Larry Swedroe: Individual Stock Investing Increases Risk

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by abuss368 » Sat Sep 21, 2019 10:19 am

Back on our stock picking days we had some winners, some huge winners, some losers, and big losers. Anyone remember a company called America On Line and dial up internet connections. Company split its shares at every turn.

At the time we thought we knew more than the street. Only upon realizing it was Gordon Gekko on the other side of the trade did we start to rethink and look at things differently.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by JoMoney » Sat Sep 21, 2019 10:30 am

^ America Online bought Time-Warner... they dropped the 'AOL' from the AOL-Time-Warner name.
Verizon later acquired the online properties that were left of AOL.
Time-Warner was recently acquired by AT&T...
... so remnants of a investment in AOL are still alive and kicking...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by CyclingDuo » Sat Sep 21, 2019 10:42 am

willthrill81 wrote:
Sat Sep 21, 2019 9:23 am
The problem is that the data suggest that 'careful research' may be no better than randomly choosing stocks.
Correct.

The Wiki here at Bogleheads about passively managing a portfolio of individual stocks links to the studies:

In Common Sense on Mutual Funds, [1] Jack Bogle suggests that a reasonable alternative to an index fund for some investors would be to hold a well-diversified portfolio of individual stocks, as long as they are held long-term, with a minimum of trading costs incurred.

https://www.bogleheads.org/wiki/Passive ... ual_stocks

Although this only represents one particular period in time from 1962 - 1995, the Ikenberry, Shockley and Womach study found...

Ikenberry, Shockley and Womack[14] use historical backtesting over the 34-year period from 1962 through 1995 to examine the impact of skewness, which they measure as the difference between the mean and median yearly average return for an n-stock portfolio, for several values of n from 15 to 150. They found that for 35-stock portfolios, where the stocks are randomly chosen from the S&P 500 index and equally weighted, the average yearly median portfolio return lags the mean by 0.22%. This number goes down to 0.14% for 50-stock portfolios, 0.09% for 75-stock portfolios, 0.06% for 100-stock portfolios, and 0.03% for 150-stock portfolios.

Personal Capital recommended solution - at least to us - was they suggested we should own 120 individual stocks which jives with the I,S and W study at least in terms of addressing skewness. They also recommended owning many ETF's as well to also address skewness. Yes, yours truly actually sat through the phone call spiel with PC a year or so ago, so am basing the discussion on what the recommendation was to us for our portfolio. I confirmed on the phone that we were happy to continue on our own DIY path, but of course there are the usual follow up calls every few months which I never answer these days. :mrgreen: Then again, paying a .8% AUM fee to PC (or other similar AUM firm) pretty much would remove matching the index performance benchmark, but it illustrates the data PC uses from similar studies that includes increasing the number of holdings well beyond a 20 stock, or 35 stock, or 60-70 stock, etc...individual stock portfolio.

Back to the Wiki, and as Bogle himself pointed out by keeping costs low with a DIY individual stock passively managed portfolio, there is no drag from ER fees if holding individual stocks these days with commission fees ranging from $0 to a few bucks to purchase/sell individual stocks, and utilizing the free DRIPs. At least in theory with a DIY index fund that includes enough individual companies to address skewness, when combined with also owning mutual funds - the issue of skewness is very well addressed for at least matching the returns of the market.

This skewness impact is more pronounced in smaller stocks, so a strategy of investing only in Large Capital individual stocks (and using mutual funds for diversification in other areas) tends to be less exposed to this issue.

Summary
In general, the answer to "how many stocks are recommended?" is, of course, as many as practically possible. Holding fewer stocks increases unsystematic risk and the effect of skewness on final portfolio value. Holding stocks in equal weights can pick up some small-cap premium, but it should be borne in mind that this also picks up extra volatility. There is no free lunch.

Reducing the number of stocks held is in principle always a negative factor in terms of risk/reward ratio. The only guaranteed benefit can come from lower costs, due to expense ratio and/or savings due to tax management opportunities. The trick is to figure out where the benefit balances out the increased risk. This is, necessarily, a somewhat individualized decision.


