I am a huge believer in Passive Indexing.. but.....

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WolfgangPauli
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I am a huge believer in Passive Indexing.. but.....

Post by WolfgangPauli » Fri May 19, 2017 7:16 am

Ok,

I just need people to walk me off the ledge here. for background, I have been a passive index investor since 1984 and have never looked back. It is the bulk of everything I do.

However, about 3 years ago I "peaked". I took some "fun money" (approx $100K) and decided I would research and buy some stocks. The research was thin - at that time I was working for a boutique consulting firm - and I just bought shares in companies who became our customers.

Here is the tough part: Average annual return over 3 years is about 16%. My 1 year return is 24.5%. My questions for discussion (not theoretical but actually would like advice specifically):
  • Do I chalk this up to luck, take the tax hit and liquidate?
  • Do I keep and ride - still just consider this to be "fun"?
  • Shave positions but essentially keep what I initially invested?
  • Do I try somemore?
  • Any other thoughts??
The good news is while the portfolio is fueled by a few stocks, everyone I picked is doing very nicely. One, Deere, I picked when it sank when everyone thought there was farming Armageddon is doing great and today, premarkets is up like 6%!

Help please...
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kelvan80
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Re: I am a huge believer in Passive Indexing.. but.....

Post by kelvan80 » Fri May 19, 2017 7:23 am

I believe the unspoken rule is if the fun money was about 5% of your portfolio then enjoy. Are you asking for a blessing to drop passive investing completely in favor of your lucky picks? Take the tax hit, or donate your earnings.

Bacchus01
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Re: I am a huge believer in Passive Indexing.. but.....

Post by Bacchus01 » Fri May 19, 2017 7:23 am

You bought shares in customer companies? Be careful here

WolfgangPauli
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Re: I am a huge believer in Passive Indexing.. but.....

Post by WolfgangPauli » Fri May 19, 2017 7:25 am

Bacchus01 wrote:You bought shares in customer companies? Be careful here
Why? My thought process was if they were smart enough to hire me .. they must be good??
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WolfgangPauli
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Re: I am a huge believer in Passive Indexing.. but.....

Post by WolfgangPauli » Fri May 19, 2017 7:25 am

kelvan80 wrote:I believe the unspoken rule is if the fun money was about 5% of your portfolio then enjoy. Are you asking for a blessing to drop passive investing completely in favor of your lucky picks? Take the tax hit, or donate your earnings.
No, perhaps add more to it though.. go up to 10%?
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Re: I am a huge believer in Passive Indexing.. but.....

Post by midareff » Fri May 19, 2017 7:30 am

First, congratulations on having reached the point in life where $100K is fun money :mrgreen: .

As long as that is "fun money" perhaps you can let it fly and in a few years write a book that rhymes with "Learn How To Trade Like Chuck". In reality, I'd be taking profits and placing them in things less volatile, like CDs, Bond funds and so forth. Wise man once said, make it in stocks, keep it in bonds.

Seeing as you could be considered to have had insider information I'd be skeptical about the whole process.

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Re: I am a huge believer in Passive Indexing.. but.....

Post by knpstr » Fri May 19, 2017 7:34 am

Hey you could be the next Buffett and you didn't even know it!

Just don't do any insider trading when you're buying companies with which you do business.
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WolfgangPauli
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Re: I am a huge believer in Passive Indexing.. but.....

Post by WolfgangPauli » Fri May 19, 2017 7:39 am

midareff wrote:First, congratulations on having reached the point in life where $100K is fun money :mrgreen: .

As long as that is "fun money" perhaps you can let it fly and in a few years write a book that rhymes with "Learn How To Trade Like Chuck". In reality, I'd be taking profits and placing them in things less volatile, like CDs, Bond funds and so forth. Wise man once said, make it in stocks, keep it in bonds.

Seeing as you could be considered to have had insider information I'd be skeptical about the whole process.
Guys, before we go crazy with this "insider trading thing", trust me, I had no inside information. I was not consulting for the CEO or anything and my day to day contacts were not even officers of the company. Further, I can show I never "traded". I made one buy and let it ride.

