"Steelmanning" the case for owning individual stocks

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hdas
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"Steelmanning" the case for owning individual stocks

Post by hdas » Tue Jan 29, 2019 12:48 pm

Steel man:
Sometimes the term "steel man" is used to refer to a position's or argument's improved form. A straw man is a misrepresentation of someone's position or argument that is easy to defeat: a "steel man" is an improvement of someone's position or argument that is harder to defeat than their originally stated position or argument.

In this forum and elsewhere, the idea of investing in individual stocks is readily dismissed. In most cases for very good reasons:

1. Concentration of risk
2. People buy lottery tickets
3. Opens more room for behavioral mistakes
4. Track record of active managers in the long run
5. Cost, Taxes, Simplicity

However, how about the cases when:

1. A desirable fund with X,Y characteristics doesn't exist.
2. The investor is willing to follow a well researched disciplined systematic approach.
3. The strategy can be implemented at reasonable cost and sensitive to tax issues.
4. The investor has the interest, quantitative skills and time to carry on with the endeavor.
5. The main objective is to have an appropriate growth with a lot less volatility and small drawdowns.

After considering the above, the main question is will the juice be worth the squeeze?. Some other issues include:

1. The odds of outperforming the benchmark over the long term are low. But how about when adding low cost?
2. Tax Loss Harvesting becomes a lot easier.
3. One requisite is that the potential under-performance can't be a threat to financial goals. It would just suck to put time and effort into something that doesn't pan out as expected.

In any case, the strategy that I will be considering will include (Updated 5/29/19):

1. Rank stocks based on Low Volatility and "Desirable" Momentum
2. Use Russell 1000 as universe.
3. Add constrains to prevent sector concentration.
4. Daily or event based rebalancing.

I'm looking forward to hear the best arguments against embarking in this effort, specifically about the desirability of the strategy features and the tax situation.

I found the wiki section very good.

Thanks :greedy

Update (6/13/2019): 3 month performance

Image

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Last edited by hdas on Thu Jun 13, 2019 5:02 pm, edited 3 times in total.
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by ryman554 » Tue Jan 29, 2019 1:00 pm

You are trying to create and run your own mutual fund based on "factors".

I think you underestimate how much work and cost is involved in tracking whatever index / method you are trying to follow.

But that is not my objection: my objection is: why do you think that the quants, with all of their AI computing power and historical data at their disposal, has not already analyzed / thought of this? I do not believe that there is any "simple" strategy such as this that can find mispricing.

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Re: "Steelmanning" the case for owning individual stocks

Post by onourway » Tue Jan 29, 2019 1:14 pm

I would take your point #1
1. A desirable fund with X,Y characteristics doesn't exist.
and say that you've created this 'problem' specifically so you can develop a strategy to 'solve' it.

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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Tue Jan 29, 2019 1:15 pm

Mr. Ryman554,

Thanks for your comment, you bring up a couple of good issues. While I'm quite adept at working with large data-sets, I think testing strategies in stocks could be very time/resource intensive. I have certain infrastructure in place to analyze futures quotes, but I'm a neophyte in the individual stocks world. I would likely have to rely heavily on the existing peer reviewed evidence to base my decisions. This is a big issue for a DYI person like me.
ryman554 wrote:
Tue Jan 29, 2019 1:00 pm
But that is not my objection: my objection is: why do you think that the quants, with all of their AI computing power and historical data at their disposal, has not already analyzed / thought of this? I do not believe that there is any "simple" strategy such as this that can find mispricing.
I tend to agree with you that the low hanging fruits are gone, however I have relatively attainable expectations with this strategy:
The main objective is to have an appropriate growth rate say 3%+/- the apt benchmark with a lot less volatility and small drawdowns
Do you think this is outside reach? :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Tue Jan 29, 2019 1:24 pm

onourway wrote:
Tue Jan 29, 2019 1:14 pm
I would take your point #1
1. A desirable fund with X,Y characteristics doesn't exist.
and say that you've created this 'problem' specifically so you can develop a strategy to 'solve' it.
This is a valid criticism, but allow me to defend my position:

1. As we get older and succeed in life we accumulate more assets, I think it's desirable to strive to have more uncorrelated sources of risk dictating the faith one's wealth.
2. I already have a BH diversified stock/bond portfolio.
3. I truly can't find a good and cheap fund that does this.

Cheers :greedy
Last edited by hdas on Wed May 29, 2019 5:01 pm, edited 1 time in total.
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by Therapist Investor » Tue Jan 29, 2019 1:33 pm

I fall into the camp that does not believe in individual stock investing. That belief was based initially on anecdotal experience of observing others play the game and losing badly. That caused me to avoid most of the longest bull market in history. I eventually came back around to investing, but my belief in using index funds was reinforced by my reading the posts from many members of this forum. I just don't believe that investing is a field in which expertise can be used to gain significantly better results than a dumb, cheap benchmark net of fees over the long term.

How is the systematic approach you describe substantially different from all of the other approaches people have tried before? Your goal of an additional 3% growth with less volatility and small drawdowns is lofty. If you are successful over several years, you will probably become well known. However, if you are successful how would you be able to tell it was due to your skills as an investor rather than due to luck? What do you estimate the total fees of this fund to be?

My opinion may be wrong and I would be open to reconsidering it. I would encourage you to post the results of your experiment on an ongoing basis. It would be interesting to follow, similar to this thread: viewtopic.php?f=10&t=5934

Best of luck to you!
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Re: "Steelmanning" the case for owning individual stocks

Post by 2015 » Tue Jan 29, 2019 1:36 pm

An obsession with investing, personal finance, and microeconomics is a great way to wake up one day and find one has been a victim of personal disruptive innovation as a result of being too focused on only one small area of the complex adaptive system that an individual lives in. Success in life occurs in many dimensions, and high performing individuals are efficient in parceling out their time and attention among all of those dimensions.

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Re: "Steelmanning" the case for owning individual stocks

Post by KlangFool » Tue Jan 29, 2019 1:40 pm

OP,

A) Why do you think that it is worth it for you for an additional 3% per year?

B) What is the additional risk that you are taking? Aka, instead of dropping 50% like the Total Stock Market Index, it can drop 100%.

C) What is the percentage of your portfolio that you are going to invest in this strategy?

D) How much time and effort that is going to cost you? Aka how many hours per week?

KlangFool

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Re: "Steelmanning" the case for owning individual stocks

Post by DaftInvestor » Tue Jan 29, 2019 1:40 pm

Sounds like you are looking for a hobby.
You lost me at both your "#1's" (underlined in original post and the follow-up comment down below).
Low cost equity funds exist.
Any portfolio you build with individual stocks will have high-correlation to already existing funds.

