Why Talking About Individual Stocks (and Sectors) Makes You Look Dumb

[frugledoc]

I don’t expect to win over any of the die hard stock/sector pickers but this article is spot on

https://www.whitecoatinvestor.com/individual-stocks-dumb/

[bacchi]

Good article.

This is how a lot of stock pickers delude themselves. They fail to track their actual returns and instead remember only their wins.

Well, the first thing to do is to find out if you are right. How do you do that? You meticulously track your returns (and perhaps even have them audited by an outside firm so you can prove your rare ability to your future investors.) Be sure to include all costs including taxes and the value of your time.

[flipboard]

"Why calling other people stupid makes you look stupid"

He does make some good points in that article, and in fact most people who pick stocks do so without a sensible plan. But he ignores the fact that there are actual ways of picking good stocks - otherwise Warren Buffet and Ben Graham would not be know for what they're known for. Realistically, no one here - including me - is likely to have the skills to pick these stocks. That doesn't negate the fact that they exist.

[Buffaloski Boris]

Well that’s a nice inflammatory title for an article. Carefully phrased to persuade no doubt. Here are some of my humble suggestions for future article titles:

“Individual stocks: the choice of ignorant dupes”
“Are you a moron? Stock picking as evidence of low intelligence”
“Index fund deniers, should they be silenced?”
“The settled science of index stock funds and the threat of individual stock pickers”

[bacchi]

"Why calling other people stupid makes you look stupid"

He does make some good points in that article, and in fact most people who pick stocks do so without a sensible plan. But he ignores the fact that there are actual ways of picking good stocks - otherwise Warren Buffet and Ben Graham would not be know for what they're known for. Realistically, no one here - including me - is likely to have the skills to pick these stocks. That doesn't negate the fact that they exist.

The article does mention that there are great stock pickers. The mutual fund tables show that -- there are some winners over 15 years. The question becomes, then, do ya feel lucky, punk?

[Davnasty]

"Why calling other people stupid makes you look stupid"

He does make some good points in that article, and in fact most people who pick stocks do so without a sensible plan. But he ignores the fact that there are actual ways of picking good stocks - otherwise Warren Buffet and Ben Graham would not be know for what they're known for. Realistically, no one here - including me - is likely to have the skills to pick these stocks. That doesn't negate the fact that they exist.

From the article:

Now, I’m not saying you cannot beat the market, even in the long-term. It is entirely possible that you are one of those rare possessors of this skill and discipline.

[vand]

Here's a small but irrefutable fact about stock investing:

Without us dumb, stupid, illogical, sexually impotent ACTIVE investors buying and selling shares on an individual level there can be NO cleverer, smarter, better performing, better knowing, better looking, sexier PASSIVE investors. None whatsoever.

[frugledoc]

Here's a small but irrefutable fact about stock investing:

Without us dumb, stupid, illogical, sexually impotent ACTIVE investors buying and selling shares on an individual level there can be NO cleverer, smarter, better performing, better knowing, better looking, sexier PASSIVE investors. None whatsoever.

I think the market would survive without the liquidity of individual investors.  The huge amount of under performing active managers and hedge fund managers provide more than enough.

But thanks for willingly wasting your time and underperforming for index investors :)

[vand]

Here's a small but irrefutable fact about stock investing:

Without us dumb, stupid, illogical, sexually impotent ACTIVE investors buying and selling shares on an individual level there can be NO cleverer, smarter, better performing, better knowing, better looking, sexier PASSIVE investors. None whatsoever.

I think the market would survive without the liquidity of individual investors.  The huge amount of under performing active managers and hedge fund managers provide more than enough.

But thanks for willingly wasting your time and underperforming for index investors :)

Fund managers are stock pickers - no different to private investors, just doing it on a bigger scale. Duh.
Passive investors think that large asset managers have an advantage over private investors, whereas the opposite is much more accurate. As a individual private investor, I have advantages that institutional money doesn't.

[Buffaloski Boris]

Here's a small but irrefutable fact about stock investing:

Without us dumb, stupid, illogical, sexually impotent ACTIVE investors buying and selling shares on an individual level there can be NO cleverer, smarter, better performing, better knowing, better looking, sexier PASSIVE investors. None whatsoever.

You forgot "morally degenerate."  Never forget the Morally Degenerate! 