There is no way I was working with information that was material enough to be considered inside information. So, please, let's put that to bed .. I appreciate everyone's concern and appreciate the fun in speculation but it is so far from the truth. I have worked for large companies where I have had this type of arrangement and have had to sign all sorts of documents which acknowledge I know I am in possession of information which could be insider information.

These stocks had none of that.
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Re: I am a huge believer in Passive Indexing.. but.....

Post by noco-hawkeye » Fri May 19, 2017 7:41 am

WolfgangPauli wrote:
Bacchus01 wrote:You bought shares in customer companies? Be careful here
Why? My thought process was if they were smart enough to hire me .. they must be good??
The concern is what happens when these companies have a downturn? They let you go, *and* the stock might go down. This is very similar to people would buy the stock of their employer, with the same type of risks. At least that would be my concern. I don't think this is a complete non starter, but I do think the advice of being careful is appropriate.

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Re: I am a huge believer in Passive Indexing.. but.....

Post by Always passive » Fri May 19, 2017 7:42 am

WolfgangPauli wrote:Ok,

I just need people to walk me off the ledge here. for background, I have been a passive index investor since 1984 and have never looked back. It is the bulk of everything I do.

However, about 3 years ago I "peaked". I took some "fun money" (approx $100K) and decided I would research and buy some stocks. The research was thin - at that time I was working for a boutique consulting firm - and I just bought shares in companies who became our customers.

Here is the tough part: Average annual return over 3 years is about 16%. My 1 year return is 24.5%. My questions for discussion (not theoretical but actually would like advice specifically):
  • Do I chalk this up to luck, take the tax hit and liquidate?
  • Do I keep and ride - still just consider this to be "fun"?
  • Shave positions but essentially keep what I initially invested?
  • Do I try somemore?
  • Any other thoughts??
The good news is while the portfolio is fueled by a few stocks, everyone I picked is doing very nicely. One, Deere, I picked when it sank when everyone thought there was farming Armageddon is doing great and today, premarkets is up like 6%!

Help please...

I have been a passive investor since the very beginner; however I am a truly believer in value investing and the teachings of Graham. I think if an investor picks the right stocks using Graham's methodology and/or the ones of those great value investors, and has the patience to wait, and by that I mean months and even years, there is a distinct possibility to do very well. The problem is that very few want or can do the analysis, and even worse, have the discipline to follow through the methodology. If you are one of them, and I am certainly not, go for it. I would not call it playing money, because it is very far from being a game.

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Re: I am a huge believer in Passive Indexing.. but.....

Post by Dottie57 » Fri May 19, 2017 7:45 am

OP

You have been playing with "fun" money during a bull market. The circumstances which have blessed your picks will change drastically during a bear market. Remember you have the fun money because you are a passive investor not because you are a genious at picking stocks during a bull market.
Last edited by Dottie57 on Fri May 19, 2017 7:47 am, edited 1 time in total.

Bacchus01
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Re: I am a huge believer in Passive Indexing.. but.....

Post by Bacchus01 » Fri May 19, 2017 7:46 am

WolfgangPauli wrote:
Bacchus01 wrote:You bought shares in customer companies? Be careful here
Why? My thought process was if they were smart enough to hire me .. they must be good??
The big risk is that you could have insider information

It could also be a significant conflict of interest

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Re: I am a huge believer in Passive Indexing.. but.....

Post by jebmke » Fri May 19, 2017 7:47 am

WolfgangPauli wrote:Guys, before we go crazy with this "insider trading thing", trust me, I had no inside information. I was not consulting for the CEO or anything and my day to day contacts were not even officers of the company. Further, I can show I never "traded". I made one buy and let it ride.
In your situation probably not a big deal. Normally, as a former "insider," our policies also covered conflict of interest not just insider trading. Employees in general were not supposed to invest in customers or suppliers. This wasn't a blanket restriction but, for example, anyone in sales would be prohibited from investing in a customer and anyone in procurement would be restricted from investing in a supplier.
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Re: I am a huge believer in Passive Indexing.. but.....

