A Boglehead Guide to Buying Individual Stocks

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backpacker
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Re: A Boglehead Guide to Buying Individual Stocks

Post by backpacker »

nedsaid wrote:This reminds me of the famous Wall Street Journal column where darts thrown at the New York Times stock page was pitted against stock market professionals. Hint: The darts won most of the time. Only problem with that is that I am not sure anyone prints a stock page anymore.
If you get sufficiently fed up with your Windows 10 PC, you could always just throw darts at it. :D
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nedsaid
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Re: A Boglehead Guide to Buying Individual Stocks

Post by nedsaid »

backpacker wrote:
nedsaid wrote:This reminds me of the famous Wall Street Journal column where darts thrown at the New York Times stock page was pitted against stock market professionals. Hint: The darts won most of the time. Only problem with that is that I am not sure anyone prints a stock page anymore.
If you get sufficiently fed up with your Windows 10 PC, you could always just throw darts at it. :D
LOL!!! I guess you read the thread I started on my Windows 10 issues!!
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Re: A Boglehead Guide to Buying Individual Stocks

Post by White Coat Investor »

backpacker wrote:
White Coat Investor wrote:
backpacker wrote:I'm convinced that beating the market is incredibly hard, that most investors can't do it, and that I am one of those investors. But suppose that an otherwise financially secure Boglehead were to set out to beat the market by buying individual stocks with a small portion of his portfolio (say 10%). The point would be learning how to value companies rather than actually making money. What books or other resources would be most useful for someone with a serious interest in security analysis?

I've been thinking that working on basic accounting might be a good place to start, maybe with a book like Accounting for Value. Damodaran's book Investment Valuation also looks good.
Why do you have to buy them to learn how to analyze them again?
Why cook when you can just read cookbooks?
Because you want to eat food. But you don't want to invest in individual stocks. Big difference.
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Re: A Boglehead Guide to Buying Individual Stocks

Post by saltycaper »

Who cares what the Boglehead way is? Do it the fun way. You need to find some situation where "everyone" thinks something will/won't happen, and then bet against them. You need to have an answer to all those people who ask, condescendingly, "What do you know that the market doesn't?"

The answer, of course, is that you know nothing about the future, but you also know the market knows nothing about the future either, so you are going to make one guess different from the collective guesses of everyone else, knowing the those collective guesses are wrong with sufficient frequency to allow you to diverge from their course.

Examples: a small company that might become a supplier to a larger company, a drug company gaining approval hardly anyone expected, a little known retailer/restaurant/etc. people might flock to, a company in financial distress that might turn it around, a manufacturer for a product forecasted to sell x units that you think will sell 10x.

You might go years between finding something worth betting on, and you might have to wait years for it to materialize. You have to be willing to lose it all.

There is nothing Bogleheadish about this, and that is okay, because you've already accepted the consequences if you are wrong.
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Beliavsky
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Re: A Boglehead Guide to Buying Individual Stocks

Post by Beliavsky »

backpacker wrote:I'm convinced that beating the market is incredibly hard, that most investors can't do it, and that I am one of those investors.
Why not tackle an easier problem first -- beating the market on an after-tax basis (in taxable accounts) through tax loss harvesting of individual stocks?
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nedsaid
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Re: A Boglehead Guide to Buying Individual Stocks

Post by nedsaid »

My general guidelines for investing in individual stocks would be these:

1) You want to start with a minimum of 5 stocks in 5 different industries.
2) No more than 25 stocks at the most. You need to be able to follow what you own and for an individual 25 is the upper limit. Plus you have to lug those annual reports to the recycle bin! Probably 15-20 is optimal.
3) Diversify across industry groups.
4) Buy quality companies at reasonable valuations. It helps to look at the historical valuation
ranges for the company and the industry.
5) Be prepared for an average holding period of at least 5 years. Most often my mistake is selling too soon rather than holding a stock too long.
6) The buy decision is a relatively easy decision to make, the sell decision is much harder. Pretty much I sell if the prospects for the company going forward are declining and the problems are not temporary in nature. Another reason for selling is if the stock becomes wildly overpriced.
7) It helps to subscribe to a service like Morningstar or Value Line. Financial information is easily available in the days of the internet and companies have good information on their websites. Because of the easy availability of information a subscription to a service isn't necessary.
8) You should develop a narrative that describes the reasons you bought the stock and a scenario of what you expect to play out. For example, I bought shares in a local Life and Disability Insurance Company thinking that it would someday get purchased. It took 16 years, but it happened and I made nine times the purchase price when I sold.
9) As much as I like to buy and hold, a portfolio does require a certain amount of maintenance. It doesn't pay to hold stocks whose companies have declining prospects and problems that are not temporary.
10) If you can, buy something with an economic moat, competitive advantages that are not easily replicated.
11) There is also the dreaded "Nedsaid effect" where what you sell outperforms what you bought to replace it! This has burned me enough times that I am really reluctant to sell. The cumulative effect of incorrect sell/buy decisions are what weighs down performance. Minimize trading.