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Re: "Steelmanning" the case for owning individual stocks

Post by staythecourse » Tue Jan 29, 2019 1:41 pm

hdas wrote:
Tue Jan 29, 2019 12:48 pm
1. A desirable fund with X,Y characteristics doesn't exist.
Right or wrong I do exactly that for my REIT slice. I wanted jut a residential REIT and have waited years for one, but figured out why it doesn't exist.... There are only about 7-8 public REITS that fit into that category. So I just made my own comprised of those. It was easier now as I just plugged all available (30 or so) into porfolio visualizer and found the ones with the highest correlation coeff. with each other with LONG track records AND large (few mid cap) size REIT stock.

I realize there is risk, but feel its risk is LOWER then buying an apartment building. The latter involves multiple risk that folks don't consider: Lack of diversification (geography), concentration risk, iliquidity, single company risk, manager risk, etc... Then, of course, the intangible takes time and effort. This approach substantially decreases diversification. concentration risk and manager risk. It eliminates iliquidity and single company risk.

The added benefit as well is no ER so lower overall portfolio costs.

So, yes I did exactly what you asked about. The difference is I am not trying to come up with some magical box to produce x return. I was trying to approximate a specific section of the market which was not available on the market. My approach gave a 100% residential REITs with the due deligence that comes from being publicly traded. Good thing especially as I just read about the 1B Woodbridge ponzi scheme.

Good luck.
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Re: "Steelmanning" the case for owning individual stocks

Post by unclescrooge » Tue Jan 29, 2019 1:43 pm

hdas wrote:
Tue Jan 29, 2019 1:24 pm
onourway wrote:
Tue Jan 29, 2019 1:14 pm
I would take your point #1
1. A desirable fund with X,Y characteristics doesn't exist.
and say that you've created this 'problem' specifically so you can develop a strategy to 'solve' it.
This is a valid criticism, but allow me to defend my position:

1. As we get older and succeed in life we accumulate more assets, I think it's desirable to strive to have more uncorrelated sources of risk dictating the faith one's wealth.
2. I already have a BH diversified stock/bond portfolio.
3. I truly can't find a cheap fund that does this. Specially the drawdown protection....maybe some hedge fund, but I'm against to the idea of giving the money to a manager that is willing to accept me as an investor.

Cheers :greedy
So adding more bonds to your asset allocation doesn't solve issues 1 and 3?

I think you have too much time on your hands or are craving intellectual stimulation.

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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Tue Jan 29, 2019 1:56 pm

Good questions:
KlangFool wrote:
Tue Jan 29, 2019 1:40 pm

A) Why do you think that it is worth it for you for an additional 3% per year?
I have certain skills that could transfer to this endeavor, so I won't be starting from scratch. Having an uncorrelated potential stream of returns is very valuable. Specially if the approach involves a limit on losses ( on/off cross sectional momentum)
KlangFool wrote:
Tue Jan 29, 2019 1:40 pm
B) What is the additional risk that you are taking? Aka, instead of dropping 50% like the Total Stock Market Index, it can drop 100%.
I think the more likely risk is of death by 1000 cuts, churning and taxes.
KlangFool wrote:
Tue Jan 29, 2019 1:40 pm
C) What is the percentage of your portfolio that you are going to invest in this strategy?
10-15% of investable assets. If the process is successful and can scale up will be more.
KlangFool wrote:
Tue Jan 29, 2019 1:40 pm
D) How much time and effort that is going to cost you? Aka how many hours per week?
3-6 hours, I can be flexible. The most important thing is to see results. I would like to develop some tools to measure short term progress. Unfortunately, for long term holding and less active approaches this is not that easy. I already tried to start an effort like this, it wasn't totally unsuccessful, however I had to prioritize my time given the opportunity set in the markets. I need to make sure that If I go for it, I don't abandon it half way.

Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Tue Jan 29, 2019 2:03 pm

unclescrooge wrote:
Tue Jan 29, 2019 1:43 pm
So adding more bonds to your asset allocation doesn't solve issues 1 and 3?

I think you have too much time on your hands or are craving intellectual stimulation.
I think this two things can be true. But I'm still solving a problem:

Having stock exposure that combines: quality, low volatility, cross sectional momentum and the option to go to cash (when not enough stocks that meet criteria). It is true that there could be an etf of fund that will achieve the same results, I just haven't found it yet.
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by KlangFool » Tue Jan 29, 2019 2:03 pm

hdas wrote:
Tue Jan 29, 2019 1:56 pm
Good questions:
KlangFool wrote:
Tue Jan 29, 2019 1:40 pm

A) Why do you think that it is worth it for you for an additional 3% per year?
I have certain skills that could transfer to this endeavor, so I won't be starting from scratch. Having an uncorrelated potential stream of returns is very valuable. Specially if the approach involves a limit on losses ( on/off cross sectional momentum)
KlangFool wrote:
Tue Jan 29, 2019 1:40 pm
B) What is the additional risk that you are taking? Aka, instead of dropping 50% like the Total Stock Market Index, it can drop 100%.
I think the more likely risk is of death by 1000 cuts, churning and taxes.
KlangFool wrote:
Tue Jan 29, 2019 1:40 pm
C) What is the percentage of your portfolio that you are going to invest in this strategy?
10-15% of investable assets. If the process is successful and can scale up will be more.
KlangFool wrote:
Tue Jan 29, 2019 1:40 pm
D) How much time and effort that is going to cost you? Aka how many hours per week?
3-6 hours, I can be flexible. The most important thing is to see results. I would like to develop some tools to measure short term progress. Unfortunately, for long term holding and less active approaches this is not that easy. I already tried to start an effort like this, it wasn't totally unsuccessful, however I had to prioritize my time given the opportunity set in the markets. I need to make sure that If I go for it, I don't abandon it half way.

Cheers :greedy
hdas,

Let's assume 3 hours per week X 50 weeks = 150 hours.

3% of 15% = 0.03 X 0.15 = additional 0.45% return for your whole portfolio.

This is a lousy ROI.

KlangFool

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Re: "Steelmanning" the case for owning individual stocks

Post by sergeant » Tue Jan 29, 2019 2:11 pm

Do it. Post your account activity in real time.
Lincoln 3 EOW!

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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Tue Jan 29, 2019 2:27 pm

KlangFool wrote:
Tue Jan 29, 2019 2:03 pm
hdas,

Let's assume 3 hours per week X 50 weeks = 150 hours.

3% of 15% = 0.03 X 0.15 = additional 0.45% return for your whole portfolio.

This is a lousy ROI.

KlangFool
This is a nice perspective, yet it doesn't apply 100% to this case bcs at the moment this money is in T-Bills as collateral for other positions (that's why the strategy should include some drawdown protection). So the real ROI would be the difference between stocks and bills + the potential 3%. However, your comment makes me reflect on the need to do some research and exploring the data as to what is the likely range of outcomes. Thanks :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Tue Jan 29, 2019 2:33 pm

DaftInvestor wrote:
Tue Jan 29, 2019 1:40 pm
Any portfolio you build with individual stocks will have high-correlation to already existing funds.
This is true. However the option to go to cash (through cs momentum) is necessary. As I mentioned in another response, the alternative for this money is not another stock fund, its cash (as it will be collateral). You could make the case that I should pick a low volatility equity fund and just have some "stop loss", however, a priori I think my approach would be preferable. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by KlangFool » Tue Jan 29, 2019 2:33 pm

hdas wrote:
Tue Jan 29, 2019 2:27 pm
KlangFool wrote:
Tue Jan 29, 2019 2:03 pm
hdas,

Let's assume 3 hours per week X 50 weeks = 150 hours.

