Indexing vs Active Stock Selection

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BlackStrat
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Indexing vs Active Stock Selection

Post by BlackStrat » Fri Jul 10, 2015 3:37 pm

Like any Boglehead, I'm a fan of the idea of indexing, but I just got a shock off how much I've made from my company stock.

I've been working on calculating my cost basis for company stock purchased over a total of 6 years starting nearly 25 years ago. I spent a total of nearly $16k and reinvested dividends without cashing out the stock. With all the splits and company offshoots (spinning off new companies), the combined value of the stock today is around $270k.

I just did a quick calculation of 'what if' I had instead invested each of the 6 years contributions into an index fund earning 7% annualy, and ended up with around $61k - 23% of what I actually made from this stock.

Now I understand the odds of picking winners like this aren't very good (especially for me), but it was kind of an eye-opener at how certain people are in the right place at the right time with regards to what company they work for and the benefits that are available (think Microsoft in the early days). In fact, the largest purchase of this stock for me was my first year with the company because they made us wait 1 year before being able to contribute to the 401k (I didn't want to get used to the 10% I planned for 401k so I grudgingly put it into company stock...thank goodness).

I don't have any questions - just making the statement that sometimes active investing works (of course - I haven't cashed out yet so there's still time for me to lose my shirt if the company goes belly-up!!)

lack_ey
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Re: Indexing vs Active Stock Selection

Post by lack_ey » Fri Jul 10, 2015 3:54 pm

For what it's worth, the total market grew about 9.7% annualized since 1990, so almost twice as much as a 7% assumption for the period. Obviously it depends on the exact dates and so on. Still, the stock returned more, though probably with much higher volatility. This is close enough that you can't even consider your stock that much of an outlier. Most stocks do worse than the index, some do a whole lot better. Yours happened to fall in the "somewhat better" range, though over 25 years that makes a big difference.

BlackStrat
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Re: Indexing vs Active Stock Selection

Post by BlackStrat » Fri Jul 10, 2015 3:58 pm

lack_ey wrote:For what it's worth, the total market grew about 9.7% annualized since 1990, so almost twice as much as a 7% assumption for the period. Obviously it depends on the exact dates and so on. Still, the stock returned more, though probably with much higher volatility. This is close enough that you can't even consider your stock that much of an outlier. Most stocks do worse than the index, some do a whole lot better. Yours happened to fall in the "somewhat better" range, though over 25 years that makes a big difference.


yeah - I was unsure of the 7% I was using. 9.7% would get me up to $102k so it's more realistic.

And to be honest - this stock has doubled in the last 2 years; there was a long stretch where it didn't move at all.

It's the only bright light in my stock pickin' portfolio - nothing else comes close to indexing.

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SimpleGift
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Re: Indexing vs Active Stock Selection

Post by SimpleGift » Fri Jul 10, 2015 4:20 pm

BlackStrat wrote:Now I understand the odds of picking winners like this aren't very good...

One study that looked at the distribution of returns from a large universe of U.S. stocks over a 24-year period found that a minority of stocks were responsible for the majority of the market gains. In fact, if an investor was unlucky enough to miss the 25% best-performing stocks from 1983 through 2006, her total gain would be 0%.

    Image
    Note: This study covers all the stocks that traded on the NYSE, AMEX and NASDAQ from 1983 through 2006,
    including stocks eventually de-listed. All returns were calculated on a total return basis (dividends reinvested).
    Source: Meb Faber Research
Cordially, Todd

oc4boxer
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Re: Indexing vs Active Stock Selection

Post by oc4boxer » Fri Jul 10, 2015 4:44 pm

Before I really started to get serious about these things, I tried my hand at stock picking with two stocks. One has gone up 300%, the other has completely cratered. I'll just stick with the index funds going forward.

IPer
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Re: Indexing vs Active Stock Selection

Post by IPer » Fri Jul 10, 2015 4:50 pm

Um, there are individual stocks included in VTI/VTSAX. The more you own the more you benefit (or suffer losses) from each
individual stock! M* has a nice tool about that exposure.

Yes, BlackStrat, now you have a problem in your portfolio: Whether or not to shave the gains from that company stock (and pay taxes sooner
than later), whether it will continue to do what has brought that shining light to your stock picking portfolio or whether it will adjust and
revert and all those gains will naturally dissipate leaving you with no more shiny feeling.
Read the Wiki !

Jack FFR1846
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Re: Indexing vs Active Stock Selection

Post by Jack FFR1846 » Fri Jul 10, 2015 6:46 pm

oc4boxer wrote:Before I really started to get serious about these things, I tried my hand at stock picking with two stocks. One has gone up 300%, the other has completely cratered. I'll just stick with the index funds going forward.


I should get my picking tips from you. When I picked stocks one (blue chip) went bankrupt and the other one might as well have. Meanwhile, indexes did just ducky.
Bogle: Smart Beta is stupid

IPer
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Re: Indexing vs Active Stock Selection

Post by IPer » Fri Jul 10, 2015 7:24 pm

Jack FFR1846 wrote:
oc4boxer wrote:Before I really started to get serious about these things, I tried my hand at stock picking with two stocks. One has gone up 300%, the other has completely cratered. I'll just stick with the index funds going forward.


I should get my picking tips from you. When I picked stocks one (blue chip) went bankrupt and the other one might as well have. Meanwhile, indexes did just ducky.