All this being said, don't expect to outperform the market doing this. My individual stocks have performed about as one would expect.
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Re: A Boglehead Guide to Buying Individual Stocks

Post by backpacker »

nedsaid wrote:My general guidelines for investing in individual stocks would be these...
11) There is also the dreaded "Nedsaid effect" where what you sell outperforms what you bought to replace it! This has burned me enough times that I am really reluctant to sell. The cumulative effect of incorrect sell/buy decisions are what weighs down performance. Minimize trading.

All this being said, don't expect to outperform the market doing this. My individual stocks have performed about as one would expect.
This is a great list. Given (11), I propose that I tell you whenever I am going to sell, so you can buy before the stock goes up. You can do the same and we'll get rich. :wink:

I also really like what you said about narrative. Damodarian talks about this a lot, how you can't do stock valuations just plugging numbers into a spreadsheet. All the work goes into finding the right inputs and that means finding the right story.

I've been thinking that (as was suggested above) it might make sense to focus on smaller companies, probably in fairly unexciting industries. My guess is that it is easier to see companies as financial machines when they aren't the Teslas and Apples and Goldman Sachs of the world.

Basically, I feel like I've gotten about as far as I can understanding investing at the portfolio level, the view from 30,000 feet if you will. It would be neat I think to have a better feel for how companies operate and create value for their shareholders.
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Re: A Boglehead Guide to Buying Individual Stocks

Post by nedsaid »

I want to make it crystal clear that individual stocks have their risks. My beloved Lucent fell hard, which I sold and replaced with Nortel, which similarly ran into problems. Fortunately, I sold Nortel and got something out of it. Another painful experience was AIG, we know how that turned out. Also the "Four Horsemen of Underperformance" which are AIG, GE, Microsoft, and Pfizer. Microsoft has done well enough that Comtech Communications replaces Microsoft in my "index of disappointment." The Four Horsemen were darlings of the 1990's that I bought at "bargain" prices in the 2000's after the 2000 crash. They were still overpriced when I bought them. Great companies purchased at too high of prices can make mediocre investments.

My individual stock portfolio has its heroes and zeroes.

I don't want to misrepresent myself as a stock market genius as I have experienced the thrill of victory and the agony of defeat. When a loved stock like Lucent or AIG blows up, it is really painful. If you do individual stocks, at some point you will have a stock blow up.
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Re: A Boglehead Guide to Buying Individual Stocks

Post by David Jay »

Watty wrote:If you do decide to invest it individual stocks then commit to yourself to keep detailed and accurate records of your performance to compare it to how you would have done with a comparable index fund. A very commom problem is that people will see that their stocks are up 30% over a few years and be bery happy since they don't realize that an index fund would have been up 40%.
^^^^ This
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Re: A Boglehead Guide to Buying Individual Stocks

Post by JoMoney »

backpacker wrote:...
I've been thinking that (as was suggested above) it might make sense to focus on smaller companies, probably in fairly unexciting industries. My guess is that it is easier to see companies as financial machines when they aren't the Teslas and Apples and Goldman Sachs of the world ...
If the objective is a learning experience, I'd suggest looking at companies/industries that actually interest you.
"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: A Boglehead Guide to Buying Individual Stocks

Post by packer16 »

I think the focus here should be adding value where others are not so this is a niche strategy that would a part of an investment plan. This of course would be for folks who like the analysis and the puzzle aspect of investing as Damodaran says if you do not beat the market you have gained in terms or knowledge or recreational value. I have found a few niche areas I have invested in and poked around in for the past few years and am in this camp. The key IMO is to stay focused in your circle of competence and slowly grow it over time. You also have to be able to deal with losing a good portion of the time and realize that over time what creates performance is amount by which the winners do better than the losers. A contrarian streak helps also. IMO you have some pretty smart people here spending time understanding factor investing & if the same amount of time was spent on a focused value approach I think the results could be the same or better than factor investing. With this approach you can go where larger other investors cannot versus in factor investing you playing against the same pros you are in active investing as the financial prize for factor and active investing are much higher than niche value investing.

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Re: A Boglehead Guide to Buying Individual Stocks

Post by NibbanaBanana »

backpacker wrote:I'm convinced that beating the market is incredibly hard, that most investors can't do it, and that I am one of those investors. But suppose that an otherwise financially secure Boglehead were to set out to beat the market by buying individual stocks with a small portion of his portfolio (say 10%). The point would be learning how to value companies rather than actually making money. What books or other resources would be most useful for someone with a serious interest in security analysis?

