Author Topic: Your Top Five Stock Positions and Why?  (Read 19915 times)

Marmot

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Your Top Five Stock Positions and Why?
« on: July 01, 2013, 12:42:31 PM »
What are your top 5 stock positions? Also, please provide a brief summary of your reason(s) for holding each, and your general strategy. Thoughts and constructive criticism appreciated.

For me:

General: Long-term value investing (attempt to diversify among many different industries, regions of world, while never having less than 15 holdings or more than 25 between myself and my fiance). I like to use ratios, while also reading articles; on the rare occasion, I listen to calls and skim SEC filings. temporarily avoiding bonds and bond funds. My fiance and I are both 29 yrs old.

1) Nvidia Co. (nvda): visual computing company; market leader for desktop/laptop graphics cards (also with exposure to mobile and supercomputing)  . Cash position represents almost half of share price (they have ~$3.75 billion) and relatively low P/E give a nice floor. I think punishment for desktop/laptop exposure is overblown, as nvidia targets the higher end of the market. Great leadership. Much smaller than two major competitors Intel and Qualcomm, which I view as a plus due to higher ceiling. Other main competitor, AMD, is in serious financial trouble. Over next year, they are returning $1bill to shareholders (via buyback and dividend); market cap is only a little over $8 billion.

2) Apache Co. (apa): Explores, develops and produces oil and natural gas. Really like valuation; EV/EBITDA is only 3.81. 20% of revenue is from Egypt which is a big concern, though I think the stock was already fairly punished for this. Poor financial situation, though hoping for recovery if they can sell some assets.

3) Expeditors International of Washington (expd): International Logistics and freight forwarding company. No debt, 1.4B in cash. Great leadership; valuation is ok; like business model with not much capital (they do not own any ocean carriers or planes). Am concerned regarding potential airfreight stagnation; this is a bet on international trade. I was a customer of their customs clearance division at a past job; was very impressed.

4) WellPoint (wlp): Managed health care company (health insurance company). Blue Cross Blue Shield Licensee in California and about a dozen other states. Low PEG Ratio (.89) and lower P/E than a lot of competitors. With an acquisition, getting big exposure to Medicaid business, which I think is a big opportunity due to affordable care act. I think the drop in valuation of insurance companies due to the affordable care act was overdone due to lack of understanding of a very confusing law. 35 million beneficiaries.

5) Bank of America (bac): Large multinational bank. Very low PEG ratio, and future P/E is estimated to be lower than most peers. Due to mismanagement relative to peers, has more room for efficiency gains. In general, from my understanding, banks benefit from rising interest rates. Due to still having potential exposure to toxic assets and litigation, this position has me worried, so will look closely at finding a replacement.

Joet

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Re: Your Top Five Stock Positions and Why?
« Reply #1 on: July 01, 2013, 12:46:49 PM »
None (more precisely 'all) , because I can't outperform the market

mpbaker22

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Re: Your Top Five Stock Positions and Why?
« Reply #2 on: July 01, 2013, 01:42:18 PM »
I have some individual stocks and REITS - Biggest investments are index funds and AIG.  AIG is a hold-over from a college, sort of "fun" account.  Smaller investments in other individual stocks include Ameren, some REITs, Citigroup, HP.
« Last Edit: July 01, 2013, 01:43:53 PM by mpbaker22 »

mlipps

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Re: Your Top Five Stock Positions and Why?
« Reply #3 on: July 01, 2013, 01:54:07 PM »
None (more precisely 'all) , because I can't outperform the market

Yup.

aj_yooper

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Re: Your Top Five Stock Positions and Why?
« Reply #4 on: July 01, 2013, 02:08:30 PM »
My mantra is diversify and index.  got.com education  Now, not a single issue in the lot.

fiveoclockshadow

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Re: Your Top Five Stock Positions and Why?
« Reply #5 on: July 01, 2013, 02:11:27 PM »

1) Index fund - because lowest risk/highest return compared to any individual stock
2) Another Index fund - because mixed asset classes both increase return and lower risk
3) Another Index fund - because mixed asset classes both increase return and lower risk
4) Another Index fund - because mixed asset classes both increase return and lower risk
5) Another Index fund - because mixed asset classes both increase return and lower risk

If you think you are smarter than the market you are fooling yourself.  And it will cost you a lot of money over time.  Even 0.5% inefficiency will cost you a lot of money over time and it would be remarkable for you to do only 0.5% worse than a proper diversified portfolio of index funds over any reasonable holding period.

Stock picking and market timing simply do not work and are not a valid long term investment strategy.  Your post is actually a bit of an oxymoron - you say you are doing "long term value investing" but then you list individual stocks.  Those two things do not go together.  You want low cost broad index funds in different asset classes (i.e. low correlation), three to five of them, re-balanced annually.

The research on this is rock solid and has been well known for at least two decades.  If you are doing something other than this you are an unwitting victim of brokerage and managed fund advertising.  They don't care about your returns, they care about your fees (commissions on stocks, expenses on funds).  Similarly the financial media wants your eyeballs for advertising dollars and they can only get that by convincing you to speculate with stock picking.

Even if you manage your fees carefully and trade infrequently you were still sold a bill of goods - they've sold you on the concept of stock picking/market timing because they need to sell that concept to get people to invest in actively managed funds.  They may not make a lot of money off of you, but in the process of trying to get money from others they've convinced you that stock picking/market timing is the right strategy and you'll lose a lot of your own money doing that.

15 to 25 individual stock holdings is vanishingly small portfolio and remarkably undiversified.  You are currently in the worst possible place - higher risk and lower return at the same time compared to even a single broad index (and you should really have a few broad index funds, not just one).

You'll probably want to do some reading, particularly on index funds, asset classes and modern portfolio theory.  The MMM reading list is a good place to start though a bit scattered.  If you want the fastest and most concise overview then "The Intelligent Asset Allocator" by Bernstein is good.  He also has a few other books that give a gentler introduction to portfolio theory.  "Common Sense on Mutual Funds" by Bogle is broader in scope and is a good start if you don't already understand how bad an idea actively managed portfolios are (e.g. your own stock picking or a actively managed mutual fund).

The good news is you are young and you are saving/investing - an excellent place to be.  Get that money into a more sound portfolio and you are on an excellent track for FI/RE.

brewer12345

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Re: Your Top Five Stock Positions and Why?
« Reply #6 on: July 01, 2013, 02:12:33 PM »
I have been working on reducing my exposure to single names this year as I prepare to try out ER/ESR next year, but it is still a work in progress.  I really only have 4 material individual positions, but for the sake of symmetry I will toss in the next biggest to make it 5.

1) Navios Maritime Acquisition (NNA): refined product and crude oil shipper run by one of the best management teams in the shipping industry.  I got into this via making a killing on the warrants when this was a SPAC.  Holding now because the product tanker business is about to turn (cycle) and this company is adroitly positioned to do very well as a result.  I sold their bonds (juicy yield) earlier this year to reduce my exposure and cash in on appreciation at a peak in the high yield market.

