NYT: Re-education of a Brash Young Stock Picker

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Jagman
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NYT: Re-education of a Brash Young Stock Picker

Post by Jagman » Fri Apr 18, 2014 8:30 pm

http://www.nytimes.com/2014/04/19/your- ... .html?_r=0

"Nine years ago, Randy Kurtz made an extraordinary bet on himself, the stock market and his ability to pick a few winners.

He hung out a shingle for his money management firm and made the following promise to investors: If his investments underperformed the Standard & Poor’s 500-stock index, they would pay him nothing. But if he beat it, they would pay him a fee equal to one-third of the money they had made beyond what the index had returned...

Despite all that success, he recently sent me a searing email with the subject heading 'My Capitulation.' In it, he described his conversion from a stock picker to someone who mostly buys index and exchange-traded funds for his clients. And his story is our story, or at least it should be."

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nedsaid
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Re: NYT: Re-education of a Brash Young Stock Picker

Post by nedsaid » Sat Apr 19, 2014 7:34 am

This was a good article. It is pretty sobering when folks like Warren Buffett and Peter Lynch say that most people should buy and hold the broad index funds. Outperforming the market CAN be done but few do it consistently and the longer the time frame, the longer the odds.

I still own individual stocks but most of them are well-known blue chips and I rarely trade them. Mostly letting them ride and collecting the dividends. I gave up on all the research after the 2000 crash and work with an independent broker. The research took a lot of time and I am not sure that it added much to my performance.
A fool and his money are good for business.

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market timer
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Re: NYT: Re-education of a Brash Young Stock Picker

Post by market timer » Sat Apr 19, 2014 8:18 am

Jagman wrote:He hung out a shingle for his money management firm and made the following promise to investors: If his investments underperformed the Standard & Poor’s 500-stock index, they would pay him nothing. But if he beat it, they would pay him a fee equal to one-third of the money they had made beyond what the index had returned...
Put half your customers in Heads, the other half in Tails. Collect 1/3 of 50% of AUM.

Article doesn't really delve much into the re-education. A clearer title would be, "Advisor changes fee structure."

berntson
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Re: NYT: Re-education of a Brash Young Stock Picker

Post by berntson » Sat Apr 19, 2014 11:40 am

nedsaid wrote:This was a good article. It is pretty sobering when folks like Warren Buffett and Peter Lynch say that most people should buy and hold the broad index funds. Outperforming the market CAN be done but few do it consistently and the longer the time frame, the longer the odds.

I still own individual stocks but most of them are well-known blue chips and I rarely trade them. Mostly letting them ride and collecting the dividends. I gave up on all the research after the 2000 crash and work with an independent broker. The research took a lot of time and I am not sure that it added much to my performance.
Did you enjoy the research? From what I can tell, beating the market is too hard and daunting and time consuming to do unless (1) you have a natural obsession with markets and finance or (2) someone is paying you large amounts of money to do it. Even then, beating the market is only a good idea if an investor has the right temperament and a bit of real skill.

I've been thinking lately that index investing and Buffett-ish active management are a nice compliment for each other. If Buffett only has a couple of good ideas every year, I'll be lucky if I have a good idea once every five years. You just can't build a reasonable portfolio with one good idea every five years. (In fact I have yet to have a good idea, so once every five years is likely too optimistic.)

What you can do, though, is hold a broadly diversified portfolio with low fees and then add a good idea every few years if it comes along. Holding index funds lets the active manager focus on his best ideas and removes the need to pick lots of stocks just to fill out a portfolio. If no ideas come along, then he just gets market returns, which is great!
Last edited by berntson on Sat Apr 19, 2014 12:33 pm, edited 1 time in total.

