Just not getting it [Stock Picking versus TSM]

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victw
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Re: Just not getting it

Post by victw » Sun Dec 10, 2017 3:29 pm

namrac wrote:
Fri Dec 08, 2017 7:39 pm
I've read several of the core BH investing books and understand the arguments made for the 3 index fund--or similar--investing approach.

...left the middle out

Where am I off? Scratching my head.
Have you read the recommended books on behavior economics? You will still be scratching your head. But you might have a better understanding of your behavior and why you are scratching your head.

Vic

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abuss368
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Re: Just not getting it

Post by abuss368 » Sun Dec 10, 2017 3:49 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.
Let me think (images of Lucent, America On Line, Pets.com, Enron, Worldcom, Global Crossing, America Home Mortgage, Lehman Brothers, Bear Sterns, Washington Mutual, Merrill Lynch, Countrywide Home Mortgage.....coming to mind)......hmmmmm.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

Rus In Urbe
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Re: Just not getting it

Post by Rus In Urbe » Sun Dec 10, 2017 4:01 pm

Emily1980---Wonderful post! And great reply from "Just not getting it"

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

Greed wears blinders! It's really easy to forget the losers and remember the winners, and think we could have picked 'em.

Great advice to take 5-10% of a portfolio and put the money down on the "sure winners." Let us know how that goes!

When the NYTimes allowed three "financial advisors" the opportunity to see if they could beat the market---well, they didn't, and eventually, that column just kinda disappeared because it was just....um.....uh.....too embarrassing for the Wall Street professionals.

Yessirree....What's not to get?

MrPotatoHead
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Re: Just not getting it

Post by MrPotatoHead » Sun Dec 10, 2017 8:17 pm

If you read common sense on mutual funds you will find that John Bogle advocates buying and holding a stock portfolio as an alternative to indexing. There are some potential tax advantages to this approach.

WanderingDoc
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Re: Just not getting it

Post by WanderingDoc » Mon Dec 11, 2017 1:42 am

Blister wrote:
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.
None of them .. what ?? Alfred Winslow Jones, Charlie Munger, Warren Buffett - all have been able to for decades. There are many more.
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Re: Just not getting it

Post by Captain kangaroo » Mon Dec 11, 2017 2:04 am

Core holdings in TSM, with a heavy tilt In the Vanguard technology ETF.

Get the best of both worlds. Core holdings in the entire market which will grow. A little tech on the side that may give you a nice profit, or a slight loss.


If someone told me 20 years ago AOL would be worthless, I would have called them crazy.

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Re: Just not getting it

Post by Thesaints » Mon Dec 11, 2017 2:55 am

If the potential loss is only “slight”, so will be the potential gains, unless their likelihood is a lot less.

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whodidntante
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Re: Just not getting it

Post by whodidntante » Mon Dec 11, 2017 3:08 am

You can certainly outperform an index fund. Simply take more risk, and get lucky.

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Re: Just not getting it

Post by technovelist » Mon Dec 11, 2017 9:45 am

whodidntante wrote:
Mon Dec 11, 2017 3:08 am
You can certainly outperform an index fund. Simply take more risk, and get lucky.
Wow, that is so simple. I wonder why no one else has thought of it? :mrgreen:
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Re: Best reason NOT to invest in individual stocks

Post by DaleMaley » Mon Dec 11, 2017 9:59 am

Taylor Larimore wrote:
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
There has been thousands of people who have tried to pick stocks and beat the index return over the last 100 years. Only a handful of them have beaten the index return for 10 straight years, and zero of them (including Warren Buffett) have beaten the index return for more than 20 straight years in-a-row. The average investor works for 30 years and then retires for another 20 or 30 years..........giving an investment horizon of 50 to 60 years. Given these results, I will pick the index fund for my lifetime investing :)
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. – Warren Buffett

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CyclingDuo
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Re: Just not getting it

Post by CyclingDuo » Mon Dec 11, 2017 11:44 am

abuss368 wrote:
Sun Dec 10, 2017 3:49 pm
Let me think (images of Lucent, America On Line, Pets.com, Enron, Worldcom, Global Crossing, America Home Mortgage, Lehman Brothers, Bear Sterns, Washington Mutual, Merrill Lynch, Countrywide Home Mortgage.....coming to mind)......hmmmmm.
This is one of the ubiquitous warnings that gets touted the most often about those who bring up investing in individual equities. Most that invest in individual stocks (according to some of the survey results we have seen here at BH - that includes a rather fair percentage of us at Bogleheads.org in addition to core index fund holdings) are not investing all of their nickels in one stock, or two stocks, or three stocks, or five stocks, etc... .

Not to mention, even if an investor is only slightly aware of diversity - one's nickels are going to be spread between sectors, market cap size, as well as include some stocks that derive a percentage of their sales from overseas. The chances of someone having such horrible, and disastrous stock picking skills to only pick losers that go the way of Lucent, or Enron, or Worldcom, or Pets.com, or Washington Mutual, or Global Crossing, or JDS Uniphase, Pan AM, TWA, Kodak, GE - or choose whatever your bad memory medicine would like to use as an illustration - as their only investments in individual stocks is remote of course.
namrac wrote:
Fri Dec 08, 2017 7:39 pm
Where am I off? Scratching my head.
Common mistakes made by those who invest in individual stocks? Overtrading is a big one - actually it's a HUGE one. Doing nothing is another one that is difficult for investors to do (they get too impatient and bored to just let one of their great performing investments continue to run for years and years and years - which leads to them being too often tempted to take profits). Blindly following others is another big mistake investors make. The mistake often made by not holding on to the quality investments for long durations (10, 20, 30 years) is one that the average investor simply cannot grasp. Getting emotionally attached to an investment is another mistake if something drastically changes in the underlying company's core business, with dividends being slashed, and the investor has no exit plan in place (insert all of the stocks mentioned above that went pffftttt). Focusing on stock quotes rather than the underlying business is another mistake investors make with individual equities. Focusing, or concentrating one's investments in as little as 10-15 stocks is another mistake too many make.