2) Navios Maritime Holdings (NM): diversified owner of dry bulk, refined/crude tankers, a few boxships, and the largest independent port operation on the Parana river system in South America.  I think this is run by the best management team in the industry and the company suffers from a conglomerate discount.  The CEO owns over 20% of the company and I expect that she will pilot this thing to calm waters and a rich bounty over a period of years.  I took some money off the table here earlier this year to reduce a concentration (I also sold their bonds).

3) Ford (F): They sell trucks.  After years of cost cutting and right-sizing the production capacity of the company, management is now faced with lots of pent up demand for their product.  They are going through a messy reorg of their European operations, but the US operations are by far the bulk of the company and they are doing very well.  Stock looks cheap to me.

4) Chesapeake Energy (CHK).  Oil and gas exploration and production.  The company has am amazing collection of driling opportunities that appear unappreciated by the market.  Their assets are encumbered by too much debt, which management is in the process of working down.  Under pressure by activists, the company booted its charismatic but self-dealing CEO and crony board and is now being run by straight arrows (management) and the people who actually own the stock (board).  Insiders have been buying stock on the open market to beat the band, so I believe this turnaround story will pan out.  I expect that this thing either gets bought out or turned into a staid, conservative operator with a much higher valuation.

5. Olin Corp. (OLN).  This thing is the unlikely union of a basic chemicals company with the manufacturer of Winchester brand ammunition.  The ammo business is running flat out and making the most money it ever has (Thank you, Mr. President).  The chemical business has been kind of soft lately due to industry overcapacity and some softness in demand.  Over time I expect that the chemicals business will do better as teh industry rationalizes capacity and the ammo business will slow down.  The company has consistently been a good dividend payer/grower and management looks pretty solid.  If this one made another trip below $20 a share I would add to my position and possibly make it a material one.

footenote

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Re: Your Top Five Stock Positions and Why?
« Reply #7 on: July 01, 2013, 02:21:05 PM »
+1 fiveoclockshadow's advice and reading suggestions.

I have been investing for 30 years and I have never once chosen and purchased an individual stock. Our non-residential real estate holdings: 91% indices and broad funds, plus 9% higher risk investments (like a Master Limited Partnership).

skyrefuge

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Re: Your Top Five Stock Positions and Why?
« Reply #8 on: July 01, 2013, 07:05:55 PM »
1) Philips Electronics (PHG): I used to work for them, so I acquired a bunch of their stock via their Stock Purchase Plan and Restricted Share Grants. I haven't sold (all of) them because A) it gives me a bit of exposure/experience with individual stocks, providing hands-on knowledge about dividends, taxes, and single-stock volatility, and B) I'm a fucking moron.

2) Apple Inc. (AAPL): It's the highest-weighted component of the S&P 500 index

3) Exxon Mobil Corp (happy to have no idea what the ticker symbol is!): It's the 2nd-highest-weighted component of the S&P 500 index

4) Microsoft (MSFT?): It's the 3rd-highest-weighted component of the S&P 500 index

5) General Electric (GE?):  It's the 4th-highest-weighted component of the S&P 500 index

Sorry to not provide full accuracy on the ticker symbols, but hopefully these companies have a website or something where you can find out more about them?

grantmeaname

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Re: Your Top Five Stock Positions and Why?
« Reply #9 on: July 01, 2013, 08:04:32 PM »
Exxon is NYSE:XOM, and Microsoft is NASDAQ:MSFT. The more you know...

Kriegsspiel

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Re: Your Top Five Stock Positions and Why?
« Reply #10 on: July 01, 2013, 08:18:08 PM »
When I first started investing, I was using the "Magic Formula" method that Joel Greenblatt came up with.  Besides having the most off-putting name for an investing strategy, it was just too nerve wracking for me.  I ended up a bit in the red, with most of the gains coming from just one stock, which is probably a lot like how the total stock market index works, but I'd rather not see it happening. So I have all my stocks in TSM and TISM.

DryIceZ33

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Re: Your Top Five Stock Positions and Why?
« Reply #11 on: July 01, 2013, 08:26:16 PM »
My after-tax portfolio has two strategies, so my top stocks will be a reflection of these:
1) Capital gains through strategies which have historically outperformed the market (see Joel Greenblatt's little blue book that beats the market).  Formula is to sort all stocks by Earnings Yield and Return on Capital, buy and hold the gains for slightly longer than a year to sell, and sell losses early.

2) Income through dividend growth stocks, which will be used to practice investing for when I reach financial independence.   I generally run all of the S&P dividend achievers through the formula as a prescreen, and then buy the few at the top if their business case makes sense to me.


The top 5:
1) VPU - Vanguard Utilities ETF
I consider it to be a relatively safe dividend payer - because the vast majority of people in the US are going to need utilities.  I consider the only significant risk to be government regulation.  I consider it a buy when the dividend yield is greater than the yield on a 30 year treasury bond.

2) KMB - Kimberly Clark
Another relatively safe dividend payer in the consumer products market, and a dividend achiever that's increased it's dividends for at least the past 10 years. 

3) MSFT - Microsoft
Fits both of my portfolios, as it pays a decent dividend, and also showed up in the formula.   I plan to sell in another few months, as it has been nearly a year, and had some nice gains.

4) SCSS - Select Comfort
It showed up in the formula a few months ago.  I have another 9 months to hold it before I can sell.  They make the "Sleep Number" bed, and are a growth strategy riding the trend of Americans preferring premium mattresses to box spring.

5) UTHR - United Therapeutics  Corp
A pharmaceutical company that focuses on drugs for Heart Disease, as the US population ages, more people will need drugs for heart disease - pretty simple growth strategy.  This one also showed up in the formula.


Marmot

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Re: Your Top Five Stock Positions and Why?
« Reply #12 on: July 01, 2013, 10:33:29 PM »
If you think you are smarter than the market you are fooling yourself.  And it will cost you a lot of money over time.  Even 0.5% inefficiency will cost you a lot of money over time and it would be remarkable for you to do only 0.5% worse than a proper diversified portfolio of index funds over any reasonable holding period.

Though I disagree with your logic, the general advice that you are giving regarding index funds would be beneficial to a lot of people. "Setting it and forgetting it" is dangerous with individual stocks. In my opinion, investing in individual stocks should only be done if you are willing and able to put in a lot of time/research, regularly monitor, have the proper disposition and know how to interpret financial statements and ratios. I have outperformed the S&P since I started investing in individual stocks 6 yrs ago; I do not believe my portfolio beta was much different than 1.0 during holding period.

Stock picking and market timing simply do not work and are not a valid long term investment strategy.  Your post is actually a bit of an oxymoron - you say you are doing "long term value investing" but then you list individual stocks.  Those two things do not go together.  You want low cost broad index funds in different asset classes (i.e. low correlation), three to five of them, re-balanced annually.

The research on this is rock solid and has been well known for at least two decades.  If you are doing something other than this you are an unwitting victim of brokerage and managed fund advertising.  They don't care about your returns, they care about your fees (commissions on stocks, expenses on funds).  Similarly the financial media wants your eyeballs for advertising dollars and they can only get that by convincing you to speculate with stock picking.

I see that you believe in at least the "semi-strong" version of the efficient-market hypothesis (meaning that you do not believe in technical analysis or fundamental analysis). I agree regarding technical analysis, that you cannot make predictions based on historical stock prices. I believe that fundamental analysis has utility though, and that the market sometimes misprices stocks in the short-run.