Nukeboilermaker
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Re: NYT: Re-education of a Brash Young Stock Picker

Post by Nukeboilermaker » Sat Apr 19, 2014 11:55 am

berntson wrote:
nedsaid wrote:This was a good article. It is pretty sobering when folks like Warren Buffett and Peter Lynch say that most people should buy and hold the broad index funds. Outperforming the market CAN be done but few do it consistently and the longer the time frame, the longer the odds.

I still own individual stocks but most of them are well-known blue chips and I rarely trade them. Mostly letting them ride and collecting the dividends. I gave up on all the research after the 2000 crash and work with an independent broker. The research took a lot of time and I am not sure that it added much to my performance.
I've been thinking lately that index investing and Buffett-ish active management are a nice compliment for each other. If Buffett only has a couple of good ideas every year, I'll be lucky if I have a good idea once every five years. You just can't build a reasonable portfolio with one good idea every five years. (In fact I have yet to have a good idea, so once every five years is likely too optimistic.)

What you can do, though, is have a broadly diversified portfolio with low fees and then add a good idea every few years if it comes along. Holding index funds lets the active manager focus on his best ideas and removes the need to pick lots of stocks just to fill out a portfolio.
Is what "mad money" or maybe even an ESPP is for. I play the lottery just about weekly, it's just some entertainment with some absurd of maybe retiring early. If I have a fully funded efund, max out all tax advantage accounts, there is nothin wrong with playing a little and supporting/investing in a company you believe in.

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Re: NYT: Re-education of a Brash Young Stock Picker

Post by Waba » Sat Apr 19, 2014 12:37 pm

market timer wrote:Put half your customers in Heads, the other half in Tails. Collect 1/3 of 50% of AUM.
Heads, you lose. Tails, I win. A solid risk averse strategy, Warren Buffet will be proud of him.
he described his conversion from a stock picker to someone who mostly buys index and exchange-traded funds for his clients.
Instead of wasting time reading all those 10K's, put Heads in LCV and Tails in SCG and spend the rest of the day improving your swing.

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Re: NYT: Re-education of a Brash Young Stock Picker

Post by berntson » Sat Apr 19, 2014 12:44 pm

Nukeboilermaker wrote:
berntson wrote:
nedsaid wrote:This was a good article. It is pretty sobering when folks like Warren Buffett and Peter Lynch say that most people should buy and hold the broad index funds. Outperforming the market CAN be done but few do it consistently and the longer the time frame, the longer the odds.

I still own individual stocks but most of them are well-known blue chips and I rarely trade them. Mostly letting them ride and collecting the dividends. I gave up on all the research after the 2000 crash and work with an independent broker. The research took a lot of time and I am not sure that it added much to my performance.
I've been thinking lately that index investing and Buffett-ish active management are a nice compliment for each other. If Buffett only has a couple of good ideas every year, I'll be lucky if I have a good idea once every five years. You just can't build a reasonable portfolio with one good idea every five years. (In fact I have yet to have a good idea, so once every five years is likely too optimistic.)

What you can do, though, is have a broadly diversified portfolio with low fees and then add a good idea every few years if it comes along. Holding index funds lets the active manager focus on his best ideas and removes the need to pick lots of stocks just to fill out a portfolio.
Is what "mad money" or maybe even an ESPP is for. I play the lottery just about weekly, it's just some entertainment with some absurd of maybe retiring early. If I have a fully funded efund, max out all tax advantage accounts, there is nothin wrong with playing a little and supporting/investing in a company you believe in.
I agree that as long as investor has sufficient savings, playing that market with a reasonable amount of money is acceptable. For myself, I don't like the idea of "playing" the market with active investments. This suggests that the decision process is less rigorous than the process an investor uses for constructing the rest of his or her portfolio. If anything, I would want active investments be the result of a more rigorous process, not less. Like all investors, I have all sorts of cognitive biases (overconfidence, confirmation bias, anchoring...), biases that are more dangerous when analyzing individual companies than when choosing index funds.