In short - there are a lot of things that can go wrong from the investor's side of the equation before we even get into the investments they choose.

To the OP's point of asking about well known stocks - such as the FAANNG stocks (Facebook, Amazon, Apple, Netflix, Nvidia, Google) or the STAB stocks (Sina, Tencent, Alibaba, Baidu), or well known favorites such as Johnson & Johnson, Walmart, Colgate, 3M, Disney, Caterpillar, Boeing, McDonalds, Microsoft, Salesforce.com, Verizon, Berkshire Hathaway, United Health, Altria, Phillip Morris, Home Depot, Intel, Amgen, AT & T, Abbott Labs, Oracle, and on and on - sure, a well crafted, diverse portfolio with dividends reinvested is going to do very well over time. Don't forget, small cap, value, international - it takes a lot to build a well-crafted diverse portfolio to reach our long term goals of accumulating wealth.

There may be years that a well crafted portfolio does better than a benchmark, there may be years a well crafted portfolio does worse than a benchmark, and there may be years that a well-crafted portfolio matches a benchmark. And that will happen even if there is a dog or two or three that absolutely goes bust and to $0. The others will make up for it over time provided one has enough capital to distribute between enough stocks in a diversified portfolio.

The problem is - the common mistakes investors make listed above are too difficult to overcome for most. Hence the attraction to index fund investing and receiving the return that the market provides. It's fun to have a big winner or two or three or four or more, no doubt about it. Too few have the investing acumens and discipline to match exactly what the market provides by holding individual equities (see those common mistakes again). How many can do better than what the market provides? That's the argument that everyone is making.

The answer being: Most likely, slim to none.

We would be the first to say "go ahead, invest in individual equities", but only do so with the expectation that your returns will most likely be equal to the market over time even if you avoid the common mistakes. A bull market can erase or cover up a lot of mistakes, but the odds of you underperforming the broader benchmarks over time increase. There's nothing wrong with receiving a percent or two below what the market provides in a given year, nor is their anything wrong with receiving a few percentage points higher at times.

You can own the haystack. You can own a few needles. Or you can own the haystack and a few needles. Most of us have probably done all three at various times with mixed results, and can claim guilt to some - if not all - of the most common mistakes along the way.

Always be humble. Even Warren Buffett has made plenty of mistakes and he'll be the first to admit them.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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Re: Best reason NOT to invest in individual stocks

Post by pkcrafter » Mon Dec 11, 2017 12:24 pm

DaleMaley wrote:
Mon Dec 11, 2017 9:59 am
Taylor Larimore wrote:
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
There has been thousands of people who have tried to pick stocks and beat the index return over the last 100 years. Only a handful of them have beaten the index return for 10 straight years, and zero of them (including Warren Buffett) have beaten the index return for more than 20 straight years in-a-row. The average investor works for 30 years and then retires for another 20 or 30 years..........giving an investment horizon of 50 to 60 years. Given these results, I will pick the index fund for my lifetime investing :)
! ! !
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Re: Just not getting it

Post by jwhitaker » Mon Dec 11, 2017 12:39 pm

I have a quarter that I have flipped 100 times and it came up heads 97 times. All you need to do is get a bunch of people to bet on it, foolishly thinking it is 50/50, and you will make a fortune. My asking price is one million dollars, but no one has bought it yet. I'm just not getting it...

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abuss368
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Re: Just not getting it

Post by abuss368 » Mon Dec 11, 2017 2:27 pm

CyclingDuo wrote:
Mon Dec 11, 2017 11:44 am
abuss368 wrote:
Sun Dec 10, 2017 3:49 pm
Let me think (images of Lucent, America On Line, Pets.com, Enron, Worldcom, Global Crossing, America Home Mortgage, Lehman Brothers, Bear Sterns, Washington Mutual, Merrill Lynch, Countrywide Home Mortgage.....coming to mind)......hmmmmm.
This is one of the ubiquitous warnings that gets touted the most often about those who bring up investing in individual equities. Most that invest in individual stocks (according to some of the survey results we have seen here at BH - that includes a rather fair percentage of us at Bogleheads.org in addition to core index fund holdings) are not investing all of their nickels in one stock, or two stocks, or three stocks, or five stocks, etc... .