I've been thinking that working on basic accounting might be a good place to start, maybe with a book like Accounting for Value. Damodaran's book Investment Valuation also looks good.
I like to invest in individual issues too. I have about 20% in individual stocks. I never really tried too hard to understand the financial statements. I'm guessing that all that information is priced in. My dad got me interested in this decades ago. Back then mutual funds weren't as popular or cheap as they are now.

One very nice feature of running your own portfolio is that you can avoid bubbles. My portfolio was up in the year 2000 after the TMT crash. I know a number of people who lost a lot when that bubble burst. And permanent losses too. That's something you want to avoid. Bubbles and permanent losses. Also, don't pay too much for great companies. I bought KO at a gogo 90's high price and ended up with a 3-4% return to this day on that money. KO was in it's own bubble.

One dangerous feature is lack of diversification. I was about 30% in financials in 2008, no 100% losses, but I took a big painful hit.

Here's a wild ride for you. I bought MRK for around $15 in 1993. It was the #1 performing stock in the DOW in 1997. It rose to the stratospheric price of $90 in 2000. It crashed and burned to $30 after the Vioxx scandel in 2004. Now it's back around $60 or so. All the while I collected a pretty nice divy and a spinoff or two. I think I did okay, but I really don't know. Probably less than the market though. Lesson: If you ever hold the #1 performing stock of an index, that's a good time to sell.

That's another problem. How have I done? I reinvested dividends and DCA'ed with DRIP plans for many of my investments. So I really have no idea. I finally moved everything to VG in the mid 2000's so they keep track of the numbers. They say I did just about exactly the same as the market since then.

My big winners are ADP, BDX, JNJ, MSFT, PEP, XOM and DIS. None of which I bought at any particularly bargain prices. Just DCA'ed most of them, reinvested divy's, and held for a long time. They're just leading companies in growing markets. Most things I bought in the depths of the financial crisis also did well but that was definitely a no brainer.

What I've learned: Can't say a whole lot here. Don't get involved in bubbles. Buy aggressively in bear markets. Take the long view and try to buy growth but at a reasonable price. Avoid value traps too. They aren't a huge mistake, but if you don't see any growth then you're probably better off somewhere else. If a stock gets way overpriced, probably a good time to sell and reinvest in something else. Above all, keep most of your money in VG index funds.

Here's an example. Now, heading into retirement, I'm an income investor. I really want to diversify away from these handfuls of huge companies that dominate the market cap index funds. I need some bonds to cushion a big market crash but consider the bond market to be way more overpriced than the stock market. Bonds are paying 2.40 or so now. My last recent purchase was MMM. MMM is paying about the same in divy. I see MMM as an increasing coupon bond. I don't really care what the stock price does. So this makes things a lot easier. But my guess is that the company's going to continue to grow. Maybe I'll be right and maybe I'll be wrong. That's part of the fun!
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Re: A Boglehead Guide to Buying Individual Stocks

Post by backpacker »

Beliavsky wrote:
backpacker wrote:I'm convinced that beating the market is incredibly hard, that most investors can't do it, and that I am one of those investors.
Why not tackle an easier problem first -- beating the market on an after-tax basis (in taxable accounts) through tax loss harvesting of individual stocks?
I have in the past toyed with the idea of running a DYI market index, buying individual stocks in proportion to their market weight over time. One advantage is that you would have essentially zero fees. The other is that you could tax loss harvest all the individual losers and donate the biggest winners.

The method would be pretty simple. You start by buying $2,900 of Apple the first month. The next month, let v be the value of your Apple stock, a the market cap of Apple, and g the market cap of Google (i.e. Alphabet). You then buy v(a/g) dollars worth of Google stock. You keep moving down the list of publicly traded companies until you hit the end. At which point, you own every publicly traded company at market weight in the form of individual securities.
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Re: A Boglehead Guide to Buying Individual Stocks

Post by Stryker »

All I know is that I've been investing in individual equities here in Canada since the early 80's. No big deal. I wasn't intelligent enough to get into university and I'm mathematically challenged, but that didn't dissuade me. I was determined to find a way to be a decent stock picker and after trying different methods of investing I've managed fine all these years. It was individual stocks I sold in the late 90's that paid for the bungalow we bought in a nice area of a major city. We took out a small mortgage on it and paid it off in less than three years. We haven't had any debt since. I've been happily retired for over a decade now, and my wife a few years after that. We got through the 2008-09 financial crisis unscathed and our portfolio of all Canadian stocks has continued to climb since then with an increasing income from dividends come each passing year. That's all from our taxable portfolio which is by far our largest of the three.

The other two smaller portfolios, tax free and tax deferred are all in a combination of index funds and ETF's and has been since 2010.

