Why is active stock picking so taboo on here ?

[privatefarmer]

I go against the grain on here personally.

I'm primarily an individual stock investor.

My investments have outperformed "the market" by about 2% per year on average. I track myself against the S&P 500 total return index because that includes dividends.

How do I do it?

I subscribe to investment advice from "The Motley Fool" to help me with my research.
I only invest in businesses for the long term (my longest stock holding is currently at 18 years)
I do the occasional options trade for additional income and upside.
I hold a pretty diversified list of investments so my single stock risk is minimized.

Commissions + advice in my case are << than I'd pay to Vanguard for investing in an index fund.

I would maintain that as a part time, business focused, small, individual investor I have lots of advantages over the professional money managers on Wall Street. The main two are my time frame - that I can be focused on the long term and not worry about the next quarter or year, and that I don't have to answer to anyone but myself. The professionals have to perform every day, week and quarter and if they underperform for even a short time, people are withdrawing their money. This is a toxic environment in which to operate.

I'm not going to share my trade history or account balances here. I just want to say that outperformance is not as daunting as most on here would lead you to believe.

Thanks for the post. The only thing I keep coming back to is the laws of math. As a closed system, if you are outperforming then someone just like you, w/ the same $$$ amount invested, HAS to underperform by the exact same amount. It cannot work any other way. Now can you or anyone honestly say that your methods will outperform the methods other individual stock pickers will  use? Is Motley Fool advice not available to everyone else? Congratulations on beating the market, hopefully an extra 2% over a couple of decades has added significant wealth. However, going forward, I don't know how anyone can confidently say that they will be on the winning side vs the losing side w/o inside information. It's essentially a 50/50 bet, if everyone has the same information, before costs (which they do). After costs is far less than 50/50.

And, one thing people forget is the risk-adjusted return. How many positions do you hold? Are they all US domestic large caps or are some foreign, small cap? What has been the standard deviation in your returns? Comparing to the S/P 500 may not be the best comparison. We all can generate higher returns by 1) leveraging the S/P 500 or 2) investing in a riskier index such as the Russell 2000 or emerging markets. You have to take risk into account and I can guarantee that if you hold less than 500 positions you are not as diversified as the S/P (not that I promote investing in the S/P, I actually prefer small-cap value indexes).

[privatefarmer]

Hedge fund managers spend a lot of time on this, but they aren't experts on the products and services businesses offer. I'd bet that a SW engineer or sysad that has read Ben Graham's books would do a much better job picking tech stocks than a hedge fund manager.

Yeah, I respectfully disagree here. Hedge funds already employ PhDs, engineers, software geeks, other insiders, etc. etc. They employ anyone they think will give them an edge. The fact is, if someone actually had insight into what the market would do they would be the richest person in the world (by far). If anyone had even a 51% chance of beating the market, they'd be getting paid millions working for a hedge fund and all of that "out performance" would be sucked up by the 2/20 fee.

Why would a sysadmin have an inside track on picking tech stocks? Working in the industry does not make you automatically more insightful about it.  You'd still have to learn and understand all the financial aspects of that business that everybody else has access to and probably understands them better anyways.  You might be in a better position to know about your own company, but you're still having to learn about the competition.  I am an IT guy and I know the movers and shakers who supply the DoD with all of their toys, but I couldn't tell you with enough certainly to bet money on it which one is going to have significant profitability (better than market average after expenses) next year. Company A is going to sell thousands of computers and radios to the Army next year.  How much will that increase their stock price? No idea.  If I did know that, my experience in IT would not be the reason.  My knowledge top to bottom of how the company operates would be.

Bingo. And if you did have inside-information that would be insider trading which could land you in prison (Martha Stewart). I'm sure it happens all the time and goes unnoticed by the SEC. But if you do work for a fortune 500 company and know something the general public does not, you probably are better off not acting on it.

[talltexan]

Re: the insider trading...

I used to think doing something that was against the law was breaking the law. I've learned over time that you're breaking the law when you're in jail or paying a judgment. Unless you have wealth/fame in the neighborhood of Ms. Stewart's, or you have regulatory authority over a company, you probably should feel free to use whatever information you have to invest.

[ooeei]

Index investing is like a horse race with 5 horses that have $10 bets and $60 payouts. Yeah, maybe you could pick the right horse. Or you could just win.

What a great way to put it.

[PaulMaxime]

I go against the grain on here personally.

I'm primarily an individual stock investor.

My investments have outperformed "the market" by about 2% per year on average. I track myself against the S&P 500 total return index because that includes dividends.

How do I do it?

I subscribe to investment advice from "The Motley Fool" to help me with my research.
I only invest in businesses for the long term (my longest stock holding is currently at 18 years)
I do the occasional options trade for additional income and upside.
I hold a pretty diversified list of investments so my single stock risk is minimized.

Commissions + advice in my case are << than I'd pay to Vanguard for investing in an index fund.

I would maintain that as a part time, business focused, small, individual investor I have lots of advantages over the professional money managers on Wall Street. The main two are my time frame - that I can be focused on the long term and not worry about the next quarter or year, and that I don't have to answer to anyone but myself. The professionals have to perform every day, week and quarter and if they underperform for even a short time, people are withdrawing their money. This is a toxic environment in which to operate.

I'm not going to share my trade history or account balances here. I just want to say that outperformance is not as daunting as most on here would lead you to believe.

Thanks for the post. The only thing I keep coming back to is the laws of math. As a closed system, if you are outperforming then someone just like you, w/ the same $$$ amount invested, HAS to underperform by the exact same amount. It cannot work any other way. Now can you or anyone honestly say that your methods will outperform the methods other individual stock pickers will  use? Is Motley Fool advice not available to everyone else? Congratulations on beating the market, hopefully an extra 2% over a couple of decades has added significant wealth. However, going forward, I don't know how anyone can confidently say that they will be on the winning side vs the losing side w/o inside information. It's essentially a 50/50 bet, if everyone has the same information, before costs (which they do). After costs is far less than 50/50.

And, one thing people forget is the risk-adjusted return. How many positions do you hold? Are they all US domestic large caps or are some foreign, small cap? What has been the standard deviation in your returns? Comparing to the S/P 500 may not be the best comparison. We all can generate higher returns by 1) leveraging the S/P 500 or 2) investing in a riskier index such as the Russell 2000 or emerging markets. You have to take risk into account and I can guarantee that if you hold less than 500 positions you are not as diversified as the S/P (not that I promote investing in the S/P, I actually prefer small-cap value indexes).

You are right that for me or anyone to outperform that someone else has to underperform. Luckily the average investor underperforms by about 4% a year. Someone is capturing that outperformance might as well be me.