Not to mention, even if an investor is only slightly aware of diversity - one's nickels are going to be spread between sectors, market cap size, as well as include some stocks that derive a percentage of their sales from overseas. The chances of someone having such horrible, and disastrous stock picking skills to only pick losers that go the way of Lucent, or Enron, or Worldcom, or Pets.com, or Washington Mutual, or Global Crossing, or JDS Uniphase, Pan AM, TWA, Kodak, GE - or choose whatever your bad memory medicine would like to use as an illustration - as their only investments in individual stocks is remote of course.
namrac wrote:
Fri Dec 08, 2017 7:39 pm
Where am I off? Scratching my head.
Common mistakes made by those who invest in individual stocks? Overtrading is a big one - actually it's a HUGE one. Doing nothing is another one that is difficult for investors to do (they get too impatient and bored to just let one of their great performing investments continue to run for years and years and years - which leads to them being too often tempted to take profits). Blindly following others is another big mistake investors make. The mistake often made by not holding on to the quality investments for long durations (10, 20, 30 years) is one that the average investor simply cannot grasp. Getting emotionally attached to an investment is another mistake if something drastically changes in the underlying company's core business, with dividends being slashed, and the investor has no exit plan in place (insert all of the stocks mentioned above that went pffftttt). Focusing on stock quotes rather than the underlying business is another mistake investors make with individual equities. Focusing, or concentrating one's investments in as little as 10-15 stocks is another mistake too many make.

In short - there are a lot of things that can go wrong from the investor's side of the equation before we even get into the investments they choose.

To the OP's point of asking about well known stocks - such as the FAANNG stocks (Facebook, Amazon, Apple, Netflix, Nvidia, Google) or the STAB stocks (Sina, Tencent, Alibaba, Baidu), or well known favorites such as Johnson & Johnson, Walmart, Colgate, 3M, Disney, Caterpillar, Boeing, McDonalds, Microsoft, Salesforce.com, Verizon, Berkshire Hathaway, United Health, Altria, Phillip Morris, Home Depot, Intel, Amgen, AT & T, Abbott Labs, Oracle, and on and on - sure, a well crafted, diverse portfolio with dividends reinvested is going to do very well over time. Don't forget, small cap, value, international - it takes a lot to build a well-crafted diverse portfolio to reach our long term goals of accumulating wealth.

There may be years that a well crafted portfolio does better than a benchmark, there may be years a well crafted portfolio does worse than a benchmark, and there may be years that a well-crafted portfolio matches a benchmark. And that will happen even if there is a dog or two or three that absolutely goes bust and to $0. The others will make up for it over time provided one has enough capital to distribute between enough stocks in a diversified portfolio.

The problem is - the common mistakes investors make listed above are too difficult to overcome for most. Hence the attraction to index fund investing and receiving the return that the market provides. It's fun to have a big winner or two or three or four or more, no doubt about it. Too few have the investing acumens and discipline to match exactly what the market provides by holding individual equities (see those common mistakes again). How many can do better than what the market provides? That's the argument that everyone is making.

The answer being: Most likely, slim to none.

We would be the first to say "go ahead, invest in individual equities", but only do so with the expectation that your returns will most likely be equal to the market over time even if you avoid the common mistakes. A bull market can erase or cover up a lot of mistakes, but the odds of you underperforming the broader benchmarks over time increase. There's nothing wrong with receiving a percent or two below what the market provides in a given year, nor is their anything wrong with receiving a few percentage points higher at times.

You can own the haystack. You can own a few needles. Or you can own the haystack and a few needles. Most of us have probably done all three at various times with mixed results, and can claim guilt to some - if not all - of the most common mistakes along the way.

Always be humble. Even Warren Buffett has made plenty of mistakes and he'll be the first to admit them.
You seem to have passion about your approach and may be looking for confirmation. You may need a different message board for that though.

Good luck in your approach.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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HomerJ
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Re: Just not getting it

Post by HomerJ » Mon Dec 11, 2017 3:18 pm

namrac wrote:
Fri Dec 08, 2017 7:39 pm
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.
So what? You're looking at past data. You're looking at winners, stocks that have already done well, and saying "See, if I had bought these 10 years ago, I'd be rich."

So what does that do for you? Absolutely nothing.
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.
Ah, you already know the answer.
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.
Those stocks are ALREADY priced for doing well going forward. They're big established companies now... The only way you're going to get 10x the stock market over the NEXT ten years is to find the small barely-known companies today that are going to grow 10x going forward.

Here's a hint: It's hard.

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Re: Just not getting it

Post by bertilak » Mon Dec 11, 2017 3:36 pm

Stock picking is simple.
  • Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it.
    If it don't go up, don't buy it.
    -- Will Rogers
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Re: Just not getting it

Post by meercatter » Mon Dec 11, 2017 4:19 pm

I occasionally have similar sentiments as well. I think about all the companies in an index fund and I know that some of them are dying (e.g Amazon crushing companies in the retail space). It's your money. If you have strong beliefs about how things will be shaped in the future, you are free to make investments according to those beliefs. Heck, you could probably do worse than putting your money in FAANG stocks. Companies such as Alphabet and Amazon are so massive they now span multiple market sectors. You could even look into ETFs that exclusively hold FAANG stocks.

I personally have around 5% of my portfolio in individual stocks that I am very optimistic about. Occasionally I've been wrong (e.g Yelp), but a lot of the time I've been right. As others in this thread mention, since you are not operating at the same scale as fund managers, you have the advantage of being able to invest relatively large proportions of your money in small cap stocks that have huge potential for growth.

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Re: Just not getting it

Post by sergeant » Mon Dec 11, 2017 10:18 pm

Well, have you got it yet?
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just frank
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Re: Just not getting it

Post by just frank » Tue Dec 12, 2017 5:17 am

I believe that the OP wants to employ a 'growth tilt'. I do too, and have. At some point in the future, I may not want a growth tilt.