A lot of what I've learned from passive indexing, I incorporate into my portfolio of individual equities.
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Re: A Boglehead Guide to Buying Individual Stocks

Post by Hawaiishrimp »

I have beaten the market by pure luck before and experienced significant gains. But now, I'm a BH devotee and I stop buying individual stocks. I have a 2 digits portfolio now and I don't dare to screw it up by thinking I' can outsmart everyone all the time. It ain't happening.
I save and invest my money, so money can make money for me, so I don't have to make money eventually.
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Re: A Boglehead Guide to Buying Individual Stocks

Post by topper1296 »

I use index funds as my core investments, however I also have 15 individual stocks in a taxable account where I plan on using the dividends to help fund my retirement. And if I retire early, they can help me bridge the gap.
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Re: A Boglehead Guide to Buying Individual Stocks

Post by qwertyjazz »

I think regression equations is played out - smart beta or factors to sell. I would learn some machine learning terminology. And then recommend individual stocks for the low low price of $19.99 per stock determined by AI. Then you win nearly 20 dollars on any individual stock.
With that you can beat the market or Time And Relative Dimension in Space methodology but I believe that requires developing a British accent.
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nedsaid
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Re: A Boglehead Guide to Buying Individual Stocks

Post by nedsaid »

NibbanaBanana wrote:
I like to invest in individual issues too. I have about 20% in individual stocks. I never really tried too hard to understand the financial statements. I'm guessing that all that information is priced in. My dad got me interested in this decades ago. Back then mutual funds weren't as popular or cheap as they are now.

Nedsaid: Before I buy, I look at the financials and the various ratios to make certain that I am not overpaying for a stock. But like you, I don't obsess over the financials. The markets do a pretty good job of pricing stocks. Really what I am looking for is a good story.

One very nice feature of running your own portfolio is that you can avoid bubbles. My portfolio was up in the year 2000 after the TMT crash. I know a number of people who lost a lot when that bubble burst. And permanent losses too. That's something you want to avoid. Bubbles and permanent losses. Also, don't pay too much for great companies. I bought KO at a gogo 90's high price and ended up with a 3-4% return to this day on that money. KO was in it's own bubble.

Nedsaid: Well, I didn't chase the high tech and internet stuff during the late 1990's but I didn't avoid the bubble completely. I took big hits in Lucent, sold that and bought Nortel and took a hit on that too. Should have sold Hewlett Packard and bought it back.

One dangerous feature is lack of diversification. I was about 30% in financials in 2008, no 100% losses, but I took a big painful hit.

Nedsaid: Tell me about it. I took losses in AIG, still own the stock and it is proudly a member of the "Four Horsemen of Underperformance." My other financial stocks also took a hit during the financial crisis but unlike AIG they all recovered. Financial stocks have been a favorite of mine too.

Here's a wild ride for you. I bought MRK for around $15 in 1993. It was the #1 performing stock in the DOW in 1997. It rose to the stratospheric price of $90 in 2000. It crashed and burned to $30 after the Vioxx scandel in 2004. Now it's back around $60 or so. All the while I collected a pretty nice divy and a spinoff or two. I think I did okay, but I really don't know. Probably less than the market though. Lesson: If you ever hold the #1 performing stock of an index, that's a good time to sell.

Nedsaid: You can overpay for great companies. The other three members of the "Four Horsemen" are Microsoft, GE, and Pfizer all of which were darlings of the 1990's. I purchased them at "bargain prices" only to find they were still overpriced after the 2000-2002 bear market. Microsoft has done really well the last three years and have been replaced in my underperformance index by Comtech Communications.

That's another problem. How have I done? I reinvested dividends and DCA'ed with DRIP plans for many of my investments. So I really have no idea. I finally moved everything to VG in the mid 2000's so they keep track of the numbers. They say I did just about exactly the same as the market since then.

My big winners are ADP, BDX, JNJ, MSFT, PEP, XOM and DIS. None of which I bought at any particularly bargain prices. Just DCA'ed most of them, reinvested divy's, and held for a long time. They're just leading companies in growing markets. Most things I bought in the depths of the financial crisis also did well but that was definitely a no brainer.

Nedsaid: Great minds think alike. I have done well with Johnson & Johnson, Exxon-Mobil, and Disney. Microsoft after disappointing for seven years has done well the last three years I have owned it. Pretty much buy good stuff at good prices and hang on to it.

What I've learned: Can't say a whole lot here. Don't get involved in bubbles. Buy aggressively in bear markets. Take the long view and try to buy growth but at a reasonable price. Avoid value traps too. They aren't a huge mistake, but if you don't see any growth then you're probably better off somewhere else. If a stock gets way overpriced, probably a good time to sell and reinvest in something else. Above all, keep most of your money in VG index funds.

Nedsaid: If you do Value, you will have a Value trap or two along the way. Sometimes, "temporary" problems aren't temporary. One of these was Eastman Kodak, which even the great George Fisher couldn't turn around. Film was a declining business and EK had no competitive edge in digital. Shoot, even Hewlett Packard was making digital cameras. So I eventually sold.