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Re: NYT: Re-education of a Brash Young Stock Picker

Post by nedsaid » Sat Apr 19, 2014 5:10 pm

Berntson, my research was several things. Recommendations from my broker. Valueline at the public library. Reading Barron's, the Wall Street Journal, Kiplinger's, Money Magazine, and other publications for ideas.

A great idea came from Barron's in an interview with Jeff Vinik, who managed Fidelity Magellan at the time. He recommended Canadian Pacific, which was primarily a railroad but was a conglomerate. I recommended it to a family member who saw the stock spinoff several companies and the investment was very profitable. Sadly, I did not buy.

I bought Fannie Mae and got the idea from one of Peter Lynch's books. Another good buy was a local insurance company that demutualized and I bought stock soon after. I still hold the shares.

The brokers I worked with had good recommendations too. One was Plum Creek Timber, which I bought back in 1988. It was probably the best investment I ever made.

Some ideas were mine, most were from the broker.

The brokers would follow a universe of about 30 stocks at a time and would recommend their best ideas. Two of the brokers in that particular office were featured as All-Star Brokers by Money Magazine and were value investors. My brokers in that office probably got most of their ideas from the two All-Star brokers. Any more than 30 stocks were too many to follow.

Fortunately, I was not churned and in any case I was pretty small fry. I had an account there because a friend of mine went into the brokerage business for about a year. The next guy was really good but after a few years he became office manager and cut me loose. Another guy followed who got bored with me pretty quickly and I was cut loose again. Yet another fellow inherited me and when he left the firm, I followed him as he became independent. So those guys taught me an awful lot.

The research was fun during the bull market of the 1980's and 1990's. I lost interest after the 2000 crash and trade stocks infrequently. I have de-emphasized the role of individual stocks in my portfolio since then. Pretty much, I try to buy good stuff and keep it.

I don't recommend what I did for several reasons. First, I lucked out and actually had pretty good brokers who did not churn me. Not everyone has had my positive experience. Second, it takes time. Third, I doubt that I outperformed the markets doing this. I have had big winners and my share of clunkers. Fourth, I am not sure that all that research really improved my performance that much.

But I did okay and owning the stocks didn't hurt me. Boy I sure learned about business, the markets, and the economy through this experience. I owned actual shares of actual businesses. I even vote my proxies best I can. But WOW, what a bunch of mail.
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Re: NYT: Re-education of a Brash Young Stock Picker

Post by Sagenick48 » Sat Apr 19, 2014 6:52 pm

Same experience as nedsaid, I recommend it to all the "young" readers, it makes you comfortable picking index funds when you are an old "fart"
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Re: NYT: Re-education of a Brash Young Stock Picker

Post by berntson » Sat Apr 19, 2014 8:10 pm

Thanks nedsaid. I like what you said about owning actual companies. In some ways, by holding diversified mutual funds and owning everything, it feels like I own nothing. A few months ago, I realized that despite years of mutual fund investing, I had no idea how to read a real financial statement. I spent the the next several weeks getting up to speed and discovered that I really like figuring out how companies work.

Another mildly frustrating thing about owning diversified mutual funds is that I can't seem to find straight answers about simple question like: How much cash flow did my investments generate? What is their book value? What is the enterprise value of my holdings? What was my share of their EBITDA? What is the average debt load for the companies I own? When you own mutual funds, the price is often the only thing that you can easily track. This encourages investors to pay attention changes in price instead of real fundamentals.

It sounds like having a coach or a mentor is helpful. I'm glad you had brokers that were helpful and not harmful!

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Re: NYT: Re-education of a Brash Young Stock Picker

Post by JoMoney » Sat Apr 19, 2014 9:19 pm

berntson wrote:...What you can do, though, is hold a broadly diversified portfolio with low fees and then add a good idea every few years if it comes along. Holding index funds lets the active manager focus on his best ideas and removes the need to pick lots of stocks just to fill out a portfolio. If no ideas come along, then he just gets market returns, which is great!
This is what I used to do along my way to becoming a completely index fund investor. I do enjoy the research, but the psychological/behavioral problems took a toll.