Are we still Bogleheads?

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Re: Just not getting it

Post by bertilak » Tue Dec 12, 2017 5:33 am

just frank wrote:
Tue Dec 12, 2017 5:17 am
I believe that the OP wants to employ a 'growth tilt'. I do too, and have. At some point in the future, I may not want a growth tilt.

Are we still Bogleheads?
Yes, but like your left ear, with a tilt!
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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CyclingDuo
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Re: Just not getting it

Post by CyclingDuo » Thu Dec 14, 2017 9:50 am

abuss368 wrote:
Mon Dec 11, 2017 2:27 pm
You seem to have passion about your approach and may be looking for confirmation. You may need a different message board for that though.

Good luck in your approach.
Skipping over your suggestion that I post elsewhere and am in some need of confirmation, let's not forget to see the forest through the trees.

Pointing out to the OP that nobody was going to stop him from his head scratching draw of curiosity to individual equities with warnings that he would most likely make some of the common mistakes I listed, underperform the market over the longer term as a result, and his chances of success of outperforming the market being "slim to none" I thought were on target. Personally, I thought it was good advice to support the value of passive investing via Index Funds.

Far be it to stop him from his curiosity. I included the caveat that even if he could manage to avoid the most common mistakes, chances are in the long run his returns would match the market at best. Some of the stocks of companies he mentioned have indeed experienced 35-86% gains in the past 12 months (Apple, Nvidia, Google, Amazon, Boeing). Of course it is natural for one to be drawn to those types of returns which is what led the OP to make his post.

I've read various things on these boards and in the Wiki's mentioning that some BH's even allow 5-15% of their overall portfolio to be in individual equities. I remember reading one survey that the BH respondents who participated in the survey showed that 63% of them also owned individual stocks. We certainly fit that mode, and are absolutely on board with our core positions in passive Vanguard/Fidelity/iShares Index Funds. Retirement plans are all in Vanguard Funds (Three Fund Portfolio), our children's Roth IRA's are in Three Fund Portfolio and it is what we recommend.

We're about to enter our 29th year of investing - both in Vanguard Funds as well as individual stocks for that time frame. So we well know what it is like. See my posts on dealing with the loss of three parents the past two years and trying to absorb the inheritance of three separate portfolios, and the mess of dealing with 57 individual stocks!
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Re: Just not getting it

Post by garlandwhizzer » Thu Dec 14, 2017 12:01 pm

namrac wrote:
Where am I off? Scratching my head.
If you can reliably and consistently pick the stocks that are going to be the big winners in the future and avoid those that are destined to be losers, it is very rational to do so. Many of us who have tried that pick-the-winners approach actually underperformed the averages over a significant time period. Hence we accepted a simpler but in our opinion more reliable index approach. There are individuals who can and do outperform the markets but they are rare, and they get rarer and rarer as the time span of observation increases.

Garland Whizzer

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Taylor Larimore
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"Fund Manager of the Year"

Post by Taylor Larimore » Thu Dec 14, 2017 12:20 pm

There are individuals who can and do outperform the markets but they are rare, and they get rarer and rarer as the time span of observation increases.
Garland:

I might add that the individuals who can and do outperform the market in one year are not the same that outperform the market in later years.

Each year Morningstar picks the "Fund Manager of the Year." No fund manager has done it twice.

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

hoops777
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Re: Just not getting it

Post by hoops777 » Thu Dec 14, 2017 12:57 pm

Going back a few years,Apple was at about 70 dollars a share and there was a rumor that Jobs was leaving so it dropped down into the low 60s.I bought 400 shares some and sold it a couple of weeks later for about a 4000$ profit.I was so happy then :annoyed
K.I.S.S........so easy to say so difficult to do.

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Re: Just not getting it

Post by Abe » Thu Dec 14, 2017 2:22 pm

When I was in grade school, all the boys played marbles during recess. We played for keeps meaning you got to keep all the marbles you won. I was not a good marble shooter, but some of the kids were very skillful and they always had a pocket full of marbles. One day I saw this kid with a tin can with a hole cut in the center. He would let other kids drop their marbles from waist high at the can on the ground and if any marbles went through the hole in the can, he would give them back two marbles. But if they missed the hole, he got to keep the marble they dropped. I noticed that he had a bag full of marbles so he was doing pretty good. I decided to get a can and try it myself. Before long I had more marbles than I knew what to do with. Anyway, I sometimes think about the can strategy and I relate it to investing. I am not very skillful at picking stocks. I can't beat the skillful stock pickers, so I use the can strategy. I just buy the total market index and hold it and doing so I can outperform most of the active investors. :happy
Slow and steady wins the race.

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Re: Just not getting it

Post by totesmagotes » Thu Dec 14, 2017 2:44 pm

I think a recently published article is relevant to the oft-discussed index vs. stock picking debate:
Abstract
Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.
Bessembinder, Hendrik, Do Stocks Outperform Treasury Bills? (November 21, 2017). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2900447

There are other studies that report on the observation that most of the gains in the stock market are attributable to a very small number of individual stocks. If you don't happen to have one of those high-flying stocks, there's a good chance that your portfolio will underperform the market. As such, you really need to diversify to increase the odds that your portfolio will contain one of these high flyers. You'd need to have ~17 (if my math is correct) stocks in your portfolio to have a 50/50 chance of holding one of the select outperformers.

