We may just have to agree to disagree, I think it is very possible for an individual to purposefully beat the market for a statistically significant amount of time, you dont.  Cool.  I am fully behind the idea that 99.9% of the population should not even be training or thinking about training for a 4min mile (including myself) - they will get hurt.  But to extend that to say that all collegiate runners should not try or even talk about it?  If you have trained up to a 5min/mile you know if you should be taking it further.

There were no black swans until there were.  Because something has not been verified does not mean it has not been done or that it cant be done.  I am not claiming to have beaten the market and I dont recall anyone on this thread to have made that clam, some are just saying that it might be possible and worth an intelligent motivated persons time to try.

Quote
What some consider a waste of time, others are fascinated by and get a lot of meaning out of. I think it's a waste of time to spend 4 hours on a golf course every day, but some guys love it.
+1

Honest question, if attempting a 4 minute mile had the very real possibility of losing your nest egg, would you recommend that in an early retirement forum?
Who said anything about losing your nest egg? Good trading starts with risk management. You can't be a good trader without first becoming a good risk manager.

Once you've learned how to not lose money, then you can learn how to make money. If anything, it preserves the nest egg more than buy and pray.

lano

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Re: Individual Stocks vs. Stock Indexing
« Reply #63 on: July 15, 2014, 06:04:59 PM »
What some consider a waste of time, others are fascinated by and get a lot of meaning out of. I think it's a waste of time to spend 4 hours on a golf course every day, but some guys love it.


This is one of the main reason I buy individual stocks and don't touch funds.  I really do enjoy learning about businesses and how they generate revenue, profits and grown in value. There are other reasons as well.  I want and do get the higher return.  As of last months closing the annual difference for the past 5.5 years between returns on businesses I own and S&P-500 is about 3.43%.  This is counting all fees -- which are lower than I would pay even for the cheapest fund.  Not counting taxes though, which for the past few years have only come from dividends.

It does not take a lot of time too.  Once I see a business that I really like and one that sells for a good price I just buy it for one or two years straight.  Every time I buy I hope that the price of the business stays the same or goes down -- the market does not disappoint on that. 

The processes is not all that exciting... and can be very similar to just buying the same few index funds... over and over...but the mental image of each purchase giving me more ownership of a value generating machine, abstract as it may be, though one which I understand... is truly amazing.

 
« Last Edit: July 15, 2014, 06:06:57 PM by lano »

Dodge

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Re: Individual Stocks vs. Stock Indexing
« Reply #64 on: July 15, 2014, 06:32:49 PM »


To continue the 1mile analogy, there is no grand poobah of investing that would authenticate such results.  No, I am not using a lack of evidence as evidence.

We may just have to agree to disagree, I think it is very possible for an individual to purposefully beat the market for a statistically significant amount of time, you dont.  Cool.  I am fully behind the idea that 99.9% of the population should not even be training or thinking about training for a 4min mile (including myself) - they will get hurt.  But to extend that to say that all collegiate runners should not try or even talk about it?  If you have trained up to a 5min/mile you know if you should be taking it further.

There were no black swans until there were.  Because something has not been verified does not mean it has not been done or that it cant be done.  I am not claiming to have beaten the market and I dont recall anyone on this thread to have made that clam, some are just saying that it might be possible and worth an intelligent motivated persons time to try.

Quote
What some consider a waste of time, others are fascinated by and get a lot of meaning out of. I think it's a waste of time to spend 4 hours on a golf course every day, but some guys love it.
+1

Honest question, if attempting a 4 minute mile had the very real possibility of losing your nest egg, would you recommend that in an early retirement forum?
Who said anything about losing your nest egg? Good trading starts with risk management. You can't be a good trader without first becoming a good risk manager.

Once you've learned how to not lose money, then you can learn how to make money. If anything, it preserves the nest egg more than buy and pray.

I've personally seen many people who considered themselves to be good with risk management, and end up losing almost everything.  You'd be surprised what a few (or even more than a few) good years of trading will do to someone's risk assessment of their trading style.

Dodge

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Re: Individual Stocks vs. Stock Indexing
« Reply #65 on: July 15, 2014, 06:36:14 PM »
What some consider a waste of time, others are fascinated by and get a lot of meaning out of. I think it's a waste of time to spend 4 hours on a golf course every day, but some guys love it.