The big issue is not really stock picking per se. The big issue is human psychology and behavior. One of the posters in this thread said he lost money on Apple stock. If you bought and held Apple stock for nearly any reasonable period of time (like over several years) since Steve Jobs returned to the company it would have been hard to lose money. You had a huge tailwind. The only way to lose money in that stock is to buy and sell at the wrong time.

Sure, good advice is available to everyone. Do people follow it? Even on here, the high church of buy and hold asset allocation index investing (well that's probably bogleheads but this is close) you see posts from people who are questioning their asset allocation and panicking when the market drops a few percentage points.

[ChpBstrd]

Here we are in a forum full of self-made millionaires. Just ask for a show of hands who acheived FIRE by:

a) Index investing and aggressive saving
b) Picking a future "100-bagger" stock
c) Casino or lottery gambling
d) Buying penny stocks promoted on junk faxes at work

I bet you get by far the most hands up for (a), the second most for (b), the third most for (c), and certainly none for (d).

The point: there are many ways to get rich, but the odds of success vary enormously depending on the strategy you pursue. Option (a) has a probability of 90-100% of making you a millionaire in 15 years. Given the smaller number of success stories, what do you suppose the odds are for (b), (c), and (d)?

[Indexer]

I bet you get by far the most hands up for (a), the second most for (b), the third most for (c), and certainly none for (d).

I think you are being far too generous. ;-)  It's probably >99% A, <1% B, and no C or D.

The few Bs are probably employees of tech start ups that got bought by the FANGs.

[BTDretire]

I get the logic, 98% of normal people who don't care about this stuff should index due to the stats,

But what I would like to challenge is this, how many % of the wider public follow this advice and be financially free decades before anyone else? They are just as rare breed than the people who can successfully pick the stocks that outperform.

Warren buffet states that you should be extremely diversified if you don't have the time or patience to pick the stocks you understand, however he states that it's a terrible mistake to diversify if you bring the intensity and focus to the game and then you should only pick 6-7 stocks that you fully understand and know and you will do very well.

When buffet speaks I listen hard, and I get that at the moment I should just stick to the index fund deal, but are people who find this stuff very interesting making a big mistake by not picking a few winning stocks with the right focus ? Warren Buffet does think so and I don't consider this a man who wants people to lose my money

I think you have it well in hand, just "Pick a Few winning stocks"
Oh, and please tell me which ones those are, I want to outperform the market too!
                                Thanks

[DarkandStormy]

82% of active fund managers underperform their indexes over 10 years (it might be 15 years, I forget).

Warren Buffet's plan for his inheritance is 90% S&P 500 fund (Vanguard) and 10% U.S. Treasuries.

So, sure...follow his advice.

[Kyle B]

The big issue is not really stock picking per se. The big issue is human psychology and behavior.

This is me all over.

Seemingly every time I've bought stocks in the past, any dip has led me to sell in a panic, locking in my loss.

A few months back I did buy some AMZN, which has turned out well.  But even that pick proved how unsuited I am for stock-picking, as it went down immediately after I got in and stayed down for months.  And I really, really, really wanted to dump it.

I finally think it's enough in the black that I will be able to hold on during future drops.  But I don't have the right psychology for stocks at all.

“if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”

[dougules]

I go against the grain on here personally.

I'm primarily an individual stock investor.

My investments have outperformed "the market" by about 2% per year on average. I track myself against the S&P 500 total return index because that includes dividends.

How do I do it?

I subscribe to investment advice from "The Motley Fool" to help me with my research.
I only invest in businesses for the long term (my longest stock holding is currently at 18 years)
I do the occasional options trade for additional income and upside.
I hold a pretty diversified list of investments so my single stock risk is minimized.

Commissions + advice in my case are << than I'd pay to Vanguard for investing in an index fund.

I would maintain that as a part time, business focused, small, individual investor I have lots of advantages over the professional money managers on Wall Street. The main two are my time frame - that I can be focused on the long term and not worry about the next quarter or year, and that I don't have to answer to anyone but myself. The professionals have to perform every day, week and quarter and if they underperform for even a short time, people are withdrawing their money. This is a toxic environment in which to operate.

I'm not going to share my trade history or account balances here. I just want to say that outperformance is not as daunting as most on here would lead you to believe.

How much time do you spend on it?  Most of use are looking to get to FIRE.  If you're spending a lot of time and effort on it then it's just another job and you're negating the RE part of it. 

[caracarn]

So my personal story is this.

I did a LOT of reading and did a LOT of learning on stocks and value investing.  I helped start and run a couple investment clubs over about 10 years.  We as a group did a ton of research, certainly compared to the average investor.  We had stock analysis tools from the NAIC and perused reports and ran numbers religiously.  We burned a lot of our time and energy on trying to outperform the market, and ...... we just about stayed even. 

I get that 1-2% better than the market as Paul does is nothing to sneeze at, but having lived probably only a portion of the work he puts into it, the group of 20 of us that did it together for a decade determined it was in no way worth the effort. 

If like Buffet, you get your jollies out of reading annual reports and churning numbers and meeting with corporate boards and doing loads of work, then by all means, go have fun.  But if like most of us you are investing to make money do do the things that provide your jollies, it is way, way, way simpler and likely to be successful by index investing. 

After buying into the Kool Aid for the better part of twenty years I switched to index investing ten years ago and never looked back and I've had a lot more fun in life since then because I got hours back each week that I did not need to spend trying to find some needle in a stock market that would help me earn an extra 1%.

[Jamese20]

So my personal story is this.

I did a LOT of reading and did a LOT of learning on stocks and value investing.  I helped start and run a couple investment clubs over about 10 years.  We as a group did a ton of research, certainly compared to the average investor.  We had stock analysis tools from the NAIC and perused reports and ran numbers religiously.  We burned a lot of our time and energy on trying to outperform the market, and ...... we just about stayed even. 

I get that 1-2% better than the market as Paul does is nothing to sneeze at, but having lived probably only a portion of the work he puts into it, the group of 20 of us that did it together for a decade determined it was in no way worth the effort. 

If like Buffet, you get your jollies out of reading annual reports and churning numbers and meeting with corporate boards and doing loads of work, then by all means, go have fun.  But if like most of us you are investing to make money do do the things that provide your jollies, it is way, way, way simpler and likely to be successful by index investing. 

After buying into the Kool Aid for the better part of twenty years I switched to index investing ten years ago and never looked back and I've had a lot more fun in life since then because I got hours back each week that I did not need to spend trying to find some needle in a stock market that would help me earn an extra 1%.