I do agree, don't chase performance. My losses in the 2000-2002 bear market were less than they could have been because I refused to get carried away with the tech boom.


Here's an example. Now, heading into retirement, I'm an income investor. I really want to diversify away from these handfuls of huge companies that dominate the market cap index funds. I need some bonds to cushion a big market crash but consider the bond market to be way more overpriced than the stock market. Bonds are paying 2.40 or so now. My last recent purchase was MMM. MMM is paying about the same in divy. I see MMM as an increasing coupon bond. I don't really care what the stock price does. So this makes things a lot easier. But my guess is that the company's going to continue to grow. Maybe I'll be right and maybe I'll be wrong. That's part of the fun!

Nedsaid: I have entertained the idea of selling my individual stocks but I keep noticing that a lot of them had dividend yields even higher than the yield of the Vanguard Total Bond Market ETF. I got to thinking this, did I want yield with zero principal growth potential or do I want yield with a good chance of price appreciation to boot? The prospect of dividend payments growing faster than inflation has a lot of appeal to me.

I know this would drive Larry Swedroe crazy, but he isn't here to wage dividend jihad around here anymore. The academic arguments about dividends are known to me but I still like them just the same. So yes, I have found a kindred spirit on this forum.

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dsronfire
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Re: A Boglehead Guide to Buying Individual Stocks

Post by dsronfire »

OP:

One tool in the box I use to analyze stocks is fastgraphs.com. You can find free tutorials on the use of the tool to determine if it may be of value to you.
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Re: A Boglehead Guide to Buying Individual Stocks

Post by NibbanaBanana »

nedsaid wrote:
NibbanaBanana wrote:

Nedsaid: I have entertained the idea of selling my individual stocks but I keep noticing that a lot of them had dividend yields even higher than the yield of the Vanguard Total Bond Market ETF. I got to thinking this, did I want yield with zero principal growth potential or do I want yield with a good chance of price appreciation to boot? The prospect of dividend payments growing faster than inflation has a lot of appeal to me.

I know this would drive Larry Swedroe crazy, but he isn't here to wage dividend jihad around here anymore. The academic arguments about dividends are known to me but I still like them just the same. So yes, I have found a kindred spirit on this forum.

I completely agree nedsaid. According to the last couple recent papers I've read from VG, they're calling for low and slow for the next decade. (Interest rates and growth.) I think it was about 5-6% for stocks and 2-3% for bonds. Maybe less. So that may be it. But I just can't bring myself to lock in 2.5% and accept that that's the best I can do. There are a lot of great companies out there making great products that people want and need that are yielding that much and growing the dividend every year. 3m is just one example. There are many others.

I've read a number of threads stating that it's been proven for years without contention that investors preference for dividends is irrational. Yet, as far as I know, (and I just requested the book) John Bogle himself has a section in his book "Battle for the Soul of American Capitalism" entitled "Dividends Matter"! I've read many articles on how management tends to buy back shares at high valuations rather than low and other wasteful uses of capital by management who feel compelled to "act". So this is completely confusing.
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nedsaid
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Re: A Boglehead Guide to Buying Individual Stocks

Post by nedsaid »

NibbanaBanana wrote:
nedsaid wrote:
NibbanaBanana wrote:

Nedsaid: I have entertained the idea of selling my individual stocks but I keep noticing that a lot of them had dividend yields even higher than the yield of the Vanguard Total Bond Market ETF. I got to thinking this, did I want yield with zero principal growth potential or do I want yield with a good chance of price appreciation to boot? The prospect of dividend payments growing faster than inflation has a lot of appeal to me.

I know this would drive Larry Swedroe crazy, but he isn't here to wage dividend jihad around here anymore. The academic arguments about dividends are known to me but I still like them just the same. So yes, I have found a kindred spirit on this forum.

I completely agree nedsaid. According to the last couple recent papers I've read from VG, they're calling for low and slow for the next decade. (Interest rates and growth.) I think it was about 5-6% for stocks and 2-3% for bonds. Maybe less. So that may be it. But I just can't bring myself to lock in 2.5% and accept that that's the best I can do. There are a lot of great companies out there making great products that people want and need that are yielding that much and growing the dividend every year. 3m is just one example. There are many others.

I've read a number of threads stating that it's been proven for years without contention that investors preference for dividends is irrational. Yet, as far as I know, (and I just requested the book) John Bogle himself has a section in his book "Battle for the Soul of American Capitalism" entitled "Dividends Matter"! I've read many articles on how management tends to buy back shares at high valuations rather than low and other wasteful uses of capital by management who feel compelled to "act". So this is completely confusing.
The academic literature that Larry Swedroe cited said that there was no difference in returns between stocks that paid dividends and those that did not. He also said that when dividend stocks sometimes did better than the broad market that it was due to underlying factors, quality or profitability for dividend growth and value for high dividend. I am not of the opinion that dividends are "free money" or even that dividends in themselves are a cause of return. Yet Siegel and Bogle talk about them and seem to think they are important. Also, as I get older, I get more interested in the income generated by my investments. I don't think that is irrational.
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CurlyDave
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Re: A Boglehead Guide to Buying Individual Stocks

Post by CurlyDave »

Years ago someone I know spent thousands of hours learning and then practicing to count cards playing blackjack. When all was said and done he had won a few thousand $. I always though that if he had devoted the same time to honest labor he would have been much further ahead.