3% of 15% = 0.03 X 0.15 = additional 0.45% return for your whole portfolio.

This is a lousy ROI.

KlangFool
This is a nice perspective, yet it doesn't apply 100% to this case bcs at the moment this money is in T-Bills as collateral for other positions (that's why the strategy should include some drawdown protection). So the real ROI would be the difference between stocks and bills + the potential 3%. However, your comment makes me reflect on the need to do some research and exploring the data as to what is the likely range of outcomes. Thanks :greedy
hdas,

Heh, it is your choice to lie to yourself in order to justify your action. But, we do not have to buy it. You could invest this money in your main portfolio. But, you choose not to.

I do not play this kind of game. My main portfolio return nominal 7%. Anything that I do will be benchmarked against that.

I have $5,000 of play money. I only gamble on the stock that has the potential of returning 10X to 30X. Anything less than that, it is not worth my effort.

KlangFool

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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Tue Jan 29, 2019 2:41 pm

KlangFool wrote:
Tue Jan 29, 2019 2:33 pm

I have $5,000 of play money. I only gamble on the stock that has the potential of returning 10X to 30X. Anything less than that, it is not worth my effort.
Funny you mention this, ppl like to bet on lottery type of stocks, which empirically do a lot worse than the market. It's one of the behavioral underpinnings of the low vol anomaly. Which according to this data point seems to be alive and well. Good luck and thanks for your input. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by bloom2708 » Tue Jan 29, 2019 2:43 pm

Read all 5 Game of Thrones books. Better use of your precious time. :D
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Re: "Steelmanning" the case for owning individual stocks

Post by Fallible » Tue Jan 29, 2019 2:45 pm

hdas wrote:
Tue Jan 29, 2019 12:48 pm
...
I found the wiki section very good.
So then you are trying to passively manage individual stocks to create a "DIY index fund"?

Also, you later say you already have a “BH diversified stock/bond portfolio.” How much of your investments overall would you be applying to individual stocks? If, say, 5%, do you consider it “play” money?

And you say this: "The most important thing is to see results. I would like to develop some tools to measure short term progress."

But since long-term will be the key to success, how will knowing short-term progress help? What can the short-term you want to measure tell you about long-term? And if this can be meaningfully measured, why haven't the top money managers already done so?
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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Tue Jan 29, 2019 3:01 pm

Fallible wrote:
Tue Jan 29, 2019 2:45 pm

So then you are trying to passively manage individual stocks to create a "DIY index fund"?
Because I can't find a cheap fund to do exactly what I want for me
Fallible wrote:
Tue Jan 29, 2019 2:45 pm
Also, you later say you already have a “BH diversified stock/bond portfolio.” How much of your investments overall would you be applying to individual stocks? If, say, 5%, do you consider it “play” money?
I would be willing to allocate 10-15% to this. I strongly don't believe in the idea of play money. I don't do that, I use money to make more money and pay for my lifestyle, never to play.
Fallible wrote:
Tue Jan 29, 2019 2:45 pm
And you say this: "The most important thing is to see results. I would like to develop some tools to measure short term progress."

But since long-term will be the key to success, how will knowing short-term progress help? What can the short-term you want to measure tell you about long-term?
Good Question, you can measure the effectiveness of your process since there are many moving pieces, for example:

1. Did the last X days behave in a manner consistent with backtest?
2. Do have measures of cross-sectional momentum that are adequate to the changing volatility environments?....How many whipsaw events occurred?
3. How did you do against your benchmark, daily, weekly, monthly.?
4. Is the optimal turnover too expensive? Where is the balance.?
5. Is the portfolio offering better TLH opportunities than a fund.

Since I'm only exploring the idea, I don't have the good metrics well thought out yet, but they will come once/if I build the framework.
Fallible wrote:
Tue Jan 29, 2019 2:45 pm
And if this can be meaningfully measured, why haven't the top money managers already done so?
Im sure they have, but they charge 2/20 strip the investors of any potential alpha.

Thanks for your good questions :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by KlangFool » Tue Jan 29, 2019 3:02 pm

hdas wrote:
Tue Jan 29, 2019 2:41 pm
KlangFool wrote:
Tue Jan 29, 2019 2:33 pm

I have $5,000 of play money. I only gamble on the stock that has the potential of returning 10X to 30X. Anything less than that, it is not worth my effort.
Funny you mention this, ppl like to bet on lottery type of stocks, which empirically do a lot worse than the market. It's one of the behavioral underpinnings of the low vol anomaly. Which according to this data point seems to be alive and well. Good luck and thanks for your input. :greedy
hdas,

In my case, if I am wrong, I lose $5,000. It does not matter to me. But, if I win, I gain 50K to 150K. It is significant.

In your case, if you are wrong, you lose 15% of your portfolio. This is a big deal. If you are right, you gain 0.45% for your portfolio, It does not matter. It is a no-win situation. You are guaranteed to lose. So, why bother?

KlangFool

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Re: "Steelmanning" the case for owning individual stocks

Post by nisiprius » Tue Jan 29, 2019 3:09 pm

KlangFool wrote:
Tue Jan 29, 2019 2:33 pm

I have $5,000 of play money. I only gamble on the stock that has the potential of returning 10X to 30X. Anything less than that, it is not worth my effort.
So far, how many of your individual stock choices have done that (counting only ones that you have actually sold, and thus actually obtained those returns)?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: "Steelmanning" the case for owning individual stocks

Post by KlangFool » Tue Jan 29, 2019 3:14 pm

nisiprius wrote:
Tue Jan 29, 2019 3:09 pm
KlangFool wrote:
Tue Jan 29, 2019 2:33 pm

I have $5,000 of play money. I only gamble on the stock that has the potential of returning 10X to 30X. Anything less than that, it is not worth my effort.
So far, how many of your individual stock choices have done that (counting only ones that you have actually sold, and thus actually obtained those returns)?
Zero. My best return was 3X.

KlangFool

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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Tue Jan 29, 2019 3:18 pm

KlangFool wrote:
Tue Jan 29, 2019 3:02 pm
hdas,

In my case, if I am wrong, I lose $5,000. It does not matter to me. But, if I win, I gain 50K to 150K. It is significant.

In your case, if you are wrong, you lose 15% of your portfolio. This is a big deal. If you are right, you gain 0.45% for your portfolio, It does not matter. It is a no-win situation. You are guaranteed to lose. So, why bother?