Hi mate, yes I think I will stick to the indexes to get me FI and only look for a winner as a hobby with all my new found spare time without risking my principle to stay FI

At least I know I enjoy the topic and is another form of interest that will keep me more than occupied if I want to

You need a lump of capital anyway to make it work properly so I may aswell do the sensible thing first and stick to indexing

[Car Jack]

I talk with people who think that they have some insight that will allow them to make money on the stock market.  Like the guy who tells me "Hey Jack, boomers are aging out and will need medical stuff and drugs and rehab equipment.  I'm going to put big money on a bunch of medical companies because it's a sure thing that they're going up".  I just shake my head.  What Einstein here is doing isn't even "chasing the puck" (putting your money on where the market just was).  He's trying to get into the arena for a hockey game that was played 10 years ago.  But he thinks that because the light bulb just went off in his head (clearly not the brightest bulb in the bunch), that he has a winning strategy.

A lot of stock pickers these days are transistors and programs to tell these transistors what to do.  Even if you hear the Fed Chair in person and have a box in front of you to hit a green "buy" or a red "sell", and hit it when the Chair speaks of interest rate direction, you'll be 100 ms too late.  By then $100B has traded in and out of the market, taking profit, calculating fees and transferring gains to the bank.  You hit the button and lose.

It's gambling, pure and simple for us mortal people.  If you have to gamble, then buy a lottery ticket.  At least some of that money pays for our schools. 

[triangle]

So my personal story is this.

I did a LOT of reading and did a LOT of learning on stocks and value investing.  I helped start and run a couple investment clubs over about 10 years.  We as a group did a ton of research, certainly compared to the average investor.  We had stock analysis tools from the NAIC and perused reports and ran numbers religiously.  We burned a lot of our time and energy on trying to outperform the market, and ...... we just about stayed even. 

I get that 1-2% better than the market as Paul does is nothing to sneeze at, but having lived probably only a portion of the work he puts into it, the group of 20 of us that did it together for a decade determined it was in no way worth the effort. 

If like Buffet, you get your jollies out of reading annual reports and churning numbers and meeting with corporate boards and doing loads of work, then by all means, go have fun.  But if like most of us you are investing to make money do do the things that provide your jollies, it is way, way, way simpler and likely to be successful by index investing. 

After buying into the Kool Aid for the better part of twenty years I switched to index investing ten years ago and never looked back and I've had a lot more fun in life since then because I got hours back each week that I did not need to spend trying to find some needle in a stock market that would help me earn an extra 1%.

I believe the scale or the amount of money involved also makes a significant difference. If one saves $10K in year 1, followed by $11K year 2, and so on; then outpacing the indexes by 1% does not lead to an outsided amount in ones investment account in the early years.

But if one has $1000K or some other big amount to manage then a small percentage increase in returns can matter. Meaning it might be worth reading annual reports, 10Ks and such, if that is your interest and passion instead of going to the movies or watching the latest sporting event. I am not suggesting that anyone should be their own investment manager after reaching some net worth mark, just that it is good to be more engaged if one has the time and aptitude.

[Travis]

I talk with people who think that they have some insight that will allow them to make money on the stock market.  Like the guy who tells me "Hey Jack, boomers are aging out and will need medical stuff and drugs and rehab equipment.  I'm going to put big money on a bunch of medical companies because it's a sure thing that they're going up".  I just shake my head.  What Einstein here is doing isn't even "chasing the puck" (putting your money on where the market just was).  He's trying to get into the arena for a hockey game that was played 10 years ago.  But he thinks that because the light bulb just went off in his head (clearly not the brightest bulb in the bunch), that he has a winning strategy.

A lot of stock pickers these days are transistors and programs to tell these transistors what to do.  Even if you hear the Fed Chair in person and have a box in front of you to hit a green "buy" or a red "sell", and hit it when the Chair speaks of interest rate direction, you'll be 100 ms too late.  By then $100B has traded in and out of the market, taking profit, calculating fees and transferring gains to the bank.  You hit the button and lose.

It's gambling, pure and simple for us mortal people.  If you have to gamble, then buy a lottery ticket.  At least some of that money pays for our schools.

Exactly.  If you have a bright idea about the market, it's probably a good bet someone else had it first, plugged it into a supercomputer, and the good money flew away by the time you finished your breakfast.  If CNBC is giving you stock advice, it was useful a week ago.

[Mighty-Dollar]

Why is active stock picking so taboo on here ?

The professionals on Wall Street can't beat the indexes after fees, so why would you do any better?

[PaulMaxime]

How much time do you spend on it?  Most of use are looking to get to FIRE.  If you're spending a lot of time and effort on it then it's just another job and you're negating the RE part of it.

I tend to buy things and hold them for a long time - years. I maybe buy one or two things a month with my incoming cash. I might also make a few options trades now and then, like when the market just dropped recently I made a trade on one of my long term winners Arista Networks.

I track the value of my portfolio monthly against the S&P 500 Total Return index which means I have a spreadsheet that takes my balances and cash flows for the month - so with 6 accounts (Two taxable, IRA, Roth IRA, Inherited IRA and 401K) that's maybe 15 minutes.

I spend a couple hours a week on research and chatting about it with other people. Not a big time committment. But I do pay to have my research outsourced, so that makes it easier - I wait for recommendations from TMF thought I do sometimes buy a stock on my own.

It's a hobby for me, but not all consuming. It's fun to learn about business and investing for me.

But I also cook, bike and hike, travel, go to the gym, sing opera and teach cocktail classes and throw cocktail parties in addition to my day job as a software engineer - so it's not like I treat it like a second job.

The picture people have in your mind of someone who stares at the screen making trades all the time is not reality. Those people are getting eaten alive by transaction costs and the program traders. If you take a much more languid pace with this and allow winners to compound over time it's really not bad.

[PaulMaxime]

Everyone in the world can become FI w/o impeding the ability of others to become FI. Only half the dollars invested can beat the index, the other half MUST lose to the index. There's no way around that. It's a closed system, in order to be above average someone else must be below average. So while it may be rare to be FI, you being FI does not impede anyone else from being FI, the two are not related. Me beating the market with $100k means that another $100k HAD to have lost to the market.

The average investor underperforms the market by a pretty large margin due to bad behavior. Don't feel bad about outperforming. Even if you are just matching the market you are already beating most investors. I don't understand that attitude - people are making their own choices. If I bought Netflix in 2012 for $10 and held on to it for several years and it's now $290.00 a share am I hurting anyone else? It's not like you are pulling the money out of their pocket directly.

https://www.ifa.com/articles/dalbar_2016_qaib_investors_still_their_worst_enemy/

[PaulMaxime]

I bet you get by far the most hands up for (a), the second most for (b), the third most for (c), and certainly none for (d).