Unless you are intending to get a day job as a stock analyst or a fund manager, this strikes me as the same kind of thing. You can spend thousands of hours working at this to maybe get a little bit higher return on your portfolio.

* * * * * * * * * * * * * *

Before I retired, I set aside about 20% of my portfolio as "fun money", which I invested in individual stocks. The way I selected them was to compare the Investor's Business Daily IBD 50 list (50 stocks) with the Value Line Timeliness 1 and 2 lists. (400 stocks total). These lists are published weekly. Stocks that were on both lists went onto my short list and I started by buying equal dollar amounts of 5 of them. Generating the "duplicates" list takes less than 15 minutes if you know Excel reasonably well, but does require a subscription to both IBD and VL.

When a stock falls off one list that is a warning sign, when it falls off both, that is a sell signal. I always held 5 stocks. This was very volatile, but my "fun money" has grown to equal the 80% I put into SPY.

I quit doing it when I retired, due to perceived risk, but for a younger guy it might be worth trying...

The point is that by letting someone else do the analysis and you distilling down their work, you can look at many more individual stocks than you can possibly analyze on your own.
Answering a question is easy -- asking the right question is the hard part.
Stryker
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Re: A Boglehead Guide to Buying Individual Stocks

Post by Stryker »

Nowadays I spend about as much time on my individual stocks as I do on my passive index investments, which is not very much. I've found after decades doing this that the less time I spend trying to play financial analyst, the better the portfolio seems to perform. On the odd occasion I have to kick an equity out of the portfolio, but generally it's because of another company buying them out, a potential or actual dividend cut, or else management incompetence, stupidity or outright fraud. Other than that, I just let them sit in the portfolio and do their thing. I do not market time my individual equities, but buy in any kind of market, including the crash of 87 and other downdrafts since then.

If I knew back in the early 80's what I know now in regard to investing in individual stocks, I'd be a lot richer, but I'm a slow learner and it's been an interesting ride. I know I haven't beaten the indexes over these last few decades but my wife and I continue to live within our means, save, invest, and re-invest even in our retirement. We live a simple life, but we have everything we could possibly want.
Karamatsu
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Re: A Boglehead Guide to Buying Individual Stocks

Post by Karamatsu »

The point would be learning how to value companies rather than actually making money.
In that case I found the Streetsmart Guide to Valuing a Stock to be a good practical introduction. Not too simple, not too complicated/theoretical. I recommend that you build a spreadsheet (or write custom software) as the best way to learn and apply the various computations. You do need a lot of company information, preferably quarterly data going back 3-5 years. If you're at Schwab you can find what you need in the research reports they provide but I'm not sure about other brokers.

As with any kind of predictive analysis, what you'll find is that the results are only as good as the assumptions that go into it, but this, too can be fun to experiment with as a "what if?" sort of way. Perhaps once you've seen all the guesswork that goes into this, you'll be less inclined to risk real money! Also one caveat: the method they teach (at least in the edition I had) doesn't apply to financial companies.

Although I did trade value stocks for a while, the most useful thing I found from the exercise was being able to look at the financial data of the company I worked for, and get a sense of its own financial strength/weakness. This can certainly liven up dinner conversation with the CEO.
aristotelian
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Re: A Boglehead Guide to Buying Individual Stocks

Post by aristotelian »

To me, the main rationale for buying individual stocks in a Boglehead perspective is not to "beat the market" but to enable Tax Loss Harvesting. If you only own Total Stock Market, it is too hard to find opportunities for TLH in bull markets. To be consistent with Boglehead principles, you would need to build your own "index" and have clear decision rules about when to buy and sell, the way an index fund does.
carofe
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Re: A Boglehead Guide to Buying Individual Stocks

Post by carofe »

I think a true Boglehead would be more like a real long term investor, screening shares of companies that are doing financially well and then holding them for a long time. Then they would buy many different stocks (300 or more) to diversify, and also across industries.
Then they go and hold the stocks in a market cap weighted fashion. That way in their portfolio, they have more of the less risky and less of the more risky, and also it makes it tax efficient by having a strategy that brings low turn over.

Then they... oh wait.