Per wikipedia, "Value investing" is buying securities that appear underpriced based on some form of fundamental analysis; not sure where you are deriving your definition from. Also per wikipedia under the entry for efficient-market hypothesis, "Empirical evidence has been mixed, but has generally not supported strong forms of the efficient-market hypothesis".  I am not of the mindset that wikipedia is infallible; simply pointing out that your claims range from being exaggerated to being false. There is concrete data regarding mutual funds on average underperforming index funds; this is not fully applicable to the claims that you are making regarding stock picking though (as there are several other contributing factors for mutual funds).

I agree in general that the financial industry can be predatory towards retail investors. Discount brokers combined with efficient tax management are the way to go... Even though a lot of index funds have very low fees, they still all have annual fees (mutual funds, as you stated, are much worse)....

15 to 25 individual stock holdings is vanishingly small portfolio and remarkably undiversified.  You are currently in the worst possible place - higher risk and lower return at the same time compared to even a single broad index (and you should really have a few broad index funds, not just one).

You misinterpreted my original post (I suppose I could have been more explicit). We have more than just individual stocks in our holdings; we have etfs and other holdings. Our single largest holding is a "target retirement holding" at one of our employers. I think there is also a risk of being too diversified.

You'll probably want to do some reading, particularly on index funds, asset classes and modern portfolio theory.  The MMM reading list is a good place to start though a bit scattered.  If you want the fastest and most concise overview then "The Intelligent Asset Allocator" by Bernstein is good.  He also has a few other books that give a gentler introduction to portfolio theory.  "Common Sense on Mutual Funds" by Bogle is broader in scope and is a good start if you don't already understand how bad an idea actively managed portfolios are (e.g. your own stock picking or a actively managed mutual fund).

The good news is you are young and you are saving/investing - an excellent place to be.  Get that money into a more sound portfolio and you are on an excellent track for FI/RE.

I appreciate your wanting to help, and thank you for the constructive criticism. Our difference is that I believe there is merit in fundamental analysis. Human behavior/emotion is a contributing factor to the short-term prices of individual stocks.



ncornilsen

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Re: Your Top Five Stock Positions and Why?
« Reply #13 on: July 01, 2013, 11:51:23 PM »
I hold index funds nearly exclusively, but I do own one individual stock, PCP. It's solidly performed year over year, they're managed well, make good acquisitions...  I've long ago pulled the money I invested out of the stock (IE, if it goes to 0, I still am even.). They pay a small dividend but it isn't worth buying the stock for.

Khan

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Re: Your Top Five Stock Positions and Why?
« Reply #14 on: July 02, 2013, 12:56:39 AM »
1. SIRI: SiriusXM. Majority owned by Liberty Media(LMCA) as of this year. SIRI has an extremely large buyback plan, and is generating very large amounts of cash. LMCA has intentions to perform a RMT(Reverse Morris Trust spinoff) of SIRI in the next several years.

2. INTC: Intel corporation. I admit, this is a bad position for me to have by many people's judgement as I am currently employed by them(and I fully acknowledge that risk). That said, I bought most of my position at a yield of ~4-4.5%, continue to participate in the ESPP. I like the dividend yield, I like the P/E, and I think the companies forays into mobile will be accretive to the bottom line, and our ability to outspend the competition, combined with superior manufacturing ability will soon turn doubters away. Stock has been stagnant for 10+ years which is too many people's argument against it(inside the company especially... poor people don't understand >_>). I own it because I believe it's undervalued, I believe it has a large moat, and it pays an extremely attractive dividend, as well as performing a strong and sustained stock buyback that has actively reduced outstanding share count.

3. AIG: AIG. I bought in after the treasury sold off the last of its stake. I believe it's undervalued, and management has been taking actions I like. Stock buybacks in progress, and management has stated plans to eventually re-initiate the dividend. I think too many people are still punishing this stock from the crash.

4. BAC: Bank of America. Same reason for ownership as AIG.

5. CSCO: Cisco. Pays an attractive dividend, has an attractive moat, and an attractive valuation. I don't have anything to say on it really, it's a complex and ever-changing company that is almost integral to the future of the internet.

dmn

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Re: Your Top Five Stock Positions and Why?
« Reply #15 on: July 02, 2013, 01:47:53 AM »
"Setting it and forgetting it" is dangerous with individual stocks. In my opinion, investing in individual stocks should only be done if you are willing and able to put in a lot of time/research, regularly monitor, have the proper disposition and know how to interpret financial statements and ratios.

Why do you think that buy and hold is dangerous for a portfolio of individual stocks? After all, buying and holding an index fund is basically buying and holding lots of individual stocks, why should a portfolio of 20 or more individual stocks be different?

SnackDog

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Re: Your Top Five Stock Positions and Why?
« Reply #16 on: July 02, 2013, 03:23:22 AM »
I thought it was illegal to discuss anything but dumb index funds on these forums, even if one was FI due to some stellar stock picking.  In any case, any number of web sites and magazines are full of hot tips.  You can get great arguments for reasons to buy or sell nearly any stock.  One magazine I read posts opposing expert opinions on a different stock each month: one bull, one bear.

fiveoclockshadow

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Re: Your Top Five Stock Positions and Why?
« Reply #17 on: July 02, 2013, 05:14:54 AM »
I have outperformed the S&P since I started investing in individual stocks 6 yrs ago; I do not believe my portfolio beta was much different than 1.0 during holding period.

I'm glad you have had good returns, and hope that you continue to do so.  You must realize, however, that six years is ridiculously short for evaluating stock picking performance.  Even in a widely diversified fund it takes over ten years to measure performance rather than noise (i.e. volatility).  You are comparing just 15 or 20 stocks to a broad index and you have no way of evaluating random fluctuation from "skill".  Put another way, if we picked 15 to 20 stocks at random over six years we would expect about half of those random portfolios to out perform the S&P.  At this point six years on we can't really tell if you or a dart board is the better stock picker :)

I believe that fundamental analysis has utility though, and that the market sometimes misprices stocks in the short-run.

This is most likely true, but very difficult to evaluate.  Again, a very noisy signal.  The evidence to date is that "successful" stock pickers are indistinguishable from "lucky" stock pickers in that for short term their performance improvement is no better than you'd expect from the volatility of small portfolios and long term their returns are worse than large portfolios.

You misinterpreted my original post (I suppose I could have been more explicit). We have more than just individual stocks in our holdings; we have etfs and other holdings. Our single largest holding is a "target retirement holding" at one of our employers. I think there is also a risk of being too diversified.

Ah, my bad.  Then I really wouldn't criticize doing some "fun" stock picking in a small fraction of your holdings.  Lots of people do it and it rarely has a significant negative impact.  And it is often very educational as well.

Our difference is that I believe there is merit in fundamental analysis. Human behavior/emotion is a contributing factor to the short-term prices of individual stocks.

I think that summarizes it.  I do agree behavior is a strong component of short-term volatility. The question is can you evaluate what that emotion is, how long it will persist and distinguish it from fundamentals you may have missed or will simply change in the time period you have to wait for emotion to "correct".  Having known a number of careful and intelligent investors over the past twenty years who have tried to use fundamental analysis to reap gains in excess of the broader market the results have not been convincing at all.  In general, each person who has appeared to be "doing it right" for quite some time eventually regresses to the mean and usually below it.