I think you are being far too generous. ;-)  It's probably >99% A, <1% B, and no C or D.

The few Bs are probably employees of tech start ups that got bought by the FANGs.

Definitely aggressive saving.

100 baggers? Well as a part of a diversified long term buy and hold portfolio your bound to have a few big winners, but it's not like I'm putting all my money on Red on the roulette wheel. 12 - 18 stocks is enough to diversify away most market risk.

If I had stuck to index funds I could have reached FI for sure. But I'm way ahead of where I would have been if I had done that. To each his own. It has been worth it for me to learn how to do this myself.

[Jamese20]

Wall Street traders don't buy and hold they trade like crazy, I don't believe that is comparing apples with apples

For a forum that's based on huge positive and also unlikely things like FI happening statistically, when it comes to investing there is a very defeatist attitude when it comes to investing

I actually don't rate mmm investing posts really i don't think he has done enough of them to give people enough confidence to be putting loads of of their net worth in them - I have had to do a ton load of research afterwards.

I think I may give it a go when I don't need to be concerned about money, untill then if I can get the average performance of 9% over the next decade that will do fine, what prompted me to start this post was alot of sensible guys decade predictions think we will only get around 4% after inflation so 7% nominal -

I also get that nobody knows either and cannot predict but even mmm assumes a recession is going to hit very soon

[boarder42]

Wall Street traders don't buy and hold they trade like crazy, I don't believe that is comparing apples with apples

For a forum that's based on huge positive and also unlikely things like FI happening statistically, when it comes to investing there is a very defeatist attitude when it comes to investing

I actually don't rate mmm investing posts really i don't think he has done enough of them to give people enough confidence to be putting loads of of their net worth in them - I have had to do a ton load of research afterwards.

I think I may give it a go when I don't need to be concerned about money, untill then if I can get the average performance of 9% over the next decade that will do fine, what prompted me to start this post was alot of sensible guys decade predictions think we will only get around 4% after inflation so 7% nominal -

I also get that nobody knows either and cannot predict but even mmm assumes a recession is going to hit very soon

FI isnt something thats unlikely its measureable and predictable can you please stop comparing something that is 100% in a persons control Spending to saving ratio - to stock picking.  Its been pointed out to you many times here that its highly unlikely you'll be able to do this regardless of how much capital you have - its a natural human reaction to be afraid of losses and want to minimize them and beat the market - but the sooner you dig into the historical data and realize its likely a losing game the better off you will be.  MMM doesnt dig into investing other than indexing b/c there really isnt much else to say.  MadFientist has dug deep into withdrawal strategies and optimized ways of saving - MMM focus more on changing your lifestyle to minimize your costs. 

Your concept that you'll give it a go when you dont care about money means 1 of 2 things

1. You're going to end up working longer and over saving so you have this "play money"
2. You're going to end up working til 4% and throwing some money into whatever system you think is going to work and you're likely going to end up losing if we assume you're as good as the chart above you have an 18% chance of being successful vs the market over any given 5 year period.  now we extrapolate that to a 30 year FIRE and you have a ~.0034*% chance of being successful over that time. 

As was said above its better to build a gambling budget and spend it at the casino than the game you're trying to play.  I played it for 17 years when i had a ton of time on my hands to research(school was easy i didnt have to study i traded/researched stocks) from the time i was 10 til i was 27 and found this blog - i beat the market by a total of 1% over this time frame.  its not worth the time or the effort and i was mostly lucky.

[Mr. Boh]

FI isnt something thats unlikely its measureable and predictable can you please stop comparing something that is 100% in a persons control Spending to saving ratio - to stock picking.  Its been pointed out to you many times here that its highly unlikely you'll be able to do this regardless of how much capital you have - its a natural human reaction to be afraid of losses and want to minimize them and beat the market - but the sooner you dig into the historical data and realize its likely a losing game the better off you will be.  MMM doesnt dig into investing other than indexing b/c there really isnt much else to say.  MadFientist has dug deep into withdrawal strategies and optimized ways of saving - MMM focus more on changing your lifestyle to minimize your costs. 

Your concept that you'll give it a go when you dont care about money means 1 of 2 things

1. You're going to end up working longer and over saving so you have this "play money"
2. You're going to end up working til 4% and throwing some money into whatever system you think is going to work and you're likely going to end up losing if we assume you're as good as the chart above you have an 18% chance of being successful vs the market over any given 5 year period.  now we extrapolate that to a 30 year FIRE and you have a ~.0034*% chance of being successful over that time. 

As was said above its better to build a gambling budget and spend it at the casino than the game you're trying to play.  I played it for 17 years when i had a ton of time on my hands to research(school was easy i didnt have to study i traded/researched stocks) from the time i was 10 til i was 27 and found this blog - i beat the market by a total of 1% over this time frame.  its not worth the time or the effort and i was mostly lucky.

I find it interesting that you insist that it is almost impossible to beat the market but then admit that you yourself did just exactly that. I agree that it is not easy but people do it all the time. One important factor that usually gets glossed over if that many active managers do in fact beat the market before fees. It's only after fees are subtracted that they fail to beat the market.

[Tyson]

To the OP, you are not a special snowflake.  You think you can pick stocks better than the average person.  You cannot.  There's only one Warren Buffet and I hate to break it to you, but it's not you.  One thing that isn't emphasized enough is just how risky individual stocks are.  If an index drops ten to twenty percent, that's about as bad as it gets.  But individual stocks?  It can drop WAY, WAY, WAY more than 20%.  Here's a nice reminder I keep around anytime I think "I'm smarter than the average bear, I can beat the market!":

[simonsez]

if we assume you're as good as the chart above you have an 18% chance of being successful vs the market over any given 5 year period.  now we extrapolate that to a 30 year FIRE and you have a ~.0034*% chance of being successful over that time. 

As was said above its better to build a gambling budget and spend it at the casino than the game you're trying to play.  I played it for 17 years when i had a ton of time on my hands to research(school was easy i didnt have to study i traded/researched stocks) from the time i was 10 til i was 27 and found this blog - i beat the market by a total of 1% over this time frame.  its not worth the time or the effort and i was mostly lucky.

I find it interesting that you insist that it is almost impossible to beat the market but then admit that you yourself did just exactly that. I agree that it is not easy but people do it all the time. One important factor that usually gets glossed over if that many active managers do in fact beat the market before fees. It's only after fees are subtracted that they fail to beat the market.

a) This is the internet - anyone can make any claim about their performance.  Humans tend to overstate the gains and mitigate blabbing about the losses.  I'm not calling any individual a liar but I take most growth rates and holding/selling claims with a grain of salt.  I also am sure some are truly beating the market, and they really have nothing to gain by stating all their positions publicly just for establishing internet legitimacy.