I knew enough that I needed my portfolio to be diversified (...what I really knew, was that I know nothing about these individual companies...) So I always had my bets spread across quite a few stocks. Despite a few amazing winning picks and a few dismal ones, the net result was about the same as the market return. For awhile, I tried to convince myself that because I wasn't trading much at all, and kept my brokerage costs low, that it was saving money even over an index fund. But after Vanguard started lowering their ER's down to .05%, and having an institutional index in my employers 401k at .02% it got harder and harder to make the argument on fees alone.
...and then there was all the psychological/behavioral problems I started getting frustrated with. It would really irk me when I saw the "could'of, would'of, should'of", time and time again I would fail to make some trade that I had thought about doing, and then change my mind only to wish I hadn't... or I would make the change and find out how wrong I was. It was also affecting my other purchases, when I would see a product that had some relationship to a company I had ownership of (or was a competitor to the company I owned) it was impacting my decisions. It got to be a bit too much considering there wasn't much additional return happening from all my efforts, and despite my desire to believe I was from Lake Wobegon , I conceded that the most likely result was a market return, and my finances were too important to keep taking the risks (and the stress) considering the guarantee of market return was there for the taking without the very real risk that I would do something stupid thinking that I knew something. The market is extremely competitive, and sometimes it takes more than just being good at something to outperform, most people underestimate how much luck/chance plays into the results.

I was just listening to an episode of The Clark Howard Show where Clark brought up some of the behaviorial reasons he prefers indexing to stock picking -
The Clark Howard Show 03.24.14 Hour 2 (last caller at the very end):
Clark Howard wrote:...I don't buy a lot of individual stocks. I own some, but mostly I buy index funds where I buy the broad stock market. I buy international, I buy an emerging market, I buy a small company, and a big company index fund - essentially - you can go around that just by buying a total stock market for your U.S. ...
...And the reason I do that is most of us have a tough time when we buy individual stocks. Really having a sense of when we've held it too long, or when we've held it just right, and we'll hold onto something that was a great story until it's a dog, or we have a dog and we keep waiting for it to become a great story and it never does...
...And that happened to me ... I dont think I've ever talked about this ... it was a stock that i bought that tanked on me and I kept waiting for it to recover and instead guess what happened to the company ? ... my stock went to zero... and so that's a human behavior kind of thing ... but that's why i really like buying index funds where you own little slices and dices of American or over-seas capitalism because you're not having to worry so much about what's happening with an individual company, you're instead owning the capitalist system...
...If you are into doing good personal primary research on companies, you're willing to put in that time - buy individual stocks ... But if that's not your thing ... that you're going to sit there and really dig in their and read... and go through their quarterlies, their 10-Qs, and annual 10-K, ... If that's not what you're about, then I'm a fan of, and I believe the champion way to invest is in a variety of index funds.
Makes sense to me, but I would add that I really did enjoy going through annual and quarterly reports... listening to conference calls and was considering going to a few annual shareholder meetings "for fun"... but I still decided owning a low cost index fund was the preferable way to hold a diversified portfolio of stocks... and I can still play around with reading annual reports without the stress of the decision making that likely won't produce a better long-run result...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: NYT: Re-education of a Brash Young Stock Picker

Post by packer16 » Sat Apr 19, 2014 9:31 pm

I think you can do well if you have the right temperament, framework and interest as you say. You have to focus (primarily) where the analyst/brokerages are not so you have to be contrarian and correct. I gradually went from a fund investor to a compounder investor (buying companies like FFH, MRK, BRK) to an individual stock investor. I have found it worth my time as I have done well versus the market over the past 10 years generating about 35% per year versus a market return of 7% per year holding primarily 8 to 10 stocks per year. As some have mentioned you can have a core index and hold a few individual stocks and see how they do. I don't like the idea of play money as it implies there is no analysis behind picks which I think is just pure speculation which I do not like to do. I perform individual stock level analysis but do not discuss it here because the audience for the most part is not interested but at CoBF they are. Under the investment ideas there are a lot of really good analyses primarily done by non-professionals. I really wonder about the background of the Brash Young Stock Picker and whether he was just going with the NYC crowd which is definitely a way to underperform.