Anyway, it sounds like you know the risk you are undertaking, have it as a small component of your portfolio and are at least only going long in individual securities.  I really can't say anything bad about that.

Best of luck! (And sorry for jumping in with the unsolicited advice)
« Last Edit: July 02, 2013, 05:28:23 AM by fiveoclockshadow »

limeandpepper

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Re: Your Top Five Stock Positions and Why?
« Reply #18 on: July 02, 2013, 05:32:51 AM »
I feel like this forum is really biased against individual stocks so I'll jump in and hopefully provide some balance. I'm not trying to convince anyone, it's not for everyone - heck, it may not even be for me, but I think there are just way too many assumptions and too much derision about this topic. The same phrases are regurgitated without any inclination to keep an open mind to at least accept that it may work for people who choose to do it properly.

Now, personally, I don't know if I have the personality and character for picking individual stocks for long term investment. BUT I do know people who have done well out of it. They are sensible, conservative, long-term investors, not speculative traders. They take their time to study and research individual companies and their financial reports. These people include those in my family and extended family. They have been investing for 10 - 30+ years, and have come out ahead. I agree that not everyone can - or should - do this. But there is no need to tar all individual stock investors with the same brush.

pom

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Re: Your Top Five Stock Positions and Why?
« Reply #19 on: July 02, 2013, 07:00:05 AM »
I agree with limeandpepper.

It is just math, assuming that you buy and hold your stocks (chosen randomly), you should have a 50-50 chance of beating the index each year. Probably 51% if you factor in the 0.05% fees of index funds.

That being said, few people have the discipline to buy and hold for years and decades. Most people just want to trade and each time they lose the bid-ask spread plus the brokerage fees.

mpbaker22

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Re: Your Top Five Stock Positions and Why?
« Reply #20 on: July 02, 2013, 07:07:20 AM »
There is something to be said for a potential decline in index funds due to baby boomers selling and no one buying.  After all, stock prices are really just a function of supply and demand even if S&D are a function of the underlying security.

What do other people think of this?  I'm not saying I expect it to happen, but it's a possibility.

http://earlyretirementextreme.com/the-major-risks-of-buy-and-hold-index-investing.html

Left

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Re: Your Top Five Stock Positions and Why?
« Reply #21 on: July 02, 2013, 07:14:13 AM »
why would they sell them off that quickly? They need something to keep them going after they retire, or are they planning to buy annuities and live off social security?

It'd still be piecemeal which isn't much different than now. Besides if it did decline, I'll buy them up at discount :D

mpbaker22

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Re: Your Top Five Stock Positions and Why?
« Reply #22 on: July 02, 2013, 07:36:24 AM »
why would they sell them off that quickly? They need something to keep them going after they retire, or are they planning to buy annuities and live off social security?

It'd still be piecemeal which isn't much different than now. Besides if it did decline, I'll buy them up at discount :D

Maybe, I'm wrong, but I don't think anyone said it would happen quickly.  But if you have more retirees than workers, at least relative to 30 years ago, you'll have several decades of higher supply than demand -> lower prices.  Worded differently, if you have 50 Million people selling over 30 years and only 40 million buying, you'll see prices go down.
Buying at a "discount" won't necessarily work if this is the case.   The Bloomberg article he links to covers some more too.

I tried to disclaim that I don't necessarily agree, but it's something worth discussing, IMO.

brewer12345

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Re: Your Top Five Stock Positions and Why?
« Reply #23 on: July 02, 2013, 08:36:25 AM »
What a shock that FYC2 has yet to post here...

Marmot

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Re: Your Top Five Stock Positions and Why?
« Reply #24 on: July 02, 2013, 08:46:12 AM »
"Setting it and forgetting it" is dangerous with individual stocks. In my opinion, investing in individual stocks should only be done if you are willing and able to put in a lot of time/research, regularly monitor, have the proper disposition and know how to interpret financial statements and ratios.

Why do you think that buy and hold is dangerous for a portfolio of individual stocks? After all, buying and holding an index fund is basically buying and holding lots of individual stocks, why should a portfolio of 20 or more individual stocks be different?

I do not think that buying, holding, monitoring, evaluating for changes in risk and re-balancing is dangerous (rebalancing could even only be once a year). I think that buying and holding and not paying attention is dangerous. If you do not pay attention, you will likely not be able to maintain diversification; ie, if your banking stock outperforms everything else in your portfolio by a large amount, you will eventually have too much exposure to one industry and one company. Instead of taking away from a winner if you still like the valuation and state of the company, then instead of reducing that position, just contribute more to other positions in your portfolio to improve diversification. I am not saying you need to check every day; just read the occasional article and check status several times per year (I like to do more than that though).

Index funds on the other hand give you the luxury of not having to pay attention as much or worry about diversification anywhere near as much (other than rebalancing your asset allocation if you want to have a certain ratio of equities to fixed income and/or commodities and/or realestate; and maintain a certain level of international exposure).

Marmot

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Re: Your Top Five Stock Positions and Why?
« Reply #25 on: July 02, 2013, 09:14:42 AM »
I think that summarizes it.  I do agree behavior is a strong component of short-term volatility. The question is can you evaluate what that emotion is, how long it will persist and distinguish it from fundamentals you may have missed or will simply change in the time period you have to wait for emotion to "correct".  Having known a number of careful and intelligent investors over the past twenty years who have tried to use fundamental analysis to reap gains in excess of the broader market the results have not been convincing at all.  In general, each person who has appeared to be "doing it right" for quite some time eventually regresses to the mean and usually below it.

Anyway, it sounds like you know the risk you are undertaking, have it as a small component of your portfolio and are at least only going long in individual securities.  I really can't say anything bad about that.

Best of luck! (And sorry for jumping in with the unsolicited advice)

I do not think that my short track record has much significance positive or negative; mostly just included to share that I am not attempting to take on excess systemic risk to beat the market (debated not including in previous post).

I agree that fundamental analysis is difficult; if a person is able to be right more often then wrong regarding fundamental analysis, while also being careful to not have too much exposure to growth stocks, I think it has potential to pay of over longterm.

I welcome advice, as I both enjoy debate and appreciate the opportunity to continually re-evaluate my worldview so that I avoid getting stuck in a paradigm.

An intangible benefit of individual stock picking is it also caters to my ego a little bit, haha (just gotta make sure that I am still able to remain level-headed).




Marmot

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Re: Your Top Five Stock Positions and Why?
« Reply #26 on: July 02, 2013, 09:26:08 AM »
My after-tax portfolio has two strategies, so my top stocks will be a reflection of these:
1) Capital gains through strategies which have historically outperformed the market (see Joel Greenblatt's little blue book that beats the market).  Formula is to sort all stocks by Earnings Yield and Return on Capital, buy and hold the gains for slightly longer than a year to sell, and sell losses early.