2) 5 years is not a typical lifetime nor is 17 as boarder42 pointed out.  The odds on time horizons of 30 years and far beyond is what matters since we typically start investing in our 20s or younger and will be involved in some way in the market until death hopefully many years later.  Yes people beat the market all the time but it's rarely the same person or entity year after year for decades.

d) I'd wager that there are several thousand threads on this forum that talk about the fees.  You can't avoid the fees.  Obviously if Fund A has higher fees compared to Fund B, Fund A compared more favorably before you considered the fees...but why wouldn't you gloss over the pre-fee number regardless of which one higher at that point?  The net result is what matters.

[boarder42]

if we assume you're as good as the chart above you have an 18% chance of being successful vs the market over any given 5 year period.  now we extrapolate that to a 30 year FIRE and you have a ~.0034*% chance of being successful over that time. 

As was said above its better to build a gambling budget and spend it at the casino than the game you're trying to play.  I played it for 17 years when i had a ton of time on my hands to research(school was easy i didnt have to study i traded/researched stocks) from the time i was 10 til i was 27 and found this blog - i beat the market by a total of 1% over this time frame.  its not worth the time or the effort and i was mostly lucky.

I find it interesting that you insist that it is almost impossible to beat the market but then admit that you yourself did just exactly that. I agree that it is not easy but people do it all the time. One important factor that usually gets glossed over if that many active managers do in fact beat the market before fees. It's only after fees are subtracted that they fail to beat the market.

a) This is the internet - anyone can make any claim about their performance.  Humans tend to overstate the gains and mitigate blabbing about the losses.  I'm not calling any individual a liar but I take most growth rates and holding/selling claims with a grain of salt.  I also am sure some are truly beating the market, and they really have nothing to gain by stating all their positions publicly just for establishing internet legitimacy.

2) 5 years is not a typical lifetime nor is 17 as boarder42 pointed out.  The odds on time horizons of 30 years and far beyond is what matters since we typically start investing in our 20s or younger and will be involved in some way in the market until death hopefully many years later.  Yes people beat the market all the time but it's rarely the same person or entity year after year for decades.

d) I'd wager that there are several thousand threads on this forum that talk about the fees.  You can't avoid the fees.  Obviously if Fund A has higher fees compared to Fund B, Fund A compared more favorably before you considered the fees...but why wouldn't you gloss over the pre-fee number regardless of which one higher at that point?  The net result is what matters.

i know in general this thread is about beating the market but my major point in my statement i should have emphasized more is

FI's rarity has nothing to do with the rarity seen when people try to beat the market. 

FI is rare because its outside of a societal norm to do the things necessary to be FI.  And passive index investing would actually be a better comparison to FI b/c its outside a societal norm for humans to dump their money into an index fund and just let it ride and not sell it till you're retired or need it for something.  vs selling based on market conditions or projections or valuations.

So i think not only are you misrepresenting FI's correlation to stock picking in the fact that its rare you're actually correlating it 100% opposite of where the real correlation lies.

a correlation based on rarity is not a good way to make a comparison.

Gold is rare so are the people who seek FIRE.  therefore we should invest in gold
BTC is rare so is gold therefore i should invest in BTC
VCR's are rare so are people who seek FIRE therefore i should invest in VCRs.

I also dont think index investing is a defeatist attitude - if anything the data above shows its a winners attitude.  Add to that the time you must spend to attempt to beat the market on the outside chance you beat it and thats a lot of negative equity there compared to passively investing.

[Jamese20]

Interesting responses,

What are people thoughts to the next decade forecasting returns of 4% from the sensible folks in investing ? I.e Bogle? Is it not worth trying to best these lower the average returns? Or are these 10 year forecasts all bogus ?

Alot of people state short term is impossible to predict but 10 years are more predictable?

This is where I knew what I know now 10 years ago!

[PaulMaxime]

Interesting responses,

What are people thoughts to the next decade forecasting returns of 4% from the sensible folks in investing ? I.e Bogle? Is it not worth trying to best these lower the average returns? Or are these 10 year forecasts all bogus ?

Alot of people state short term is impossible to predict but 10 years are more predictable?

This is where I knew what I know now 10 years ago!

10 year forecasts are all bogus. As are 1 year forecasts.

[Tyson]

Interesting responses,

What are people thoughts to the next decade forecasting returns of 4% from the sensible folks in investing ? I.e Bogle? Is it not worth trying to best these lower the average returns? Or are these 10 year forecasts all bogus ?

Alot of people state short term is impossible to predict but 10 years are more predictable?

This is where I knew what I know now 10 years ago!

You have short term mentality.  Don't worry, lots of people do.  Re: 4% returns for a decade?  So what?  How about the next 20 or 30 years?  Still 4%? 

OK, I'll concede the point for a second.  If 4% is the best indexing can do over the next decade, then what's the alternative?  If you say "pick individual stocks", you have to understand that you're moving from something with very low risk (buy and hold indexing) to something with very HIGH risk.  So you might make a better return.  Maybe you make 10% instead of 4%.  Whooppee.  You might also LOSE 40% or MORE!!!!!!  That is WAY more likely to kill FI and RE than plodding along at a super-safe 4% returns.

In other words, stop taking the short view and engaging in risky behavior under the mistaken idea that stock picking is the right answer to lower than average expected returns. 

[boarder42]

Interesting responses,

What are people thoughts to the next decade forecasting returns of 4% from the sensible folks in investing ? I.e Bogle? Is it not worth trying to best these lower the average returns? Or are these 10 year forecasts all bogus ?

Alot of people state short term is impossible to predict but 10 years are more predictable?

This is where I knew what I know now 10 years ago!

no one can predict future returns there are always some talking heads saying something about the forecast for the next "x" years ... no one has a crystal ball.  the only semi predictable horizon is avg returns over 30 years based on history.  but that doesnt mean we can know what will happen - 10 year returns are all over the map - when the market is full steam ahead and climbing higher and higher its pretty easy to say the returns will be lower than expected.

If they are correct how do you think you will beat the market- there will be more stocks making less money or losing money to get the market to produce less. 

You're talking from a state of poor experience and understanding and thinking you're different or better than the next guy. you're not - could you get lucky and beat the market yes - but its not very likely.

[Travis]

Interesting responses,

What are people thoughts to the next decade forecasting returns of 4% from the sensible folks in investing ? I.e Bogle? Is it not worth trying to best these lower the average returns? Or are these 10 year forecasts all bogus ?