Post by Grt2bOutdoors » Fri May 19, 2017 7:51 am

Let's be clear here:
One more very important thing to note - you were NOT in possession NOR were you "tipped or told" about anything your customer was doing that was Non-Public Information. Correct? If there is any thought of impropriety, the information you used to purchase was not publicly disclosed in public filings found on the SEC website, you will be in big doo-doo. This is not a joke! The trust in the public markets needs to be maintained, no matter how little a profit you may make or even a loss, if you traded on a tip or non public information, you will be crucified.


If none of the above applies, keep reading. Otherwise, STOP!!!


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2) See rule number 1.

Rule of successful investors: ride your winners, sell your losers. So long as this "fun" portfolio does not get out of hand and become the bulk of your portfolio, I don't see anything wrong with letting it ride. However, you should set sell metrics in place now and adhere to it. Example, no holding shall exceed more than 2% of total holdings in value. No holding shall be kept if a) i need the money b) don't let the fear of taxes stop you from selling, great fortunes have been lost due to fear of taxes.
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Re: I am a huge believer in Passive Indexing.. but.....

Post by JoMoney » Fri May 19, 2017 7:53 am

I have no idea if it was luck (and I don't think anyone else does either). You're the one who picked them, I would hope you have some idea whether it was through some sound reasoning on the price and expected growth at the time you bought and whether or not you feel that situation has changed.

I sold my individual stock portfolio several years back, initially I had considered holding onto them until an opportunity made it look like a good time to sell, but after I had made up my mind to index it just got to bothering me. I eventually just sold the remainder of them and chalked it up to "I wouldn't buy them today, and I know what I would do with the money if I had it (indexed)"
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Re: I am a huge believer in Passive Indexing.. but.....

Post by Grt2bOutdoors » Fri May 19, 2017 7:55 am

WolfgangPauli wrote:
midareff wrote:First, congratulations on having reached the point in life where $100K is fun money :mrgreen: .

As long as that is "fun money" perhaps you can let it fly and in a few years write a book that rhymes with "Learn How To Trade Like Chuck". In reality, I'd be taking profits and placing them in things less volatile, like CDs, Bond funds and so forth. Wise man once said, make it in stocks, keep it in bonds.

Seeing as you could be considered to have had insider information I'd be skeptical about the whole process.
Guys, before we go crazy with this "insider trading thing", trust me, I had no inside information. I was not consulting for the CEO or anything and my day to day contacts were not even officers of the company. Further, I can show I never "traded". I made one buy and let it ride.

There is no way I was working with information that was material enough to be considered inside information. So, please, let's put that to bed .. I appreciate everyone's concern and appreciate the fun in speculation but it is so far from the truth. I have worked for large companies where I have had this type of arrangement and have had to sign all sorts of documents which acknowledge I know I am in possession of information which could be insider information.

These stocks had none of that.
While all of the above may be true, a trade is a trade. Trade - a one way or two way transaction that involves a buyer and a seller of securities.
You never traded? You made a decision, you ponied up the money and you hit the "buy" button. Guess what? You traded!! And it does not matter if you did not sell and instead held, the very fact that your transaction is documented, you have a copy of transaction, broker has a copy, stock exchange has a record as does the company's transfer agent does not negate anything if you had insider knowledge.
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Re: I am a huge believer in Passive Indexing.. but.....

Post by dodecahedron » Fri May 19, 2017 7:58 am

WolfgangPauli wrote: Here is the tough part: Average annual return over 3 years is about 16%. My 1 year return is 24.5%. My questions for discussion (not theoretical but actually would like advice specifically):
  • Do I chalk this up to luck, take the tax hit and liquidate?
  • Do I keep and ride - still just consider this to be "fun"?
  • Shave positions but essentially keep what I initially invested?
  • Do I try somemore?
  • Any other thoughts??
If you have any charitable donation plans, you could reduce the tax hit by donating some of your most appreciated shares.

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Re: I am a huge believer in Passive Indexing.. but.....

Post by Artisan » Fri May 19, 2017 7:59 am

Posing this on the Bogleheads forum is going to yield Boglehead type advice.