As of last months closing the annual difference for the past 5.5 years between returns on businesses I own and S&P-500 is about 3.43%.

Do you believe this past performance is indicative of your future results?

AlanStache

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Re: Individual Stocks vs. Stock Indexing
« Reply #66 on: July 15, 2014, 07:22:00 PM »
What some consider a waste of time, others are fascinated by and get a lot of meaning out of. I think it's a waste of time to spend 4 hours on a golf course every day, but some guys love it.


As of last months closing the annual difference for the past 5.5 years between returns on businesses I own and S&P-500 is about 3.43%.

Do you believe this past performance is indicative of your future results?

Rather loaded question as a good part of the case for indexing rests on past performance.  As for risking the nest egg...  guess it all depends on what you are doing and how much you are risking, buying the DOW 30 components in your own ratios is very different from sinking the 401k into one Bangladeshi gold miner.

Quote
if attempting a 4 minute mile had the very real possibility of losing your nest egg, would you recommend that in an early retirement forum?

It seems you have it in your mind that all active investors are 50% Kodak Eastman and 50% Venezuelan Pesos with 200% leverage and we are recommending that.  I just dont see that here.

And to paraphrase this thread if this were a running thread:
some guy: I think I want to run a 4 min mile
group: thats really hard, why you want to do that
some guy: well I need to get off the couch and get some exercise
group: you probably should start with a 5k at a brisk walk.
<devolve into discussion of sub 3hr marathon>

Sorry for the over simplification but I dont think anyone has trivialized the difficulty in beating the market or even really recommended it, some have only been open to it being possible or stated that they have done it.

lano

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Re: Individual Stocks vs. Stock Indexing
« Reply #67 on: July 15, 2014, 07:44:58 PM »
What some consider a waste of time, others are fascinated by and get a lot of meaning out of. I think it's a waste of time to spend 4 hours on a golf course every day, but some guys love it.


As of last months closing the annual difference for the past 5.5 years between returns on businesses I own and S&P-500 is about 3.43%.

Do you believe this past performance is indicative of your future results?


Yes, but let me explain.   

I believe that the businesses which I own generate a higher return on invested capital than the hypothetical average S&P-500 business.  I also believe the businesses which I own will continue to generate the higher return for years on end. 

These two factors raise the value of my businesses over time, and more importantly these two factors raise the value of my businesses more, every day, than the value of the average S&P-500 business.

The quoted prices then just show up.

To me the past price returns are not just some random ups and downs, but rather a simple representation of a higher growth in value than that of the average business.

 

Dodge

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Re: Individual Stocks vs. Stock Indexing
« Reply #68 on: July 15, 2014, 08:48:30 PM »
What some consider a waste of time, others are fascinated by and get a lot of meaning out of. I think it's a waste of time to spend 4 hours on a golf course every day, but some guys love it.


As of last months closing the annual difference for the past 5.5 years between returns on businesses I own and S&P-500 is about 3.43%.

Do you believe this past performance is indicative of your future results?

Rather loaded question as a good part of the case for indexing rests on past performance.

Not specifically past performance, but it's risk-adjusted return.  Since the index contains every stock in the market, it captures the gains (or losses) of the market, and removes the risk of any single company going bankrupt and losing a large portion of your funds.  Risk which can be diversified away, is uncompensated risk.

This is how it should go:

1.  Looking at all the assets available to invest in, based on historical returns I choose stocks.

2.  Now that I've chosen my asset, what's the least risky and most diversified way to hold this asset?  Ah, an index like VTSAX.

While past performance plays a part in choosing the asset (stocks), it should play no part in choosing VTSAX (the index).

Quote
if attempting a 4 minute mile had the very real possibility of losing your nest egg, would you recommend that in an early retirement forum?


And to paraphrase this thread if this were a running thread:
some guy: I think I want to run a 4 min mile
group: thats really hard, why you want to do that
some guy: well I need to get off the couch and get some exercise
group: you probably should start with a 5k at a brisk walk.
<devolve into discussion of sub 3hr marathon>

Sorry for the over simplification but I dont think anyone has trivialized the difficulty in beating the market or even really recommended it, some have only been open to it being possible or stated that they have done it.