I caution you to be skeptical regarding information from a "guru" who uses the words "magic" or "little" in the titles of their stock advice that they are making money off of. If something is sold as easy (ie "10 simple steps to..."), it should usually be viewed with suspicion. Formula's largely do not work in the long term; if they did then the opportunity would quickly be take advantage of by a lot of people, causing the formula to stop working. All of the low hanging fruit was already picked many decades ago. One of the ones that might still have a little bit to it is the "January Effect" http://en.wikipedia.org/wiki/January_effect ; I agree with the following quote though: "seasonal anomalies such as the January Effect are transient and do not present investors with reliable arbitrage opportunities."

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Re: Your Top Five Stock Positions and Why?
« Reply #27 on: July 02, 2013, 10:28:05 AM »
I do not think that buying, holding, monitoring, evaluating for changes in risk and re-balancing is dangerous (rebalancing could even only be once a year). I think that buying and holding and not paying attention is dangerous. If you do not pay attention, you will likely not be able to maintain diversification; ie, if your banking stock outperforms everything else in your portfolio by a large amount, you will eventually have too much exposure to one industry and one company. Instead of taking away from a winner if you still like the valuation and state of the company, then instead of reducing that position, just contribute more to other positions in your portfolio to improve diversification.

If I buy an index fund, then I basically buy and hold the stocks in the index (only when the index changes, I sell the stock that drops out and buy the stocks that is introduced in the index). If some stocks outperform everything else, then they also gain larger weight in the index. For example, the Stoxx Europe 600 index currently consists to 10% of Nestle, Novartis, HSBC and Roche, so the 4 largest companies are massively overweight compared to the 596 next largest companies. Most people invested in an index fund do not worry about this lack of diversification. Why should I then be worried if I bought the individual stocks?

Buying and selling always incurs transaction costs and often also capital gains taxes. Would it not be more sensible to keep both winning and losing stocks in the portfolio? I could then try to maintain an index-like exposure by reinvesting dividends to buy shares of companies I do not own yet, preferrably of industries which are underrepresented in my current portfolio.

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Re: Your Top Five Stock Positions and Why?
« Reply #28 on: July 02, 2013, 10:52:30 AM »
This has turned into yet another index-vs-stocks tirade, which is fine.  I'd like to take the opportunity to point out that index funds (which I own and of which I am fond) will be composed of stocks which are winners and losers. The losers are sold at a loss. However, because the sale is within an index fund one does not get the advantage of claiming the loss on taxes.  If one could build one's own index fund, this tax advantage could be a significant boost to overall portfolio performance.  Alternatively, if any of you can come up with a way to never own stock which under-performs the market enough to warrant a sale, I'd love to hear about it.

DryIceZ33

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Re: Your Top Five Stock Positions and Why?
« Reply #29 on: July 02, 2013, 11:05:25 AM »
I caution you to be skeptical regarding information from a "guru" who uses the words "magic" or "little" in the titles of their stock advice that they are making money off of. If something is sold as easy (ie "10 simple steps to..."), it should usually be viewed with suspicion. Formula's largely do not work in the long term; if they did then the opportunity would quickly be take advantage of by a lot of people, causing the formula to stop working. All of the low hanging fruit was already picked many decades ago. One of the ones that might still have a little bit to it is the "January Effect" http://en.wikipedia.org/wiki/January_effect ; I agree with the following quote though: "seasonal anomalies such as the January Effect are transient and do not present investors with reliable arbitrage opportunities."

Indeed, healthy caution is needed when following any financial advice!  I've read many other books in addition to Joel Greenblatt's, and was also a finance & investing minor in college.

I think the formula makes sense for two reasons:
1) Earnings Yield - (inverse of P/E) sorting by this metric yields a list of companies that are undervalued relative to other companies.  You're paying a lower price for every dollar of earnings.  Some thinking is required to figure out why on each case - but if I understand the business case for the stock that shows up on the top of this list, then I think it's a reasonable investment.

2) Return on Capital - sorting by this metric yields a list of companies that are earnings the highest returns relative to their capital.

So overall, by following this formula you're buying undervalued companies that are good at making money.

I disagree that if the opportunity worked then everyone would follow it - the backtested strategy was shown to only beat the market historically over 3 consecutive year periods of time, and most mutual fund managers are unable to survive lagging their peers for 1-2 years.  Since mutual funds make up the majority of the market, not everyone can follow it.

I also do not believe in the efficient market hypothesis - the markets often seem to be driven more by emotions than fact, and I think investors that use fundamental analysis can achieve greater returns than those that simply buy when everyone else is buying, and sell when everyone else is selling (most mutual funds).

Marmot

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Re: Your Top Five Stock Positions and Why?
« Reply #30 on: July 02, 2013, 11:11:30 AM »
If I buy an index fund, then I basically buy and hold the stocks in the index (only when the index changes, I sell the stock that drops out and buy the stocks that is introduced in the index). If some stocks outperform everything else, then they also gain larger weight in the index. For example, the Stoxx Europe 600 index currently consists to 10% of Nestle, Novartis, HSBC and Roche, so the 4 largest companies are massively overweight compared to the 596 next largest companies. Most people invested in an index fund do not worry about this lack of diversification. Why should I then be worried if I bought the individual stocks?

Buying and selling always incurs transaction costs and often also capital gains taxes. Would it not be more sensible to keep both winning and losing stocks in the portfolio? I could then try to maintain an index-like exposure by reinvesting dividends to buy shares of companies I do not own yet, preferrably of industries which are underrepresented in my current portfolio.

I cannot tell if you are being facetious (trolling) and trying to get me to contradict a previous statement that I made or are actually being sincere (and just had a lapse in comprehension). I will give you the benefit of the doubt, this one time, and respond as if you were being sincere. When I said "just contribute more to other positions", that implied contribute more to the relative "losing stocks" in your portfolio.

If you have your eggs in less baskets, it is prudent to pay more attention.... I fail to see how that opinion is controversial... Also, I never said anything about selling losing stocks (if they still have a good underlying business and valuation, then you should keep and consider adding more to that position).

The four companies that you mentioned in your example are in three separate industries and only represent 10% of one index fund of 600 companies. Fiveoclockshadow previously gave good advice in saying that it is wise to have more than one index fund (if you are going the index only route). Also, I do not see how having the top four companies representing 2.5% of your portfolio each (on average) is any foundation for an argument of lack of diversification.

I personally believe that if your exposure to the top individual company in your portfolio represents less than 2.5% of the total portfolio, then you are too diversified (unless you are consciously making that decision due to lack of time, interest and/or faith in either your own ability or the general ability to pick individual stocks).

Marmot

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Re: Your Top Five Stock Positions and Why?
« Reply #31 on: July 02, 2013, 11:40:24 AM »
I think the formula makes sense for two reasons:
1) Earnings Yield - (inverse of P/E) sorting by this metric yields a list of companies that are undervalued relative to other companies.  You're paying a lower price for every dollar of earnings.  Some thinking is required to figure out why on each case - but if I understand the business case for the stock that shows up on the top of this list, then I think it's a reasonable investment.

2) Return on Capital - sorting by this metric yields a list of companies that are earnings the highest returns relative to their capital.

So overall, by following this formula you're buying undervalued companies that are good at making money.