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Re: "Fund Manager of the Year"

Post by abuss368 » Thu Dec 14, 2017 3:40 pm

Taylor Larimore wrote:
Thu Dec 14, 2017 12:20 pm
There are individuals who can and do outperform the markets but they are rare, and they get rarer and rarer as the time span of observation increases.
Garland:

I might add that the individuals who can and do outperform the market in one year are not the same that outperform the market in later years.

Each year Morningstar picks the "Fund Manager of the Year." No fund manager has done it twice.

Best wishes.
Taylor
I was not aware that no fund manager has ever done it twice. That is interesting.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Just not getting it

Post by JimmyJammy » Thu Dec 14, 2017 4:20 pm

This is an important topic. Great discussion.

I suffer from a mild addiction to individual stocks and I want to break it because it takes up too much of my time.

25% of my portfolio is in individual names.

But, if you're going to bet on individuals, I recommend keeping track of your performance with a carefully chosen benchmark. For me, it's the fund I would have chosen if I hadn't become involved in individual names. A Vanguard Retirement fund - VFORX (2040).

Since I've been tracking my performance (I started in 2007 or 2008), I've only been able to beat the benchmark a couple of times and it wasn't by large margins. Part of the reason was cash drag - I've always kept about 10-15% in cash.

There are many hours I would have saved by simply investing everything in an index fund.

Also, one of the big drawbacks of having stocks in a taxable account is 1) How do yo know when to sell? and 2) When you sell, assuming they're good picsk, you have to pay a lot of tax. With a buy-and-hold index fund, I just pay taxes at the end of the line.

I have a lot of fun reading about individual names on sites like SeekingAlpha.com but I'm getting too old to be gambling like this. Time is is the most valuable resource.

My current plan is to 1) not buy any more individual names and 2) start trimming my positions bit by bit.

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Re: Just not getting it

Post by inbox788 » Thu Dec 14, 2017 6:09 pm

IowaFarmBoy wrote:
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?
Is that meant as a rhetorical question? Jack Bogle has answered that numerous times:
https://www.youtube.com/watch?v=EC8rWTG ... u.be&t=837

Pay attention to the mathematical argument.

There are 2 ways to do better. The low cost index fund will beat the average fund by the lower fees on average, so BH investors are expected to beat the average professional. The other way is to do what the professionals do, and pick a few stocks. If you are a winner, tell the world, but if you were wrong, just stay quiet. Maybe half (or say 40%) of amateurs will beat the average pro and have bragging rights and can create a lot of noise.

Survival bias plays a big part in our poor memory of what really happens in the market. You think you can pick the winners, but that's because winners brag about it and losers just whittle away. Once you create the correct measurements, much of the stock picking "skill" disappears.
namrac wrote:
Fri Dec 08, 2017 7:39 pm
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.
Why are you comparing a lot of winners? Why are you not picking the winner out of the lot? You're that good, right? Pick the one, two or 3 individual stocks you believe will be the biggest winner in the next 10 years? Are you confident enough to put 10% of your portfolio in that stock? Let's say you did that and now think about this: you get a $10k bonus this year, do you add to these best picks? Or do you look for diversification by picking less than your best pick? Why choose a horse you think is going to come in 4th or 5th place? It's a little counterintuitive, but BH investors simply add to their best strategy maintaining their AA, bonus or not. Once you've found the best answer (for yourself) why keep looking?

Here's another exercise. Among the 8 listed stocks, pick the top 3 and the bottom 3. See if after a week, month or year whether you're correct. Now pick 8 other winners you think will beat the market. Which "fund" will do better the original 8 or the next 8 you pick? Oh, and it's not that surprising that growth stocks are doing well in a growing market. If the market keeps growing, I would expect many of these same stocks to continue to beat the market average. But can you accurately predict when the market turns around?

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Re: Just not getting it

Post by bertilak » Thu Dec 14, 2017 6:57 pm

inbox788 wrote:
Thu Dec 14, 2017 6:09 pm
IowaFarmBoy wrote:
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?
Is that meant as a rhetorical question? Jack Bogle has answered that numerous times:
https://www.youtube.com/watch?v=EC8rWTG ... u.be&t=837
That's the answer to a different question.

The question here is, can you beat the market by picking stocks? Unless you are among the top few percent (Buffet territory) the answer is NO. But, you can beat those who rely on (expensive) professionals by not paying the professionals for their services. Do this with low-cost index funds, as Bogle points out. That is not the same as beating the market. On the contrary, it is accepting market returns.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Re: Just not getting it

Post by Monster99 » Fri Dec 15, 2017 10:51 am

TeamArgo wrote:
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
Lucent was also my Swan Song - Wrote that off the taxes for close to 5 years. I also tested my stock picking prowess with a small portion of the portfolio but when compared to the Vanguard S&P 500 fund I did poorly and even compared to my wife's IRA (one fund, the Balanced Index) I got killed. Now it is low cost broadly diversified funds for me.....

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Re: Just not getting it

Post by rebellovw » Fri Dec 15, 2017 10:59 am

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.
Don't forget pets.com. I loved that little sock puppet.