Keep the play money at 5% or sell it, take the hit and invest it in index funds.

/yawn.

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Re: I am a huge believer in Passive Indexing.. but.....

Post by carolinaman » Fri May 19, 2017 8:00 am

It sounds like you were lucky, although I do not want to discount your skill and judgment. We have been in a rising market since 2009. As the saying goes, "a rising tide lifts all boats", may apply here. When the next downturn occurs, these stocks may take a big hit. I believe Deere is considered to be a cyclical company who may be especially hard hit by that.

One strategy is to let your investments ride, but to do some profit taking, taking some off the table. If you have enough investments to where $100k is "fun money", then I think you are safe whatever you do. Best wishes.

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Re: I am a huge believer in Passive Indexing.. but.....

Post by aristotelian » Fri May 19, 2017 8:02 am

I don't have enough in my portfolio to do anything with "fun money", but I believe stock investing could be reconciled with Boglehead principles. I would not be trying to pick stocks so much as to approximate an index. The main advantage would not be to "beat the market" but to increase opportunities for tax loss harvesting. With a large enough portfolio your transaction costs could actually come in competitive with index fund ER's.

I currently have a watchlist of 18 S&P 500 stocks on Yahoo Finance just to see how it would perform. The stocks are equal weight starting with $5K each. I am about two weeks in and currently beating SCHB -0.27% to -1.24%, mostly because AMD had a crazy week.

I am sure you were not doing anything wrong, but even the appearance of conflicts could look bad. Also, does the focus on companies you work with mean that you are concentrated in a particular industry? Might be good to diversify for multiple reasons.

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Re: I am a huge believer in Passive Indexing.. but.....

Post by 3CT_Paddler » Fri May 19, 2017 8:03 am

Dottie57 wrote:OP

You have been playing with "fun" money during a bull market. The circumstances which have blessed your picks will change drastically during a bear market. Remember you have the fun money because you are a passive investor not because you are a genious at picking stocks during a bull market.
People investing in index funds will be dealing with the same exact issues and risks when the next bear hits.

OP, you seem like you understand enough about the benefits of passive index investing. You understand that you are upping your risk by picking single stocks, and diversification is a bit of a free lunch that you are not taking advantage of with your fun money. If it's truly fun money (less than 10% of portfolio), I wouldn't sweat it. If it becomes a significant part of your portfolio, then you might want to reevaluate your plan.

Many posters on here own Vanguard's actively managed mutual funds (Wellington, Wellesley). At the end of the day two truths are critical to long term success... low costs and diversification. Some active funds and active investors may be able to meet those criteria (or they may change their strategy at the worst possible time). Index investing is the autopilot way to keep yourself from being your own worst enemy.

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Re: I am a huge believer in Passive Indexing.. but.....

Post by RadAudit » Fri May 19, 2017 8:04 am

WolfgangPauli wrote:I was working for a boutique consulting firm - and I just bought shares in companies who became our customers.
What's the success rate of your consulting firm, again? Are you still with them?

If you are not with the firm, you have access to the same info everyone else does. In that case, luck begins to play a part. If you are still with the firm, you might be getting close to insider trading if you know something before it is publicly available - don't know about that. Anyway, best of luck in either case.
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Re: I am a huge believer in Passive Indexing.. but.....

Post by bigred77 » Fri May 19, 2017 8:19 am

WolfgangPauli wrote:Ok,

I just need people to walk me off the ledge here. for background, I have been a passive index investor since 1984 and have never looked back. It is the bulk of everything I do.

However, about 3 years ago I "peaked". I took some "fun money" (approx $100K) and decided I would research and buy some stocks. The research was thin - at that time I was working for a boutique consulting firm - and I just bought shares in companies who became our customers.

Here is the tough part: Average annual return over 3 years is about 16%. My 1 year return is 24.5%. My questions for discussion (not theoretical but actually would like advice specifically):
  • Do I chalk this up to luck, take the tax hit and liquidate?
  • Do I keep and ride - still just consider this to be "fun"?
  • Shave positions but essentially keep what I initially invested?
  • Do I try somemore?
  • Any other thoughts??
The good news is while the portfolio is fueled by a few stocks, everyone I picked is doing very nicely. One, Deere, I picked when it sank when everyone thought there was farming Armageddon is doing great and today, premarkets is up like 6%!