Another ratio I'd suggest taking a look at is Enterprise Value/earnings before interest, taxes, depreciation, and amortization (or EV/EBITDA; my current favorite valuation ratio). http://www.readyratios.com/reference/market/ev_ebitda_ratio.html Sort of like P/E, but also takes into account capital structure and cash position. Keep in mind that these ratios are not always appropriate/that useful for comparing companies in different industries.

I also do not believe in the efficient market hypothesis - the markets often seem to be driven more by emotions than fact, and I think investors that use fundamental analysis can achieve greater returns than those that simply buy when everyone else is buying, and sell when everyone else is selling (most mutual funds).

The weakest subset of the EMH only says technical analysis does not work; does not have to do with human behavior or fundamental analysis.

grantmeaname

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Re: Your Top Five Stock Positions and Why?
« Reply #32 on: July 02, 2013, 11:46:22 AM »
I also do not believe in the efficient market hypothesis - the markets often seem to be driven more by emotions than fact
That's a misstatement of every form of the EMH.

Quote
I think investors that use fundamental analysis can achieve greater returns than those that simply buy when everyone else is buying, and sell when everyone else is selling (most mutual funds).
How do you explain the underperformance of 'contrarian' mutual funds, other than by a hand wave?

Marmot

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Re: Your Top Five Stock Positions and Why?
« Reply #33 on: July 02, 2013, 01:06:41 PM »
From the sound of it, there are plenty of other threads to discuss index funds vs stockpicking (or we could start a new one; interesting subject which I enjoy discussing; just wish we could also discuss other topics). In an attempt to steer us back to original subject, my thoughts regarding other peoples posts on their top stocks:

@mpbaker22: Been a wild ride for citi and HP, though I think they have decent valuations now; sold my HP earlier this year during run up and me having too much tech. AIG kinda makes me nervous, largely due to me not understanding their business that well (that credit default swap thing would have snuck up on me...I'd imagine they still have a lot of other very complex derivatives on the books)

@brewer12345: I like your ford and chesapeake holdings. Regarding your two Navios stocks, I'd caution against having your top two holdings in companies with a below 1b market cap and in the same industry. The PE ratios for these companies are so low probably due to the mountain of debt that each of them have. Also, the ocean freight industry is kind of dangerous as it is so capital intensive (also hard to compete with larger companies that receive government subsusdies; ie China Shipping).

@dryiceZ33: For utilities, I'd take a look at exelon. I'd be careful of kimberly clark (and other consumer basic stocks); it might have been bid up by frustrated fixed income investors chasing dividend income (once bonds yields start doing better, might get punished). In general, not a fan of your only holding for a year strategy as that is contrary to long-term investing.

@Khanjar: In general, big fan of buyback plans and cash. I also have some INTC; and fully agree with your assessment. If they offer a X% discount for employees, might as well take advantage of that in moderation (having a little bit of stock in your employer isn't that big of a risk). In long term, I think Intel's manufacturing prowess will outpace Taiwan Semiconductor; as intel dominated AMD, I think there is a decent chance it will do so to other competitors (though I am hoping that is not the case with nvidia, who has also dominated their rivals in the past (ATI)). Regarding CSCO, as it is so complex, I've kinda just avoided it, though it has an attractive valuation now. Hadn't heard of "reverse morris trust spinoff" before... interesting; corporate accounting jujitsu.

brewer12345

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Re: Your Top Five Stock Positions and Why?
« Reply #34 on: July 02, 2013, 01:22:23 PM »

@brewer12345: I like your ford and chesapeake holdings. Regarding your two Navios stocks, I'd caution against having your top two holdings in companies with a below 1b market cap and in the same industry. The PE ratios for these companies are so low probably due to the mountain of debt that each of them have. Also, the ocean freight industry is kind of dangerous as it is so capital intensive (also hard to compete with larger companies that receive government subsusdies; ie China Shipping).



Same management team between the two Navios companies and NM owns a controlling stake in NNA.  Oh my!

I've been investing in this industry for almost a decade and I have made more money on these two companies than on anything else I have ever touched.  As I have been scaling down individual exposuresthis year, I sold my bonds issued by both of these companies (after a trip from about 80 cents on the dollar to par while collecting an 8% coupon) and I sold some NM when it hit 5.  I have sell targets in mind for both of these companies when they hit certain target prices, but I think they are still worth holding and NNA has the potential to double or triple in the next few years, IMO.

fiveoclockshadow

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Re: Your Top Five Stock Positions and Why?
« Reply #35 on: July 02, 2013, 01:40:02 PM »

I'm going to agree with StrategicMarmot that things are getting off track, and apologize for helping to drag it off track a bit.

I do have one clarification question about this tax scheme:

I'd like to take the opportunity to point out that index funds (which I own and of which I am fond) will be composed of stocks which are winners and losers. The losers are sold at a loss. However, because the sale is within an index fund one does not get the advantage of claiming the loss on taxes.  If one could build one's own index fund, this tax advantage could be a significant boost to overall portfolio performance.  Alternatively, if any of you can come up with a way to never own stock which under-performs the market enough to warrant a sale, I'd love to hear about it.

Is the idea here that you would split your capital gains and capital losses into different years?  Or more specifically every other year you ensure you sell such that you have an overall capital loss of over $3K. You can offset up to $3K against normal income taxed at lets say 28%.  Then in the following year you realize your capital gains at 15%.  Obviously this restricts your trading a bit, but since the presumption is we don't trade very often anyway perhaps that is fine.

I hadn't considered this honestly. 

So since we hope on average we have capital gains rather than losses it seems on average you could at best do this every other year.  For example, re-balance in the winter moving the loss/gain sales to either side of Jan 1 such that every other year you had a capital loss in total and hopefully a much higher gain in the other year.  In doing so you get to trade $3K of income for $3K of capital gain tax treatment every other year.

So the return from such a strategy would be for the 28% tax bracket about $195 per year (3000*0.13/2).  How significant that is in percentage terms would of course depend on portfolio size as the dollar amount is limited by the tax law.

Did I get that correct?  Miss some pitfall?

Kriegsspiel

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Re: Your Top Five Stock Positions and Why?
« Reply #36 on: July 02, 2013, 03:59:37 PM »
I think the formula makes sense for two reasons:
1) Earnings Yield - (inverse of P/E) sorting by this metric yields a list of companies that are undervalued relative to other companies.  You're paying a lower price for every dollar of earnings.  Some thinking is required to figure out why on each case - but if I understand the business case for the stock that shows up on the top of this list, then I think it's a reasonable investment.

2) Return on Capital - sorting by this metric yields a list of companies that are earnings the highest returns relative to their capital.

So overall, by following this formula you're buying undervalued companies that are good at making money.

Another ratio I'd suggest taking a look at is Enterprise Value/earnings before interest, taxes, depreciation, and amortization (or EV/EBITDA; my current favorite valuation ratio). http://www.readyratios.com/reference/market/ev_ebitda_ratio.html Sort of like P/E, but also takes into account capital structure and cash position. Keep in mind that these ratios are not always appropriate/that useful for comparing companies in different industries.


The Magic Formula uses the EBITDA, not P/E ratio IIRC.

DryIceZ33

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Re: Your Top Five Stock Positions and Why?
« Reply #37 on: July 02, 2013, 09:19:38 PM »
The Magic Formula uses the EBITDA, not P/E ratio IIRC.