Not advocating either strategy over the other (outside of agreeing that if you do own individual stocks - own a lot of 'em), but would say for most investors - it's simpler and easier to just go the index route as it doesn't involve having to select a large portfolio of individual stocks (be they randomly chosen, or selected with some level of reasoning and choice via the usual avenues of study), making alterations if and when a company's business changes to the point the investment is no longer a desirable asset to keep in the portfolio, or is changed due to M&A, or as everyone loves to point out - ends up being defunct as your investment in that company drops to $0.

Some usually mention their preference that time is more important to them than money when it comes to things like lawn care, food preparation, home repairs, automotive maintenance, etc... . As long as investors are armed with data and information such as this thread presents to make choices, whether one goes the route of index funds only, or the route of passively managing a large number of individual stocks only, or a hybrid mix of the two to address the issues of skewness - we have options as investors to be successful over the decades.

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by stlutz » Sat Sep 21, 2019 11:26 am

"Carefully selecting" is a term that can have a variety of meanings. The problem with just "ramdomly" selecting stocks is that you might end up with portfolio of microcap uranium stocks.

One certainly ought to give a lot of thought to proper diversification--if you are going to have 20 stocks then pick 20 that are significantly different from one another. The cures a lot of the randomness in your returns from the start.

It's pretty much impossible to manage return. One can manage risks.

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by rossington » Sat Sep 21, 2019 12:57 pm

abuss368 wrote:
Sat Sep 21, 2019 10:19 am
Back on our stock picking days we had some winners, some huge winners, some losers, and big losers.
Sounds like the dynamics of a total stock market index. :beer
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by Taylor Larimore » Sat Sep 21, 2019 1:18 pm

Bogleheads:

Long ago, and for many years, I tried my hand at stock-picking. I wish I had read what these experts say:
Alpha Architect: "Between 1983 and 2006, around 73% of firms had a drawdown larger than 50% (the S&P 500’s maximum drawdown during this period was around 44%). Holding one individual stock can be very risky!"

Barber and Odean Study: "Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earned an annual return of 11.4 percent, while the market returned 17.9 percent."

Michael Batnick, CFA: "Ordinary investors would be well served if they thought for a second about who they were transacting with. Over 90% of today’s volume is done by institutions, so chances are that your counter-party has done their homework."

Brett Arends, Wall Street Journal columnist: "Buy individual stocks only as a gamble."

Benjamin Graham: "I have little confidence, even in the ability of analysts, let alone untrained investors, to select common stocks what will give better than average results."

Bill Bernstein, author of The Four Pillars of Investing: "Picking individual stocks is like volleying with the Williams sisters."

Adam Bold, author, adviser: "Mutual funds don't have the pizzazz of the hot stocks of the moment. If you're looking for entertainment, go gambling in Las Vegas. But if you want to accumulate real money for your retirement and other goals, mutual funds are the safer bet."

James Dahle, MD, financial advisor, and author of The White-Coat Investor: “Think you know how to pick stocks? Then guess again. Every time you buy or sell the person on the other side of the trade likely has an IQ of 160, spends 70 hours per week analyzing his industry, and has access to computing power and databases you can only dream of.”

Dalbar Research Report (July 15, 2003): "The average equity investor earned a paltry 2.57% annually; compared to inflation of 3.14% and the 12.22% the S & P 500 index earned annually for the last 19 years."

Charles Ellis author of Winning the Loser's Game: "If you, like Walter Mitty, still fantasize that you can and will beat the pros, you'll need both luck and prayer."

Kenneth French: Former President of The American Finance Association: "The market is smarter than we are and no matter how smart we get, the market will always be smarter than we are."

Sy Harding, Forbes contributor: "My advice – avoid individual stocks! Even experienced full-time professional money managers, with staffs of trained people performing research, with access to data, software, and corporate contacts that most part-time investors could not come close to duplicating, struggle to match the market’s performance by buying, holding, or selling individual stocks."

Danial Kahneman, Nobel Laureate: "There is general agreement among researchers that nearly all stock pickers, whether they know it or not-and few of them do-are playing a game of chance."

Kiplinger Personal Finance “Eight Stocks to Buy Now” in the January, 2015 forecast issue under-performed its “Five Stocks to Sell” twelve months later.

Michael Lewis, former bond broker and financial journalist: "A vast industry of stockbrokers, financial planners, and investment advisers skims a fortune for themselves off the top in exchange for passing their clients' money on to people who, as a whole, cannot possibly outperform the market."

