Just not getting it [Stock Picking versus TSM]

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namrac
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Just not getting it [Stock Picking versus TSM]

Post by namrac » Fri Dec 08, 2017 7:39 pm

I posted most of this in another post but I suspect that thread is not being looked at much at this point so I'd like to post it again because it is for me a foundational question re the BH approach to investing that I can't come to terms with.

I've read several of the core BH investing books and understand the arguments made for the 3 index fund--or similar--investing approach. But I'm confounded by the following comparison to TSM I've done multiple times with numerous groups of stocks. Stocks that don't require any analytic skills at all to come up with. I came up with (as have thousands of others) the very common list below--and there are plenty more--by just getting a sense of well-performing stocks from reading financial sites and news sources. Then looking at how they have done both short and long-term. And thinking about the place of their products or service in our economy/culture. I keep repeating this type of comparison to try and convince myself I should put my money into a TSM fund but I just can't rationalize how it makes any sense.

This is my conundrum. If I compare some commonly invested good stocks--say FANGS and a few others--(eg AMAT, MU, FB, GOOG, NFLX, NVDA, BA, AAPL) to ITOT (total market), they all come out ahead at 1, 2, 5, and 10 year time frames (GOOG the exception at 2 year time frame). Not a few of them. Every single one. And not just by a little. By multiples of 4 to 10+ times greater. The BH argument, I assume, would be you don't know what will happen in the next 10 years though...the past is no indication of the future, etc.

But really? Anyone think most if not all of these stocks are not going to do well in the next 5-10 years given where the world is headed with AI, self-driving cars, the change in content delivery, the IOT, and the rapidly evolving move to online marketplaces? It was not a slightly better result with any of these stocks, it was a HUGELY better result for every single one of them. Even if only half of them performed as well in the future, you'd likely be miles ahead of TSM.

To the argument that you wouldn't know that beforehand, I would use Amazon as an example. A few years ago it was obvious to me Amazon was just getting going based on my and many friends increase in online purchases habits from Amazon. Same for Apple. Same for Netflix and Google. For the same reasons, it seems pretty likely these companies will do well for some time to come. Hence Buffet loading up on Apple. When I look at how my family uses Amazon as compared to even a year ago, for example, I think Amazon's transformation of our society is just getting going. Same for Google. Netflix and FB less certain but more likely than not, they will continue to do well for some time.

Where am I off? Scratching my head.
Last edited by namrac on Fri Dec 08, 2017 7:53 pm, edited 1 time in total.

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KlingKlang
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Re: Just not getting it

Post by KlingKlang » Fri Dec 08, 2017 7:50 pm

20 years ago you could have come up with a similar list of tech stocks (AOL, CPQ, DELL, GTW, HWP, LSOS, SGI, YHOO, XCIT) that had also far outperformed the market and were expected to keep going up forever. Until they didn't.

Check out the Nifty Fifty stocks from the 1960's. Some are still doing well, many aren't around any more.

For fun read Mark Twain's essay on the length of the Mississippi River.
Last edited by KlingKlang on Fri Dec 08, 2017 8:03 pm, edited 1 time in total.

barnaclebob
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Re: Just not getting it

Post by barnaclebob » Fri Dec 08, 2017 7:53 pm

The trends you seen in amazon and all of these other companies are seen by everyone else and priced into the stock. Why do you think Tesla has such a huge market cap compared to established auto makers when it has a tiny fraction of the output? Its already priced at a level that assumes electric cars will become extremely prolific and that Tesla will get a major piece of that pie. You don't need to predict whether amazon will do well or not, you need to predict if it will do better than predicted.

I work for a large company and not even I can predict the movements of my company's stock because the movements are always relative to analyst predictions and how we change our year end guidance relative to what it was at already.
Last edited by barnaclebob on Fri Dec 08, 2017 8:01 pm, edited 4 times in total.

Nate79
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Re: Just not getting it

Post by Nate79 » Fri Dec 08, 2017 7:56 pm

If your stock picking is so great why are you posting here and instead would be the richest hedge fund manager on Wall street?

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Blister
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Re: Just not getting it

Post by Blister » Fri Dec 08, 2017 7:57 pm

There are plenty of people out there that are smarter than you or I and have more information about individual stocks than we do. They do this full time and don't have a 9-5 job. They are called fund managers. Not one of them has been able to out perform the TSM over the long term.

Past performance is no guarantee of future results.
Everthing works out in the end. If it doesn't then its not the end.

Afty
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Re: Just not getting it

Post by Afty » Fri Dec 08, 2017 8:14 pm

You're picking a list of stocks based on their past performance, then validating them by checking their past performance. Of course they've outperformed. The real test is picking those stocks today, then following them out to 1 year, 2 years, 3 years, etc., and seeing if they continue to outperform. You will find that past performance does not predict future returns.

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in_reality
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Re: Just not getting it

Post by in_reality » Fri Dec 08, 2017 8:21 pm

Self driving cars?

No idea who is going to win that.

Maybe no-one will have tech that differentiates them, or maybe someone will.

It’s certain that many will try including foreign companies.

So good luck picking the winner. I know I can’t. Thus the use of an index. All the companies you mention are in it.

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InvestorNewb
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Re: Just not getting it

Post by InvestorNewb » Fri Dec 08, 2017 8:30 pm

I'm sure many of us have toyed with the idea that you are thinking about. My philosophy is that I want to be able to sleep at night. I'm already very heavy in stocks (almost my entire net worth) and feel that I am taking enough risk with TSM/TISM. I am happy with my returns so far and taking greater risk in a small concentration of stocks would simply exceed my comfort levels.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

namrac
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Re: Just not getting it

Post by namrac » Fri Dec 08, 2017 8:34 pm

Thank you for your answers. I took over my ret fund a year ago but didn't have the nerves to go against the index mantra I read multiple times in multiple books. I do know multiple people who didn't follow this approach who did extremely well. I see them and I see the studies that say it will not work out for them in the long run. I'm not so sure. I continue to read, watch and learn.

sambb
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Re: Just not getting it

Post by sambb » Fri Dec 08, 2017 8:47 pm

i made a lot of money in AAPL and paid off my mortgage. You are correct, i would have done better in it, than in the index fund. But it would have been greater risk. No doubt, however, that risk and reward are greater.