If there were any evidence that effort had any correlation with a particular person beating the index over any length of time, then I would be with you on that.  In any case I'm fine with agreeing to disagree.  I believe it's dangerous advice, and it doesn't seem like either of us are going to convince each other :)

Cookie Monster

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Re: Individual Stocks vs. Stock Indexing
« Reply #69 on: October 08, 2014, 10:42:40 PM »
Many people drinking too much of indexing Kool aid on this thread.

I mean, if you consider you cannot beat indexes on the long run, then you think market is quite efficient. If someone spending many hours studying the markets are expected to get only average results, then throwing darts to pick stocks should get the same average results. So, picking individual stocks is not worse (or better) than buying index funds.  Of course, index funds get better diversification, thus smaller variance, but the average results are the same, specially in the long term.

So, if you get some rush on picking a different individual stock every month with your fresh deposit of retirement money, that is all right. As long as you do not try to sell and buy to time the market, in 4 years you would have a pretty diversified portfolio.  Enjoy your growth. Many moustachers get the same results with less effort, but you may find gratifying working to earn fine investment results.

ScroogeMcDutch

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Re: Individual Stocks vs. Stock Indexing
« Reply #70 on: October 09, 2014, 05:35:25 AM »
It's quite simple I would say:

Low effort, market-rate returns: Index-Investing
High effort, uncertain returns: Individual Stocks

I am of the opinion that if you spend a lot of time, and you have the capacity to properly analyze a company and sector, you can pick stocks that outperform the market, if you are in it for the long haul. This is mainly due to picking healthy companies, in sectors where you expect the market to behave differently than the general opinion.

At the same time I am also of the opinion that even if you spend a lot of time and you have the capabilities, you cannot outperform the market with shortterm or daytrading stocks. The derivative trading houses and algorithmic flash-trading is going to take any obvious advantage out of the market before you as an individual investor can pick them up.

All in all, if you have the skills, the time, the drive, I think it is possible to beat the market with a select few individual stocks. To see if this is a better investment, you'd have to take into account the starting bankroll, the amount you'd add each year, your opportunity cost, the rate with which you beat the market after transaction fees.

Taking a $200k roll, a $20k yearly deposit, a $50/hour opportunity cost, and beating the index by 3% (10% instead of 7%), it still takes our handpicker 10 years before he outperforms taking the $50 opportunity cost and just depositing it in an index fund. This is given you take 1000 hours learning and figuring it out, and 100 hours yearly maintaining your portfolio.




johnhenry

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Re: Individual Stocks vs. Stock Indexing
« Reply #71 on: October 09, 2014, 07:32:24 AM »
Many people drinking too much of indexing Kool aid on this thread.

I mean, if you consider you cannot beat indexes on the long run, then you think market is quite efficient. If someone spending many hours studying the markets are expected to get only average results, then throwing darts to pick stocks should get the same average results. So, picking individual stocks is not worse (or better) than buying index funds.  Of course, index funds get better diversification, thus smaller variance, but the average results are the same, specially in the long term.


This is only true IF... you buy so many individual stocks that you basically mimic an index.  And of course that's not possible to do without incurring transaction costs much higher than using index funds.

Using index funds as opposed to individual stocks doesn't necessarily mean you think that a portfolio of individual stocks could NEVER "outperform" an index in the long run, but it recognizes the RISK that comes with that strategy.  It's the volatility of individual stocks that makes them so dangerous vs index funds.  Proponents of investing in individual stocks seem to forget that their is a risk side to the equation, as well as reward. 

foobar

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Re: Individual Stocks vs. Stock Indexing
« Reply #72 on: October 09, 2014, 08:21:10 AM »
Many people drinking too much of indexing Kool aid on this thread.

I mean, if you consider you cannot beat indexes on the long run, then you think market is quite efficient. If someone spending many hours studying the markets are expected to get only average results, then throwing darts to pick stocks should get the same average results. So, picking individual stocks is not worse (or better) than buying index funds.  Of course, index funds get better diversification, thus smaller variance, but the average results are the same, specially in the long term.


http://www.forbes.com/sites/rickferri/2012/12/20/any-monkey-can-beat-the-market/ Turns out you are better at throwing darts instead of doing research or buying an index fund:).

The average results are the same across all stock pickers. The problem is that your odds of being in the winning 25% are the same as being in the losing 25%:)