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Re: Just not getting it

Post by harvestbook » Fri Dec 15, 2017 1:19 pm

I can think of a few uncertainties right off the bat: Facebook could easily turn into Myspace, especially given its alleged fraudulent advertising reports and millions of fake accounts; Apple could have a couple of really bad product launches in a row or become a serious focus of hackers; Amazon could run into a real or contrived antitrust battle with a belligerent government; the end of net neutrality could severely damage Google; blockchain technology could disrupt any or all of these companies, or none of them, or make them better; new competitors could arise; an unforeseen technology could erupt in a very short time frame; and of course all the usual uncertainties of war, famine, natural disaster, governmental collapse, societal upheaval, etc.

That's just from my armchair and not claiming any expertise at all. I will stay broad, cheap, and diverse and stick with my motto, "I'm too dumb to know and I can't afford to guess." I don't get it, either. But I know I don't get it.
I'm not smart enough to know, and I can't afford to guess.

OkieIndexer
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Re: Just not getting it

Post by OkieIndexer » Tue Dec 26, 2017 1:49 pm

Let's look at 6 of the top performing tech stocks between 12/26/97 - 12/26/2007 (all returns from Stockcharts.com):

BB - Blackberry (formerly Research in Motion) = 6095% gain from 2/12/99 IPO to 12/26/2007

SGMS - Scientific Games Corp. = 1599% gain

QCOM - Qualcomm = 1386% gain

ADBE - Adobe = 832% gain

FLIR - FLIR Systems, Inc. = 1267% gain

ANSS - Ansys Inc. = 2254% gain

The Vanguard Total Stock Market fund only returned 98% during this period. Surely these tech companies that had the massive returns above (even taking into account the tech bust) and were very highly regarded by the end of 2007 would continue to outperform the market in the next 10 years?

Now let's look at their performance from 12/26/2007 - 12/22/2017:

BB - Blackberry (formerly Research in Motion) = -90% loss

SGMS - Scientific Games Corp. = 47% gain (all of this gain was since July 2017...it spent the 9 1/2 years before that in negative territory)

QCOM - Qualcomm = 100% gain

ADBE - Adobe = 307% gain

FLIR - FLIR Systems, Inc. = 61% gain

ANSS - Ansys Inc. = 246% gain

The Vanguard Total Stock Market fund gained 124% during this period. So 2 of these stocks outperformed Total Stock Market and 4 underperformed. The average of the 6 was 112%. Pretty disappointing I'd say compared to how much of a sure thing they seemed in 2007.
"In bull markets, people say 'The more risk I take, the greater my return.' But when people aren't afraid of risk, they'll accept risk without being compensated." -Howard Marks, Oaktree Capital

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Re: Just not getting it

Post by ivk5 » Tue Dec 26, 2017 2:05 pm

OkieIndexer wrote:
Tue Dec 26, 2017 1:49 pm
The Vanguard Total Stock Market fund gained 124% during this period. So 2 of these stocks outperformed Total Stock Market and 4 underperformed. The average of the 6 was 112%. Pretty disappointing I'd say compared to how much of a sure thing they seemed in 2007.
No no, OP is only going to buy the ones that are going UP! :twisted:

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Re: Just not getting it

Post by pkcrafter » Tue Dec 26, 2017 6:40 pm

Everybody is brilliant in a runaway market.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Just not getting it

Post by timmy » Tue Dec 26, 2017 10:50 pm

The OP's arguments can be restated as follows:

These companies - A, B, C, etc. - are successful now and will be 20 years from now. They have moats/ can build moats to protect/ advance themselves.

Take a look at the DOW 30: https://en.wikipedia.org/wiki/Historica ... al_Average

Notice the turnover.

Why would today's companies be any different? History says they won't be.

BTW, I started investing in the mid to late 1990s. Walmart was taking over the world, not Amazon. Same with Microsoft, not Google.

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Re: Just not getting it

Post by qwertyjazz » Wed Dec 27, 2017 1:39 am

WanderingDoc wrote:
Mon Dec 11, 2017 1:42 am
Blister wrote:
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.
None of them .. what ?? Alfred Winslow Jones, Charlie Munger, Warren Buffett - all have been able to for decades. There are many more.
Yes and Lebron James makes a lot of money playing basketball. There are more professional athletes making more money than I will ever see than successful stock pickers over decades time period. But I will not drop everything and practice basketball. I know I am not Lebron. It is just on some level and for some reason harder for most people to realize they are not Buffett. He sure makes it look easy.
G.E. Box "All models are wrong, but some are useful."

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Re: Just not getting it

Post by Agggm » Wed Dec 27, 2017 7:32 am

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.
Exactly

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Re: Just not getting it [Stock Picking versus TSM]

Post by Call_Me_Op » Wed Dec 27, 2017 8:55 am

namrac wrote:
Fri Dec 08, 2017 7:39 pm
Where am I off? Scratching my head.
Honestly? Everywhere. You need to understand that all current expectations are already built-into the price of any given stock.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Just not getting it

Post by gouverneur » Wed Dec 27, 2017 9:02 am

Emily1980 wrote:
Fri Dec 08, 2017 9:39 pm

We are really, really bad at predicting the future and really, really good at fooling ourselves into thinking otherwise.
This is probably the real foundation, or at least an excellent distillation, of the wisdom accumulated on this site. You can learn a lot more detailed information and tactics, but as a matter of strategy, this is exactly it. We're psychologically equipped to overestimate ourselves and our abilities, to recall and exaggerate our successes more than our failures.