I am actually happy with 90% of my stock picks. But am way more comfortable with low cost indexing. Don't put all your eggs in one basket!
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JoMoney
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Re: Indexing vs Active Stock Selection

Post by JoMoney » Fri Jul 10, 2015 7:37 pm

Your experience is not completely uncommon. I've worked with several people who had very high allocations to their company stock and achieved "above average" results from doing so. I've also known people who've made big bets on owning individual stocks and done quite well. ... but on the other side I've seen it devastate as well. I don't consider diversification a 'free lunch', but it eliminates a lot of risk I don't need/want to take.

The stock in a company I worked at (a large Fortune 500 company that's been around for decades) fell 75% over a six month period over 1999-2000, this was during a period that the broad market was still going up. This wasn't a tech company or a stock that was trading at sky-high valuations. The fall was attributed to an accounting scandal that none of the employees (outside of maybe the executive officers) would have seen coming. The broad market never sunk to the levels the company stock did. Over the past 15 years the company stock has managed to recover and essentially 'match' the markets performance over that same period. People who continued (or started) purchasing after the decline and have held on through the subsequent recovery have done fantastic relative to the broad market. Over most of the past 1-5-10 year periods the company stock has been the best performing option in are 401k plan. While I don't think the company is going out of business anytime soon, I have no idea what risks are at the corporate level, I hope people investing in it remember how quickly and unexpectedly it fell in the past.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

IPer
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Re: Indexing vs Active Stock Selection

Post by IPer » Fri Jul 10, 2015 7:45 pm

JoMoney wrote:Your experience is not completely uncommon. I've worked with several people who had very high allocations to their company stock and achieved "above average" results from doing so. I've also known people who've made big bets on owning individual stocks and done quite well. ... but on the other side I've seen it devastate as well. I don't consider diversification a 'free lunch', but it eliminates a lot of risk I don't need/want to take.

The stock in a company I worked at (a large Fortune 500 company that's been around for decades) fell 75% over a six month period over 1999-2000, this was during a period that the broad market was still going up. This wasn't a tech company or a stock that was trading at sky-high valuations. The fall was attributed to an accounting scandal that none of the employees (outside of maybe the executive officers) would have seen coming. The broad market never sunk to the levels the company stock did. Over the past 15 years the company stock has managed to recover and essentially 'match' the markets performance over that same period. People who continued (or started) purchasing after the decline and have held on through the subsequent recovery have done fantastic relative to the broad market. Over most of the past 1-5-10 year periods the company stock has been the best performing option in are 401k plan. While I don't think the company is going out of business anytime soon, I have no idea what risks are at the corporate level, I hope people investing in it remember how quickly and unexpectedly it fell in the past.


Yes they do! Great story and lesson, thanks a bunch for sharing it.
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lack_ey
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Re: Indexing vs Active Stock Selection

Post by lack_ey » Fri Jul 10, 2015 7:47 pm

Well, one thing to consider is that if we condition on the event that somebody was with a company and holding stock for decades, that should definitely bias results upwards compared to the average stock. That should go without saying, but you never know.

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Re: Indexing vs Active Stock Selection

Post by tyler_cracker » Fri Jul 10, 2015 8:09 pm

one of my colleagues gave a talk about basic personal finance. in it, he highlighted the importance of diversifying away from company stock. he made his point with a personal anecdote:

fifteen years ago, he was a young engineer working for a promising early web company, USWeb. company stock was through the roof. employees fantasized about the mansions and yachts they would buy with their equity:

Firmage is the 28-year-old founder of USWeb, a high-profile Internet consulting firm that merged recently with the Net marketing firm CKS to form a 1,950-person public company worth $2.1 billion. Clients of Santa Clara-based USWeb/CKS include Apple Computer, Levi Strauss and Harley-Davidson.


and then this happened:

Joe Firmage -- the Fox Mulder of Silicon Valley -- resigned yesterday from the firm he founded so he could promote his belief that many of today's high-tech advancements, including semiconductors, fiber optics and lasers, came from aliens.


http://www.sfgate.com/bayarea/article/C ... 952834.php

the market did not respond well to this news, and the undiversified paper millionaires quickly found themselves neither millionaires nor even employed.

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Re: Indexing vs Active Stock Selection

Post by kolea » Fri Jul 10, 2015 9:28 pm

Like many here, I used to be a stock-picker but no longer am. I had successes and failures and lots of anxiety about whether I was doing the right thing. For piece of mind more than anything else I adopted indexing. Well at least mostly. I still tilt a bit here and there. Old habits die hard.

But what is really aggravating is I have a couple of friends that are die-hard stock pickers. I debate with them constantly about our respective approaches. They say I am investing in lots of losers with broad market indexing, I tell them they are lucky and will mean revert at some point. But it is hard to argue with their success. One friend is up 14% YTD and her portfolio has gained 50% more than mine in the last 15 years. So anything I say falls on deaf ears. Sometimes I wonder if they are right and I am wrong. You never know until you get to the end and that pretty much means I am dead so who cares.
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fortyofforty
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Re: Indexing vs Active Stock Selection

Post by fortyofforty » Fri Jul 10, 2015 9:57 pm

BlackStrat wrote:Like any Boglehead, I'm a fan of the idea of indexing, but I just got a shock off how much I've made from my company stock.