Alot of people state short term is impossible to predict but 10 years are more predictable?

This is where I knew what I know now 10 years ago!

The same rules and concerns discussed here about beating the market apply whether average returns are 2, 4, or 20%.  If the market is having a barely profitable year, then 50% of folks are probably in the negative.  Why does that change your odds?

[boarder42]

Interesting responses,

What are people thoughts to the next decade forecasting returns of 4% from the sensible folks in investing ? I.e Bogle? Is it not worth trying to best these lower the average returns? Or are these 10 year forecasts all bogus ?

Alot of people state short term is impossible to predict but 10 years are more predictable?

This is where I knew what I know now 10 years ago!

The same rules and concerns discussed here about beating the market apply whether average returns are 2, 4, or 20%.  If the market is having a barely profitable year, then 50% of folks are probably in the negative.  Why does that change your odds?

b/c i dont wanna lose money!!! and i'm smarter than the avg person so therefore i'm going to be in the 50% that make money!!! you just dont get it

[koshtra]

A good resource, if you want to stock-pick, is Investing at Level3. He thinks you ought to be able to beat the S&P 500 by a couple percentage points if you do your homework and fish where there are fish (generally that means buying stock in companies whose capitalization is so small that it's not worth big investors' time to research them.)

But it really takes a ton of time to do it properly. If you like it, sure, go for it, but you probably get a better return on the investment of your time by improving your earning and frugality skills.

[Jamese20]

Interesting responses,

What are people thoughts to the next decade forecasting returns of 4% from the sensible folks in investing ? I.e Bogle? Is it not worth trying to best these lower the average returns? Or are these 10 year forecasts all bogus ?

Alot of people state short term is impossible to predict but 10 years are more predictable?

This is where I knew what I know now 10 years ago!

10 year forecasts are all bogus. As are 1 year forecasts.

I.hope they are mate all I want is the average during the next decade! The better the returns the quicker I achieve FI...I know it will be fine longer term but I want FI asap

[Tyson]

Interesting responses,

What are people thoughts to the next decade forecasting returns of 4% from the sensible folks in investing ? I.e Bogle? Is it not worth trying to best these lower the average returns? Or are these 10 year forecasts all bogus ?

Alot of people state short term is impossible to predict but 10 years are more predictable?

This is where I knew what I know now 10 years ago!

10 year forecasts are all bogus. As are 1 year forecasts.

I.hope they are mate all I want is the average during the next decade! The better the returns the quicker I achieve FI...I know it will be fine longer term but I want FI asap

What’s your current savings rate?

[boarder42]

Interesting responses,

What are people thoughts to the next decade forecasting returns of 4% from the sensible folks in investing ? I.e Bogle? Is it not worth trying to best these lower the average returns? Or are these 10 year forecasts all bogus ?

Alot of people state short term is impossible to predict but 10 years are more predictable?

This is where I knew what I know now 10 years ago!

10 year forecasts are all bogus. As are 1 year forecasts.

I.hope they are mate all I want is the average during the next decade! The better the returns the quicker I achieve FI...I know it will be fine longer term but I want FI asap

You fi faster by spending less. Then increasing income and saving it all you don't try to best the market to expedite it. Bc chances are it will take longer.

[Telecaster]

Interesting responses,

What are people thoughts to the next decade forecasting returns of 4% from the sensible folks in investing ? I.e Bogle? Is it not worth trying to best these lower the average returns? Or are these 10 year forecasts all bogus ?

Alot of people state short term is impossible to predict but 10 years are more predictable?

This is where I knew what I know now 10 years ago!

10 year forecasts are all bogus. As are 1 year forecasts.

Facts not in evidence.  PE/10, or CAPE if you prefer, has good predictive power over five and ten years. 

[PaulMaxime]

[
OK, I'll concede the point for a second.  If 4% is the best indexing can do over the next decade, then what's the alternative?  If you say "pick individual stocks", you have to understand that you're moving from something with very low risk (buy and hold indexing) to something with very HIGH risk.  So you might make a better return.  Maybe you make 10% instead of 4%.  Whooppee.  You might also LOSE 40% or MORE!!!!!!  That is WAY more likely to kill FI and RE than plodding along at a super-safe 4% returns.

In other words, stop taking the short view and engaging in risky behavior under the mistaken idea that stock picking is the right answer to lower than average expected returns.

Investing in individual stocks is not HIGH RISK compared to indexing. It's only that way if you buy a single stock. A diversified portfolio of 12-18 stocks is enough to diversify non-systematic risk. In my experience, several losers, even if they go to ZERO do not outweigh the big gainers in a buy-to-hold reasonably diversified stock portfolio. You are not being fair comparing investing in one stock to indexing. That's not what sane people do.

https://news.morningstar.com/classroom2/course.asp?docId=145385&page=4

Let's hear from the experts. In their book Investment Analysis and Portfolio Management, Frank Reilly and Keith Brown reported that in one set of studies for randomly selected stocks, "…about 90% of the maximum benefit of diversification was derived from portfolios of 12 to 18 stocks." In other words, if you own about 12 to 18 stocks, you have obtained more than 90% of the benefits of diversification, assuming you own an equally weighted portfolio.

[Travis]

[
OK, I'll concede the point for a second.  If 4% is the best indexing can do over the next decade, then what's the alternative?  If you say "pick individual stocks", you have to understand that you're moving from something with very low risk (buy and hold indexing) to something with very HIGH risk.  So you might make a better return.  Maybe you make 10% instead of 4%.  Whooppee.  You might also LOSE 40% or MORE!!!!!!  That is WAY more likely to kill FI and RE than plodding along at a super-safe 4% returns.

In other words, stop taking the short view and engaging in risky behavior under the mistaken idea that stock picking is the right answer to lower than average expected returns.

Investing in individual stocks is not HIGH RISK compared to indexing. It's only that way if you buy a single stock. A diversified portfolio of 12-18 stocks is enough to diversify non-systematic risk. In my experience, several losers, even if they go to ZERO do not outweigh the big gainers in a buy-to-hold reasonably diversified stock portfolio. You are not being fair comparing investing in one stock to indexing. That's not what sane people do.

https://news.morningstar.com/classroom2/course.asp?docId=145385&page=4

Let's hear from the experts. In their book Investment Analysis and Portfolio Management, Frank Reilly and Keith Brown reported that in one set of studies for randomly selected stocks, "…about 90% of the maximum benefit of diversification was derived from portfolios of 12 to 18 stocks." In other words, if you own about 12 to 18 stocks, you have obtained more than 90% of the benefits of diversification, assuming you own an equally weighted portfolio.