Mathwizard: The vast majority of trades you would make are between you and a professional investor. Both of you are assigning a value to the stock, and one of you thnks the price is high and another thinks it is low. Who do you suppose is more likely to be right.

Charlie Munger, Warren Buffett's partner: "Teaching young people to actively trade stocks is like starting them on heroin."

Standard & Poor's: When the S&P 500 index was officially formed in 1957 to its 50th anniversary in 2007, only 86 of the original 500 companies still remained.

Larry Swedroe, author of many financial books: "Owning individual stocks and sector funds is more akin to speculating, not investing."

David Swensen, Chief Investment Officer of Yale University: "There's no way that spending a few hours a week looking at individual securities is going to equip an investor to compete with the incredibly talented, highly qualified, extremely educated individuals who spend their entire professional careers trying to pick stocks."

Eric Tyson, author of Mutual Funds for Dummies: The notion that most average people and non-investment professionals can, with minimal effort, beat the best full-time, experienced money managers is, how should I say, ludicrous and absurd."
Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Attempting to build an investment program around a handful of individual securities is, for all but the most exceptional investors, a fool's errand."
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by abuss368 » Sat Sep 21, 2019 1:20 pm

rossington wrote:
Sat Sep 21, 2019 12:57 pm
abuss368 wrote:
Sat Sep 21, 2019 10:19 am
Back on our stock picking days we had some winners, some huge winners, some losers, and big losers.
Sounds like the dynamics of a total stock market index. :beer
Indeed. We soon realized after fees and taxes we were doing below average.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by abuss368 » Sat Sep 21, 2019 1:22 pm

Taylor Larimore wrote:
Sat Sep 21, 2019 1:18 pm
Bogleheads:

Long ago, and for many years, I tried my hand at stock-picking. I wish I had read what these experts say:
Alpha Architect: "Between 1983 and 2006, around 73% of firms had a drawdown larger than 50% (the S&P 500’s maximum drawdown during this period was around 44%). Holding one individual stock can be very risky!"

Barber and Odean Study: "Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earned an annual return of 11.4 percent, while the market returned 17.9 percent."

Michael Batnick, CFA: "Ordinary investors would be well served if they thought for a second about who they were transacting with. Over 90% of today’s volume is done by institutions, so chances are that your counter-party has done their homework."

Brett Arends, Wall Street Journal columnist: "Buy individual stocks only as a gamble."

Benjamin Graham: "I have little confidence, even in the ability of analysts, let alone untrained investors, to select common stocks what will give better than average results."

Bill Bernstein, author of The Four Pillars of Investing: "Picking individual stocks is like volleying with the Williams sisters."

Adam Bold, author, adviser: "Mutual funds don't have the pizzazz of the hot stocks of the moment. If you're looking for entertainment, go gambling in Las Vegas. But if you want to accumulate real money for your retirement and other goals, mutual funds are the safer bet."

James Dahle, MD, financial advisor, and author of The White-Coat Investor: “Think you know how to pick stocks? Then guess again. Every time you buy or sell the person on the other side of the trade likely has an IQ of 160, spends 70 hours per week analyzing his industry, and has access to computing power and databases you can only dream of.”

Dalbar Research Report (July 15, 2003): "The average equity investor earned a paltry 2.57% annually; compared to inflation of 3.14% and the 12.22% the S & P 500 index earned annually for the last 19 years."

Charles Ellis author of Winning the Loser's Game: "If you, like Walter Mitty, still fantasize that you can and will beat the pros, you'll need both luck and prayer."

Kenneth French: Former President of The American Finance Association: "The market is smarter than we are and no matter how smart we get, the market will always be smarter than we are."

Sy Harding, Forbes contributor: "My advice – avoid individual stocks! Even experienced full-time professional money managers, with staffs of trained people performing research, with access to data, software, and corporate contacts that most part-time investors could not come close to duplicating, struggle to match the market’s performance by buying, holding, or selling individual stocks."

Danial Kahneman, Nobel Laureate: "There is general agreement among researchers that nearly all stock pickers, whether they know it or not-and few of them do-are playing a game of chance."

Kiplinger Personal Finance “Eight Stocks to Buy Now” in the January, 2015 forecast issue under-performed its “Five Stocks to Sell” twelve months later.

Michael Lewis, former bond broker and financial journalist: "A vast industry of stockbrokers, financial planners, and investment advisers skims a fortune for themselves off the top in exchange for passing their clients' money on to people who, as a whole, cannot possibly outperform the market."