You are probably correct that many companies that expand will do far better than the index funds. Amazon is an obvious example that most people figure out years ago. It just is more risky since it is more concentrated. Index funds are more diversified so are lower risk, and thus lower reward.
Last edited by sambb on Fri Dec 08, 2017 9:00 pm, edited 1 time in total.

namrac
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Re: Just not getting it

Post by namrac » Fri Dec 08, 2017 8:55 pm

And I've also questioned because I've read articles explaining that fund managers are not a good comparison to individual investors because they have far different criteria when managing multimillion to billion dollar portfolios and the pressures of clients and other large funds they are competing against.

There's no doubt in my mind the average investor is better off with an index fund. Look at Cramer's "The Street" portfolio that is supposed to educate about investing but doesn't even do as well as the S&P index (I've emailed them multiple times LOL to ask how they can promote that as good investing but alas no answer). But when I noted to myself several years ago that buying Amazon and Google seemed certain to have great results based on what I saw on a daily basis among family and friends (buying what you know as Peter Lynch talked about) I can't help but think about it now. I didn't act on it because I had a financial advisor handling my account. I was clueless about how to even make a stock purchase let alone the difference between a bond and an equity at that time (I finally started to try and educate myself to find I was the recipient of classic stock churning financial advisor products).

frugalecon
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Re: Just not getting it

Post by frugalecon » Fri Dec 08, 2017 8:57 pm

I have been content to get rich slowly, and with greater certainty.

onourway
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Re: Just not getting it

Post by onourway » Fri Dec 08, 2017 8:58 pm

When I first got here I had a brief fascination as well with putting together my own portfolio that fit exactly what I thought I wanted. It took me a while to really understand that all I was doing was re-arranging the pieces of a puzzle that was already completed. The future will inevitably look different than the past. That's the only thing we can know with certainty.

Consider that the companies on your list are fully established, the chance of them continuing to see the kind of astronomical growth they have already seen is rather small. Do you really think Amazon, Apple, et all will get another 5 or 10 times as large as they are already? They may not go anywhere in the next decades, but most of their growth is already priced in - the stock may continue to hold steady or even climb, but it's not going to grow in the kind of multiples that make a really huge impact. You may do ok holding such a portfolio, but you also have a high likelihood of missing out on the next round of massive growth stocks. By holding the entire market, you guarantee you won't miss out.

sambb
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Re: Just not getting it

Post by sambb » Fri Dec 08, 2017 9:03 pm

the higher risk and higher reward issue are not just limited to stocks.

For example, one could spend alot of money on college, and get a good job. Or you could spend that money on learning poker. Learning poker is higher risk, but could be higher reward.

Any investment with higher risk can result in higher reward. bitcoin is a good example.

Thesaints
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Re: Just not getting it

Post by Thesaints » Fri Dec 08, 2017 9:08 pm

namrac wrote:
Fri Dec 08, 2017 7:39 pm
Stocks that don't require any analytic skills at all to come up with.
The answer lies therein
I do know multiple people who didn't follow this approach who did extremely well.
Rest assured that there are many more who did substantially worse.

Emily1980
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Re: Just not getting it

Post by Emily1980 » Fri Dec 08, 2017 9:39 pm

I think everyone here, including me, has felt the way you feel at some point. Mostly I think about how much better my husband's and my portfolio could be doing if only I had taken this opportunity or that opportunity. One way to deal with these feelings is to take a small percentage of your portfolio, say five percent or less, and simply buy the stocks you think you can beat the index with. And then see if you do. No cheating. No saying, well these stocks that I picked beat the index and those didn't. You have to see if your picks, all together, beat the index. And over what time frame. A fair number of Bogleheads do this. No one's going to kick you out for playing. The good thing about doing this with a small percentage of your portfolio is that you can't do any real damage to yourself if you're wrong. You can't become the next Warren Buffet if you're right either, but with most of your money in index funds, it's not like you're going to be poor. You were already a millionaire when you joined Bogleheads.

But here's the thing about thinking you can predict the future because the future is "obvious," as you called it. I've skimmed through some of your older posts. When you first joined Bogleheads, you had taken over your portfolio from a high-priced manager and noted that your portfolio value would have been higher if you had simply used index funds. So already the guy you had making active decisions for you in the past underperformed the index. Though, granted, that could just have been because he was overcharging you for his services and putting you in funds with high expense ratios. But your first post was titled: "Wait for the drop?" You said that you had moved to all cash when taking over your portfolio while the Dow was at 16,500. You also said that it seemed silly to get back in before the drop that would obviously be coming in the near future. The Dow has been over 24,000 since then. No sign of the obvious drop yet. And when and if it does come, will the Dow be so high that the drop will not be below 16,500? Everything is obvious in hindsight. And, of course, the drop could come tomorrow and be way below 16,500. But the point is that we don't know. And in the meantime, the index is up almost 50%.

Also, by investing in an index fund you're not saying that you think all companies are equally valuable and that none will do better than others. That's not how stocks are priced in an index. The index already takes into account that some companies are more valuable and will do better than others. By investing in an index fund you're saying that you don't know better than everyone else already knows which companies are more valuable and will do better than others.

I'm not a total diehard on efficient market theory. (Probably because I'm not educated enough to know what I'm talking about.) But it seems to me that the market isn't always efficient in the short term. Just look at how some companies' stock prices rocket upwards or plummet downwards in anticipation of events that sometimes don't occur. I think short term overreactions to events that do occur happen sometimes too, otherwise bailing out and staying out in March 2009 would have been a good idea for everyone. And by tilting to small value, I'm already basically saying that I believe in systemic inefficiencies. But I also think that short term price fluctuations are a siren's song. Everyone was in love with PBR (a Brazilian oil company) a few years back. It could do no wrong. Like Google it just kept going up and up. You could have handily beaten any index fund you liked. Now PBR is selling for pennies on the dollar. No one even cares anymore. I looked at bitcoin when it was $500 and thought, "Gee, if only I had bought it at $200. Oh well; it's too late now." I wasn't going to get roped in for an obvious drop, like I surmised had probably happened to greedy PBR suckers. What is Bitcoin at now, like umpteen thousand dollars?