Help please...
You are out performing in a 3 year period right in the middle of a bull market and you referred to your investment research as "thin".

Hopefully you realize that yes, this was good fortune smiling down at you and your current investment process has nothing to suggest it will continue to out perform :D .

I would suggest you sell and take the tax hit (congrats, you made money!). If 100k is fun money to you then I hope that means it's maybe 5% or so of your portfolio (so like $2M total invested)? If that's the case, and you like doing this, maybe put the original 100k back into your portfolio and use any profit to invest however you like?

P.S. - This is my exact strategy whenever I play black jack at the casinos. I sit down with a couple hundred bucks and once I get up 50% or so I put my principal back in my pocket and play with the winnings. Once that's gone I go hit the buffet. If I never get up 50% and lose it all, well I still go hit the buffet.

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Re: I am a huge believer in Passive Indexing.. but.....

Post by Call_Me_Op » Fri May 19, 2017 8:21 am

WolfgangPauli wrote:
  • Do I chalk this up to luck...
Yes
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Re: I am a huge believer in Passive Indexing.. but.....

Post by knpstr » Fri May 19, 2017 8:30 am

WolfgangPauli wrote:Average annual return over 3 years is about 16%.
Just curious, is this 16% average return arithmetic? (year1 return+ year2 return+ year3 return)/3 = average return
Or did you calculate the CAGR?
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Re: I am a huge believer in Passive Indexing.. but.....

Post by nisiprius » Fri May 19, 2017 8:35 am

WolfgangPauli wrote:...Do I chalk this up to luck...
I think you should. What is your evidence, other than outcome, that it wasn't?
[should I]..take the tax hit and liquidate?... Do I keep and ride - still just consider this to be "fun"...
Nobody can answer that but you.

I'd suggest that the (ambiguous) evidence I've seen on skill on the part of professional managers, who spend their working lives on this stuff and have access to information resources you and I can only dream of, is that professionals might be able to add 0.5% to 1% in alpha before costs. Maybe not, but if they do it's only 0.5% to 1% in annualized return. Yeah, I can do the compounding and maybe that should be regarded as a big deal, but it's 0.5% to 1%. It's not 5%/year, 10%/year, 20%/year.

If you have beaten the market by 8%, then I would suggest that a reasonably modest person might attribute 1% to skill and 7% to luck.

I would also suggest that you examine carefully the amount of "fun" per dollar you get by doing this, taking into account the possibility that you may not always succeed and you may experience "negative fun" in future. I honestly just don't get the concept of "fun" in this kind of context, and suspect that the "fun" is based on the idea that you will in fact win and denying the possibility of painful loss.

Sometime maybe twenty years or so ago, I formulated an idea. The idea is that if I look a dollar number on my brokerage statement and begin to think of it as if it were really dollars and count on it in my planning, then the only rational thing to do was to turn it into actual dollars by selling.

Another possibility that falls under the heading of "irrational but I personally have done it" is to say "I am now cumulatively 26% ahead. I will continue to keep careful records of my performance relative to the Total Stock Market index fund. I will decide that I am willing to give back half of my gains (or any other desired amount). If my accounting ever shows that I am only 13% ahead I will sell at that point."

Of course plunges can be very sudden but I think you can stay in your investments and still be reasonably sure of keeping some of your gains if you can be brutal and follow through on selling as soon as you are only 13% ahead.

By far the biggest danger in your situation is coming to believe that you really are a stock-picking genius.
Last edited by nisiprius on Fri May 19, 2017 8:38 am, edited 2 times in total.
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Re: I am a huge believer in Passive Indexing.. but.....

Post by RRAAYY3 » Fri May 19, 2017 8:36 am

bank the profits and reinvest the "fun" 100K

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Re: I am a huge believer in Passive Indexing.. but.....