[frugledoc]

Here's a small but irrefutable fact about stock investing:

Without us dumb, stupid, illogical, sexually impotent ACTIVE investors buying and selling shares on an individual level there can be NO cleverer, smarter, better performing, better knowing, better looking, sexier PASSIVE investors. None whatsoever.

I think the market would survive without the liquidity of individual investors.  The huge amount of under performing active managers and hedge fund managers provide more than enough.

But thanks for willingly wasting your time and underperforming for index investors :)

Fund managers are stock pickers - no different to private investors, just doing it on a bigger scale. Duh.
Passive investors think that large asset managers have an advantage over private investors, whereas the opposite is much more accurate. As a individual private investor, I have advantages that institutional money doesn't.

Maybe you should read the article and reconsider?

It includes all these nonsense arguments like your claimed advantage.

[vand]

Here's a small but irrefutable fact about stock investing:

Without us dumb, stupid, illogical, sexually impotent ACTIVE investors buying and selling shares on an individual level there can be NO cleverer, smarter, better performing, better knowing, better looking, sexier PASSIVE investors. None whatsoever.

I think the market would survive without the liquidity of individual investors.  The huge amount of under performing active managers and hedge fund managers provide more than enough.

But thanks for willingly wasting your time and underperforming for index investors :)

Fund managers are stock pickers - no different to private investors, just doing it on a bigger scale. Duh.
Passive investors think that large asset managers have an advantage over private investors, whereas the opposite is much more accurate. As a individual private investor, I have advantages that institutional money doesn't.

Maybe you should read the article and reconsider?

It includes all these nonsense arguments like your claimed advantage.

I read it. It brings nothing new to the table and relies on the usual law of averages fallacy.

Here is MY main active portfolio for the last year.... and in case you are wondering, this is not a cherry-picked timeframe, it just so happens that it was a year ago to the day that I tracked my portfolio as I had just finished paying off my mortgage at that time as was able to commit much more money to my investments.

[vand]

and here is how my PP investments have done since I started slugging money into that.. again, not cherry picked, just coincides with when I started committing serious money to the strategy which coincides with the start of this tax year

[vand]

The EMH argument that active investors can't outperform the market on a risk adjusted basis can just as easily be flipped on its head: you also can't underperform it... unless you overtrade.

If I put 100% of my net worth in any random single stock, my expected return is exactly the same as it is if I put it in an index fund if the market is all-knowing and all powerful. Sure, my reasonable range of outcomes would be much wider, but overall the midpoint should be the exact same as the whole index.

[Davnasty]

Here's a small but irrefutable fact about stock investing:

Without us dumb, stupid, illogical, sexually impotent ACTIVE investors buying and selling shares on an individual level there can be NO cleverer, smarter, better performing, better knowing, better looking, sexier PASSIVE investors. None whatsoever.

I think the market would survive without the liquidity of individual investors.  The huge amount of under performing active managers and hedge fund managers provide more than enough.

But thanks for willingly wasting your time and underperforming for index investors :)

Fund managers are stock pickers - no different to private investors, just doing it on a bigger scale. Duh.
Passive investors think that large asset managers have an advantage over private investors, whereas the opposite is much more accurate. As a individual private investor, I have advantages that institutional money doesn't.

So when you said "on an individual level" you meant...?

[Davnasty]

Here's a small but irrefutable fact about stock investing:

Without us dumb, stupid, illogical, sexually impotent ACTIVE investors buying and selling shares on an individual level there can be NO cleverer, smarter, better performing, better knowing, better looking, sexier PASSIVE investors. None whatsoever.

I think the market would survive without the liquidity of individual investors.  The huge amount of under performing active managers and hedge fund managers provide more than enough.

But thanks for willingly wasting your time and underperforming for index investors :)

Fund managers are stock pickers - no different to private investors, just doing it on a bigger scale. Duh.
Passive investors think that large asset managers have an advantage over private investors, whereas the opposite is much more accurate. As a individual private investor, I have advantages that institutional money doesn't.

Maybe you should read the article and reconsider?

It includes all these nonsense arguments like your claimed advantage.

To be fair I've heard other arguments for individual investors having an advantage over fund managers that were not addressed in the article. For example, fund managers will lose investors if they see sudden significant drops whereas an individual investor can take greater risks and accept that a big loss might occur once in a while or that some opportunities are too small for a fund manager to even bother with. I'm not commenting on whether or not those arguments are legit, but they weren't refuted in the article.