I may have missed the detail in your post, but did you account for any company matching? I think it was the Beardstown Ladies who at one time miscalculated their investing prowess by neglecting to account for money added into their accounts when figuring out their performance. Any company match would have to be included when comparing your actual and hypothetical performance.
Last edited by fortyofforty on Sat Jul 11, 2015 8:22 am, edited 1 time in total.
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InvestorNewb
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Re: Indexing vs Active Stock Selection

Post by InvestorNewb » Fri Jul 10, 2015 10:07 pm

It's easier to sleep at night with index funds. Why invest in a few great companies when you can invest in thousands of great companies? I read stock picking blogs and have trouble grasping why someone would want to waste their time doing it. I would also recommend doing backtests at sites like portfoliovisualizer.com. See how far a 10k investment has the potential to take you over 30-40 years in a fund like the S&P 500. Sure you can find sectors and individual stocks that outperform it by a long shot, but good luck trying to pick the next winner. I would just consider yourself lucky and try to absorb as many of the Boglehead principles as you can.
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Re: Indexing vs Active Stock Selection

Post by pkcrafter » Fri Jul 10, 2015 10:29 pm

270k in company stock. How much of your total equity does this represent, and what is your overall stock/bond %?

Paul
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Maynard F. Speer
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Re: Indexing vs Active Stock Selection

Post by Maynard F. Speer » Sat Jul 11, 2015 12:07 am

I've got friends who live off their stock portfolios .. It seems to be quite an older generational thing - they own maybe 4 or 5 well known brands paying 5-7% dividends, and just top up their allocations when a stock falls significantly

It's very hard to argue with - I've no idea what their total returns look like, but the volatility of individual stocks seem to present great buying opportunities .. and every now and then a company will be taken over or merge, and they'll get a large bonus

I've always felt the strength of indexing is more in the long-term compounding of returns ... If I were older I may just go the dividend route myself
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BlackStrat
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Re: Indexing vs Active Stock Selection

Post by BlackStrat » Sat Jul 11, 2015 8:12 am

Don't get me wrong - I'm totally in agreement with the Bogle philosophy and most of my other individual stock picks (I have a small E*TRADE Account and I'm also in an investment club) are nothing to write home about. In fact, I hope this thread wasn't misconstrued as me bragging as you can count me in as a BH disciple (Amen brother!); like I said before I still have the ability to grab defeat from the jaws of victory with this particular investment!

In fact - I believe the other posts mentioning friends doing well picking individual stocks don't take into account the human condition to brag about the winnings but stay silent on the losings (I have a coworker who plays in serious poker tournaments and we can tell Monday morning whether he won or not based on whether we hear a word out of him - LOL!)

fortyofforty wrote:I may have missed the detail in your post, but did you account for any company matching? I think it was the Bearstown Ladies who at one time miscalculated their investing prowess by neglecting to account for money added into their accounts when figuring out their performance. Any company match would have to be included when comparing your actual and hypothetical performance.


Forty - the company stock purchase plan would deduct our contributions weekly from our paycheck but did allow us to buy stock at the end of the year at the lower of either the year's beginning price or ending price. If it were the beginning price (meaning the stock value appreciated over the year) I guess you could consider the difference a sort of company 'match'. It seemed to be a good deal at the time and I didn't want to refuse free money but you're correct in pointing out my computation on the return.

pkcrafter wrote:270k in company stock. How much of your total equity does this represent, and what is your overall stock/bond %?


That's a good question Paul - and what brought me to the Bogleheads. Until recently I was 100% stocks (Ignorance is bliss!!) but have since put about 30% of my investable portfolio into bonds (I did this in my 401k to minimize any tax ramifications). This was entirely thanks to what I read in the 'Bogleheads Guide to Investing' and what I learned on this site. I'm 54 years old and realize this AA may be a little low for my age but I'm facing a possible layoff and considering an early retirement which may put me right on the edge of being able to make it for the possible 40 years I'd have left.

Here's my current breakout of company stock in relation to my portfolio:

- acquired via stock purchase program: 9%
    I've just worked out my cost basis on this (and it's very low for the majority of this stock so I'm worried about cashing it out). I do have a plan to donate a portion of this yearly to a couple of charities and dollar-cost what I would usually donate back into my 3-fund portfolio according to whatever my asset allocation dictates.
B) acquired via stock options: 3%
    The cost basis on this is more reasonable but still not willing to take the hit at this time - right now I have no plans with this
C) acquired through my 401k: 3.25%
    This is easy because I can trade it tax free for an S&P 500 fund in my 401k

Obviously I'm concerned about 15% of my portfolio being tied up in my company (and my job is at risk as well) - hence my sudden interest in all things Bogle!!

In fact, this stock along with my other individual stock investments comes out to nearly 23% of my investable portfolio. When I attempt to 'forecast' (if that's possible) the returns on a three-fund portfolio this really throws a wrench into my plans and still has me scratching my head as to the best approach to turn what I have into a 3-fund portfolio without a huge tax hit.

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arcticpineapplecorp.
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Re: Indexing vs Active Stock Selection

Post by arcticpineapplecorp. » Sat Jul 11, 2015 9:13 am

As stated by William Bernstein, author of The Four Pillars of Investing, “...concentrating your portfolio in a few stocks maximizes your chances of getting rich. Unfortunately, it also maximizes your chance of becoming poor. Owning the whole market—indexing—minimizes your chances of both outcomes by guaranteeing you the market return.” (The Four Pillars of Investing by William Bernstein, pg. 102).