We are really, really bad at predicting the future and really, really good at fooling ourselves into thinking otherwise.

Jack FFR1846
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Re: Just not getting it

Post by Jack FFR1846 » Fri Dec 08, 2017 9:42 pm

Let's turn back time to the start of my engineering career and pick the most stable, big, great companies who are going to rule the world forever.

DEC....it's already passed on buying this silly startup, Apple because it's just a toy. Same with Compaq. It's outmaneuvering Big Blue (IBM).
Wang.....because it has cornered the word processing market and will dominate.
Data General.....because it has a loyal following and is right on the heels of DEC.
Milton Bradley....the biggest and best toy guys with electronics reaching into the future.

Get it? Back then, it was easy to see that these guys were killing it and would be kings forever. Until they weren't. That could be in the next year with anyone on your list.

Instead, buy a few thousand of the top stocks with TSM or another large broad market fund and when a Tesla crashes and burns, it doesn't do more than blip for your portfolio.
Bogle: Smart Beta is stupid

namrac
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Re: Just not getting it

Post by namrac » Fri Dec 08, 2017 9:43 pm

You may do ok holding such a portfolio, but you also have a high likelihood of missing out on the next round of massive growth stocks. By holding the entire market, you guarantee you won't miss out.
I like that way of putting it.

namrac
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Re: Just not getting it

Post by namrac » Fri Dec 08, 2017 10:11 pm

I've skimmed through some of your older posts. When you first joined Bogleheads, you had taken over your portfolio from a high-priced manager and noted that your portfolio value would have been higher if you had simply used index funds. So already the guy you had making active decisions for you in the past underperformed the index. Though, granted, that could just have been because he was overcharging you for his services and putting you in funds with high expense ratios. But your first post was titled: "Wait for the drop?" You said that you had moved to all cash when taking over your portfolio while the Dow was at 16,500. You also said that it seemed silly to get back in before the drop that would obviously be coming in the near future. The Dow has been over 24,000 since then. No sign of the obvious drop yet. And when and if it does come, will the Dow be so high that the drop will not be below 16,500?
Man o man, busted! Gonna have to cross m T's and dot my I's on this forum lol! That's impressive you dug up my initial posts. I make a good story of learning the hard way. And you are indeed correct. I've had as many misgivings about my trying to time it as I've had about not putting all of it into FANGS with buy and hold as my gut told me to do. I did not heed the advice given here back then and possibly--most likely probably--to my detriment. Yet still I hold out. I've been in an out a few times the past year. Did Ok but not as well as buy and hold with ITOT would have done which I started out with. I watched my 40% AGG drop and 60% ITOT underperform so got out and started picking and timing. I went into FANGS and a half of dozen others. Had I bought and held with those I would have done better than TM/TBM. But I tried to time it in constant fear of a correction this late into a record bull market. So I didn't do as well as buy and hold 60/40 index. I learned a lot but at a cost to be sure.

A couple of lessons learned for me: buy and hold. Another I've just come to understanding/admitting: the money I would have gained with a buy and hold TM approach during the past year would likely have matched or surpassed the correction that will come. But I could end up well behind since no one knows when that correction is coming.

Good post Emily. Thanks

GCD
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Re: Just not getting it

Post by GCD » Fri Dec 08, 2017 10:12 pm

Quite the conundrum isn't it? A lot of people will run you down for thinking what you are thinking, but maybe you are the next Warren Buffet. Because really, that's the question right? Are you one of the top half dozen stock pickers in the world? Literally thousands of pros are not... over the long run. I don't know a thing about you. I'd hate to see you limit yourself because a bunch of hesitating nervous nellies talked you out of demonstrating your greatness. It all hinges on your appraisal of yourself. Nobody great ever achieved what they did by listening to the naysayers. But for all of us who aren't great, recognizing our limits is a useful tool. I'm not being sarcastic. Maybe you have some good insight.

I think pretty highly of myself, but I'm gonna stick with index funds.

namrac
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Re: Just not getting it

Post by namrac » Fri Dec 08, 2017 10:14 pm

Instead, buy a few thousand of the top stocks with TSM or another large broad market fund and when a Tesla crashes and burns, it doesn't do more than blip for your portfolio.
I hear yuh. Blips are good on the grand scale.

namrac
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Re: Just not getting it

Post by namrac » Fri Dec 08, 2017 10:17 pm

Nobody great ever achieved what they did by listening to the naysayers.
Right!? Huhaaaah for greatness! Real men buy bitcoin!

And I was thinking me and Warren got a lot in common LOL.

GCD
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Re: Just not getting it

Post by GCD » Fri Dec 08, 2017 10:27 pm

namrac wrote:
Fri Dec 08, 2017 10:17 pm
Nobody great ever achieved what they did by listening to the naysayers.
Right!? Huhaaaah for greatness! Real men buy bitcoin!

And I was thinking me and Warren got a lot in common LOL.
I wouldn't advise dropping out of college either, but it has worked wonderfully for some very successful people. And if they would've posted here "should I drop out of college?", well I can imagine the responses they would get. From me included.