KlangFool
Since our interaction in this thread is already at a stage of diminishing returns, so let this be the end. I just want to say a couple of things in the interest of keeping the integrity of the thread:

1. I'm exploring the idea of this framework to precisely avoid a larger than necessary drawdown.
2. When comparing 2 quantities, make sure that they are comparable and are in the same units. A one year excess return can't be compared to a X years (not defined) compounded final outcome. Also, don't forget incorporating (probability * outcome) = Expected Value. Good luck

Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by KlangFool » Tue Jan 29, 2019 3:25 pm

hdas wrote:
Tue Jan 29, 2019 3:18 pm
KlangFool wrote:
Tue Jan 29, 2019 3:02 pm
hdas,

In my case, if I am wrong, I lose $5,000. It does not matter to me. But, if I win, I gain 50K to 150K. It is significant.

In your case, if you are wrong, you lose 15% of your portfolio. This is a big deal. If you are right, you gain 0.45% for your portfolio, It does not matter. It is a no-win situation. You are guaranteed to lose. So, why bother?

KlangFool
Since our interaction in this thread is already at a stage of diminishing returns, so let this be the end. I just want to say a couple of things in the interest of keeping the integrity of the thread:

1. I'm exploring the idea of this framework to precisely avoid a larger than necessary drawdown.
2. When comparing 2 quantities, make sure that they are comparable and are in the same units. A one year excess return can't be compared to a X years (not defined) compounded final outcome. Also, don't forget incorporating (probability * outcome) = Expected Value. Good luck

Cheers :greedy
hdas,

FYI. My 10X to 30X return is for a 5 years period. I bought the stock and wait for at most 5 years.

KlangFool

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Re: "Steelmanning" the case for owning individual stocks

Post by unclescrooge » Tue Jan 29, 2019 3:27 pm

hdas wrote:
Tue Jan 29, 2019 3:01 pm
Fallible wrote:
Tue Jan 29, 2019 2:45 pm

So then you are trying to passively manage individual stocks to create a "DIY index fund"?
Because I can't find a cheap fund to do exactly what I want for me
Fallible wrote:
Tue Jan 29, 2019 2:45 pm
Also, you later say you already have a “BH diversified stock/bond portfolio.” How much of your investments overall would you be applying to individual stocks? If, say, 5%, do you consider it “play” money?
I would be willing to allocate 10-15% to this. I strongly don't believe in the idea of play money. I don't do that, I use money to make more money and pay for my lifestyle, never to play.
Fallible wrote:
Tue Jan 29, 2019 2:45 pm
And you say this: "The most important thing is to see results. I would like to develop some tools to measure short term progress."

But since long-term will be the key to success, how will knowing short-term progress help? What can the short-term you want to measure tell you about long-term?
Good Question, you can measure the effectiveness of your process since there are many moving pieces, for example:

1. Did the last X days behave in a manner consistent with backtest?
2. Do have measures of cross-sectional momentum that are adequate to the changing volatility environments?....How many whipsaw events occurred?
3. How did you do against your benchmark, daily, weekly, monthly.?
4. Is the optimal turnover too expensive? Where is the balance.?
5. Is the portfolio offering better TLH opportunities than a fund.

Since I'm only exploring the idea, I don't have the good metrics well thought out yet, but they will come once/if I build the framework.
Fallible wrote:
Tue Jan 29, 2019 2:45 pm
And if this can be meaningfully measured, why haven't the top money managers already done so?
Im sure they have, but they charge 2/20 strip the investors of any potential alpha.

Thanks for your good questions :greedy
If you allocate 10% of your portfolio and manage a generous 50% outperformance you're overall portfolio return increased a whopping 5 bps.😂😂

And I say generous because you mentioned moving to cash below a specific indicator. I bet you'll be whipsawed in and out and that even if you have no cost commissions, I doubt you'll actually see any outperformance. Just a lower drawdown in the best case, resulting in the same returns but with a higher Sharpe ratio.

I would wager that you'll go though all this exercise only to find you have added 1 or 2 bps in return.

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Re: "Steelmanning" the case for owning individual stocks

Post by bgf » Tue Jan 29, 2019 3:27 pm

klangfool, your approach seems best suited for calls. ever considered that? your likelihood of 10x+ increases dramatically, as does your probability of total loss.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: "Steelmanning" the case for owning individual stocks

Post by bgf » Tue Jan 29, 2019 3:30 pm

unclescrooge wrote:
Tue Jan 29, 2019 3:27 pm
hdas wrote:
Tue Jan 29, 2019 3:01 pm
Fallible wrote:
Tue Jan 29, 2019 2:45 pm

So then you are trying to passively manage individual stocks to create a "DIY index fund"?
Because I can't find a cheap fund to do exactly what I want for me
Fallible wrote:
Tue Jan 29, 2019 2:45 pm
Also, you later say you already have a “BH diversified stock/bond portfolio.” How much of your investments overall would you be applying to individual stocks? If, say, 5%, do you consider it “play” money?
I would be willing to allocate 10-15% to this. I strongly don't believe in the idea of play money. I don't do that, I use money to make more money and pay for my lifestyle, never to play.
Fallible wrote:
Tue Jan 29, 2019 2:45 pm
And you say this: "The most important thing is to see results. I would like to develop some tools to measure short term progress."

But since long-term will be the key to success, how will knowing short-term progress help? What can the short-term you want to measure tell you about long-term?
Good Question, you can measure the effectiveness of your process since there are many moving pieces, for example:

1. Did the last X days behave in a manner consistent with backtest?
2. Do have measures of cross-sectional momentum that are adequate to the changing volatility environments?....How many whipsaw events occurred?
3. How did you do against your benchmark, daily, weekly, monthly.?
4. Is the optimal turnover too expensive? Where is the balance.?
5. Is the portfolio offering better TLH opportunities than a fund.

Since I'm only exploring the idea, I don't have the good metrics well thought out yet, but they will come once/if I build the framework.
Fallible wrote:
Tue Jan 29, 2019 2:45 pm
And if this can be meaningfully measured, why haven't the top money managers already done so?
Im sure they have, but they charge 2/20 strip the investors of any potential alpha.

Thanks for your good questions :greedy
If you allocate 10% of your portfolio and manage a generous 50% outperformance you're overall portfolio return increased a whopping 5 bps.😂😂

And I say generous because you mentioned moving to cash below a specific indicator. I bet you'll be whipsawed in and out and that even if you have no cost commissions, I doubt you'll actually see any outperformance. Just a lower drawdown in the best case, resulting in the same returns but with a higher Sharpe ratio.