That is one of my favorite quotes (there are many others of Dr. Bernstein's that have influenced me). What Dr. Bernstein acknowledges is that of course you can do better than the index, if only you can find the companies that will beat the index--in advance. The problem is there's no way of knowing in advance which companies will do better than the index, so whereas you have a chance of outperforming, you also have a chance of underperforming. And the research shows that most investors are about average BEFORE costs. When you factor in costs, most stock pickers wind up underperforming a much more diversified index fund and at far MORE risk. (remember that it's not just how much you make, but how much risk you take to get there. Risk adjusted returns are what's important. Over time stock picking is likely to do about as well as the index, that is, AVERAGE. However the risk you took to get average returns isn't worth it when measured against the amount of risk (less) of a well diversified index fund.

There are many stories of those that beat the market. Unfortunately, there are many MORE stories of those that lost big time. The average person (and not so average fund managers) never saw what happened to Enron, AIG, GM...until it was too late.
Last edited by arcticpineapplecorp. on Sat Jul 11, 2015 9:26 am, edited 1 time in total.
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arcticpineapplecorp.
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Re: Indexing vs Active Stock Selection

Post by arcticpineapplecorp. » Sat Jul 11, 2015 9:22 am

TwoByFour wrote:Like many here, I used to be a stock-picker but no longer am. I had successes and failures and lots of anxiety about whether I was doing the right thing. For piece of mind more than anything else I adopted indexing. Well at least mostly. I still tilt a bit here and there. Old habits die hard.

But what is really aggravating is I have a couple of friends that are die-hard stock pickers. I debate with them constantly about our respective approaches. They say I am investing in lots of losers with broad market indexing, I tell them they are lucky and will mean revert at some point. But it is hard to argue with their success. One friend is up 14% YTD and her portfolio has gained 50% more than mine in the last 15 years. So anything I say falls on deaf ears. Sometimes I wonder if they are right and I am wrong. You never know until you get to the end and that pretty much means I am dead so who cares.


Time will tell. Let's see what happens in the next bear market--my guess is your friends' individual stocks will fare much worse than if they had held a diversified index fund tracking the entire market. I know a guy who's 89 who still holds AIG. That stock lost like 97% or 98% during the Great Recession, whereas the U.S. Market was down around 50%....and the U.S. Market bounced back by March 2012. Take a look at AIG...still down around where it was 7 years ago.

I overheard him talking to his son in CA (who "manages" his portfolio) back in the depths of the crisis and I'll never forget those seven words he uttered: "I thought you said AIG was safe!!"

As safe as investing in 9000 companies of all different sizes, styles, in all sectors and countries all over the world? No way, no how.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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fortyofforty
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Re: Indexing vs Active Stock Selection

Post by fortyofforty » Sat Jul 11, 2015 9:34 am

We also have to allow for the appropriate index comparison. If you are investing is a high-flying growth oriented biotechnology company, the comparison to the Total Stock Market or S&P 500 isn't the most valid.

From my own experience, I know an investor who has the bulk of her net worth tied up in the stock of one technology company. I suggested she diversify into a broad based index fund, like the S&P 500. Of course, she didn't, and the value of her stock has skyrocketed. I sound like a worry wart, and she is happy she didn't listen to my advice. I suspect the investing world is full of anecdotal stories like BlackStrat's and hers. It will be harder than ever to convince her to move out of that stock, since she can point to the "dollars and cents" results of standing pat.

I like the ability BlackStrat had to purchase stock at the lower of the "beginning of the year" price or the "end of the year" price. That is a built in, guaranteed return in a rising market, and minimizes losses in a falling market. It's probably even more beneficial buying a highly volatile stock, since you can capture a year's worth of tremendous gains in an instant. Can you imagine having the chance to do this, even with an index fund like Total Stock Market? :moneybag
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Re: Indexing vs Active Stock Selection

Post by Longdog » Sat Jul 11, 2015 9:51 am

That's awesome! You are very fortunate. Now, what will it do for the next ten years compared to the market? Is it time to cash it in and pay the capital gains taxes or should you hold it and add more to your portfolio? Hmmm. Is this a significant portion of your net worth? How will you feel when the stock goes up and down and you see your net worth change by tens of thousands of dollars a day? Be careful what you do - don't want to make any foolish mistakes with that much money! Such stress! Such first world problems! :happy
Steve

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Maynard F. Speer
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Re: Indexing vs Active Stock Selection

Post by Maynard F. Speer » Sat Jul 11, 2015 10:24 am

I'd be interested to hear if anyone's tried this .. Using 13f filings to clone the top holdings from investors like Warren Buffett and George Soros - the theory being that they've got far more experience and resources available than the average investor

Faber found 10% annual outperformance over 10 years, and another study found 11% outperformance from the 70s

http://www.dailywealth.com/129/a-simple ... -10-a-year

Out of sample results:

Image

http://mebfaber.com/2015/03/30/13f-critics-silenced/
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Re: Indexing vs Active Stock Selection

Post by Kenkat » Sat Jul 11, 2015 10:30 am

There is a bit of a lottery aspect to this. You happened to work for a company that has had outstanding stock performance. That's great - congratulations for being a part of a successful company - America at its best really.

In Cincinnati (where I live), there is a phenomenon called the "P&G Millionaire". P£G (Procter and Gamble - Tide, Pampers, etc.) is a longstanding Cincinnati company. They have a profit sharing plan and it pays out in P&G stock. Through the 80's and 90's, P&G become a global giant and those who got all that stock through the 70's, 80's and 90's ended up very well off in retirement. This was because they worked hard and happened to work for the right company. Other people at other companies worked hard too but maybe the company didn't have the success of P&G or went through an acquisition, etc. You don't know when you start a career somewhere how it will end up. Luck of the draw to a certain extent.