Emily1980
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Re: Just not getting it

Post by Emily1980 » Fri Dec 08, 2017 10:49 pm

namrac wrote:
Fri Dec 08, 2017 10:11 pm
I've skimmed through some of your older posts. When you first joined Bogleheads, you had taken over your portfolio from a high-priced manager and noted that your portfolio value would have been higher if you had simply used index funds. So already the guy you had making active decisions for you in the past underperformed the index. Though, granted, that could just have been because he was overcharging you for his services and putting you in funds with high expense ratios. But your first post was titled: "Wait for the drop?" You said that you had moved to all cash when taking over your portfolio while the Dow was at 16,500. You also said that it seemed silly to get back in before the drop that would obviously be coming in the near future. The Dow has been over 24,000 since then. No sign of the obvious drop yet. And when and if it does come, will the Dow be so high that the drop will not be below 16,500?
Man o man, busted! Gonna have to cross m T's and dot my I's on this forum lol! That's impressive you dug up my initial posts. I make a good story of learning the hard way. And you are indeed correct. I've had as many misgivings about my trying to time it as I've had about not putting all of it into FANGS with buy and hold as my gut told me to do. I did not heed the advice given here back then and possibly--most likely probably--to my detriment. Yet still I hold out. I've been in an out a few times the past year. Did Ok but not as well as buy and hold with ITOT would have done which I started out with. I watched my 40% AGG drop and 60% ITOT underperform so got out and started picking and timing. I went into FANGS and a half of dozen others. Had I bought and held with those I would have done better than TM/TBM. But I tried to time it in constant fear of a correction this late into a record bull market. So I didn't do as well as buy and hold 60/40 index. I learned a lot but at a cost to be sure.

A couple of lessons learned for me: buy and hold. Another I've just come to understanding/admitting: the money I would have gained with a buy and hold TM approach during the past year would likely have matched or surpassed the correction that will come. But I could end up well behind since no one knows when that correction is coming.

Good post Emily. Thanks
Lol. Sorry. I often skim through people's old posts to get an idea of what shape they're in financially and what sort of temperament they have about money if they're new or if I just haven't come across them before.

It's not unusual, though, for people to change their minds about their investments often to their detriment. I do it too. I'm working on not doing it. It's a temperament thing. I also think it's a human nature thing. I liken it to the opening sequence in the movie Office Space, if you've seen it. (I'm a huge dorky fangirl of that movie.) In the scene the guy is trying to get to work and the lane he's in isn't moving. He sees the lane next to him start moving. So he changes into that lane. Then that lane stops moving and the lane he was in before starts moving. So he switches back and gets stuck again. He would have been much better off just staying in his lane...

Nicolas
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Re: Just not getting it

Post by Nicolas » Fri Dec 08, 2017 11:13 pm

KlingKlang wrote:
Fri Dec 08, 2017 7:50 pm
20 years ago you could have come up with a similar list of tech stocks (AOL, CPQ, DELL, GTW, HWP, LSOS, SGI, YHOO, XCIT) that had also far outperformed the market and were expected to keep going up forever. Until they didn't.

Check out the Nifty Fifty stocks from the 1960's. Some are still doing well, many aren't around any more.

For fun read Mark Twain's essay on the length of the Mississippi River.
I think this is what you were referring to.
https://www.goodreads.com/work/quotes/2 ... ississippi
Last edited by Nicolas on Sat Sep 29, 2018 4:21 pm, edited 1 time in total.

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TeamArgo
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Re: Just not getting it

Post by TeamArgo » Fri Dec 08, 2017 11:49 pm

Emily1980 wrote:
Fri Dec 08, 2017 9:39 pm
I think everyone here, including me, has felt the way you feel at some point. Mostly I think about how much better my husband's and my portfolio could be doing if only I had taken this opportunity or that opportunity. One way to deal with these feelings is to take a small percentage of your portfolio, say five percent or less, and simply buy the stocks you think you can beat the index with. And then see if you do. No cheating. No saying, well these stocks that I picked beat the index and those didn't. You have to see if your picks, all together, beat the index. And over what time frame. A fair number of Bogleheads do this. No one's going to kick you out for playing. The good thing about doing this with a small percentage of your portfolio is that you can't do any real damage to yourself if you're wrong. You can't become the next Warren Buffet if you're right either, but with most of your money in index funds, it's not like you're going to be poor. You were already a millionaire when you joined Bogleheads.

...

We are really, really bad at predicting the future and really, really good at fooling ourselves into thinking otherwise.
I cemented my investment philosophy into what I eventually found out was the BH way about 14 years ago by doing something similar to what Emily1980 suggests here. Fifteen percent of my portfolio was about exactly $100K, so I took it out of stock and bond funds and self-managed investing in a smattering of stocks that just seemed like they couldn't lose. I managed to get the $100K down to $54K in 18 months, before I figured out I didn't have the knack I thought I had. (Remember Lucent's amazing rise until it hit the 80's or so, and then dropping to nearly pennystock range before the Alcatel buyout? I rode a bunch of that down, including twice buying more on the dips because such a company was "bound to rebound"! Other smaller disasters occurred, but this was my grand opus.). Stock and Bond index funds have been my friends ever since, and have not let me down.
So, yes, Namrac, give it a try. One way or another, it will provide you with a good lesson! :beer
"A man hears what he wants to hear, and disregards the rest" -Paul Simon (The Boxer, 1970)

Dandy
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Re: Just not getting it

Post by Dandy » Sat Dec 09, 2017 8:15 am

The lure of individual stocks is quite strong especially with those who have some knowledge. As others have pointed out many sure bets from the past didn't turn out so well. I would add that most of the sure things surely have high valuations - so they don't have to go out of business they can just disappoint to have their value fade/stagnate. Today's pace of change is breathtaking and that can mean a blue chip can turn into a cow chip rather quickly.

So, be careful venturing out -- it can be rewarding or very disappointing.