I would wager that you'll go though all this exercise only to find you have added 1 or 2 bps in return.
90*1.1 + 10*1.15 = 110.5, or 50 bps. right? or am i going crazy?

i agree though generally. if you aren't willing to do it with 20% of your allocation there is little point in doing it at all. that, at least, is where i draw my arbitrary line.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Tue Jan 29, 2019 3:39 pm

unclescrooge wrote:
Tue Jan 29, 2019 3:27 pm

If you allocate 10% of your portfolio and manage a generous 50% outperformance you're overall portfolio return increased a whopping 5 bps.😂😂

And I say generous because you mentioned moving to cash below a specific indicator. I bet you'll be whipsawed in and out and that even if you have no cost commissions, I doubt you'll actually see any outperformance. Just a lower drawdown in the best case, resulting in the same returns but with a higher Sharpe ratio.

I would wager that you'll go though all this exercise only to find you have added 1 or 2 bps in return.
You are likely to be right. However, If I can add 1, 2 bps on top of a normal index returns with a 10-15% max drawdown, it would be very satisfactory. Since the process is scalable, I could move more money into this strategy. Seems like your down to earth expectations are my optimistic case. :sharebeer

:greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by staythecourse » Tue Jan 29, 2019 3:45 pm

KlangFool wrote:
Tue Jan 29, 2019 3:14 pm
nisiprius wrote:
Tue Jan 29, 2019 3:09 pm
KlangFool wrote:
Tue Jan 29, 2019 2:33 pm

I have $5,000 of play money. I only gamble on the stock that has the potential of returning 10X to 30X. Anything less than that, it is not worth my effort.
So far, how many of your individual stock choices have done that (counting only ones that you have actually sold, and thus actually obtained those returns)?
Zero. My best return was 3X.

KlangFool
This is the exact reason I don't try to get rich by doing individual stocks. I've thought about using some play money 2-3x and each time the stock went up 100-300x however I don't regret it because I would have put AT MOST 20k or so in. The problem is to make a big difference in my overall portfolio it would take a MUCH bigger bet then that. If I had the guts to put at least 100k AND hit it big going up to 400k then you start moving the needle of a larger portfolio. So for the guy who has a larger portfolio it just doesn't seem worth it UNLESS you are willing to make a big bet so individual stock picking as a lottery attempt seems to be a waste of time.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: "Steelmanning" the case for owning individual stocks

Post by Fallible » Tue Jan 29, 2019 3:59 pm

hdas wrote:
Tue Jan 29, 2019 3:01 pm
...
Fallible wrote:
Tue Jan 29, 2019 2:45 pm
And you say this: "The most important thing is to see results. I would like to develop some tools to measure short term progress."

But since long-term will be the key to success, how will knowing short-term progress help? What can the short-term you want to measure tell you about long-term?
Good Question, you can measure the effectiveness of your process since there are many moving pieces, for example:

1. Did the last X days behave in a manner consistent with backtest?
2. Do have measures of cross-sectional momentum that are adequate to the changing volatility environments?....How many whipsaw events occurred?
3. How did you do against your benchmark, daily, weekly, monthly.?
4. Is the optimal turnover too expensive? Where is the balance.?
5. Is the portfolio offering better TLH opportunities than a fund.
...
But my question was “How will knowing short-term progress help? What can the short-term you want to measure tell you about long-term?” In other words, how and what can these five measurements reliably tell you about - or predict - the future?
"John Bogle has changed a basic industry in the optimal direction. Of very few can this be said." ~Paul A. Samuelson

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Re: "Steelmanning" the case for owning individual stocks

Post by KlangFool » Tue Jan 29, 2019 4:00 pm

staythecourse wrote:
Tue Jan 29, 2019 3:45 pm
KlangFool wrote:
Tue Jan 29, 2019 3:14 pm
nisiprius wrote:
Tue Jan 29, 2019 3:09 pm
KlangFool wrote:
Tue Jan 29, 2019 2:33 pm

I have $5,000 of play money. I only gamble on the stock that has the potential of returning 10X to 30X. Anything less than that, it is not worth my effort.
So far, how many of your individual stock choices have done that (counting only ones that you have actually sold, and thus actually obtained those returns)?
Zero. My best return was 3X.

KlangFool
This is the exact reason I don't try to get rich by doing individual stocks. I've thought about using some play money 2-3x and each time the stock went up 100-300x however I don't regret it because I would have put AT MOST 20k or so in. The problem is to make a big difference in my overall portfolio it would take a MUCH bigger bet then that. If I had the guts to put at least 100k AND hit it big going up to 400k then you start moving the needle of a larger portfolio. So for the guy who has a larger portfolio it just doesn't seem worth it UNLESS you are willing to make a big bet so individual stock picking as a lottery attempt seems to be a waste of time.

Good luck.
But, this keeps me from betting 100K to 300K. Hence, it serves its purposes.

KlangFool

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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Tue Jan 29, 2019 4:01 pm

SelfEmployed123 wrote:
Tue Jan 29, 2019 1:33 pm
How is the systematic approach you describe substantially different from all of the other approaches people have tried before?
Probably not that different. One difference is focusing on low vol stocks instead of the common man high flying stocks. Another is to not be focused in absolute return (I already do some of that) but focus on drawdown and volatility. And the third difference will be that because of the nature of the funds, a conservative style is necessary.
SelfEmployed123 wrote:
Tue Jan 29, 2019 1:33 pm
Your goal of an additional 3% growth with less volatility and small drawdowns is lofty. If you are successful over several years, you will probably become well known.
The good one forbid that happens. I just want to keep what I have, after the lifestyle and inflation take it away.
SelfEmployed123 wrote:
Tue Jan 29, 2019 1:33 pm
However, if you are successful how would you be able to tell it was due to your skills as an investor rather than due to luck? What do you estimate the total fees of this fund to be?
There are good stats that aim to answering that question. In term's of fees. I'd like to keep it under 0.25%, but that's just a rough approximation at this point.
SelfEmployed123 wrote:
Tue Jan 29, 2019 1:33 pm
I would encourage you to post the results of your experiment on an ongoing basis. It would be interesting to follow, similar to this thread: viewtopic.php?f=10&t=5934
The fellow in that thread is a good writer, but what he actually does is a complete disaster. It's not difficult to be better than that. No leverage involved here, at least not in the common sense.
SelfEmployed123 wrote:
Tue Jan 29, 2019 1:33 pm
Best of luck to you!
Thanks ! :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by unclescrooge » Tue Jan 29, 2019 5:04 pm

hdas wrote:
Tue Jan 29, 2019 3:39 pm
unclescrooge wrote:
Tue Jan 29, 2019 3:27 pm

If you allocate 10% of your portfolio and manage a generous 50% outperformance you're overall portfolio return increased a whopping 5 bps.😂😂

And I say generous because you mentioned moving to cash below a specific indicator. I bet you'll be whipsawed in and out and that even if you have no cost commissions, I doubt you'll actually see any outperformance. Just a lower drawdown in the best case, resulting in the same returns but with a higher Sharpe ratio.