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Re: NYT: Re-education of a Brash Young Stock Picker

Post by berntson » Sat Apr 19, 2014 9:54 pm

Thanks JoMoney and packer16. I can see where there could be serious behavioral issues owning individual stocks. My only foray into owning individual stocks was buying Apple stock at around $100 just because I liked the company. When I settled in with a proper index portfolio, the shares were just a bit under their peak of $700 and I sold them to setup a proper portfolio of index funds. It was emotionally very hard. I kept thinking: I'll sell my stock and it will promptly double. Lucky for my psychological health, it didn't. :beer

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Re: NYT: Re-education of a Brash Young Stock Picker

Post by JoMoney » Sat Apr 19, 2014 9:56 pm

packer16 wrote:...over the past 10 years generating about 35% per year versus a market return of 7% per year holding primarily 8 to 10 stocks per year...
This sort of focus plays a big role in "beating the market", the more "diversified" the portfolio the more likely your results will mimic market returns (with the ultimate in diversification being to simply own the entire market)...
The greater the specific risk you take on the greater potential you have to do something other than the market, maybe out-sized gains, maybe lose everything.. we can call it "tracking error" or "maverick risk" but it is a very real risk of losing everything, the less diversified your portfolio is the less likely you are to get the markets return... and their is a much higher probability of ending up broke then being the next Warren Buffett. I think people interested in this Mad-Money Cramer 5 stock portfolio investing should read "Common Stocks and Uncommon Profits" and think about how willing they are too put in the effort of his "Scuttlebutt" approach to gathering business intelligence that the market doesn't already know about... and even then consider all the scandals and accounting frauds that happen.. most of us are in no position to really "know" anything about these businesses.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: NYT: Re-education of a Brash Young Stock Picker

Post by packer16 » Sat Apr 19, 2014 10:15 pm

JoMoney wrote:
packer16 wrote:...over the past 10 years generating about 35% per year versus a market return of 7% per year holding primarily 8 to 10 stocks per year...
This sort of focus plays a big role in "beating the market", the more "diversified" the portfolio the more likely your results will mimic market returns (with the ultimate in diversification being to simply own the entire market)...
The greater the specific risk you take on the greater potential you have to do something other than the market, maybe out-sized gains, maybe lose everything.. we can call it "tracking error" or "maverick risk" but it is a very real risk of losing everything, the less diversified your portfolio is the less likely you are to get the markets return... and their is a much higher probability of ending up broke then being the next Warren Buffett. I think people interested in this Mad-Money Cramer 5 stock portfolio investing should read "Common Stocks and Uncommon Profits" and think about how willing they are too put in the effort of his "Scuttlebutt" approach to gathering business intelligence that the market doesn't already know about... and even then consider all the scandals and accounting frauds that happen.. most of us are in no position to really "know" anything about these businesses.
I agree there is very real risk but I think it can be mitigated by two factors. First buying when the price is worth less 50% of its intrinsic value today. Second, buy when people hate the stock. You preferably want both situations. I also roll stocks by trading stocks that have a value of 50% of a current holding. The other advantage is I can buy the cheapest or the highest exposure to value factors per stock than others who have to add less exposure to "diversify" their holdings. At some point the diversification effects will more than dilute the value factors in a portfolio of greater than 10 stocks. I also have the background of being a business appraiser so I understand the key drivers of value of most companies.