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Re: Indexing vs Active Stock Selection

Post by BlackStrat » Sat Jul 11, 2015 10:40 am

I agree with luck of the draw on this one. I had a friend who worked for WorldCom back in the heyday. He amassed almost $4M in his 30's through stock options (which he couldn't yet realize). I was jealous. Of course, it all crashed and he ended up broke and starting all over again in his late 40's and I'm currently in much better shape (for the time being at least).

I would prefer to strictly have a 3-fund portfolio. The stock portfolio I've accumulated is from before I became a BogleHead and I'm well aware of my limitations with stock picking. I just have to come to grips with either realizing the capital gains or continuing to roll the dice....the million dollar question.

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arcticpineapplecorp.
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Re: Indexing vs Active Stock Selection

Post by arcticpineapplecorp. » Sat Jul 11, 2015 11:31 am

BlackStrat wrote:Like any Boglehead, I'm a fan of the idea of indexing, but I just got a shock off how much I've made from my company stock.

I've been working on calculating my cost basis for company stock purchased over a total of 6 years starting nearly 25 years ago. I spent a total of nearly $16k and reinvested dividends without cashing out the stock. With all the splits and company offshoots (spinning off new companies), the combined value of the stock today is around $270k.

I just did a quick calculation of 'what if' I had instead invested each of the 6 years contributions into an index fund earning 7% annualy, and ended up with around $61k - 23% of what I actually made from this stock.

Now I understand the odds of picking winners like this aren't very good (especially for me), but it was kind of an eye-opener at how certain people are in the right place at the right time with regards to what company they work for and the benefits that are available (think Microsoft in the early days). In fact, the largest purchase of this stock for me was my first year with the company because they made us wait 1 year before being able to contribute to the 401k (I didn't want to get used to the 10% I planned for 401k so I grudgingly put it into company stock...thank goodness).

I don't have any questions - just making the statement that sometimes active investing works (of course - I haven't cashed out yet so there's still time for me to lose my shirt if the company goes belly-up!!)


Forgot to mention something from the OP, but reading a few posters after mine reminded me of something...you really haven't "made" anything, yet.

You only "make" the percentage you claimed, when you SELL. Up until the time you sell, yes the "value" of your portfolio is higher than where a more diversified portfolio might be, but you can just as easily wind up losing all those "gains" or more. Not just a semantic issue. You could be back here in a day, week, month, or years from now (if the price of the stock declines relative to where the market as a whole winds up) wishing you had been more diversified.

There was another post on here a few months ago similar to this and one poster thought the same thing (he "made" a killing) right up until the company he was holding lost value never to recover to where it was before. He realized he didn't "make" what he thought he did. His "gains" were on paper until the moment he sold his shares. Unfortunately, he sold after the stock came back down to earth.

In other words, don't get too excited until you take your chips off the table. Only then do you get bragging rights if your return beat a more diversified portfolio. Though the question then is...was it skill or luck? I.E., what are the odds you can do that again, and again, and again right up to (and through) retirement???
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Indexing vs Active Stock Selection

Post by inbox788 » Sat Jul 11, 2015 6:20 pm

BlackStrat wrote:Now I understand the odds of picking winners like this aren't very good (especially for me), but it was kind of an eye-opener at how certain people are in the right place at the right time with regards to what company they work for and the benefits that are available (think Microsoft in the early days). In fact, the largest purchase of this stock for me was my first year with the company because they made us wait 1 year before being able to contribute to the 401k (I didn't want to get used to the 10% I planned for 401k so I grudgingly put it into company stock...thank goodness).

I don't have any questions - just making the statement that sometimes active investing works (of course - I haven't cashed out yet so there's still time for me to lose my shirt if the company goes belly-up!!)


What industry? If it's big pharma, your chances of equal success over similar time-frame are similar. You don't always have to pick the right company, just the right industry. And survivors should do better than average to make up for all the failures. Last decade was internet companies. Before that personal computers. Today it's social networks and biotechs.

People have selective memory. Everyone remembers Google, but what happened to Excite, AOL, Lycos, and even Yahoo? It's great if you own or work for Facebook, but will Google meet the same fate as Yahoo in the coming decade? Also, what if you're into Zynga, Yelp, Pandora, Groupon, Fitbit, Twitter, or Gopro? Terrific startups that have succeeded, but now as public companies, they're something else. One or two might be a high flyer, but which one? And there's some chance that one or more might not exist in 5-10 years.

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Re: Indexing vs Active Stock Selection

Post by fortyofforty » Sat Jul 11, 2015 10:22 pm

It's not just owners of single company stock that haven't made anything until they cash out. It's each of us. Granted the chances of losing everything are a lot less when you're speaking of the Total Stock Market, but the risk of loss is real. This is, by the way, one of the advantages of regular dividend payouts rather than companies reinvesting in speculative growth prospects or stock buybacks in an attempt to drive up prices. Cash is cash, and ultimately is the only thing you can spend with ease.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell

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Re: Indexing vs Active Stock Selection

Post by JoMoney » Sat Jul 11, 2015 11:11 pm

I wouldn't call dividends an "advantage", but I suppose individuals can have preferences in how they set their allocations.
I would prefer to set my stock/cash allocation myself rather than have it based on the whims of companies dividend policy.
As has been gone over multiple times, it doesn't make any economic difference if one chooses to create their own dividends by selling a portion of their equities, or chooses to use the dividends as paid out by stocks. It's just shifting the money from one side of the balance sheet to another. People spending the dividends (or keeping them as cash) will miss out on whatever growth (for better or worse) that the money would have had if it had remained invested rather than moved to cash or spent.