I would wager that you'll go though all this exercise only to find you have added 1 or 2 bps in return.
You are likely to be right. However, If I can add 1, 2 bps on top of a normal index returns with a 10-15% max drawdown, it would be very satisfactory. Since the process is scalable, I could move more money into this strategy. Seems like your down to earth expectations are my optimistic case. :sharebeer

:greedy
Also see this article. It's originally from Bloomberg and needs you to sign-in for free.
Basically says an anti-Smart Beta Portfolio does just as well as a smart beta one. Sometimes.

https://blendle.com/i/bloomberg-busines ... OWI5In0%3D

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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Tue Jan 29, 2019 7:40 pm

Fallible wrote:
Tue Jan 29, 2019 3:59 pm
But my question was “How will knowing short-term progress help? What can the short-term you want to measure tell you about long-term?” In other words, how and what can these five measurements reliably tell you about - or predict - the future?
I'm not sure I understand your question, but the general case in active management (and in life) is that a long career is the accumulation of successful short term periods. As I said, at this point I don't have a clear picture of what the most relevant things to measure are, but I see the problem as an engineering challenge, it's not about predicting the future as you say but a matter of implementing a system where you control the things you can in order to have a better chance to achieve your goals.

For example, one of my goals is minimize drawdown. Ok, there are different things I can implement in pursue of this goal. Let's pick one: apply on/off cross sectional momentum. The challenge here is to have a mom model that is: a.) Robust to changes in volatility and/or b.) Adaptive to changes in volatility. Easier said than done, but lets say if after 3 months you are not being forced to be swapped out of good positions more than what your model expects and you are in line or beating your benchmark, we can say that you are in a good path and there's nothing to fix yet.

To be honest, I'm more worried about being able to have a good simulation environment for +2000 stocks and many combinations of portfolios. It's the interactions that make this project immensely more complex compared to what I already have in place. It's likely that as I keep getting deeper in this exploration I discover that the implementation I want is way more than I can chew, perhaps I'll need to find an associate :twisted:.

Thanks for your input. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Sat Feb 02, 2019 2:57 pm

Here's what I have found so far:

>> There's a decent python library for portfolio optimization. And on top of that, writing the objective functions yourself doesn't seem too complex.

>> Extreme care has to be placed on the sychronization of price database with fundamental data. Special attention to the releases and revisions.

>> I'm not a fan of the ppl from Alpha Architect, but they wrote two books where they nicely outline the industrial process in order to implement a project like this.

>> Getting fundamental data from companies is a bit of a higher hurdle. The really good ones like factset are outside reach. I might have to settle for something like YCharts. And then we are looking at $1000-$2000 cost per year. The other, more reasonable option is good data and decent API Im already getting from Tiingo, this is way cheaper but quality is the question.

>> Soon I'm going to start a reference guide for all the knowledge base support for the project.

>> The time investment it's going to be mostly frontloaded, once the framework is in place, the weekly/monthly maintenance tasks are trivial.

>> If I decide to start testing, the minimum outperformance suggested by the out of sample has to be significantly higher than I thought in orther to overcome: a.) Normal Decay, b.) Higher expenses, c.) Tax issues of high turnover.

>> Interactive Brokers seems like the obvious choice.

>> In the case that I decide to go ahead with this and that it works ok, It might make sense to do it in a tax advantaged account.

>> As I map the amount of effort this requires, the idea of doing this with another set of eyes is very attractive. However at that point the objective has to be a business proposition.

Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by nedsaid » Sun Feb 03, 2019 11:31 am

hdas wrote:
Tue Jan 29, 2019 12:48 pm
Steel man:
Sometimes the term "steel man" is used to refer to a position's or argument's improved form. A straw man is a misrepresentation of someone's position or argument that is easy to defeat: a "steel man" is an improvement of someone's position or argument that is harder to defeat than their originally stated position or argument.

In this forum and elsewhere, the idea of investing in individual stocks is readily dismissed. In most cases for very good reasons:

1. Concentration of risk
2. People buy lottery tickets for the wrong reasons
3. Opens more room for behavioral mistakes
4. Track record of active managers in the long run
5. Cost, Taxes, Simplicity

However, how about the cases when:

1. A desirable fund with X,Y characteristics doesn't exist.
2. The investor is willing to follow a disciplined systematic approach
3. The strategy can be implemented at reasonable cost and sensible to tax issues.
4. The investor has the interest, quantitative skills and time to carry on with the endeavor.
5. The main objective is to have an appropriate growth rate say 3%+/- the apt benchmark with a lot less volatility and small drawdowns.

After considering the above, the main question is will the juice be worth the squeeze?. Some other issues include:

1. The odds of outperforming the benchmark over the long term are low. But how about when adding low cost?
2. The main obstacle I see is the tax management of the account when adding momentum. However it opens Tax Loss Harvesting options.
3. Trading around earnings releases becomes important and could be expensive.
4. One requisite is that the potential under-performance can't be a threat to financial goals. It would just suck to put time and effort into something that doesn't pan out as expected.

In any case, the strategy that I will be considering will include:

1. Screen out high beta/high volatility stocks and super expensive stocks.
2. Add a filter(s) of quality/profitability
3. Select stocks in the boundary of mid-cap and large cap (hypothesis, needs to be supported)
4. Add constrains to prevent sector concentration.
5. Implement a on/off filter for Momentum, instead of Ranking. (This offers the theoretical option to go to cash, however this adds the problem of taxes)
6. Explore adding top policies of volatility/correlation (not sure about this yet)
7. Manage turn over to not exceed 0.2% in fees.
8. Likely will be using Interactive Brokers

I haven't fully made up my mind yet. I'm looking forward to hear the best arguments against embarking in this effort, specifically about the desirability of the strategy features and the tax situation.

Thanks :greedy

I found the wiki section very good.
hdas, I have posted on the topic of individual stocks many times on this forum. My conclusion is that managing a portfolio of individual stocks is fun and that if you do things mostly right that you will about track the broad indexes. That has been my experience. I don't do the fancy stuff, I try to buy good and great companies at reasonable prices and hold for a long time. Lots of eyeballing but I don't do huge amounts of analysis on spreadsheets or stuff like that. I do read the Morningstar analyst reports. I work with a broker. I diversify across industry sectors and have a preference for dividend payors.

Couldn't help but notice that I see many of my individual stocks in Vanguard High Dividend and have floated the idea of selling the stocks and buying that. I like stocks with dividend yields that are a bit higher than the market as a whole. The yield on my individual stocks within my Brokerage IRA account is 2.79%. Stylebox is
31 54 09
04 00 00
01 02 00

So I am Value oriented but not a deep Value investor.
A fool and his money are good for business.

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Re: "Steelmanning" the case for owning individual stocks

Post by nedsaid » Sun Feb 03, 2019 12:04 pm

The problem with Quantitative Analysis is that the numbers produced by the accountants are pretty good but not exact. There are judgments made and such things as accruals are made in an attempt to better match income and expense within the same time period.