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happyisland
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Re: Just not getting it

Post by happyisland » Sat Dec 09, 2017 8:21 am

sambb wrote:
Fri Dec 08, 2017 9:03 pm

Any investment with higher risk can result in higher reward. bitcoin is a good example.
Or powerball...

fundseeker
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Re: Just not getting it

Post by fundseeker » Sat Dec 09, 2017 8:41 am

namrac wrote:
Fri Dec 08, 2017 7:39 pm
AMAT, MU, FB, GOOG, NFLX, NVDA, BA, AAPL
If we had all known then what we know now about those stocks, many of us would have bought them. But, that's my 20/20 hindsight at work. Also, if we had known then what we know now about how well the entire market would do, most of us would have gone 100% into stock funds instead of staying the course with 70/30, 60/40, etc. But, that's my 20/20 hindsight at work. I hate it that I was not 100% in stock funds, but I am not about to change now just because they're up.

epictetus
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Re: Just not getting it

Post by epictetus » Sat Dec 09, 2017 8:53 am

do it with 10% of your portfolio.
put the rest in a reasonable balance of stock/bond index funds.

if you are able to pick well you will make some extra money.
if you aren't you won't be hurt too badly.

it can be good to go ahead and get this out of your system when you are relatively young and resources relatively small.
Focus on what you can control

IowaFarmBoy
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Re: Just not getting it

Post by IowaFarmBoy » Sat Dec 09, 2017 8:59 am

The thing I keep asking myself when I have thoughts like yours is "how can I be smarter than all those professionals who devote all their time to this?" Active managers generally are smart, well-educated, experienced, have access to more data and company management than I do and this is their full-time job. And they are not able to consistently beat the market, at least by enough to overcome their expenses. How am I as a part-time amateur gonna do better than them?
Last edited by IowaFarmBoy on Sat Dec 09, 2017 11:31 am, edited 2 times in total.

KlangFool
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Re: Just not getting it

Post by KlangFool » Sat Dec 09, 2017 9:05 am

OP,

1) I gambled on Telecom stock during Telecom bust and lost 50% of my investment.

2) One of my family members worked on Wall Street for 20+ years. He has a Master Degree in Economy from the University of Chicago. He makes 7 figures in annual salary and bonuses. He lost 10 million in the Telecom bust too.

3) Nobody knows nothing.

4) My uncle is one of few people that could win in a casino. He strikes lottery 3 times in his life. He is one of those lucky people.

5) Some people are just extremely lucky. If you are one of them, you just need to buy one lottery ticket. If you are not.......

KlangFool

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Re: Just not getting it

Post by tibbitts » Sat Dec 09, 2017 9:14 am

Change a few of those tech ticker symbols and this sounds just like 1998-1999.

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Re: Just not getting it

Post by deltaneutral83 » Sat Dec 09, 2017 11:28 am

There are bold investors, old investors, but rarely both. If your horizon is 20+ years and you are not an industry professional, you statistically have zero business picking single stocks to build out a portfolio. If you are picking 1/2/3 stocks for fun like FAANG, that's speculating and is the equivalent of Vegas. I have more fun blowing $2000 in Vegas than picking stocks personally. All the information retail people have regarding fundamentals is also available to the pros and it's baked in to the current price. You know nothing that others don't.

I don't necessarily think it's that hard for pros to beat the market with their own portfolios. But they will charge you, the retail man, 1.5-2.5% AUM (for example 1% to the house, 0.5%-1.5% in ER's/churning costs) and this negates 100+% of the return above the indexes for 94% of the pros over 20+ years. And this of course doesn't incorporate taxes for actively managed funds in taxable accounts. That takes the % of pros able to beat benchmarks after expenses/taxes down to about 1 out of 100 over 20+years in taxable accounts. Good luck.

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Re: Just not getting it

Post by Abe » Sat Dec 09, 2017 12:31 pm

barnaclebob wrote:
Fri Dec 08, 2017 7:53 pm
The trends you seen in amazon and all of these other companies are seen by everyone else and priced into the stock. Why do you think Tesla has such a huge market cap compared to established auto makers when it has a tiny fraction of the output? Its already priced at a level that assumes electric cars will become extremely prolific and that Tesla will get a major piece of that pie. You don't need to predict whether amazon will do well or not, you need to predict if it will do better than predicted.
I totally agree with this. These outperforming stocks the OP is following probably will continue to outperform the market as a whole. If I invest $10k in a company and get a 35% return per year, I'll have over $200k in 10 years. But the problem is all that potential growth is priced in now, so I'll have to pay a lot more than $10k now to get that $200k 10 years from now. I used to have the same idea as the OP, that all I needed to do was pick the good companies, the ones that outperformed the market. But that strategy seemed too easy, too good to be true, and it was. Thanks barnaclebob and other Bogleheads for wising me up to that.
Slow and steady wins the race.

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Re: Just not getting it

Post by srt7 » Sat Dec 09, 2017 12:50 pm

GCD wrote:
Fri Dec 08, 2017 10:27 pm
namrac wrote:
Fri Dec 08, 2017 10:17 pm
Nobody great ever achieved what they did by listening to the naysayers.
Right!? Huhaaaah for greatness! Real men buy bitcoin!

And I was thinking me and Warren got a lot in common LOL.
I wouldn't advise dropping out of college either, but it has worked wonderfully for some very successful people. And if they would've posted here "should I drop out of college?", well I can imagine the responses they would get. From me included.
:mrgreen: :mrgreen: :mrgreen: Good one!
I can't think of anything more luxurious than owning my time. - remomnyc

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Re: Just not getting it

Post by srt7 » Sat Dec 09, 2017 12:51 pm

Jack FFR1846 wrote:
Fri Dec 08, 2017 9:42 pm
Let's turn back time to the start of my engineering career and pick the most stable, big, great companies who are going to rule the world forever.

DEC....it's already passed on buying this silly startup, Apple because it's just a toy. Same with Compaq. It's outmaneuvering Big Blue (IBM).
Wang.....because it has cornered the word processing market and will dominate.
Data General.....because it has a loyal following and is right on the heels of DEC.
Milton Bradley....the biggest and best toy guys with electronics reaching into the future.

Get it? Back then, it was easy to see that these guys were killing it and would be kings forever. Until they weren't. That could be in the next year with anyone on your list.

Instead, buy a few thousand of the top stocks with TSM or another large broad market fund and when a Tesla crashes and burns, it doesn't do more than blip for your portfolio.
This should answer OP's question (which has been on my mind many times as well). FANG's or FAANG's of today could end up being dead long before many of us hit retirement.
I can't think of anything more luxurious than owning my time. - remomnyc

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Oak&Elm
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Re: Just not getting it

Post by Oak&Elm » Sat Dec 09, 2017 1:03 pm

Fact:
Jim Cramer, stock picker YTD return 10.94%
Vanguard Total US Stock Index VTSAX YTD return 19.96%
What’s not to get?