[Buffaloski Boris]

The EMH argument that active investors can't outperform the market on a risk adjusted basis can just as easily be flipped on its head: you also can't underperform it... unless you overtrade.

If I put 100% of my net worth in any random single stock, my expected return is exactly the same as it is if I put it in an index fund if the market is all-knowing and all powerful. Sure, my reasonable range of outcomes would be much wider, but overall the midpoint should be the exact same as the whole index.

The EMH also seems to imply that if you were to select say 20 stocks at random, then you would do just as well as the market. So what’s the practical advantage then in owning an index fund in an environment where trades are very inexpensive or in some cases, free? With any fund there are management and transaction fees. Plus there are distributions that have tax implications. You have no choice about those. You would have a choice if you were to simply buy those random 20 stocks. You could choose when to take any capital gains or losses, and if you don’t (or do) want dividends, can select your 20 random stocks from a subset of stocks that doesn’t (or alternatively does) pay dividends. For a buy and hold investor, the cost of buying and maintaining a portfolio of individual stocks is low and with recent changes in trade prices in the US driving towards zero, becoming almost advantageous from a fee perspective.

The advantage I see to that is you could slice and dice your portfolio in accordance with your preferences. Don’t like dividend stocks? Don’t include them. Don’t like the FAANGs? Well exclude them too.  Love midcaps? Add those to the mix. Perhaps the “index” of the future isn’t an index at all, but a basket of stocks picked randomly that better reflect idiosyncratic needs.

[AdrianC]

The EMH argument that active investors can't outperform the market on a risk adjusted basis can just as easily be flipped on its head: you also can't underperform it... unless you overtrade.

If I put 100% of my net worth in any random single stock, my expected return is exactly the same as it is if I put it in an index fund if the market is all-knowing and all powerful. Sure, my reasonable range of outcomes would be much wider, but overall the midpoint should be the exact same as the whole index.

The market incorporates all (most?) known information. It can't know what can't be known.

[Chris Pascale]

Here's a small but irrefutable fact about stock investing:

Without us dumb, stupid, illogical, sexually impotent ACTIVE investors buying and selling shares on an individual level there can be NO cleverer, smarter, better performing, better knowing, better looking, sexier PASSIVE investors. None whatsoever.

You forgot "morally degenerate."  Never forget the Morally Degenerate!

And everything Clark Griswald called his boss when he got his Christmas bonus - https://www.youtube.com/watch?v=TQXuazYI_YU

Starts at 1:42

[Chris Pascale]

I sometimes get some good picks, and talk to friends about them, but always feel like a moron when I do. For example, about a year ago I wrote a good friend that if Fannie Mae went below a dollar, I'd go all-in with my whole account. His reply was that that would not be wise. And he was right.

I started picking up shares a little each month, but then it doubled all of a sudden, and I wasn't sure why, so took the profits and the capital, and got the heck out of there.

[BicycleB]

The EMH argument that active investors can't outperform the market on a risk adjusted basis can just as easily be flipped on its head: you also can't underperform it... unless you overtrade.

If I put 100% of my net worth in any random single stock, my expected return is exactly the same as it is if I put it in an index fund if the market is all-knowing and all powerful. Sure, my reasonable range of outcomes would be much wider, but overall the midpoint should be the exact same as the whole index.

The EMH also seems to imply that if you were to select say 20 stocks at random, then you would do just as well as the market. So what’s the practical advantage then in owning an index fund in an environment where trades are very inexpensive or in some cases, free?

If I understand correctly, about half the gains in the stock market come from a tiny % of the stocks, maybe 1 out of 100 companies. If so, then the odds are high that a 20-stocks-at-random portfolio would fail to capture any of the winners. In other words, such a portfolio would have something like a 4-in-5 chance of underperforming.

Choosing a single stock, you'd have roughly a 99% chance of not getting a big winner. Thus there'd be roughly a 99% chance that your pick's range would have a midpoint equal to about half the gains of the market. (Sure, there's a 1% chance of getting the big winner, and if you average that in, then yes the overall midpoint is the same as the market. But the odds of meeting or exceeding the overall midpoint with your one pick would be much less than 50%.)