So your alternative to index investing is to build your own index?

[steveo]

[
OK, I'll concede the point for a second.  If 4% is the best indexing can do over the next decade, then what's the alternative?  If you say "pick individual stocks", you have to understand that you're moving from something with very low risk (buy and hold indexing) to something with very HIGH risk.  So you might make a better return.  Maybe you make 10% instead of 4%.  Whooppee.  You might also LOSE 40% or MORE!!!!!!  That is WAY more likely to kill FI and RE than plodding along at a super-safe 4% returns.

In other words, stop taking the short view and engaging in risky behavior under the mistaken idea that stock picking is the right answer to lower than average expected returns.

Investing in individual stocks is not HIGH RISK compared to indexing. It's only that way if you buy a single stock. A diversified portfolio of 12-18 stocks is enough to diversify non-systematic risk. In my experience, several losers, even if they go to ZERO do not outweigh the big gainers in a buy-to-hold reasonably diversified stock portfolio. You are not being fair comparing investing in one stock to indexing. That's not what sane people do.

https://news.morningstar.com/classroom2/course.asp?docId=145385&page=4

Let's hear from the experts. In their book Investment Analysis and Portfolio Management, Frank Reilly and Keith Brown reported that in one set of studies for randomly selected stocks, "…about 90% of the maximum benefit of diversification was derived from portfolios of 12 to 18 stocks." In other words, if you own about 12 to 18 stocks, you have obtained more than 90% of the benefits of diversification, assuming you own an equally weighted portfolio.

So your alternative to index investing is to build your own index?

I think the argument is buying your own selected stocks will work out better than the index. Personally I don't believe it and I don't think the risk to reward is worth it and that is excluding the opportunity cost of selecting your stocks.

Lot's of people like to pick their stocks. It's fun and they can talk about it to other people. I think that is the real reason for picking stocks.

[PaulMaxime]

So your alternative to index investing is to build your own index?

No, it's called building a portfolio.

[Mr Mark]

WRT OP's question: "Why is active stock picking so taboo on here ?"

I disagree with the prmise of the thread for a start - IMHO it's not 'taboo'  - it's just highly discouraged as a way to invest because it is demonstrably a very sub-optimal way to invest over the long term, based on a LOT of data and hard won personal experiences.

Mustashianism to me is about how you (or almost anyone) can FIRE in a very reliable and predictable way by doing things that are totally within your control: reducing expenditure through sensible frugality, progressively increasing your savings rate, and reaching a point where your stash is ~25x your expenses. Bingo.

Can active stock picking be successful? Of course it can. However, while it's impossible to judge how successful you will be at it forward looking, the cold statistics of those that have done it in the past are very discouraging... Over 30 years, the number of professional active money managers who have achieved it and beaten the market is less than 1%.

In your case, some of the comments you make on this thread suggest to me that you are looking for a 'shortcut' to FIRE (and by the way, this is not an uncommon desire) by boosting your CAGR, perhaps by replicating a successful stock picker and thus "beating the market".

What many here are trying to point out is that:
- your ability to achieve that is statistically almost zero over the long term.
- therefore you are most likely just going to reduce your CAGR and delay FIRE
- that your attempt to do so will also serve as a delusional goal that will distract you from the route of certain (eventual) proven success, ie being frugal and increasing your saving rate.

So does that mean it's '100% VTSAX or nothing' in Mustache-investment-land?

Not at all. There are other recommended investment strategies, prime among them being real estate (SFH rental, multiplex, commercial, fix and flip), and more esoteric index fund formulae (endlessly debated) like how much (if any) International, or what about the value of a Smallcap value tilt, or bond allocation (and if so what % of what type, when). Plus different tax optimisation strategies (Roth or not?), etc etc.

However, all those things are distinctly second order to the prime directive: spend a lot less, and save a lot more. This takes effort. Generally the time and effort required by attempts to beat the market are better directed towards improving upon achieving those goals.

[CoffeeR]

... but are people who find this stuff very interesting making a big mistake by not picking a few winning stocks with the right focus ?

Picking a 'winning' stock? Yes, that would be a good strategy. The problem is identifying a 'winning' stock. It really is not easy. A one-off example, most people in 2000 would have told you Microsoft (MSFT) was a winning stock. Even people who saw and recognized the then insane tech-valuations, (in general) would have told you MSFT would survive any shake-out. After the tech crash, it did survive, but it languished stock wise for 10+ years. Would you have had that kind of patience even while other stocks started to rally again? Most people tell themselves they would have the patience. Most do not have that patience.

I for one, in the 90's would have told you that Apple (AAPL) was dead. I do computers/tech for a living. I know computers/tech. I thought AAPL was going to die or become irrelevant in the 90's. I was wrong. It is really hard to predict what is going to happen.

You have a longer time horizon than 10 years? Look at the blue-chip stocks of the 50's, 60's, 70's, 80's, the stocks that everyone said were big and "safe" since they have been around for 50+ years and certainly would be here 50+ years from now. Do your research on those so you know how to distinguish the winning stocks from the loosing ones. Start with Kodak.

Right now the high flyers are stocks like Amazon and Netflix and NVidia and they may continue to rally more for a long time, but by all standard metrics (the ones Buffet uses) they are insanely expensive.  Talking about price, Buffet can't find anything to purchase right now, because everything is so expensive.

So, yes, pick the winning stocks if you know what they will be.

[Kyle B]

... but are people who find this stuff very interesting making a big mistake by not picking a few winning stocks with the right focus ?

I for one, the 90's would have told you that Apple (AAPL) was dead. I do computers/tech for a living. I know computers/tech. I thought AAPL was going to die or become irrelevant in the 90's. I was wrong. It is really hard to predict what is going to happen.

I got rid of my Macs just before Jobs returned to Apple. There was zero sense Apple would recover, especially in the face of Windows 95.

Even when Jobs came back, I don't really think things turned around hugely for AAPL until the iPod (ie, not a revolutionary product, and not the computer one might have predicted would be Apple's savior.) The iPod's value-add was that it was a device that finally made it easy to listen to stolen songs. It saved AAPL by wrecking the music business. (If you predicted that of AAPL in 1995, you indeed should be picking your own stocks.) :-)

(And the iPhone was certainly not expected, and even it was not obviously a success at launch.)

[Money Maker Mike]

After reading this thread, I finally decided to sell my 9 AMZN stocks that I bought before becoming a born-again indexer. 110% in approximately 2 years is good enough I suppose, but with that kind of gain it is so tempting to believe I could be in that extreme minority. Time to put my money where my mouth is... Looking back at this post in a few years should be interesting.