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Re: Just not getting it

Post by staythecourse » Sat Dec 09, 2017 1:32 pm

namrac wrote:
Fri Dec 08, 2017 7:39 pm
I posted most of this in another post but I suspect that thread is not being looked at much at this point so I'd like to post it again because it is for me a foundational question re the BH approach to investing that I can't come to terms with.

I've read several of the core BH investing books and understand the arguments made for the 3 index fund--or similar--investing approach. But I'm confounded by the following comparison to TSM I've done multiple times with numerous groups of stocks. Stocks that don't require any analytic skills at all to come up with. I came up with (as have thousands of others) the very common list below--and there are plenty more--by just getting a sense of well-performing stocks from reading financial sites and news sources. Then looking at how they have done both short and long-term. And thinking about the place of their products or service in our economy/culture. I keep repeating this type of comparison to try and convince myself I should put my money into a TSM fund but I just can't rationalize how it makes any sense.

This is my conundrum. If I compare some commonly invested good stocks--say FANGS and a few others--(eg AMAT, MU, FB, GOOG, NFLX, NVDA, BA, AAPL) to ITOT (total market), they all come out ahead at 1, 2, 5, and 10 year time frames (GOOG the exception at 2 year time frame). Not a few of them. Every single one. And not just by a little. By multiples of 4 to 10+ times greater. The BH argument, I assume, would be you don't know what will happen in the next 10 years though...the past is no indication of the future, etc.

But really? Anyone think most if not all of these stocks are not going to do well in the next 5-10 years given where the world is headed with AI, self-driving cars, the change in content delivery, the IOT, and the rapidly evolving move to online marketplaces? It was not a slightly better result with any of these stocks, it was a HUGELY better result for every single one of them. Even if only half of them performed as well in the future, you'd likely be miles ahead of TSM.

To the argument that you wouldn't know that beforehand, I would use Amazon as an example. A few years ago it was obvious to me Amazon was just getting going based on my and many friends increase in online purchases habits from Amazon. Same for Apple. Same for Netflix and Google. For the same reasons, it seems pretty likely these companies will do well for some time to come. Hence Buffet loading up on Apple. When I look at how my family uses Amazon as compared to even a year ago, for example, I think Amazon's transformation of our society is just getting going. Same for Google. Netflix and FB less certain but more likely than not, they will continue to do well for some time.

Where am I off? Scratching my head.
I would say the biggest issue is recall bias. You are remembering everyone that did well that you thought. I can guarantee there were others that you thought that didn't and now you don't remember them. The other is a form of survivorship bias. You are looking at all the ones that did well and looking back so, of course, they did better then the others otherwise you wouldn't have picked those to look at. It isn't like you are looking at Enron and comparing since you already know that it imploded. The biggest reason to believe in bogleheads passive approach finally comes down to if you really in your heart of hears believe in EMH or not. If you believe that the markets are efficient enough then you wouldn't assume you, nor anyone else, has any insight that already isn't incorporated into the market. It seems you have a "feeling" there is a price inefficiency.

In the end, there is NOTHING wrong with going with what you think is correct. Just put your money IN REAL LIFE on the table and go for it. Look back in 10 years and then compare. All I know is ALL the data has shown security selection is a losers game who are professionals, brilliant, and have more tech resources that I will ever have and they have shown to produce negative alpha.

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

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Taylor Larimore
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Re: Just not getting it

Post by Taylor Larimore » Sat Dec 09, 2017 1:38 pm

Emily1980 wrote:
Fri Dec 08, 2017 9:39 pm
I think everyone here, including me, has felt the way you feel at some point. Mostly I think about how much better my husband's and my portfolio could be doing if only I had taken this opportunity or that opportunity. One way to deal with these feelings is to take a small percentage of your portfolio, say five percent or less, and simply buy the stocks you think you can beat the index with. And then see if you do. No cheating. No saying, well these stocks that I picked beat the index and those didn't. You have to see if your picks, all together, beat the index. And over what time frame. A fair number of Bogleheads do this. No one's going to kick you out for playing. The good thing about doing this with a small percentage of your portfolio is that you can't do any real damage to yourself if you're wrong. You can't become the next Warren Buffet if you're right either, but with most of your money in index funds, it's not like you're going to be poor. You were already a millionaire when you joined Bogleheads.

But here's the thing about thinking you can predict the future because the future is "obvious," as you called it. I've skimmed through some of your older posts. When you first joined Bogleheads, you had taken over your portfolio from a high-priced manager and noted that your portfolio value would have been higher if you had simply used index funds. So already the guy you had making active decisions for you in the past underperformed the index. Though, granted, that could just have been because he was overcharging you for his services and putting you in funds with high expense ratios. But your first post was titled: "Wait for the drop?" You said that you had moved to all cash when taking over your portfolio while the Dow was at 16,500. You also said that it seemed silly to get back in before the drop that would obviously be coming in the near future. The Dow has been over 24,000 since then. No sign of the obvious drop yet. And when and if it does come, will the Dow be so high that the drop will not be below 16,500? Everything is obvious in hindsight. And, of course, the drop could come tomorrow and be way below 16,500. But the point is that we don't know. And in the meantime, the index is up almost 50%.

Also, by investing in an index fund you're not saying that you think all companies are equally valuable and that none will do better than others. That's not how stocks are priced in an index. The index already takes into account that some companies are more valuable and will do better than others. By investing in an index fund you're saying that you don't know better than everyone else already knows which companies are more valuable and will do better than others.