Mathwizard: The vast majority of trades you would make are between you and a professional investor. Both of you are assigning a value to the stock, and one of you thnks the price is high and another thinks it is low. Who do you suppose is more likely to be right.

Charlie Munger, Warren Buffett's partner: "Teaching young people to actively trade stocks is like starting them on heroin."

Standard & Poor's: When the S&P 500 index was officially formed in 1957 to its 50th anniversary in 2007, only 86 of the original 500 companies still remained.

Larry Swedroe, author of many financial books: "Owning individual stocks and sector funds is more akin to speculating, not investing."

David Swensen, Chief Investment Officer of Yale University: "There's no way that spending a few hours a week looking at individual securities is going to equip an investor to compete with the incredibly talented, highly qualified, extremely educated individuals who spend their entire professional careers trying to pick stocks."

Eric Tyson, author of Mutual Funds for Dummies: The notion that most average people and non-investment professionals can, with minimal effort, beat the best full-time, experienced money managers is, how should I say, ludicrous and absurd."
Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Attempting to build an investment program around a handful of individual securities is, for all but the most exceptional investors, a fool's errand."
Taylor -

Thank you for including a quote from Jack Bogle. Another Boglehead did not realize Mr. Bogle did not recommend individual stocks for investors. This should help.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sat Sep 21, 2019 2:02 pm

willthrill81 wrote:
Fri Sep 20, 2019 6:05 pm
stlutz wrote:
Fri Sep 20, 2019 5:38 pm
Let's cut the strawman stuff here folks.

I think suggestions have been made here and elsewhere on this forum of individual stocks portfolios of around 15-30 stocks. That is 3 to 6 "handfuls" of stocks and it's definitely more than three.

I also don't understand the whole, "I own mutual funds therefore I'm unaffected by what happened to GE, AIG, and Lehman." GE was at one time the largest holding in Vanguard Total Market. Those of us who own VTI once had it as about 3% of our holding. We have since ridden it all the way down and continue to hold onto it. Numerous smallcap companies go belly up every year. We own those as well.

It's considered perfectly acceptable here to take big chunk of one's portfolio and concentrate it into one type of stock. I guess I don't see taking 20% of one's portfolio and buying 15-30 individual stocks that meet your selected criteria to be that much different. If one already owns VTI, you still own all of the stocks--you'll just now own some at non-market weights.
If we take the 1.33% proportion of stocks that have historically accounted for all the gains, which is cited in Larry's article, a portfolio of 15 randomly chosen stocks has an 82% probability of not including a single one of these stocks. Even for a portfolio of 30 stocks, the probability is still 67%. You would need 52 stocks in order to have a 50% probability of getting at least one. So unless you can beat the odds or get lucky, the probabilities don't appear to be in favor of those with 15-30 stocks even matching the performance of TSM over the long-term.
I just have to call these numbers out as baloney, even if Larry Swedroe cited them. This has not been my experience. Remember that most individual stock investors live in the area of Large Cap stocks which has a lot less of the risks cited in the thread. Don't know where the 1.33% figure comes from but it is pure baloney. Most folks aren't investing in the wild west of the NASDAQ Bulletin Board, The Pink Sheets, or the Vancouver Stock Exchange. If you are taking into account every stock that has ever been traded, there might be a grain of truth here but there are only about 3,500 stocks or so that are really investable. There might be 10,000 stocks listed somewhere but most probably don't trade or have very low trading volumes. Sorry, I just don't buy it.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sat Sep 21, 2019 2:15 pm

Probably what I have done with my individual stocks has been to sample the total market with a bias towards Value stocks and higher dividends. I also have had fairly long holding periods for my stocks, five years or more, don't trade much, in effect I have sort of created a Value/Higher Dividend Index. If I was starting out now, I would probably not do individual stocks but stick with Index Funds and ETFs.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by stlutz » Sat Sep 21, 2019 2:43 pm

nedsaid wrote:
Sat Sep 21, 2019 2:02 pm
I just have to call these numbers out as baloney, even if Larry Swedroe cited them. This has not been my experience. Remember that most individual stock investors live in the area of Large Cap stocks which has a lot less of the risks cited in the thread. Don't know where the 1.33% figure comes from but it is pure baloney. Most folks aren't investing in the wild west of the NASDAQ Bulletin Board, The Pink Sheets, or the Vancouver Stock Exchange. If you are taking into account every stock that has ever been traded, there might be a grain of truth here but there are only about 3,500 stocks or so that are really investable. There might be 10,000 stocks listed somewhere but most probably don't trade or have very low trading volumes. Sorry, I just don't buy it.
These numbers go awry in a couple of ways.