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Re: NYT: Re-education of a Brash Young Stock Picker

Post by telemark » Sun Apr 20, 2014 4:13 am

Jagman wrote:If his investments underperformed the Standard & Poor’s 500-stock index, they would pay him nothing.
Nothing, that is, beyond what they have already lost relative to the index.
Jagman wrote:But if he beat it, they would pay him a fee equal to one-third of the money they had made beyond what the index had returned...
So when he underperforms you bear 100% of the loss, but when he beats the index you only collect two thirds of the gain. What's extraordinary about this bet is that people were willing to take it.

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Re: NYT: Re-education of a Brash Young Stock Picker

Post by livesoft » Sun Apr 20, 2014 6:38 am

I think Mr. Lieber has an ulterior motive for getting this article published and it's a good one.

He knows that readers will weigh in with comments and that folks will read the comments section. And in the comments section of this particular article praise for index funds, Vanguard, and even a mention of bogleheads.org will predominate. And this is all good. Mr. Lieber cannot simply write an article about how great Vanguard and bogleheads are because I think it would be unlikely to get past his editors. This article thus fulfills almost the same purpose by showing the alternative and letting others do the work in the comments section.
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Re: NYT: Re-education of a Brash Young Stock Picker

Post by nedsaid » Sun Apr 20, 2014 9:50 am

One reason that stock picking often doesn't beat the market is that it involves intangible factors that cannot be quantified. Yes, buying at a good price is important. If you want to take the time and really dig into the financials and the footnotes, that is really helpful. Checking to see if the dividend payment is sustainable and can grow over time. Asking yourself if the company has an economic "moat" around it that gives it an advantage over its competition. Does it have a strong brand? Does the company have a strong balance sheet? Is the company strong enough to weather a big storm?

I might be a bit of a heretic here but the numbers while important are not the determining factor. Companies are people and ultimately when you buy a stock, you are putting confidence into its management and in its workforce. A couple of examples.

Peter Lynch famously made a bet on Chrysler. It was a pretty hopeless situation and it needed a government loan and the charismatic leadership of Lee Iaccoca to give it a chance. There was a great design team that were getting exciting products in the pipeline but could everyone get things turned around in time? As I recall, Louis Rukeyser asked Lynch on Wall Street Week why he was buying Chrysler and Lynch nervously said, "Because I like to take risks." Chrysler was a gamble but regardless of what you say about the numbers it was in reality a vote of confidence in Iaccoca and his crack design team. There was no guarantee that this would work.

Upon the recommendation of broker number 2, I bought shares of Philips, the General Electric of Europe. A very good and a very strong company. I held it for a while and the stock did nothing. I went to the trusty Valueline at my public library. The numbers didn't look great. Poor earnings growth. The pipeline of new products looked uninspiring. I carefully read the article and went through the numbers. Uninspiring leadership. What a complete turkey!! So I sold the darned thing. The stock went up and went up a lot not long after I sold it. This is why I often say that if you want your investment to go up, sell it!!!

So this is one big reason that stock picking doesn't beat the market averages. You can crunch and crunch and crunch numbers and that is very helpful. It is a very important part of the stock picking process. But often it is the intangible factors like company leadership that determines the future price of the stock. This is why money managers visit companies and talk to management in person. They know all about the intangible factors I am talking about. This is one of the things that made Warren Buffett very successful. Yes the guy crunches numbers with the best of them but it is his ability to make judgments about people that ultimately was the source of his success.
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Re: NYT: Re-education of a Brash Young Stock Picker

Post by packer16 » Sun Apr 20, 2014 10:04 am

You bring up some good points. Stock picking can beat the averages if you hold non-consensus views and you are correct. You don't need to interview management to do this. Most data about mid to large companies is publicly available so you will not get excess returns from that so what you have to do is hold a non-consensus opinion and be correct. I will give you a current example. I hold Fiat. In looking at the business you have adequate positioning and a great CEO in Machionne who has turned around other firms and likes to have a hands approach for deals. If you read most of the analyst reports they have been negative with price targets have been below the current price. So you have to be against the consensus in the larger / mid cap space. For the smaller companies many times there is no consensus as few analysts follow them and funds hold them so the main measure of the hatred is price. Growth is also important as at some point growth will be realized and the stock re-rated.