That's correct - from what I understand the EBIT / EV is a  more refined version of earnings yield, that takes into account the debt levels of a company, and not just the market cap.

I also do not believe in the efficient market hypothesis - the markets often seem to be driven more by emotions than fact
That's a misstatement of every form of the EMH.

Quote
I think investors that use fundamental analysis can achieve greater returns than those that simply buy when everyone else is buying, and sell when everyone else is selling (most mutual funds).
How do you explain the underperformance of 'contrarian' mutual funds, other than by a hand wave?

My intent wasn't to define EMH, it was to say that I disagree that the markets are efficient and reflect all information readily available.  I think markets are inefficient in that they include emotional reactions to information and irrational behavior rather following a strictly scientific and mathematical reasoning in every movement up or down.

I'm also not attempting to say that a strategy contrary to normal mutual fund behavior will outperform. 

I am saying that a strategy based on purchasing mathematically undervalued stocks that have well above average return on capital tend will statistically perform better than the market's average over the long haul. 

However, I will also readily admit that this type of strategy isn't for everyone - it requires maybe 2-3 hours per month of research - basically running the stats on every stock on the market, exporting to excel, sorting, and using common sense about what's going on in the world to determine what I want to be invested in.   I suppose you could value my time at $25/hour and then extrapolate those savings into an index fund if you like - to say that I'd be better off in an index, and perhaps so.  However, after running a few miles, having a dinner, and settling down for the evening - it's a bit fun to do some math and read up on what's going on in the financial world.

@StrategicMarmot - I actually already own Excelon!  It's just not in my top five holdings.  I've owned it for a few years, and lost a bit when they cut their dividend - but considering investing more.    Appreciate the thought!

zunachy

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Re: Your Top Five Stock Positions and Why?
« Reply #38 on: July 02, 2013, 10:32:33 PM »
1. SIRI: SiriusXM. Majority owned by Liberty Media(LMCA) as of this year. SIRI has an extremely large buyback plan, and is generating very large amounts of cash. LMCA has intentions to perform a RMT(Reverse Morris Trust spinoff) of SIRI in the next several years.

2. INTC: Intel corporation. I admit, this is a bad position for me to have by many people's judgement as I am currently employed by them(and I fully acknowledge that risk). That said, I bought most of my position at a yield of ~4-4.5%, continue to participate in the ESPP. I like the dividend yield, I like the P/E, and I think the companies forays into mobile will be accretive to the bottom line, and our ability to outspend the competition, combined with superior manufacturing ability will soon turn doubters away. Stock has been stagnant for 10+ years which is too many people's argument against it(inside the company especially... poor people don't understand >_>). I own it because I believe it's undervalued, I believe it has a large moat, and it pays an extremely attractive dividend, as well as performing a strong and sustained stock buyback that has actively reduced outstanding share count.

3. AIG: AIG. I bought in after the treasury sold off the last of its stake. I believe it's undervalued, and management has been taking actions I like. Stock buybacks in progress, and management has stated plans to eventually re-initiate the dividend. I think too many people are still punishing this stock from the crash.

4. BAC: Bank of America. Same reason for ownership as AIG.

5. CSCO: Cisco. Pays an attractive dividend, has an attractive moat, and an attractive valuation. I don't have anything to say on it really, it's a complex and ever-changing company that is almost integral to the future of the internet.


Hi, what is Cisco's moat?   

Also, how do you feel about them holding 47 billion and not doing anything with it for at least the past three years?

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Re: Your Top Five Stock Positions and Why?
« Reply #39 on: July 03, 2013, 09:55:51 AM »

I'm glad you have had good returns, and hope that you continue to do so.  You must realize, however, that six years is ridiculously short for evaluating stock picking performance.  Even in a widely diversified fund it takes over ten years to measure performance rather than noise (i.e. volatility).  You are comparing just 15 or 20 stocks to a broad index and you have no way of evaluating random fluctuation from "skill".  Put another way, if we picked 15 to 20 stocks at random over six years we would expect about half of those random portfolios to out perform the S&P.  At this point six years on we can't really tell if you or a dart board is the better stock picker :)


It was this that made me go back and do some rollup measurements.  I computed the IRR for everything that was in various Vanguard accounts (in several different index funds) with everything we've ever done with individual stocks. 

In my case, it goes back 15 years and individual stocks beat Vanguard by 2.5%.

As far as equities go: I still have 90% in Vanguard funds / 10% individual stocks -- and I can't say I am risk tolerant enough to take that any higher.

This is also new code in my own home-rolled software... so it's theoretically possible that this has bugs in it.  I need to go back and hand check that my scripts have 100% of the correct data in their calculations.

Marmot

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Re: Your Top Five Stock Positions and Why?
« Reply #40 on: July 03, 2013, 03:04:55 PM »
It was this that made me go back and do some rollup measurements.  I computed the IRR for everything that was in various Vanguard accounts (in several different index funds) with everything we've ever done with individual stocks. 

In my case, it goes back 15 years and individual stocks beat Vanguard by 2.5%.

As far as equities go: I still have 90% in Vanguard funds / 10% individual stocks -- and I can't say I am risk tolerant enough to take that any higher.

This is also new code in my own home-rolled software... so it's theoretically possible that this has bugs in it.  I need to go back and hand check that my scripts have 100% of the correct data in their calculations.

That's really good, especially considering it encompasses both the tech bubble and great recession. So (1+.025)^15= 1.45 

Ascend

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Re: Your Top Five Stock Positions and Why?
« Reply #41 on: July 05, 2013, 02:23:20 PM »
Very interesting discussion. Although I haven't browsed extensively in this part of the forum, I would tend to agree that there is a pro-Index Fund bias here. I do own Index fund ETFs for sectors that I do not know much about (Emerging Markets and Europe, mainly), but other than that, my strategy is centered around the 'Dogs of the Dow' (http://www.dogsofthedow.com/). 

Stock-picking doesn't necessarily need to be a highly risky affair, especially if you invest in companies that have a solid foundation and that consistently deliver good financial numbers and dividends year after year. The companies I hold which fall into that category and which I intend on holding for quite a few years still are McDonalds, Pfizer, GE, Dupont and Coca-Cola. I also acquired a few Berkshire Hathaway stocks early this year. I feel quite confident having my portfolio centered around these companies on the long-term.

I also have a few Canadian stocks, but some of the names probably won't ring a bell to most users here (Alimentation Couche-Tard, Quebecor, Telus, Scotia Bank). Except for Alimentation Couche-Tard, which has doing very well, the Canadian Market hasn't fared quite well lately, especially compared to the U.S. Market.

Admittedly, I am a neophyte when it comes to investing, with only two-three years under my belt, but the subject fascinates me, and I'm looking forward to learning more about value investing, the stock market and so forth in the coming years. I would say my approach is similar to StrategicMarmot's, although, as I said, I am quite in the early stages of my 'investing' career.