Don't just backtest portfolios of the biggest winners of the last 10-15 years. Try to apply your method to arbitrary years and think about what stocks you would have picked, and how you would have done. For instance, in 2013 when Twitter IPO'd, what would the same "obvious" factors such as public awareness and increasing widespread public adoption (the things you referenced re Amazon) have suggested about its future? As I recall in 2013, Twitter seemed to be going up and up in people's social awareness, more people were joining the platform, it was becoming a dominant form of social media. In contrast, people were pretty down on Facebook, it was old, tired, it was for people's parents, it ranked at the bottom in "cool" factor. Its stock had bounced around some since its IPO but hadn't taken off stratospherically. Which one of those tech stocks would you have purchased in late 2013? How would that bet look today, in late 2017, 4 years later?

Look at any successful company's stock and look at the long periods of time during which its value can stagnate (e.g., Microsoft). Do you have the fortitude to hold on for 7-8 years of seeming stagnation and corporate mismanagement or mediocre stewardship (i.e., Ballmer)? Look at how any individual stock can experience precipitous drops and how conventional wisdom shifts at those moments. Would you be able to hold Tesla when it is stagnant or losing for 2-3 years at a time because of some view of its fundamentals and place in the economy? Or would another "obvious" pick show up on the radar, and convince you to sell a loser to pick up a "sure winner"?

I don't mean the questions as personal attacks, because perhaps you are such a person, and perhaps you are also a fortunate person who would do well with an individual stock-picking strategy. My attitude, informed in part by the fact that I have friends who work or have worked at the major hedge funds' research arms, is that I do not want to be out there in the market trying to capture alpha that those guys somehow aren't capturing.

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Re: Just not getting it

Post by David Jay » Wed Dec 27, 2017 9:19 am

gouverneur wrote:
Wed Dec 27, 2017 9:02 am
My attitude, informed in part by the fact that I have friends who work or have worked at the major hedge funds' research arms, is that I do not want to be out there in the market trying to capture alpha that those guys somehow aren't capturing.
^^^ This
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

OkieIndexer
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Re: Just not getting it [Stock Picking versus TSM]

Post by OkieIndexer » Wed Dec 27, 2017 10:20 am

A few other stocks, thinking about companies/products I liked 10 years ago...

Performance 12/26/97 - 12/26/07:

CAJ - Canon (digital cameras, I had a Canon back then and loved it, very respected in '07) = 229% gain

EA - Electronic Arts (video game maker, VERY popular in '07...Madden, FIFA, Sims, Ultima, Battlefield, Crysis, Rock Band, etc.) = 563% gain

TEVA - Teva Pharmaceuticals (the king of generic drugs in '07, aging population) = 760% gain

DISH - DISH Network (satellite TV) = 1933% gain

Average of the 4 stocks '97-'07 = 871% gain, vs. 98% gain for Vanguard Total Stock Market.

Performance 12/26/07 - 12/26/17:

CAJ - Canon = -15% loss

EA - Electronic Arts = 77% gain

TEVA - Teva Pharmaceuticals = -51% loss

DISH - DISH Network = 75% gain

Average of the 4 stocks '07-'17 = 22% gain, vs. 124% gain for Vanguard Total Stock Market.


Kiplinger's Personal Finance magazine's 8 stock picks, December 2007 issue: https://books.google.com/books?id=reb9b ... &q&f=false

I've added 12/26/97 - 12/26/07 performance, then 12/26/07 - 12/26/17 performance:

T - AT&T ("as Apple cuts iPhone prices, AT&T is likely to attract millions of additional customers") = 40%, 61%

CX - Cemex (concrete company for the global growth boom at the time, especially in China) = 174%, -58%

CNX - Consol Energy (coal) = 1037%, -74%

INTC - Intel = 67%, 132%

PRXL - Parexel (drugs & clinical trials...aging population) = 45%, was acquired on 9/29/17 but performance '07-'17 was 240% according to Tradestation

SWK - Stanley Black & Decker = 24%, 341%

TEVA - TEVA Pharmaceutical = 760%, -51%

XTO - XTO Energy (discovers new natural gas fields) = 1890%, was acquired in 2010 by Exxon...performance 12/26/07-12/26/17 according to Tradestation was 13%

So the average of the 8 Kiplinger picks was only a 76% gain in the past 10 years vs. 124% gain for Vanguard Total Stock Market

As for actively-managed mutual funds, there was the wildly popular (in 2007) CGM Focus fund (CGMFX). I was tempted to invest in it that year. It was the Bitcoin of mutual funds that year, haha. Performance 12/26/97 - 12/26/2007 = 984% gain....performance 12/26/07 - 12/26/17 = 2% gain

And that's not even scratching the surface of the stocks since late 2007 that were delisted from the Nasdaq 100 due to poor performing stock price, such as Sun Microsystems (Java).
"In bull markets, people say 'The more risk I take, the greater my return.' But when people aren't afraid of risk, they'll accept risk without being compensated." -Howard Marks, Oaktree Capital

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Re: Just not getting it [Stock Picking versus TSM]

Post by wbrianwhite » Wed Dec 27, 2017 3:26 pm

If you're really interested in this, I'd suggest joining the American Institution of Individual Investors. They have a "shadow" stock portfolio, as in stocks in the shadow of wall street. It's a pure micro cap portfolio. Because it's micro cap, professional money managers can't buy any of these stocks, eliminating the whole "professionals with more information will out smart you" objection. They have a strict mathematical formula for adding or removing stocks, which they follow. I always thought it looked interesting, but it looked like too much work for too little marginal return. But it's a lot of smart people with academic background, so I'd check that out before trying hunches

BigPrince
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Re: Just not getting it [Stock Picking versus TSM]

Post by BigPrince » Wed Dec 27, 2017 5:06 pm

I have personally found the best cure for this is to take a small portion of the portfolio and mange it.