Post by JonnyDVM » Fri May 19, 2017 8:41 am

You're allowed to have fun money. Portfolio fun money is best kept to 5-10% at absolute max. At this point I say sell, take the monies and run. When you find something else that piques your interest and you want to take a swing, go ahead. I just did the same thing with a stock that doubled after I bought it less than a year ago. I have another one that's been slogging around break even. You can't win long term trying to pick stock unless you dedicate your life to it, and in some cases not even then. Nevertheless, trying to pick individual winners is entertaining and has a better EV then the craps table. Indexing is great for the bulk of ones portfolio. There no bogleheads rule that dictates it be 100% of the portfolio.
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Re: I am a huge believer in Passive Indexing.. but.....

Post by nisiprius » Fri May 19, 2017 8:53 am

I wrote:...I'd suggest that the (ambiguous) evidence I've seen on skill on the part of professional managers, who spend their working lives on this stuff and have access to information resources you and I can only dream of, is that professionals might be able to add 0.5% to 1% in alpha before costs. Maybe not, but if they do it's only 0.5% to 1% in annualized return. Yeah, I can do the compounding and maybe that should be regarded as a big deal, but it's 0.5% to 1%. It's not 5%/year, 10%/year, 20%/year.
Here's an interesting case in point. During the time Berkshire Hathaway has been a listed stock, here is how it has compared with the Vanguard 500 Index Fund:

Source
Image

Now, let's assume that the performance is pure 100% stock-picking skill, no elements of business participation, no effective leverage from ownership of insurance companies, no adjustment for value tilt, no "but it was all years ago," no allowing for the fact that we know about this stock because of its outperformance... assume it's 100% Warren's stock-picking skill. I calculate the CAGR over that time period to have been:

Vanguard 500 index Fund (blue), 9.45%.
Berkshire Hathaway BRK.A (orange), 13.93%
Difference ("geometric sum"), 4.09%

In other words, Warren Buffett is 4.09% ahead of the S&P 500.

The most impressive performance in living memory is to add 4.09% annualized to the S&P 500. This accords pretty well with my statement that for "professional managers" the amount they might be able to add is "0.5% to 1%. It's not 5%/year, 10%/year, 20%/year." Even Warren Buffett has not added 5%/year.

So if you are 8%/year above the market, I would say that must have a good deal of luck in it unless you literally are more skilled than Warren Buffett.
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Re: I am a huge believer in Passive Indexing.. but.....

Post by Nate79 » Fri May 19, 2017 8:57 am

Maybe you have a great system. Maybe you have the magic touch. Who knows? But that's not the point about passive vs active. Active here meaning doing your own stock picking (vs active mutual fund). The point is that depending on your age are you ready to keep this up for an investing horizon of 20, 30, 40, 50+ years? The nice thing about passive index funds is you can focus your time in other areas for the rest of your life and get the market return.

The other part of that is what will be your performance after 30 years of this? 1 year is meaningless.

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Re: I am a huge believer in Passive Indexing.. but.....

Post by BolderBoy » Fri May 19, 2017 9:07 am

Call_Me_Op wrote:
WolfgangPauli wrote:
  • Do I chalk this up to luck...
Yes
+1

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knpstr
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Re: I am a huge believer in Passive Indexing.. but.....

Post by knpstr » Fri May 19, 2017 9:27 am

nisiprius wrote:Now, let's assume that the performance is pure 100% stock-picking skill, no elements of business participation, no effective leverage from ownership of insurance companies, no adjustment for value tilt, no "but it was all years ago," no allowing for the fact that we know about this stock because of its outperformance... assume it's 100% Warren's stock-picking skill. I calculate the CAGR over that time period to have been:

Vanguard 500 index Fund (blue), 9.45%.
Berkshire Hathaway BRK.A (orange), 13.93%
Difference ("geometric sum"), 4.09%

In other words, Warren Buffett is 4.09% ahead of the S&P 500.

The most impressive performance in living memory is to add 4.09% annualized to the S&P 500. This accords pretty well with my statement that for "professional managers" the amount they might be able to add is "0.5% to 1%. It's not 5%/year, 10%/year, 20%/year." Even Warren Buffett has not added 5%/year.