Edit to add: In an attempt to stave off any 'dividend hater' comments, I'll add that I'm not making any arguments about whether or not stocks that pay dividends have any special qualities or not. I'm relatively dividend agnostic so to speak. All I'm saying is that if they're stocks I want to be invested in, the dividend doesn't offer an advantageous method of determining the allocation I want of stocks/cash.
"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: Indexing vs Active Stock Selection

Post by Steadfast » Mon Jul 13, 2015 11:36 am

I think what happened to you is actually more in line with the perspective that you get wealthy from your job, not from investing. You didn't take your job because it was an investment, so you shouldn't count the returns as investment returns.
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Re: Indexing vs Active Stock Selection

Post by HomerJ » Mon Jul 13, 2015 5:15 pm

TwoByFour wrote:Like many here, I used to be a stock-picker but no longer am. I had successes and failures and lots of anxiety about whether I was doing the right thing. For piece of mind more than anything else I adopted indexing. Well at least mostly. I still tilt a bit here and there. Old habits die hard.

But what is really aggravating is I have a couple of friends that are die-hard stock pickers. I debate with them constantly about our respective approaches. They say I am investing in lots of losers with broad market indexing, I tell them they are lucky and will mean revert at some point. But it is hard to argue with their success. One friend is up 14% YTD and her portfolio has gained 50% more than mine in the last 15 years. So anything I say falls on deaf ears. Sometimes I wonder if they are right and I am wrong. You never know until you get to the end and that pretty much means I am dead so who cares.


Heh, are these friends really showing you all their trades?

I have a friend who picks almost nothing but winners (He always throws in the name of one loser, just to make it look plausible).

His wife, on the other hand, tells my wife all about the other picks he made that went bad that he never mentions to me.

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Re: Indexing vs Active Stock Selection

Post by HomerJ » Mon Jul 13, 2015 5:26 pm

Maynard F. Speer wrote:they own maybe 4 or 5 well known brands paying 5-7% dividends


I'd like to know the names of 4 or 5 well known brands paying 5%-7% dividends.

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Re: Indexing vs Active Stock Selection

Post by kolea » Mon Jul 13, 2015 5:51 pm

HomerJ wrote:
Heh, are these friends really showing you all their trades?



Yes, about 6000 shares of AAPL in 2009 when it was $15 and then a couple years later did the same thing with TSLA.

Apple I can see. TSLA is just nuts. My friend picks stocks based on the charisma factor of the leader. Jobs and Musk enchanted her and she bet big time. She has losers for sure, but you hit a couple of grand slams and you can afford some losers.
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Re: Indexing vs Active Stock Selection

Post by lack_ey » Mon Jul 13, 2015 6:28 pm

HomerJ wrote:
Maynard F. Speer wrote:they own maybe 4 or 5 well known brands paying 5-7% dividends


I'd like to know the names of 4 or 5 well known brands paying 5%-7% dividends.

In the US it's harder than in many other markets these days because prices are are not that low so yields are lower (I believe Maynard is in the UK), but here is a list. Breaking 5% with a brand name is difficult.

Yield is taken from Morningstar. I excluded a number of regionally famous telecom and energy utilities, companies like CenturyLink and Southern Company, some of which have dividends higher than 7%. Also skipped are ADRs for internationally domiciled multinationals like GlaxoSmithKline, AstraZeneca, Royal Bank of Canada, BP, Royal Dutch Shell, etc. Like I said, it's easier internationally.

Code: Select all

AT&T                        - 5.40%
Verizon                     - 4.68%
Philip Morris International - 4.87%
Chevron                     - 4.53%
ConocoPhillips              - 4.94%
Seagate Technology          - 4.46%

(In case somebody forgot what a Seagate is, they're one of the couple big players left in computer hard drives, with a bit under half the market share, though that's all their core business is.)

So you're right that there's not too much with actually 5-7%.

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Re: Indexing vs Active Stock Selection

Post by HomerJ » Mon Jul 13, 2015 8:14 pm

TwoByFour wrote:
HomerJ wrote:
Heh, are these friends really showing you all their trades?



Yes, about 6000 shares of AAPL in 2009 when it was $15 and then a couple years later did the same thing with TSLA.

Apple I can see. TSLA is just nuts. My friend picks stocks based on the charisma factor of the leader. Jobs and Musk enchanted her and she bet big time. She has losers for sure, but you hit a couple of grand slams and you can afford some losers.


So two stocks? Just luck then.

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Re: Indexing vs Active Stock Selection

Post by Maynard F. Speer » Mon Jul 13, 2015 8:46 pm

lack_ey wrote:
HomerJ wrote:
Maynard F. Speer wrote:they own maybe 4 or 5 well known brands paying 5-7% dividends


I'd like to know the names of 4 or 5 well known brands paying 5%-7% dividends.

In the US it's harder than in many other markets these days because prices are are not that low so yields are lower (I believe Maynard is in the UK), but here is a list. Breaking 5% with a brand name is difficult.