[enigmawrap]

Well, this is my very first post on the Mustache site, so here goes:

As one who has suffered the trials and tribulations of stock market "investing," Warren Buffet's idea of the "do nothing" investor to invest in index funds is probably the correct way for most people to go.  And, that idea doesn't come from Buffet, it comes from his teacher, Benjamin Graham.  After reading Graham's book, Security Analysis, for the 5th time, one realizes that Graham states several times in the book that (paraphrased) "...it would be extremely hard for an individual to handle the ups/downs of a market...and, most would buy/sell at the wrong time..."  If one does not really understand what one is investing in - whether that is Apple stock, a duplex rental property, a small business, etc. than one would be more likely to panic at the wrong time (whether a moment of despair or ecstasy).  And, reading through Graham's book, one finds Buffet's present philosophy w/regards to honest management, the numbers that reveal a great business, etc.  As far as the "time" needed to investigate an investment, what does Buffet say?  "Become a voracious reader..."  If one does not have the time for that, than an individual stock purchase is off-limits.  So, (OH NO!) why do I pick individual stocks?  I'm no expert, I'm not a genius, and have no "system."  Well, because I do like to read those reports...I do like to review the financials (going back 10 years), and so on...now, did I know how to read that stuff 10-15 years ago?  Hell no - which is the reason for my first sentence.  So, read, read, read, plus a couple of courses in accounting, etc.  And, here we are.  Finally, I would never tell anyone to buy this or that stock....if someone asked, I would just say "I like them because...." and leave it at that.  And, it seems 90%+ on this forum already have the very good habit of setting aside funds for an index fund, and that is better than (sadly) 70%+ of the American population, which is probably some of the best advice.  And, helps everyone to keep Buffet's rule #1.  This a great forum - and, I'm glad I found the mustache site. :)

[boarder42]

Well, this is my very first post on the Mustache site, so here goes:

As one who has suffered the trials and tribulations of stock market "investing," Warren Buffet's idea of the "do nothing" investor to invest in index funds is probably the correct way for most people to go.  And, that idea doesn't come from Buffet, it comes from his teacher, Benjamin Graham.  After reading Graham's book, Security Analysis, for the 5th time, one realizes that Graham states several times in the book that (paraphrased) "...it would be extremely hard for an individual to handle the ups/downs of a market...and, most would buy/sell at the wrong time..."  If one does not really understand what one is investing in - whether that is Apple stock, a duplex rental property, a small business, etc. than one would be more likely to panic at the wrong time (whether a moment of despair or ecstasy).  And, reading through Graham's book, one finds Buffet's present philosophy w/regards to honest management, the numbers that reveal a great business, etc.  As far as the "time" needed to investigate an investment, what does Buffet say?  "Become a voracious reader..."  If one does not have the time for that, than an individual stock purchase is off-limits.  So, (OH NO!) why do I pick individual stocks?  I'm no expert, I'm not a genius, and have no "system."  Well, because I do like to read those reports...I do like to review the financials (going back 10 years), and so on...now, did I know how to read that stuff 10-15 years ago?  Hell no - which is the reason for my first sentence.  So, read, read, read, plus a couple of courses in accounting, etc.  And, here we are.  Finally, I would never tell anyone to buy this or that stock....if someone asked, I would just say "I like them because...." and leave it at that.  And, it seems 90%+ on this forum already have the very good habit of setting aside funds for an index fund, and that is better than (sadly) 70%+ of the American population, which is probably some of the best advice.  And, helps everyone to keep Buffet's rule #1.  This a great forum - and, I'm glad I found the mustache site. :)

This post gave no actual data or actionable plan to follow.  And even though I don't if I'd believe what you said if you told us you didn't even provide any data point as to the return you've had over your extremely small sample size of 5-10 years doing this compared to the actual market. You have also been doing this in the hottest bull market in history. Your reading could have produced above avg returns. But it's a small window. Just like I can sit at a black jack table for 5 hours and come out ahead. But over a long time stastically say I'll lose. And over along time stastically say you'll break even with the market or lose

[Jamese20]

The level of detail here from people is impressive I thank you all for advising me in the best way possible

I think indexing I will go for in 12 months time and see where it takes me... hopefully I will get lucky and the market will take a dive just before I start to Go aggressive in the index!

[caracarn]

Interesting responses,

What are people thoughts to the next decade forecasting returns of 4% from the sensible folks in investing ? I.e Bogle? Is it not worth trying to best these lower the average returns? Or are these 10 year forecasts all bogus ?

Alot of people state short term is impossible to predict but 10 years are more predictable?

This is where I knew what I know now 10 years ago!

You have short term mentality.  Don't worry, lots of people do.  Re: 4% returns for a decade?  So what?  How about the next 20 or 30 years?  Still 4%? 

OK, I'll concede the point for a second.  If 4% is the best indexing can do over the next decade, then what's the alternative?  If you say "pick individual stocks", you have to understand that you're moving from something with very low risk (buy and hold indexing) to something with very HIGH risk.  So you might make a better return.  Maybe you make 10% instead of 4%.  Whooppee.  You might also LOSE 40% or MORE!!!!!!  That is WAY more likely to kill FI and RE than plodding along at a super-safe 4% returns.

In other words, stop taking the short view and engaging in risky behavior under the mistaken idea that stock picking is the right answer to lower than average expected returns.

This was exactly my point to anyone with this concern.  If the market returns drop, all other investments will still maintain parity and drop accordingly, as that's how financial instruments works.  If I could get a bank CD to return 20% it would be doing that already, but it can't do that as it is dependent on the interest rates the Fed sets, which impact the stock market and on and on.  The stock market, if it drops to 4%, will be doing so based on economic forces that impact EVERY alternative not simply the market.  And since all those individual stocks are making up the stock market average (after all I believe we all understand how math works) that means individual stock returns also drop, otherwise the market average would not drop.  It's a mathematical impossibility for anything else to happen.

So my viewpoint is always to assess what has the best chance of the best return for the least risk and I'm not seeing anything that will overtake the stock market likely to happen in my lifetime.

[caracarn]

So your alternative to index investing is to build your own index?

No, it's called building a portfolio.

No, it's really not.  You are just building a tiny "average".  As I stated in one of my posts earlier, a well run investment club does exactly this, buys 12-18 stocks and hopes to best the market.  And it can happen and for some it does, but it is a ton of work compared to indexing which requires 0 work, so one might argue it is infinitely more work.  Having played that game to ten years, I'd say that it was not worth the effort as we beat the market by less than 1/2% over that time.  And I promise you I thought I was at least as good at doing this as you think you are.