I'm not a total diehard on efficient market theory. (Probably because I'm not educated enough to know what I'm talking about.) But it seems to me that the market isn't always efficient in the short term. Just look at how some companies' stock prices rocket upwards or plummet downwards in anticipation of events that sometimes don't occur. I think short term overreactions to events that do occur happen sometimes too, otherwise bailing out and staying out in March 2009 would have been a good idea for everyone. And by tilting to small value, I'm already basically saying that I believe in systemic inefficiencies. But I also think that short term price fluctuations are a siren's song. Everyone was in love with PBR (a Brazilian oil company) a few years back. It could do no wrong. Like Google it just kept going up and up. You could have handily beaten any index fund you liked. Now PBR is selling for pennies on the dollar. No one even cares anymore. I looked at bitcoin when it was $500 and thought, "Gee, if only I had bought it at $200. Oh well; it's too late now." I wasn't going to get roped in for an obvious drop, like I surmised had probably happened to greedy PBR suckers. What is Bitcoin at now, like umpteen thousand dollars?

We are really, really bad at predicting the future and really, really good at fooling ourselves into thinking otherwise.
Emily1980:

Nice post!

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

RRAAYY3
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Re: Just not getting it

Post by RRAAYY3 » Sat Dec 09, 2017 1:43 pm

Why bet on a few when you can buy a fund that included them and any other relevant key players

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Re: Just not getting it

Post by bottlecap » Sat Dec 09, 2017 1:45 pm

Hey, if you can really pick successful stocks based on what you see your friends doing, go for it. Don’t change friends, either.

I’m guessing you can’t. But only you know if you’re the unicorn next door.

JT

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Re: Just not getting it

Post by arcticpineapplecorp. » Sat Dec 09, 2017 2:09 pm

I very much enjoyed Emily's post as well. I don't believe it was intended as a gotcha moment but rather to remember what we often forget...that is, how we felt or thought in the past. That can help put things in perspective as I believe it has.

I believe you're suffering from two things: 1. recency bias and 2. FOMO (fear of missing out).

Recency bias. You think that because FAANG stocks have done well they will continue to do well. They may continue to go up, but do you think the future returns are likely to be anywhere near as great as their past returns? Apple is approaching a $1 trillion dollar market cap. What do you think is easier, a small company with a $1 million market cap that grows to double it's current size (to become worth $2 million) or Apple to go from $1 trillion to $2 trillion? Tech companies start out as growth companies because they have lots of room to grow when they're starting out and small. Once these companies become large they become more stable (not growth) companies.

It's also hard to know what's the right thing to do in advance. In hindsight it's easy to see what was the right thing. But because of tracking error, companies will perform differently from the market. You won't mind in years when they're beating the market, but in the years when they don't it will take nerves of steel to stay the course. What happens so often is people abandon their strategy when the going gets tough. They market time. They chase performance selling todays dogs to buy last years great companies. They never get the great returns because they're buying high and selling low.

regarding FOMO, you'll always suffer that if you look in the rear view mirror. There's always something that would have been better. No way to know in advance. What we do know is that if you buy individual stocks you'll be taking many more risks you avoid when you own the market. You'll have stock risk, size risk, style risk, sector risk, country risk and manager risk (you). You avoid these when you own the market and only face market risk (and currency risk if you invest internationally). But you can mitigate market risk to the extent you hold fixed income. So the choice is yours. How much and what types of risk do you want to take? I have no idea how to calculate this, I'm sure others can show the way but it's risk adjusted returns that matter. Even if you get higher returns with some stocks over the market as a whole if you took much higher risk doesn't that have to factor in as to whether it was worth it? In other words, if you take twice the risk but the return is only 1.5X as great then the risk wasn't worth it right? So you have to figure out your risk adjusted return if you're going to stray from the market to see if it was really worth having taken it.

Finally, don't forget to learn history. In the 60s and 70s there was a group of stocks (technology mostly like polaroid, xerox, texas instruments and others) like today, but then were called the Nifty Fifty. It was believed that if you just owned these stocks, you'd be rich as rich.
That's the point of the Nifty Fifty that investors should never forget. After they had their parabolic rise, the Nifty Fifty then proceeded to dive and lose more than half their value in the ensuing bear markets of the mid-1970s. By 1975, investors who bought the Nifty Fifty at their peak in 1972 would have seen more two-thirds of their wealth evaporate.

Now, as professor Jeremy Siegel of the Wharton School pointed out in a very popular 1996 white paper, those investors who had the patience to hold on until 1988 would have recovered all of their losses, and furthermore would have matched the returns of the S&P 500. Although that recovery sounds impressive, it's actually mainly due to just one stock: Philip Morris. Absent that one single holding, the Nifty Fifty would have been a disaster of a portfolio.

Furthermore, professor Siegel's study benefits from its end date. If we were to carry on the thought experiment to present times such stocks as Coca-Cola and GE, which looked so promising in the late 1980s, have been nothing but dogs as investments ever since.

In many ways, the FAANG phenomenon is even more dangerous than the Nifty Fifty. The Nifty Fifty were at least somewhat diversified by industry and by name (and as Philip Morris shows, just one lucky position kept the whole portfolio alive).
source:https://www.cnbc.com/2017/08/07/are-faa ... fifty.html
read more here:
https://www.google.com/search?client=fi ... nt-x9DT9nk

this is a link to the Siegel paper they reference in the cnbc article:
https://www.aaii.com/journal/article/va ... ifty-fifty

"‘Those who cannot remember the past are condemned to repeat it."--George Santayana
"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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badbreath
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Re: Just not getting it

Post by badbreath » Sat Dec 09, 2017 2:14 pm

lets pick the biggest companies in 1917, 1967, 2017

https://howmuch.net/articles/100-years- ... -companies

Make sure you pick one that stays around
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

Miriam2
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Re: Just not getting it

Post by Miriam2 » Sat Dec 09, 2017 2:30 pm

namrac wrote: . . . But when I noted to myself several years ago that buying Amazon and Google seemed certain to have great results based on what I saw on a daily basis among family and friends (buying what you know as Peter Lynch talked about) I can't help but think about it now.
You know the answer to this. It's all about risk.