Yield is taken from Morningstar. I excluded a number of regionally famous telecom and energy utilities, companies like CenturyLink and Southern Company, some of which have dividends higher than 7%. Also skipped are ADRs for internationally domiciled multinationals like GlaxoSmithKline, AstraZeneca, Royal Bank of Canada, BP, Royal Dutch Shell, etc. Like I said, it's easier internationally.

Code: Select all

AT&T                        - 5.40%
Verizon                     - 4.68%
Philip Morris International - 4.87%
Chevron                     - 4.53%
ConocoPhillips              - 4.94%
Seagate Technology          - 4.46%

(In case somebody forgot what a Seagate is, they're one of the couple big players left in computer hard drives, with a bit under half the market share, though that's all their core business is.)

So you're right that there's not too much with actually 5-7%.


Yeah, these guys are UK based

A list of top UK dividend stocks
http://www.topyields.nl/Top-dividend-yi ... TSE100.php

Code: Select all

WM MORRISON SUPERMARKETS ----- 7.67%
ROYAL DUTCH SHELL-A ---------- 6.67%
BHP BILLITON ----------------- 6.39%
ANGLO AMERICAN --------------- 6.34%
BP --------------------------- 5.96%
GLAXOSMITHKLINE -------------- 5.77%
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Re: Indexing vs Active Stock Selection

Post by kolea » Mon Jul 13, 2015 10:11 pm

HomerJ wrote:
So two stocks? Just luck then.


And you think it could be otherwise? It really does not matter. From our perspective, anyone who beats the market is lucky. From that person's perspective, she has a skill. I don't really care what it is because I know I don't have that "skill" and am going to continue muddling along with market-average performance. It matters little if it is luck or a unique skill as I am not going to try it. But it makes for interesting dinner table debate between us which is my point here.
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Re: Indexing vs Active Stock Selection

Post by JoMoney » Tue Jul 14, 2015 3:59 am

lack_ey wrote:...In the US it's harder than in many other markets these days because prices are are not that low so yields are lower...
It's not really just 'these days', it's been the typical case for decades that U.S. stocks tend to have lower yields than other countries. Tax treatment of dividends in many other countries is quite different. https://en.wikipedia.org/wiki/Dividend_imputation
The U.S. penalizes dividends by effectively taxing the earnings twice. This may be a factor in why U.S. companies tend to have lower dividend payout ratios (but they also tend to do more buybacks and have commensurately higher per share earnings growth). Dividends in the U.S. are higher now than they've been for most of the past 20 years.
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Re: Indexing vs Active Stock Selection

Post by IlliniDave » Tue Jul 14, 2015 6:22 am

JoMoney wrote:The stock in a company I worked at (a large Fortune 500 company that's been around for decades) fell 75% over a six month period over 1999-2000, this was during a period that the broad market was still going up. This wasn't a tech company or a stock that was trading at sky-high valuations. The fall was attributed to an accounting scandal that none of the employees (outside of maybe the executive officers) would have seen coming. The broad market never sunk to the levels the company stock did. Over the past 15 years the company stock has managed to recover and essentially 'match' the markets performance over that same period. People who continued (or started) purchasing after the decline and have held on through the subsequent recovery have done fantastic relative to the broad market. Over most of the past 1-5-10 year periods the company stock has been the best performing option in are 401k plan. While I don't think the company is going out of business anytime soon, I have no idea what risks are at the corporate level, I hope people investing in it remember how quickly and unexpectedly it fell in the past.


That sounds extremely similar to my company, so much so we could even have the same employer! In my company's case the big drop happened in two stages, the first being a sudden 40-some % decline. I knew a bunch of guys who threw their entire 401k balances into company stock at that point only to see it decline more than 50% very shortly thereafter. Luckily I wasn't one of them.
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Re: Indexing vs Active Stock Selection

Post by Railroader » Tue Jul 14, 2015 9:01 am

$10,000 invested in Union Pacific in 2005 was worth 88,000 a couple months ago. Total kick in the ass I work there and didn't invest. I have a vanguard target fund now and I've been thinking of setting a small percentage to start purchasing these shares. I know this is not recommended but I don't think I could let this happen again right?

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Re: Indexing vs Active Stock Selection

Post by JoMoney » Tue Jul 14, 2015 3:49 pm

Railroader wrote:$10,000 invested in Union Pacific in 2005 was worth 88,000 a couple months ago. Total kick in the ass I work there and didn't invest. I have a vanguard target fund now and I've been thinking of setting a small percentage to start purchasing these shares. I know this is not recommended but I don't think I could let this happen again right?
I think there are plenty of respected advisers that allow for it in moderation. The idea being to limit it to a very small amount of the portfolio.
I think if it were me, and I had any success with it, I would be tempted to play games with trading it though, or letting my exposure/'risk' to the stock grow and grow which could be counter productive to the diversified portfolio I want. If you put too many eggs in one basket, you better "watch that basket". Frankly I don't think I'm in any position to be watching any particular company better than the information everyone else is using and pricing in before I'd have an opportunity to act on, so I'm not so sure my 'watching' would add anything beneficial to it. Having a portfolio with lots of different pieces to muck with is something I try to avoid as well. It's not the 'complexity' of it that bothers me, it actually kind of appeals to me. I avoid it because it adds temptations to play with those pieces and do things that are detrimental - I would likely be my own worst enemy. A cap weighted portfolio provides a very convenient and low cost way to manage the portfolios exposure to various stocks, as well as lumping it into fewer individual pieces that I'm less likely to get bit with a gambling bug to try and mess with it. My companies stock already has an allocation inside my index fund (UNP does as well).