I have been humbled.

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nedsaid
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Re: Just not getting it

Post by nedsaid » Wed Dec 27, 2017 8:05 pm

Emily1980 wrote:
Sun Dec 10, 2017 12:13 pm

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?
I keep a "How Do You Like My New "Doo" thread here on the forum to reveal my major portfolio holdings, show portfolio analysis and rates of return, and tell folks what I am doing. Really, it is a case study of what a real life investor has done with his own money. As I like to say, the forum is sort of like my own confession booth where I confess my investing sins.

Before the 2000 crash, my individual stocks were 46% of my retirement portfolio, today they are 13%. After disasters in Lucent, Nortel, and AIG, I got the hint and further diversified. I also have posted about my "anti-index" which I call "The Four Horsemen of Underperformance." I have had my successes too. Last I looked, I had beat the US Total Stock Market by 0.10% a year over 15 years. A few months before, I trailed by something like 0.83% a year over 15 years. So I have about tracked the market.

If you look at my stocks, you see a lot of familiar names. Pretty much, I have sampled the big names in the US Stock Market and it shouldn't be too surprising that I have tracked the market. Normally, I will have a small-cap name in there too. Whatever success I have had has come from buying good companies at reasonable prices, diversifying across industry groups, and long holding periods. I do have a preference for dividends but it is a secondary consideration. An analysis of my individual stocks shows a Large Value tilt. So my performance hasn't been bad when you consider that Large Value has lagged the market since the 2008-2009 financial crisis.

So pretty much, a US Total Stock Market Index or the S&P 500 would have done just as well with almost zero effort. I am not telling people to load up their portfolio with individual stocks.
A fool and his money are good for business.

jibantik
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Re: Just not getting it [Stock Picking versus TSM]

Post by jibantik » Wed Dec 27, 2017 8:32 pm

So you picked some of the top performing stocks over the last several years and they outperform the market average over the last several years? Color me shocked. :P

WL2034
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Re: Just not getting it

Post by WL2034 » Wed Dec 27, 2017 8:43 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 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.
Exactly. Unless you have some insider info, it is VERY likely that everything you know about any of these companies is already priced into these stocks.

investorpeter
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Re: Just not getting it [Stock Picking versus TSM]

Post by investorpeter » Wed Dec 27, 2017 9:26 pm

namrac wrote:
Fri Dec 08, 2017 7:39 pm
... (eg AMAT, MU, FB, GOOG, NFLX, NVDA, BA, AAPL) ...

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?
I do not think most of the stocks you mentioned are going to do better than the overall market over the next 5-10 years. My personal opinion is that Nvidia has the best chance of outperforming over the next 30 years but that’s just a wild guess. The past year has been an anomaly in that retail investor type technology stocks have done extremely well (FANG) etc. so there are probably a lot of retail investors (me and perhaps you among them) who have an inflated sense of our stock picking skills.

On a general note, I don’t think there is necessarily anything wrong with investing in individual stocks if it is money you can afford to lose. In fact, it is stock pickers like us that allow the system to work, so I would not feel like you are somehow sinning by buying individual stocks. You are just taking on a higher level of risk that others have chosen not to take. Without risk takers, the system would not work. Even as a Bogleheader, one must decide how much risk to take by deciding on asset allocation. By buying individual stocks you take on more risk than buying an equity index fund. But if you can handle the risk, then don’t feel bad about buying individual stocks. Just be prepared to lose 100%. When I buy an equity index fund, I prepare myself to lose 40-60%.

A final point I would make, is that I do disagree with the general BH argument often mentioned that a retail investor has a slim chance of outperforming a professional investor in the long run because the professionals are MBAs, have access, have technology, etc. etc. etc. Investing is not a science or even a trainable skill at this point. A trained surgeon will produce better surgical outcomes than a random person off the street at least 99 out of 100 times, but I would guess that no more than 55 times out of 100 could a professional investor pick a SP500 company that would be a better performer over a 10 year span than random person off the street or a monkey throwing darts. The professional investor would perhaps be slightly better, but probably not by much, and by the slimmest margin over the monkey. And the reason is because we are talking about huge stretches of time relative to how long the stock market has existed. If you are talking about trading in millisecond, minute, hour, day, monthly or 1-5 year timeframes, the professional has a huge advantage. Most financial news, discussion, company earnings, and general Wall Street activity falls into these time frames. For longer time frames, I would argue that a retail investor with wisdom could outperform a professional investor. Of course, this could just be my overconfidence talking. Let me emphasize again, that I would not stake my future financial security on this hunch, but I am willing to risk a proportion of my discretionary assets on individual stocks based on this reasoning.

joer1212
Posts: 429
Joined: Sun Feb 17, 2013 1:55 pm

Re: Just not getting it

Post by joer1212 » Sat Sep 29, 2018 3:48 pm

deltaneutral83 wrote:
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.
:thumbsup :thumbsup :thumbsup

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