You also have to take into account industry differences when you look at the numbers. It gets to be pretty complex and you can see why investment firms hire stock analysts that specialize by industry. Hard enough to analyze stocks within a certain industry sector but even harder to analyze across sectors. For example, the financials of a manufacturing company that needs lots of plant and equipment will look a lot different than those of a software company where the assets are mostly intangible. The financials of a bank will look different than the first two examples.

You have to understand the assumptions behind accounting, which is more than bookkeeping. Assets are mostly valued at historical cost or lower of cost or market. One issue is that book value is of decreasing importance as intangible assets, which are hard to value, are of increasing importance. Another is that the definition of earnings has become more conservative over time, a couple of things I can think of are amortization of goodwill and expensing of employee stock options.

A big problem with the quant stuff is that there is a going concern value of a business. Given enough time, a business will take on a life of its own. How do you put a value on the life of a business? You build such things as customer loyalty, brands, franchise value. In other words, a business is worth more than the sum of its parts. The value of a business as valued by the markets is much more than its liquidation value, that is if you close the doors and put the assets on the auction block. So businesses are mostly valued by putting a multiple on the cash flows that it generates. I have often posted about Microsoft which has a book value of about $9 a share and a market value of over $100 a share.

I also watched a video produced by a distinguished professor who is a favorite of Larry Swedroe, he said that every good valuation has a good story behind it. He echoed thoughts expressed many years earlier by Peter Lynch, former manager of FIdelity Magellan fund. He said that you should develop a good story or narrative for a stock before you buy it. The professor talked about Uber, whose value increased greatly by describing it as a logistics company rather than just a transportation company. A good story means a lot but it is pretty difficult to quantify.
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Re: "Steelmanning" the case for owning individual stocks

Post by hdas » Sun Feb 03, 2019 12:46 pm

nedsaid wrote:
Sun Feb 03, 2019 12:04 pm
The problem with Quantitative Analysis is that the numbers produced by the accountants are pretty good but not exact. There are judgments made and such things as accruals are made in an attempt to better match income and expense within the same time period.

You also have to take into account industry differences when you look at the numbers. It gets to be pretty complex and you can see why investment firms hire stock analysts that specialize by industry. Hard enough to analyze stocks within a certain industry sector but even harder to analyze across sectors. For example, the financials of a manufacturing company that needs lots of plant and equipment will look a lot different than those of a software company where the assets are mostly intangible. The financials of a bank will look different than the first two examples.

You have to understand the assumptions behind accounting, which is more than bookkeeping. Assets are mostly valued at historical cost or lower of cost or market. One issue is that book value is of decreasing importance as intangible assets, which are hard to value, are of increasing importance. Another is that the definition of earnings has become more conservative over time, a couple of things I can think of are amortization of goodwill and expensing of employee stock options.

A big problem with the quant stuff is that there is a going concern value of a business. Given enough time, a business will take on a life of its own. How do you put a value on the life of a business? You build such things as customer loyalty, brands, franchise value. In other words, a business is worth more than the sum of its parts. The value of a business as valued by the markets is much more than its liquidation value, that is if you close the doors and put the assets on the auction block. So businesses are mostly valued by putting a multiple on the cash flows that it generates. I have often posted about Microsoft which has a book value of about $9 a share and a market value of over $100 a share.

I also watched a video produced by a distinguished professor who is a favorite of Larry Swedroe, he said that every good valuation has a good story behind it. He echoed thoughts expressed many years earlier by Peter Lynch, former manager of FIdelity Magellan fund. He said that you should develop a good story or narrative for a stock before you buy it. The professor talked about Uber, whose value increased greatly by describing it as a logistics company rather than just a transportation company. A good story means a lot but it is pretty difficult to quantify.
Thanks a lot for your post, some observations:

1. I mostly agree with all your comments regarding the perils of valuation techniques and the data used to derive such measurements. You bring a good point about information relative to specific sectors, this is a very good insight even if you are just looking at price derived anomalies.

2. My assumption at this point is that the top anomalies are momentum and low volatility. Which exploitation depends heavily on the details of the implementation, but in this case we are talking about price measures. Not easy by any means, but not as complex as getting involved with fundamental data.

3. The only use I want have for fundamental data is a rough proxy for quality, just a way to screen out the obvious bad stocks. Alternatively I could "outsource" this and use the stocks within an index as my universe of stocks to work with.

4. Everybody has to leverage their personal skills and go from there. In my case those skills are not in the valuation/accounting department.

Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: "Steelmanning" the case for owning individual stocks

Post by nedsaid » Sun Feb 03, 2019 12:53 pm

I don't want to give the impression that I don't believe in quantitative analysis, I do. Just pointing out that it has its limitations. Using a Costco approach of buying stocks in bulk and using computer screening would be a much more efficient approach to portfolio management than trying a bottoms up Benjamin Graham approach of putting an intrinsic value upon each stock. Sort of a Dimensional Fund Advisors approach vs. Warren Buffett. I think Graham and his famous disciple Buffett would pay attention to the intangible aspects of a company that I post so much about. Most people don't have the skills of a Graham or a Buffett and would be better served using a more quant approach.
A fool and his money are good for business.

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Re: "Steelmanning" the case for owning individual stocks

Post by honduranhurricane » Sun Feb 03, 2019 12:58 pm

staythecourse wrote:
Tue Jan 29, 2019 1:41 pm
hdas wrote:
Tue Jan 29, 2019 12:48 pm
1. A desirable fund with X,Y characteristics doesn't exist.
Right or wrong I do exactly that for my REIT slice. I wanted jut a residential REIT and have waited years for one, but figured out why it doesn't exist.... There are only about 7-8 public REITS that fit into that category. So I just made my own comprised of those. It was easier now as I just plugged all available (30 or so) into porfolio visualizer and found the ones with the highest correlation coeff. with each other with LONG track records AND large (few mid cap) size REIT stock.

I realize there is risk, but feel its risk is LOWER then buying an apartment building. The latter involves multiple risk that folks don't consider: Lack of diversification (geography), concentration risk, iliquidity, single company risk, manager risk, etc... Then, of course, the intangible takes time and effort. This approach substantially decreases diversification. concentration risk and manager risk. It eliminates iliquidity and single company risk.

The added benefit as well is no ER so lower overall portfolio costs.

So, yes I did exactly what you asked about. The difference is I am not trying to come up with some magical box to produce x return. I was trying to approximate a specific section of the market which was not available on the market. My approach gave a 100% residential REITs with the due deligence that comes from being publicly traded. Good thing especially as I just read about the 1B Woodbridge ponzi scheme.

Good luck.
Hi STC, IF you don't mind, what stocks did you end up with? I like the thought process and could benefit. I have considered buying rentals but have not pulled the trigger. Concerns about the extra work in an already busy life along with those you highlight.