If ten years ago, you put 10% in UNP, and the rest in something like Vanguard's 'LifeStrategy Growth' fund, the portfolio would now be about 50/50 between those two. Would you have let the exposure grow that much? What would you do now if you had let it grow to that level? Some stock pickers have advised that you don't sell the stock unless the conditions you believed true when you bought it changed. If you continue to believe its a growing company with strong prospects you ride it out for as long as you can. Warren Buffett has quipped that the "best time to sell is never", which I believe is a borrowed quote from Phillip Fisher who bought stock in Motorola in 1955 and never sold it (until his death in 2004). It sounds like an interesting strategy, but I don't think I'm in a situation where I could evaluate the company at that level - for me, (despite my desire to try to convince myself otherwise) it would just be a gamble. I'm not in a position to really dig in on a companies details, nor am I willing to put in the work that even Phillip Fisher suggested in his 'scuttlebutt' method of gathering information about a business.
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Re: Indexing vs Active Stock Selection

Post by 3Wood85 » Fri Jul 17, 2015 2:10 pm

Why cant you do both? Have a 401k with index funds and make the occasional individual stock purchase for companies like Chipotle, Facebook, Uber etc. Best of both worlds?

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Re: Indexing vs Active Stock Selection

Post by rca1824 » Fri Jul 17, 2015 2:31 pm

If your company is privately owned, company stock can be a good idea, as long as it's no more than 5-20% of your total portfolio. Private equity tends to outperform public equity, so the extra reward is justified by the extra non-diversification risk.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: Indexing vs Active Stock Selection

Post by investorguy1 » Fri Jul 17, 2015 5:31 pm

I know people who worked for a big tech company that went under. They lost their stock, pension and job. Like you said being it the right place at the right time has a lot to do with it. Some people bought a house in 2008 because that is when they needed a bigger place to live and they are still underwater. That is just how it goes.

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Re: Indexing vs Active Stock Selection

Post by Novine » Fri Jul 17, 2015 6:45 pm

I'm not sure I consider what the OP described as a good example of "active investing". First, it sounds like the OP has employed a "buy and hold" strategy. That gives them an advantage over the average active stock picker by minimizing transaction costs and taxes. Second, while there appears to be some element of market timing, the OP has an advantage of being able to time those purchases with knowledge that no average stock picker could have.

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Re: Indexing vs Active Stock Selection

Post by Novine » Fri Jul 17, 2015 6:54 pm

By the way, how is GT Advanced Technologies doing these days? That was a "can't miss path to millions" for stock pickers.

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Re: Indexing vs Active Stock Selection

Post by grabiner » Fri Jul 17, 2015 9:42 pm

This is actually an interesting example of survivorship bias; the average return of investments which still exist is better than the return of the market.

Many investors were buying company stock in 1990. Some of those companies, such as Worldcom and Bear Stearns, no longer exist; they are no longer employed with the same company and the company stock because worthless. Those companies which existed in 1990 and in 2015 have outperformed the stock market, as that excludes all the companies with a -100% return.
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Re: Indexing vs Active Stock Selection

Post by abuss368 » Fri Jul 17, 2015 9:44 pm

Invest in a few Total Market Index Funds and "stay the course".

Thank you Jack Bogle!
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Re: Indexing vs Active Stock Selection

Post by leonard » Fri Jul 17, 2015 9:48 pm

Yes. Occasionally people get lucky.
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Re: Indexing vs Active Stock Selection

Post by Ged » Fri Jul 17, 2015 10:00 pm

lack_ey wrote:
HomerJ wrote:
Maynard F. Speer wrote:they own maybe 4 or 5 well known brands paying 5-7% dividends


I'd like to know the names of 4 or 5 well known brands paying 5%-7% dividends.

In the US it's harder than in many other markets these days because prices are are not that low so yields are lower (I believe Maynard is in the UK), but here is a list. Breaking 5% with a brand name is difficult.

Yield is taken from Morningstar. I excluded a number of regionally famous telecom and energy utilities, companies like CenturyLink and Southern Company, some of which have dividends higher than 7%. Also skipped are ADRs for internationally domiciled multinationals like GlaxoSmithKline, AstraZeneca, Royal Bank of Canada, BP, Royal Dutch Shell, etc. Like I said, it's easier internationally.

Code: Select all

AT&T                        - 5.40%
Verizon                     - 4.68%
Philip Morris International - 4.87%
Chevron                     - 4.53%
ConocoPhillips              - 4.94%
Seagate Technology          - 4.46%

(In case somebody forgot what a Seagate is, they're one of the couple big players left in computer hard drives, with a bit under half the market share, though that's all their core business is.)

So you're right that there's not too much with actually 5-7%.


That's the problem with a dividend strategy - concentrated risk. I used to have a portfolio with the above names in it, and a couple of others but not Seagate. When the BP GOM spill occurred BP stock got savaged plus they stopped paying their dividend. That's when I realized the risk of this approach in retirement. Add in the fact that in late retirement you might be in cognitive decline and things could be pretty hard to deal with.

I think index fund investing is less risky and more sustainable over a hopefully long retirement. Plus there is evidence that the total returns are better, and of course getting dividends as an income stream gives you less tax flexibility.

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