You're looking back and saying, "aw darn, I should have, why didn't I, what a fool I was . . . ." You can feel depressed because Amazon & Google did well. In 1998-1999, my family and friends were talking about high-flying tech stocks "they knew well" and were making them BIG money. Family and friends weren't so exuberant by 2002. It's all about risk.

Investors use index funds or well-managed low cost active funds because THE INVESTOR doesn't have to be his own stock researcher, stock analyzer, stock picker and suffer the risk. Investors can have a life and have the best mutual fund companies with the best index and low cost active funds do this for them. If investors don't have quite the fabulous returns they "would" have had if they invested huge chucks of their hard earned money in Amazon and Google - well, so be it, the investor took on far less risk, can look at his family and feel comfortable he has preserved as best as possible their financial well-being, education, food and shelter without risking it all on great stocks.

You know this story. And btw, John Bogle expressly states that you can invest in any stocks you want. You can pick the companies you know best and pile your money in, he understands the "lure of the hunt" and says "Life is short. If you want to enjoy the fun, enjoy! . . . Individual stocks? Yes. Pick a few. Listen to the promoters. Listen to your broker or adviser. Listen to your neighbors. Heck, even listen to your brother-in-law."

But he cautions to keep your fabulous stock picking to a small percentage of your investments and to keep that separate from your "Serious Money" account that you need for your rent, the college education for your kids and your retirement nest egg.

Bogle: "But after all is said and done, there are no surefire solutions for investment success - wealth without risk, if you will. It's just not a realistic expectation."

(John Bogle, "Little Book of Common Sense Investing," pgs201-202)

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Re: Just not getting it

Post by eye.surgeon » Sat Dec 09, 2017 2:37 pm

"I would rather be certain of a good return than hopeful of a great one"
Warren Buffett
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

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Taylor Larimore
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Best reason NOT to invest in individual stocks

Post by Taylor Larimore » Sat Dec 09, 2017 2:41 pm

Bogleheads:

The best reason I have heard NOT to invest in individual stocks is this:

Mutual fund managers who select individual stocks are bright, highly educated, well-trained, with large staffs and computer information we can only dream about. Nevertheless, most are unable to beat a comparable index fund.

If mutual fund managers can't beat their index benchmark, I know it is foolish for me to try.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Just not getting it

Post by panhead » Sat Dec 09, 2017 2:41 pm

namrac wrote:
Fri Dec 08, 2017 7:39 pm
(eg AMAT, MU, FB, GOOG, NFLX, NVDA, BA, AAPL) to ITOT (total market), they all come out ahead at 1, 2, 5, and 10 year time frames (GOOG the exception at 2 year time frame). Not a few of them. Every single one. And not just by a little. By multiples of 4 to 10+ times greater. The BH argument, I assume, would be you don't know what will happen in the next 10 years though...the past is no indication of the future, etc.
You ever here the phrase shoot where the target will be? These are huge established companies. If you want to make "real" money, pick the small companies that will become these companies eventually. I actually believe that someone with the time, motivation, and intelligence can outperform the indexes, maybe by a large margin, if you put in the effort. I also believe that one will never be able to do that trading companies that all of the professional fund managers are watching and trading. You have to look at the small cap stocks. The risk is huge, but fund managers can't load up on these stocks because they are too small. This is your only advantage as an individual investor. I don't do this, but I also don't think its impossible. I don't have the time. Maybe you do. Don't invest in what everybody already knows about, find the next Google, the next Netflix, etc. If you are going to try to fight the large fund managers, who do you really think is going to win that battle? Me? I'll stick to a tilted index portfolio and accept whatever that gives.

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Re: Just not getting it

Post by Emily1980 » Sun Dec 10, 2017 12:13 pm

Thank you for the kind words, Taylor. I know how much you've contributed to this community, so they mean a lot from you.

Arctic, you're right, I wasn't trying to gotch-him. Based on his posts, Namrac sounds like he's struggling with the same thoughts we all struggle with, especially when we're starting out. Except that, due to having had his portfolio professionally managed for him until last year, instead of struggling with these thoughts in the beginning with $100k, he's struggling with them now with $1.3MM. From what I've read of people's posts on this forum, it seems that most Bogleheads, by the time they join the two-comma club, have had enough hands on experience with their portfolios that these thoughts aren't new any more. (I don't know if anyone ever completely masters these thoughts, though. I know I haven't. I haven't even joined the two-comma club yet.)

Namrac (if you're still listening): The posters encouraging you to try stock picking with a limited portion of your portfolio aren't trying to gotch you either. It's entirely possible that you have good instincts for business. After all, you didn't amass a seven figure portfolio by being a dummy. And people here are really supportive of others' success. Stock picking is just really, really hard to do. Primarily because picking the stocks is probably less than half the battle. The real challenge is in mastering our human impulses, mainly greed and fear. You have to pick stocks not based on past performance (greed) and, once you pick the stocks, not abandon them when they have temporary setbacks (fear). Given the way you've said you've switched in and out of investments over the past year, it seems that you are still very much a slave to your impulses. And because no one here really enjoys seeing people fail just so they can say, "I told you so," they're encouraging you to practice with a limited percentage of your net worth.

If you're truly interested in stock picking, there are bogleheads who do it. Nedsaid posts on this forum quite a bit and has held as high as 20% of his portfolio in individual stocks, I think. (Not sure because he's been around way, way longer than I have.) You can search through his post history and read about his experiences. Or maybe even talk to him, if you want. Have you figured out how to PM users yet?

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Re: Just not getting it

Post by Veiled » Sun Dec 10, 2017 1:42 pm

onourway wrote:
Fri Dec 08, 2017 8:58 pm
By holding the entire market, you guarantee you won't miss out.
"Don't look for the needle in the haystack, buy the whole haystack." This phrase is usually applied to finding the next great stock, but it works backwards, too. The haystack protects you from the phenomenon everyone is laying out (great companies that become obsolete or go bust). You own the needles you think you're already sure about...and everything else just in case those flop.
Pardon me as I read these one hundred and fifty-seven SP vs LLC vs Scorp threads...

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