Thanks
HH

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Re: "Steelmanning" the case for owning individual stocks

Post by Amor Fati » Sun Feb 03, 2019 1:13 pm

The biggest case against this that I can think of is that historically, around 4% of listed stocks are attributable to around ALL of the historical market gains. Deviating from a total market index and making individual selections significantly increases your chances of not owning some or all of the 4% of stocks that will contribute to future market gains. As most have mentioned, optimistically you are likely to track the gains of the index, more likely to underperform the longer you try to do this

averagedude
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Re: "Steelmanning" the case for owning individual stocks

Post by averagedude » Sun Feb 03, 2019 2:29 pm

Im sure if you do some deep dives on etf's, that you can create a portfolio that would emulate closely to the factors that you desire and would be close to the performance that you would get if you selected a couple hundred individual stocks that is probably needed to satisfy your objectives. As far as the drawdowns, you can manage this by selling your etf's to cash at the tops of the market, and then buying back into the etf's at market bottoms. If you can successfully do this, you will easily beat the benchmarks by 3 percent annually. Unfortunately I don't have the skill to do this, but if you can pull this off consistently and sucessfully, I will happily subscribe to your future newsletter.

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nedsaid
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Re: "Steelmanning" the case for owning individual stocks

Post by nedsaid » Mon Feb 04, 2019 9:20 pm

Just for fun, as of 2/1/2019 my 15 year return on my individual stocks is 7.62% IRR compared to 8.20% for the S&P 500 and 8.49% for Total Stock Market Index. My 10 year return is 13.92% compared to 15.01% for the S&P 500 and 15.20% for Total Stock Market Index. So over 15 years, I am trailing the market by 0.87% a year. I am using Morningstar figures and Total Stock Market is represented by Vanguard Total Stock Market Admiral shares. My return figures come from Quicken which calculates IRR or Internal Rate of Return.
A fool and his money are good for business.

pdavi21
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Re: "Steelmanning" the case for owning individual stocks

Post by pdavi21 » Mon Feb 04, 2019 9:32 pm

"Steelmanning" isn't a thing. This sounds more like salesmanning.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

Grt2bOutdoors
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Re: "Steelmanning" the case for owning individual stocks

Post by Grt2bOutdoors » Mon Feb 04, 2019 11:17 pm

KlangFool wrote:
Tue Jan 29, 2019 3:25 pm
hdas wrote:
Tue Jan 29, 2019 3:18 pm
KlangFool wrote:
Tue Jan 29, 2019 3:02 pm
hdas,

In my case, if I am wrong, I lose $5,000. It does not matter to me. But, if I win, I gain 50K to 150K. It is significant.

In your case, if you are wrong, you lose 15% of your portfolio. This is a big deal. If you are right, you gain 0.45% for your portfolio, It does not matter. It is a no-win situation. You are guaranteed to lose. So, why bother?

KlangFool
Since our interaction in this thread is already at a stage of diminishing returns, so let this be the end. I just want to say a couple of things in the interest of keeping the integrity of the thread:

1. I'm exploring the idea of this framework to precisely avoid a larger than necessary drawdown.
2. When comparing 2 quantities, make sure that they are comparable and are in the same units. A one year excess return can't be compared to a X years (not defined) compounded final outcome. Also, don't forget incorporating (probability * outcome) = Expected Value. Good luck

Cheers :greedy
hdas,

FYI. My 10X to 30X return is for a 5 years period. I bought the stock and wait for at most 5 years.

Your impatience is why you failed. Remember one of the key components In compounding retutns requires time in the market. Monies needed in 5 years or less doesn’t belong in the stock market, be it funds or individual equities. Warren Buffetts favorite holding period is forever, for good reason too. It can take a long time for the returns to show up. Another quote - don’t do anything, just stand there.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

KlangFool
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Re: "Steelmanning" the case for owning individual stocks

Post by KlangFool » Mon Feb 04, 2019 11:26 pm

Grt2bOutdoors wrote:
Mon Feb 04, 2019 11:17 pm
KlangFool wrote:
Tue Jan 29, 2019 3:25 pm
hdas wrote:
Tue Jan 29, 2019 3:18 pm
KlangFool wrote:
Tue Jan 29, 2019 3:02 pm
hdas,

In my case, if I am wrong, I lose $5,000. It does not matter to me. But, if I win, I gain 50K to 150K. It is significant.

In your case, if you are wrong, you lose 15% of your portfolio. This is a big deal. If you are right, you gain 0.45% for your portfolio, It does not matter. It is a no-win situation. You are guaranteed to lose. So, why bother?

KlangFool
Since our interaction in this thread is already at a stage of diminishing returns, so let this be the end. I just want to say a couple of things in the interest of keeping the integrity of the thread:

1. I'm exploring the idea of this framework to precisely avoid a larger than necessary drawdown.
2. When comparing 2 quantities, make sure that they are comparable and are in the same units. A one year excess return can't be compared to a X years (not defined) compounded final outcome. Also, don't forget incorporating (probability * outcome) = Expected Value. Good luck

Cheers :greedy
hdas,

FYI. My 10X to 30X return is for a 5 years period. I bought the stock and wait for at most 5 years.

Your impatience is why you failed. Remember one of the key components In compounding retutns requires time in the market. Monies needed in 5 years or less doesn’t belong in the stock market, be it funds or individual equities. Warren Buffetts favorite holding period is forever, for good reason too. It can take a long time for the returns to show up. Another quote - don’t do anything, just stand there.
Grt2bOutdoors,

A) This is my play money. My judgment told me that the stock should return 10X to 30X in 5 years. If I am wrong, I sell.

B) I am not Warren Buffett. If I want to invest like Warren Buffett. I will buy BRK.A and BRK.B.

C) I know that I am gambling/speculating. The stock/company may never be profitable. My goal is to sell the hype.

KlangFool

sf_tech_saver
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Re: "Steelmanning" the case for owning individual stocks

Post by sf_tech_saver » Tue Feb 05, 2019 3:45 am

hdas wrote:
Tue Jan 29, 2019 1:56 pm
3-6 hours, I can be flexible. The most important thing is to see results. I would like to develop some tools to measure short term progress. Unfortunately, for long term holding and less active approaches this is not that easy. I already tried to start an effort like this, it wasn't totally unsuccessful, however I had to prioritize my time given the opportunity set in the markets. I need to make sure that If I go for it, I don't abandon it half way.
All of your comments about 'seeing results' are the truly scary part of this thread for me....

I hope everyone has read the Taleb work "Fooled by Randomness." All of his trading friends are heroes to their wives/kids for 5 years before they 'blow up' on the 6th and everything ends.

Anything but a Buffet like commitment to buy and hold a stock almost forever.....or at least as if the market would be closed for 5-10 years is, to the points made already on the thread, trying to out quant Wall Street in the medium term. :shock: :shock: :shock:

Trying to beat the quant hedge funds by researching a few hours a week sounds wacky to me! If one is really good at investing one should do nothing but it their whole life as its potential leverage is enormous. If you really are great....go full Charlie Munger....or stick to the BH path.
VTI is a modern marvel

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