So if you are 8%/year above the market, I would say that must have a good deal of luck in it unless you literally are more skilled than Warren Buffett.
I don't think your chart went back far enough.

since 1965 (beginning for the BRK era)
Warren's CAGR is 20.8% after-tax
S&P 500 is 9.7% with dividends included, pre-tax

Source: Berkshire Hathaway 2016 annual report
Last edited by knpstr on Fri May 19, 2017 9:39 am, edited 1 time in total.
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wrongfunds
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Re: I am a huge believer in Passive Indexing.. but.....

Post by wrongfunds » Fri May 19, 2017 9:35 am

RE: The Berkshire chart

If the starting point were changed to 1993 on that chart (or 2002 etc), does it still show impressive performance over S&P? Both the lines seem to be tracking quite well to each other i.e. the difference between them is relatively constant and NOT growing. That says gains are similar to S&P.

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knpstr
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Re: I am a huge believer in Passive Indexing.. but.....

Post by knpstr » Fri May 19, 2017 9:46 am

wrongfunds wrote:RE: The Berkshire chart

If the starting point were changed to 1993 on that chart (or 2002 etc), does it still show impressive performance over S&P? Both the lines seem to be tracking quite well to each other i.e. the difference between them is relatively constant and NOT growing. That says gains are similar to S&P.
Warren Buffett in 2016 annual report:
"As for Berkshire, our size precludes a brilliant result: Prospective returns fall as assets increase. Nonetheless, Berkshire’s collection of good businesses, along with the company’s impregnable financial strength and owner-oriented culture, should deliver decent results. We won’t be satisfied with less."
It is a phenomena due to their size, which they have been vocal about for many years, that returns will start going down and it will be harder to beat the benchmark.

But even beating the benchmarks after all taxes/costs by 1-2% per year is significant in the long run.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

jcavana1
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Re: I am a huge believer in Passive Indexing.. but.....

Post by jcavana1 » Fri May 19, 2017 2:05 pm

It is a phenomena due to their size, which they have been vocal about for many years, that returns will start going down and it will be harder to beat the benchmark.

But even beating the benchmarks after all taxes/costs by 1-2% per year is significant in the long run.[/quote]

I read a quote from Buffett several months ago in which he said that if he were starting out with only 50k today he thinks he could destroy the S and P. I can't remember the exact number. But I remember that it was large enough that I thought it couldn't be true. Like 30-40% return annually.

aristotelian
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Re: I am a huge believer in Passive Indexing.. but.....

Post by aristotelian » Fri May 19, 2017 2:19 pm

jcavana1 wrote:
I read a quote from Buffett several months ago in which he said that if he were starting out with only 50k today he thinks he could destroy the S and P. I can't remember the exact number. But I remember that it was large enough that I thought it couldn't be true. Like 30-40% return annually.
Wouldn't be hard. He could buy my kids' lemonade stand and a few others. Their profit margin is like 6000%.

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knpstr
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Re: I am a huge believer in Passive Indexing.. but.....

Post by knpstr » Fri May 19, 2017 2:22 pm

jcavana1 wrote:I read a quote from Buffett several months ago in which he said that if he were starting out with only 50k today he thinks he could destroy the S and P. I can't remember the exact number. But I remember that it was large enough that I thought it couldn't be true. Like 30-40% return annually.
Yes, I recall reading that somewhere but I think it was 5-10 years ago. He stated he'd stick to searching micro/small caps and thinks he could get close to 50% returns for awhile. He stated he'd go back to his Ben Graham style.

Unfortunately, making 50% returns on $1,000,000 doesn't even move BRK's needle.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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greg24
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Re: I am a huge believer in Passive Indexing.. but.....

Post by greg24 » Fri May 19, 2017 2:28 pm

Obviously this is a huge positive sign of your stock-picking skill. You should find a job as a stock broker, or, even better, start your own mutual fund. Would it be crazy to suggest a hedge fund?

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Re: I am a huge believer in Passive Indexing.. but.....