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Re: Your Top Five Stock Positions and Why?
« Reply #42 on: July 08, 2013, 07:14:48 PM »
I'd like some experienced eyes on HFC's financials and give some opinions.  Kind of looks too good to be true and my only problem with it is that as an oil refiner, it is tied to a commodity.  Picked it up friday anyway, and it shot up 4.48% today.


grantmeaname

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Re: Your Top Five Stock Positions and Why?
« Reply #43 on: July 08, 2013, 08:12:35 PM »
I'd like some experienced eyes on HFC's financials and give some opinions.  Kind of looks too good to be true and my only problem with it is that as an oil refiner, it is tied to a commodity.  Picked it up friday anyway, and it shot up 4.48% today.
Wow, it hasn't been that high since last Monday!

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Re: Your Top Five Stock Positions and Why?
« Reply #44 on: July 08, 2013, 09:23:23 PM »
I'm kind of fascinated to find this discussion on this forum, and get the sense that a fair bit of this is really in the vein of the balancing that limeandpepper talks about. This seems an odd location for that, but interesting. There's a lot here already though so I'll just add a few thoughts.

First, when calculating all the comparative returns between various advice and portfolios and index funds you have to include transaction costs and taxes. The earlier comments about exhaustive studies done on this is documented rather thoroughly in Burton Malkiel's "Random Walk Down Wall Street" if you want to see the full result. So when calculating IRRs and such, factor in transaction costs and taxes before you declare it better than buying a Vanguard index fund.

The same goes for people you know who did well with picking stocks. If you buy a wide variety of stocks in the US market and hold them for a long time you'll probably make money net. That doesn't mean you did better than the index though, so someone making a living off that doesn't mean anything about their investment approach. If you predict that tomorrow's weather will be the same as today's you'll be right around 70% of the time, so doing better than that 70% range is how you evaluate weathermen. The same is true with investing strategies, making money doesn't prove quality, making money over the general market does, but again, only after taxes and fees and transaction costs.

Beyond that, I'm not going to manage to convince any fans of fundamental investing that they're actually shooting themselves in the foot any better than I can by recommending that book so I'll leave that there. All that said, I am a fan of taking a small portion of my money and considering it entertainment investing (effectively gambling) and picking stocks in which case, here are my top 5:

Google
MSFT (managed to buy this just at the bottom of the crash!)
IBM
BRKB
and until recently ING but I lost faith in their practices about a year back and finally got out a few months ago. Moved that money to VB.

Of course, to reiterate, I treat all this as entertainment investing only, but based on the four stocks I still own alone I'm up 50% overall. I don't feel like annualizing that calculation at the moment, I started buying in small chunks in 2009 for the first time if someone wants to compare. I don't claim it to be anything other than luck at having ridden the market back up from the crash.

And for all you people who actually do follow one of those other theories that gives you a strategy or magic formula or who think you really can pick stocks, best of luck doing better than the index, and thank you for all your transaction fees and taxes! The national debt could use the contribution, and those transaction costs make the financial services portion of my index funds do really well. :)
« Last Edit: July 08, 2013, 09:26:10 PM by nataelj »

fiskeb

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Re: Your Top Five Stock Positions and Why?
« Reply #45 on: July 09, 2013, 05:31:03 AM »
I'm kind of fascinated to find this discussion on this forum, and get the sense that a fair bit of this is really in the vein of the balancing that limeandpepper talks about. This seems an odd location for that, but interesting. There's a lot here already though so I'll just add a few thoughts.

First, when calculating all the comparative returns between various advice and portfolios and index funds you have to include transaction costs and taxes. The earlier comments about exhaustive studies done on this is documented rather thoroughly in Burton Malkiel's "Random Walk Down Wall Street" if you want to see the full result. So when calculating IRRs and such, factor in transaction costs and taxes before you declare it better than buying a Vanguard index fund.

The same goes for people you know who did well with picking stocks. If you buy a wide variety of stocks in the US market and hold them for a long time you'll probably make money net. That doesn't mean you did better than the index though, so someone making a living off that doesn't mean anything about their investment approach. If you predict that tomorrow's weather will be the same as today's you'll be right around 70% of the time, so doing better than that 70% range is how you evaluate weathermen. The same is true with investing strategies, making money doesn't prove quality, making money over the general market does, but again, only after taxes and fees and transaction costs.

Beyond that, I'm not going to manage to convince any fans of fundamental investing that they're actually shooting themselves in the foot any better than I can by recommending that book so I'll leave that there. All that said, I am a fan of taking a small portion of my money and considering it entertainment investing (effectively gambling) and picking stocks in which case, here are my top 5:

Google
MSFT (managed to buy this just at the bottom of the crash!)
IBM
BRKB
and until recently ING but I lost faith in their practices about a year back and finally got out a few months ago. Moved that money to VB.

Of course, to reiterate, I treat all this as entertainment investing only, but based on the four stocks I still own alone I'm up 50% overall. I don't feel like annualizing that calculation at the moment, I started buying in small chunks in 2009 for the first time if someone wants to compare. I don't claim it to be anything other than luck at having ridden the market back up from the crash.

And for all you people who actually do follow one of those other theories that gives you a strategy or magic formula or who think you really can pick stocks, best of luck doing better than the index, and thank you for all your transaction fees and taxes! The national debt could use the contribution, and those transaction costs make the financial services portion of my index funds do really well. :)

I find that by taking a small portion of my net worth and using it for individual stocks, it keeps me busy researching and playing with money that doesn't matter so much.  It keeps me from toying with my mutual funds! 

oldtoyota

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Re: Your Top Five Stock Positions and Why?
« Reply #46 on: July 09, 2013, 07:30:49 AM »
In the interest of not starting a new thread, I'd love if I could ask my question about stocks here.

These days, I would not buy more stocks.

My stocks are going up. However, I do not want to track them any longer, and I think it makes more sense to put the money into a Vanguard fund. What do I need to keep in mind if I want to sell them all?

The dividends generated around $500 for the last quarter. However, I have other investments that did a lot better in the same time period.


matchewed

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Re: Your Top Five Stock Positions and Why?
« Reply #47 on: July 09, 2013, 07:33:24 AM »
I would keep in mind the taxes you would incur on the sale. Capital Gains and the like assuming this is not in a tax advantaged account. Other than that I'm not sure what else you are thinking about when you say "what to keep in mind."

Marmot

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Re: Your Top Five Stock Positions and Why?
« Reply #48 on: July 09, 2013, 08:45:28 AM »
If you do not want to track them any longer, I agree that switching to index funds is the route to go.

To add on to matchewed's advice, I would recommend to be aware of which stocks that you have owned for less than one year. Short term capital gains is taxed at the ordinary income tax rate instead of long term rate. For example, if you have owned a stock for 11 months that has gone up by 40%, you might want to consider waiting another month before selling. Of course, there are risks in delaying a sale, though it is worth considering in certain situations.

oldtoyota

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Re: Your Top Five Stock Positions and Why?
« Reply #49 on: July 09, 2013, 11:42:47 AM »
If you do not want to track them any longer, I agree that switching to index funds is the route to go.

To add on to matchewed's advice, I would recommend to be aware of which stocks that you have owned for less than one year. Short term capital gains is taxed at the ordinary income tax rate instead of long term rate. For example, if you have owned a stock for 11 months that has gone up by 40%, you might want to consider waiting another month before selling. Of course, there are risks in delaying a sale, though it is worth considering in certain situations.

Thank you. I did not know that. Very helpful!