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Re: NYT: Re-education of a Brash Young Stock Picker

Post by nedsaid » Sun Apr 20, 2014 10:11 am

Another couple thoughts on stock picking. I think the "sweet spot" for diversification of an individual stock portfolio is 15-20 stocks diversified across industry sectors. A person can pretty easily follow these companies, particularly if you subscribe to a service like Morningstar. And I would build the core of the portfolio around Blue Chip stocks and branch out from there. The absolute minimum if you want to do this is five stocks but I think you want to have a target of 15-20.

Another reason is that stock picking most often doesn't beat the market are incorrect buy/sell decisions. The buy decision is relatively easy, the sell decision is very difficult. You increase your odds greatly if you minimize your transactions because the fewer transactions the lower the odds you will screw up the sell decision. So buy stocks at a good price and plan on a long time horizon preferably forever.

Another issue is that no matter how hard you try, you will have an occasional investing disaster. Lucent, Nortel, AIG were all disasters for me. The first two were because I didn't realize that the telecom business was undergoing radical and fundamental changes. The market for a lot of their products was just going away. A lot of very smart people on Wall Street did not realize that. AIG was the classic "black swan". How could the biggest insurance company get into trouble? Well, got into trouble it did and because of credit default swaps. From what I read, the team that really understood this got replaced by a team that thought they understood the credit default swap market but really didn't. The really smart people realized what was happening and sold like crazy, the smart people were mystified at why the price of the stock of a quality company was dropping precipitously. The really smart people were selling and the merely smart people were probably buying in thinking they were getting the bargain of a lifetime. No matter how smart you are, there are always things out there you just don't know.

Yes, I am becoming the old fart I used to joke about. All I need is a donut shop where I can hang out with the regulars and complain bitterly about my property taxes! And write angry letters to the editor.
A fool and his money are good for business.

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Re: NYT: Re-education of a Brash Young Stock Picker

Post by nedsaid » Sun Apr 20, 2014 10:33 am

Packer16, you are right about going against the grain.

First of all, one of Nedsaid's rules of investing says something like this. Upon buying an investment you will soon come across a newspaper article or a TV report telling you that whatever you just did was a mistake and completely wrong. This is almost guaranteed. So a frustrating part of investing is dealing with contrary information.

Secondly, a bit of a contrarian streak as an investor is helpful. The trouble with this is that the crowd is often right. Being contrary for the sake of being contrarian can cost you big time. But being contrarian can help you capitalize on the behavioral errors of your fellow investors. I have often posted about taking advantage of the extremes of market sentiment.

If you are contrarian, a couple things really help. First is looking at the sentiment indicators of money managers. As I remember, Louis Rukeyser would post this on his TV show and it was a good contrary indicator. Too much bullishness was a bad sign, too much bearishness was a good sign. Insider buying and selling is an imperfect indicator but it is helpful. For an example, an insider may be selling to put his daughter through college. Looking at money flows in and out of asset classes is also helpful. If you have new monies to invest and don't know what to do, there are many dumber things you can do than putting the new money into asset classes that the crowd is taking money out of. I don't follow Jim Cramer much anymore, but he seemed like the perfect contrary indicator. When he got excited about the market, it tended to have setbacks. When he was really pessimistic about the market, it tended to go up. Don't use Cramer as a contrary indicator but I couldn't help noticing.