Post by bottlecap » Fri May 19, 2017 2:42 pm

WolfgangPauli wrote:
Bacchus01 wrote:You bought shares in customer companies? Be careful here
Why? My thought process was if they were smart enough to hire me .. they must be good??
I believe he was referring to conflicts of interest and ethics. A lot of companies have rules about this. It is also dangerous to do investing-wise because if you are taking more risk. If they tank, you lose your investment and your income from the company.


To answer your question, chalk it up to luck. This is exactly why fun money is a bad idea, especially if you are susceptible to this kind of temptation.

You had success over a short period of time in a bull market. That tells you exactly nothing about your strategy that you shouldn't already have known when you began.

JT

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Meg77
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Re: I am a huge believer in Passive Indexing.. but.....

Post by Meg77 » Fri May 19, 2017 2:47 pm

Your fun money portfolio has a dramatic lack of diversification compared to index funds. That means it has more risk, which means it will either outperform or underperform a broadly diversified basket of equities with comparatively little diversification risk. You are lucky in that all your picks are doing well, hence the outperformance over a short period of time. If even one of your picks suffers a loss though, due to any number of company- or industry-specific factors (political or regulatory changes, industry cycle, an internal scandal, an earnings miss, competition, etc), your fun money portfolio could dramatically underperform the market.

I've made some individual picks before - BP after the oil spill, Toyota after the big break recall, Bank of America during the recession, the European stock index after the Brexit vote. They all did more or less well, but frankly I've never compared my "wins" to what the broad market did over the same holding period.

I think you can still let it ride and/or keep at it. I personally would keep any individual stock holding below 5% of total investible assets though.
"An investment in knowledge pays the best interest." - Benjamin Franklin

dacalo
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Re: I am a huge believer in Passive Indexing.. but.....

Post by dacalo » Fri May 19, 2017 3:34 pm

I am not sure what kind of consulting you are doing but when I worked in a Big 4 audit firm we had strict policy that we cannot purchase stocks of customers we serve. They did random audits of our portfolio too.

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Re: I am a huge believer in Passive Indexing.. but.....

Post by Bob-a-job » Fri May 19, 2017 5:59 pm

Dottie57 wrote:OP

You have been playing with "fun" money during a bull market. The circumstances which have blessed your picks will change drastically during a bear market. Remember you have the fun money because you are a passive investor not because you are a genious at picking stocks during a bull market.
+1
Count your blessings..

ColoradoRick
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Re: I am a huge believer in Passive Indexing.. but.....

Post by ColoradoRick » Fri May 19, 2017 9:55 pm

OP - first congrats! Enjoy your success.

2nd is Questions I'd ask myself:
Do you enjoy the process of picking the stocks?
Are you willing to spend the time to monitor them?
How would you feel if the stocks you picked fell 50%? Would you hang in there, or would you forever kick yourself and sell at the bottom?

My personal experience: My best results the first 30 years of my life has been indexing in just 3 funds. However as I retired and wanted a hobby I took 5% of my portfolio and had a good experience as you did. I have increased it; but in a disciplined manner. That is I buy only solid companies with a predetermined criteria and a minimum hold time frame. My results have been slightly better to better than indexing and I realize that it may be luck, but I am enjoying doing it. As long as my returns are close to indexing and I am not endangering my retirement, I will continue to do it. I keep my allocation between 50/50 and 70/30 with a CD ladder to sleep at night. I don't trade and have been humbled enough by the market to realize I could have a rough patch. BUT I AM THOROUGHLY ENJOYING IT. It all depends on you. Don't risk your retirement, but if you limit the % amount and don't get addicted, go to 10%. Give it a couple of years and if you are still exceeding indexing, perhaps a little more.

I have 22% in (10) stocks but as mentioned my criteria are consistent. All Dividend Aristocrats, with dividend payments < 50% of EPS, little to no debt and have a defensible moat. Only buy 1-3 x per year. Buy when dividends > 3% and P/E is 15 (will make an exception to 18 if company has excellent ROTC). This is not to say I've not had losses, but the gains have made up for it.

I do it for fun. Let us know what you finally decide. We are all different, and many may say its not the Boglehead way, but even Jack himself has a little in an active mutual fund (I think his son runs it.)

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