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
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.
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.namrac wrote: ↑Fri Dec 08, 2017 6:39 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.
None of them .. what ?? Alfred Winslow Jones, Charlie Munger, Warren Buffett - all have been able to for decades. There are many more.Blister wrote: ↑Fri Dec 08, 2017 6:57 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.
Wow, that is so simple. I wonder why no one else has thought of it?whodidntante wrote: ↑Mon Dec 11, 2017 2:08 am You can certainly outperform an index fund. Simply take more risk, and get lucky.
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 investingTaylor Larimore wrote: ↑Sat Dec 09, 2017 1:41 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
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... .
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.
! ! !DaleMaley wrote: ↑Mon Dec 11, 2017 8:59 amThere 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 investingTaylor Larimore wrote: ↑Sat Dec 09, 2017 1:41 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
You seem to have passion about your approach and may be looking for confirmation. You may need a different message board for that though.CyclingDuo wrote: ↑Mon Dec 11, 2017 10:44 amThis 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.
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.
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."namrac wrote: ↑Fri Dec 08, 2017 6:39 pmIf 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.
Ah, you already know the answer.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.
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.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.
Yes, but like your left ear, with a tilt!just frank wrote: ↑Tue Dec 12, 2017 4:17 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?
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.
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.namrac wrote:
Where am I off? Scratching my head.
Garland: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.
Bessembinder, Hendrik, Do Stocks Outperform Treasury Bills? (November 21, 2017). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2900447Abstract
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.
I was not aware that no fund manager has ever done it twice. That is interesting.Taylor Larimore wrote: ↑Thu Dec 14, 2017 11:20 amGarland: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.
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
Is that meant as a rhetorical question? Jack Bogle has answered that numerous times:IowaFarmBoy wrote: ↑Sat Dec 09, 2017 7:59 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?
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?namrac wrote: ↑Fri Dec 08, 2017 6:39 pmThis 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.
That's the answer to a different question.inbox788 wrote: ↑Thu Dec 14, 2017 5:09 pmIs that meant as a rhetorical question? Jack Bogle has answered that numerous times:IowaFarmBoy wrote: ↑Sat Dec 09, 2017 7:59 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?
https://www.youtube.com/watch?v=EC8rWTG ... u.be&t=837
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.....TeamArgo wrote: ↑Fri Dec 08, 2017 10:49 pmI 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.Emily1980 wrote: ↑Fri Dec 08, 2017 8:39 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.
So, yes, Namrac, give it a try. One way or another, it will provide you with a good lesson!
Don't forget pets.com. I loved that little sock puppet.KlingKlang wrote: ↑Fri Dec 08, 2017 6:50 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.
No no, OP is only going to buy the ones that are going UP!OkieIndexer wrote: ↑Tue Dec 26, 2017 12:49 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.
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.WanderingDoc wrote: ↑Mon Dec 11, 2017 12:42 amNone of them .. what ?? Alfred Winslow Jones, Charlie Munger, Warren Buffett - all have been able to for decades. There are many more.Blister wrote: ↑Fri Dec 08, 2017 6:57 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.
ExactlyKlingKlang wrote: ↑Fri Dec 08, 2017 6:50 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.
Honestly? Everywhere. You need to understand that all current expectations are already built-into the price of any given stock.
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.
^^^ Thisgouverneur wrote: ↑Wed Dec 27, 2017 8:02 amMy 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.
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.Emily1980 wrote: ↑Sun Dec 10, 2017 11:13 am
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?
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.barnaclebob wrote: ↑Fri Dec 08, 2017 6:53 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.
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.namrac wrote: ↑Fri Dec 08, 2017 6:39 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?
deltaneutral83 wrote: ↑Sat Dec 09, 2017 10:28 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.