I think a true Boglehead would make their individual stock portfolio a closet index fund :D.
US Total Stock Market + Intermediate Term Bond. That's it.
nyblitz
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Re: A Boglehead Guide to Buying Individual Stocks

Post by nyblitz »

Best resource for buying individual stocks here is to search for posts authored by Wagnerjb, also known as Andy.
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patrick013
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Re: A Boglehead Guide to Buying Individual Stocks

Post by patrick013 »

NibbanaBanana wrote: I've read a number of threads stating that it's been proven for years without contention that investors preference for dividends is irrational.
nedsaid wrote: The academic literature that Larry Swedroe cited said that there was no difference in returns between stocks that paid dividends and those that did not.
I have 2 studies that go back many decades to the present. The conclusion
is that a high dividend index has a total return which is more over the market
portfolio, the S&P 500. Also, someone made the point to avoid falling into a
"value trap" regular dividends give support that the stock(s) have a stable
market share in their industry. When you put all the metrics in the table the one
that matters most is total return, and that is what high dividend fund has done
objectively.

Re: nice short piece on the math of factor investing
age in bonds, buy-and-hold, 10 year business cycle
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nedsaid
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Re: A Boglehead Guide to Buying Individual Stocks

Post by nedsaid »

patrick013 wrote:
NibbanaBanana wrote: I've read a number of threads stating that it's been proven for years without contention that investors preference for dividends is irrational.
nedsaid wrote: The academic literature that Larry Swedroe cited said that there was no difference in returns between stocks that paid dividends and those that did not.
I have 2 studies that go back many decades to the present. The conclusion
is that a high dividend index has a total return which is more over the market
portfolio, the S&P 500. Also, someone made the point to avoid falling into a
"value trap" regular dividends give support that the stock(s) have a stable
market share in their industry. When you put all the metrics in the table the one
that matters most is total return, and that is what high dividend fund has done
objectively.

Re: nice short piece on the math of factor investing
Larry Swedroe would agree with you that High Dividend outperformed the broad market. He would say that High Dividend does well because of the underlying Value factor and not because of the dividends themselves.

I would look at the studies you cited and respond with a raised eyebrow. I have a preference for dividends and there are smart people like Jeremy Siegel and James O'Shaughnessy agree. There are people out there that dividends are a cause of return and not just an element of return. It is a minority view in academia and I don't 100% dismiss it.
A fool and his money are good for business.
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JoMoney
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Re: A Boglehead Guide to Buying Individual Stocks

Post by JoMoney »

There seems to be all sorts of "could'a would'a should'a" market beating portfolios that come out in hindsight... and yet when I look at portfolios of dividend stocks that were actually being broadly invested in, such as the Vanguard, Fidelity, or T.Rowe Price "Equity Income" funds.. Don't see the performance [Morningstar Chart]
"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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patrick013
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Re: A Boglehead Guide to Buying Individual Stocks

Post by patrick013 »

JoMoney wrote:There seems to be all sorts of "could'a would'a should'a" market beating portfolios that come out in hindsight... and yet when I look at portfolios of dividend stocks that were actually being broadly invested in, such as the Vanguard, Fidelity, or T.Rowe Price "Equity Income" funds.. Don't see the performance [Morningstar Chart]
Yes it's very hard to find the right index. One study specifies the 30%
highest dividend payments and the other study specifies the 50 highest
based on yield. Other details apply also. Also, history doesn't go back
many decades for any of the dividend index funds we have today. Further,
the "index funds" used for investors try to equal weight sectors, pick stocks
with very lengthy dividend increases, things that aren't in the studies I think.
Ticker SPYD could be the closest match to the original studies but includes utility
and REIT which doesn't exactly replicate the study again. 500 High Dividend Index
Ten year return of the SPYD TR index is different from the 500 TR by 1 bps .

Here's the results of a study Morningstar publishes.
Image

I'll probably find some room for a dividend fund in my permanent portfolio,
perhaps 10 %.
age in bonds, buy-and-hold, 10 year business cycle
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JoMoney
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Re: A Boglehead Guide to Buying Individual Stocks

Post by JoMoney »

patrick013 wrote:... Yes it's very hard to find the right index. One study specifies the 30%
highest dividend payments and the other study specifies the 50 highest
based on yield. Other details apply also. Also, history doesn't go back
many decades for any of the dividend index funds we have today. Further,
the "index funds" used for investors try to equal weight sectors, pick stocks
with very lengthy dividend increases, things that aren't in the studies I think...
Actually, there are faux "studies" and indices that go back decades if you know where to look. My point, was that portfolios focusing on dividends is nothing new. There are/were all sorts of mutual funds that focus on dividends, and they don't have the performance of these portfolios that come out of torturing the data looking for something to fit the story.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
aristotelian
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Re: A Boglehead Guide to Buying Individual Stocks

Post by aristotelian »

nedsaid wrote: Larry Swedroe would agree with you that High Dividend outperformed the broad market. He would say that High Dividend does well because of the underlying Value factor and not because of the dividends themselves.