Going against the grain of stock analysts can be helpful though I never did this myself. A great insight into how this all worked was how the late great CEO of Coke would call up analysts and bully them over the phone if they put out information that he didn't like. The fiction that Coke had 15-18% earnings growth that you could trace with a ruler had to be defended at all costs. I used to joke that the company was going to spin off everything but the logo!!! A lot of financial engineering and bullying to keep the story going. Reality eventually settled in. A great company but the real growth rate was probably half of what was claimed. And "earnings growth" was often optimistic projections that didn't pan out. It was all about projections and estimates and not so much actual results. Eventually, Wall Street did notice this.

I did read somewhere that buying on the "buy" recommendations of stock analysts was the prescription for underperformance and by a lot. You actually could make lots of money buying the "sell" recommendations. So the stock analysts are actually the crowd that one should bet against. But I never did this either. This takes real courage.
A fool and his money are good for business.

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packer16
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Re: NYT: Re-education of a Brash Young Stock Picker

Post by packer16 » Sun Apr 20, 2014 11:49 am

The sell decision is difficult but if I can find something twice as undervalued as what I am selling it has worked so far. I have also rode through bear markets but have had above average volatility. One thing I have done is to buy some insurer/investment companies to provide some buffer for a decline. Before the last decline it was BRK and FFH. This time it include Dhando Holding (a private insurance company planning to go public next year) and possibly either a NNN company or MKL or LUK. As to losers you are correct and that is one big difference to fund investing. For stocks it is part of the game you just have to accept it and try to identify early before you lose too much. Part of it is knowing your weakness and preventing it from happening again. I have done this with leveraged firms. However, in funds it can be a disaster and probably means you did something wrong.

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Re: NYT: Re-education of a Brash Young Stock Picker

Post by nedsaid » Sun Apr 20, 2014 12:09 pm

It really boils down to correct investor behavior rather than picking the "right" investments. Reading Peter Lynch's books did not turn me into Peter Lynch but I did okay as a stock picker. What was most important was that I was patient and stuck with stocks even when things looked bad. I also tried to have an eye towards value.

I have found that financial companies like banks and insurance companies tend to be good investments. Lower than market P/E ratios and often good dividend payout with decent earnings growth. The famed Davis Family built their fortune in part by investing in financials. They often pass value screens and tend to be owned by value funds. This approach isn't foolproof. A local money manager spoke at a function and he mentioned that Value Funds loaded up on financials prior to the 2008-2009 financial crisis not understanding what part of the credit cycle we were in. So some Value funds got hit really, really hard.

My "three horsemen of underperformance" GE, Pfizer, and Microsoft were purchased by me in the 2000's at "bargain" prices. I admired these companies for years and was looking to buy these at a good price. Unfortunately, these stocks went from greatly overvalued to just overvalued and I have gotten very tepid performance. I am still underwater on GE, about even on Pfizer on price (I keep collecting those dividends), and actually am making money on Microsoft. My broker recommended that I sell Microsoft. He sold his, I kept mine. Predictably the price went up. I called him to thank him for selling his stock so that mine could go up!! We got a good laugh over that. I think this is what Cramer means when he talks about making a sacrifice to the trading gods.

I post this to show that even good value strategies are not foolproof. And Value is often in the eyes of the beholder.

I was probably a very average stock picker with good behavioral characteristics. My investing behavior and patience counted a lot more than my stock picking "genius." I still say that investing is mostly behavioral. The key is to only do the stupid things and learn from them. Stay away from doing the really, really, really, really stupid things and you should do just fine.
A fool and his money are good for business.

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Captain Sensible
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Re: NYT: Re-education of a Brash Young Stock Picker

Post by Captain Sensible » Sun Apr 20, 2014 2:50 pm

berntson wrote:Did you enjoy the research?
I think this is the best response, because of the real opportunity cost of spending so much time and attention on analysis and stock-picking. I'd much rather earn extra income, or invest in my human capital (work or "life" skills), or at least learn about topics I find more interesting.

I do agree with the comments above about the value of contrarian investing versus following the herd. I believe this is nicely captured by periodic rebalancing instead of stock picking. But good luck, you crazy kids!

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