So there's a big question to answer. Is it important to you to obtain returns that are at least close the market? If so, the index is likely to succeed but the individual picks are not.

If I understand that stats correctly. Not sure what the odds of that are, though...  :)

ETA: Come to think of it, I don't need to talk about individual stocks to make myself look dumb. I can do that all by myself!

[Scandium]

Well that’s a nice inflammatory title for an article. Carefully phrased to persuade no doubt. Here are some of my humble suggestions for future article titles:

“Individual stocks: the choice of ignorant dupes”
“Are you a moron? Stock picking as evidence of low intelligence”
“Index fund deniers, should they be silenced?”
“The settled science of index stock funds and the threat of individual stock pickers”

I wouldn't care so much about the active investors here if they didn't insist on being so extremely butthurt every time someone points out the flaws in this approach. They know data, experience, and almost every person on this forum does not believe in their supposed supersmart, special snowflake, I'm-totally-not-like-the-others approach, yet they keep coming back duking it out over minute details and insisting the rest of us are "silencing" them when people refuse to humor the same blabber we've heard a thousand times before. Almost as if proving to others that their investing works is more important than, you know; it working. The victim complex is getting old.

[Buffaloski Boris]

If I understand correctly, about half the gains in the stock market come from a tiny % of the stocks, maybe 1 out of 100 companies. If so, then the odds are high that a 20-stocks-at-random portfolio would fail to capture any of the winners. In other words, such a portfolio would have something like a 4-in-5 chance of underperforming.

Choosing a single stock, you'd have roughly a 99% chance of not getting a big winner. Thus there'd be roughly a 99% chance that your pick's range would have a midpoint equal to about half the gains of the market. (Sure, there's a 1% chance of getting the big winner, and if you average that in, then yes the overall midpoint is the same as the market. But the odds of meeting or exceeding the overall midpoint with your one pick would be much less than 50%.)

So there's a big question to answer. Is it important to you to obtain returns that are at least close the market? If so, the index is likely to succeed but the individual picks are not.

If I understand that stats correctly. Not sure what the odds of that are, though...  :)

ETA: Come to think of it, I don't need to talk about individual stocks to make myself look dumb. I can do that all by myself!

I’ve heard about that study. I wonder if this is it?

http://csinvesting.org/wp-content/uploads/2017/05/Bessembinder-Do-Stocks-Outperform-Treasury-Bills.pdf

It’s not 1 in 100, but it’s a very small percentage according to the author. Something else I noticed was that it appears that equal weighted indexes did somewhat better than the cap weighted. Those were my takeaways from a brief scan of a long paper.

[BicycleB]

@Buffalo Chip - wow, what a great study! Thanks for posting.

I've never seen any of the original research on this. Bookmarking. Just reading the first few pages is eye opening.

58% of stocks underperform one month Treasuries through the entire life of the big CRSP database (NYSE+NASDAQ+Amex, 1926-2015)...
4% of stocks account for all of the gains in the market...
less than half of monthly CRSP returns are positive...
more than half of stocks deliver lifetime negative returns...
less than one-third of one percent of the stocks produced more than half of the gains...

Plus the simulations to analyze the single stock strategy:
single-stock strategy underperformed value-weighted market in 96% of simulations
single-stock strategy underperformed equal-weighted market in 99% of simulations

And the study included all stocks that were delisted from the exchanges in question.

Holy cow.

[Buffaloski Boris]

@Buffalo Chip - wow, what a great study! Thanks for posting.

I've never seen any of the original research on this. Bookmarking. Just reading the first few pages is eye opening.

58% of stocks underperform one month Treasuries through the entire life of the big CRSP database (NYSE+NASDAQ+Amex, 1926-2015)...
4% of stocks account for all of the gains in the market...
less than half of monthly CRSP returns are positive...
more than half of stocks deliver lifetime negative returns...
less than one-third of one percent of the stocks produced more than half of the gains...

Plus the simulations to analyze the single stock strategy:
single-stock strategy underperformed value-weighted market in 96% of simulations
single-stock strategy underperformed equal-weighted market in 99% of simulations

And the study included all stocks that were delisted from the exchanges in question.

Holy cow.

You’re welcome. At first blush it certainly doesn’t shore up my position that individual stocks are a good way to invest. I’ll have to read it in detail. 

Given the choice of being right or honest, I’ll take honest. But I prefer being both honest and right. 😁