I would look at the studies you cited and respond with a raised eyebrow. I have a preference for dividends and there are smart people like Jeremy Siegel and James O'Shaughnessy agree. There are people out there that dividends are a cause of return and not just an element of return. It is a minority view in academia and I don't 100% dismiss it.
Are dividends a cause of return, or is return a cause of dividends? A company that is doing well will have more profits to distribute. I don't see dividends being a causal factor in return, since you are distributing profits to investors rather than reinvesting in growth. That said, dividends could be an indicator of return.
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JoMoney
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Re: A Boglehead Guide to Buying Individual Stocks

Post by JoMoney »

aristotelian wrote:
nedsaid wrote: Larry Swedroe would agree with you that High Dividend outperformed the broad market. He would say that High Dividend does well because of the underlying Value factor and not because of the dividends themselves.

I would look at the studies you cited and respond with a raised eyebrow. I have a preference for dividends and there are smart people like Jeremy Siegel and James O'Shaughnessy agree. There are people out there that dividends are a cause of return and not just an element of return. It is a minority view in academia and I don't 100% dismiss it.
Are dividends a cause of return, or is return a cause of dividends? A company that is doing well will have more profits to distribute. I don't see dividends being a causal factor in return, since you are distributing profits to investors rather than reinvesting in growth. That said, dividends could be an indicator of return.
What I believe Ned is referring to, is that it's been pointed out that a high dividend yield, or a low (Price / Dividend) IS a "value" measurement, and was looked at in the Fama-French studies that found "value" as a factor in explaining returns... But dividends did not explain returns as well relative to Price / Book, or other value measurements. Any price / x is a value measurement, but some are weaker than others in their model for explaining risk and returns. If you believe that the FF model is on to something, and have a strategy to increase risk hoping for higher returns, then it makes sense to target Price/Book more so than high dividend yield. If you don't have a lot of faith in the 'value' model though, it's a moot point.
"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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nedsaid
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Re: A Boglehead Guide to Buying Individual Stocks

Post by nedsaid »

aristotelian wrote:
nedsaid wrote: Larry Swedroe would agree with you that High Dividend outperformed the broad market. He would say that High Dividend does well because of the underlying Value factor and not because of the dividends themselves.

I would look at the studies you cited and respond with a raised eyebrow. I have a preference for dividends and there are smart people like Jeremy Siegel and James O'Shaughnessy agree. There are people out there that dividends are a cause of return and not just an element of return. It is a minority view in academia and I don't 100% dismiss it.
Are dividends a cause of return, or is return a cause of dividends? A company that is doing well will have more profits to distribute. I don't see dividends being a causal factor in return, since you are distributing profits to investors rather than reinvesting in growth. That said, dividends could be an indicator of return.
The Academic research would say that dividends are not a cause of return. In fact, the argument is that a dividend is in effect a partial liquidation of your ownership of the company, this is reinforced by the federal tax law that gives capital gains treatment to qualified dividends. Many Bogleheads would say that you can create your own dividend by selling shares of your mutual fund.

Nevertheless, there are people out there whom I respect that have a dividend preference. I think dividends are not necessarily a cause of return but an indicator of factors in a stock that make it a good investment. Dividends, with a few exceptions, are a sign of sustainable earnings. Dividend growth signals growing earnings (quality) and High Dividends signal Value. It is easier to fake earnings than it is to fake a dividend.
A fool and his money are good for business.
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nedsaid
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Re: A Boglehead Guide to Buying Individual Stocks

Post by nedsaid »

JoMoney wrote:
aristotelian wrote:
nedsaid wrote: Larry Swedroe would agree with you that High Dividend outperformed the broad market. He would say that High Dividend does well because of the underlying Value factor and not because of the dividends themselves.

I would look at the studies you cited and respond with a raised eyebrow. I have a preference for dividends and there are smart people like Jeremy Siegel and James O'Shaughnessy agree. There are people out there that dividends are a cause of return and not just an element of return. It is a minority view in academia and I don't 100% dismiss it.
Are dividends a cause of return, or is return a cause of dividends? A company that is doing well will have more profits to distribute. I don't see dividends being a causal factor in return, since you are distributing profits to investors rather than reinvesting in growth. That said, dividends could be an indicator of return.
What I believe Ned is referring to, is that it's been pointed out that a high dividend yield, or a low (Price / Dividend) IS a "value" measurement, and was looked at in the Fama-French studies that found "value" as a factor in explaining returns... But dividends did not explain returns as well relative to Price / Book, or other value measurements. Any price / x is a value measurement, but some are weaker than others in their model for explaining risk and returns. If you believe that the FF model is on to something, and have a strategy to increase risk hoping for higher returns, then it makes sense to target Price/Book more so than high dividend yield. If you don't have a lot of faith in the 'value' model though, it's a moot point.
Thank you for explaining this.
A fool and his money are good for business.
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