First, the overwhelming majority of stocks are microcaps and just don't add much value. Wal*Mart has underperformed the market this year, adding about 12%. That is *still* more than the combined market value of the smallest 700 stocks in the iShares Total Market ETF, which holds about 3500 stocks. Not more than the increase for those companies--but their entire value. What does that tell us? Wal*Mart is bigger than most companies.

Second, when you rank stocks by who has provided the most value over time and then count down from the top, it is of course the case that a few stocks provided all of the value. But you can manipulate the numbers a different way. What if I balanced off the best performers against the losers and then summed up the gains from the remainder? I'd say that market gains over time have been distributed among a very large number of companies. Same data; different presentation.

Equity returns have positive skew. But not nearly as much as gets claimed in these types of exaggerated articles, unless you are focusing on penny stocks.

Like most here, my stock picking days are long in the past. But index fund investors should understand where returns come from, and it's not just from a handful of companies.
Last edited by stlutz on Sat Sep 21, 2019 6:26 pm, edited 2 times in total.

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sat Sep 21, 2019 2:49 pm

stlutz wrote:
Sat Sep 21, 2019 11:26 am
"Carefully selecting" is a term that can have a variety of meanings. The problem with just "ramdomly" selecting stocks is that you might end up with portfolio of microcap uranium stocks.

One certainly ought to give a lot of thought to proper diversification--if you are going to have 20 stocks then pick 20 that are significantly different from one another. The cures a lot of the randomness in your returns from the start.

It's pretty much impossible to manage return. One can manage risks.
Thank you for posting this.

There are certainly risks to stock picking that one doesn't have to take if he or she just buys an index fund. But I do think the risks of stock picking have been exaggerated here and a see some knocking down of strawman arguments.

There are reasons that people fail at stock picking. First, recency bias, investors want to buy what is popular and what has been performing well lately. Performance chasing does not enhance investment performance. Second, too much trading. The more trading you do, the bigger of a drag that incorrect sell/buy decisions put on your portfolio. People who tend to leave their portfolios alone tend to do better than those who constantly tinker. Third, not being adequately diversified across market sectors. Fourth, regarding stocks as lottery tickets and not as investment in actual businesses. Small investors think too much like a trader and not enough like a businessman. Fifth, many people will not research their stocks. Too much following of stock tips which come from people who may or may not know what they are talking about.

All that being said, even the active managers with all the resources available to them have a hard time beating the indexes. One reason is that higher expense ratios are a big hurdle to overcome. A second reason is that markets are pretty efficient, hard to find truly mispriced stocks. There is a lot of brainpower and powerful computers trying to find inefficiencies in the market. An individual investor is up against very fierce competition, a competition he or she is unlikely to win.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by willthrill81 » Sat Sep 21, 2019 2:53 pm

nedsaid wrote:
Sat Sep 21, 2019 2:02 pm
willthrill81 wrote:
Fri Sep 20, 2019 6:05 pm
stlutz wrote:
Fri Sep 20, 2019 5:38 pm
Let's cut the strawman stuff here folks.

I think suggestions have been made here and elsewhere on this forum of individual stocks portfolios of around 15-30 stocks. That is 3 to 6 "handfuls" of stocks and it's definitely more than three.

I also don't understand the whole, "I own mutual funds therefore I'm unaffected by what happened to GE, AIG, and Lehman." GE was at one time the largest holding in Vanguard Total Market. Those of us who own VTI once had it as about 3% of our holding. We have since ridden it all the way down and continue to hold onto it. Numerous smallcap companies go belly up every year. We own those as well.

It's considered perfectly acceptable here to take big chunk of one's portfolio and concentrate it into one type of stock. I guess I don't see taking 20% of one's portfolio and buying 15-30 individual stocks that meet your selected criteria to be that much different. If one already owns VTI, you still own all of the stocks--you'll just now own some at non-market weights.
If we take the 1.33% proportion of stocks that have historically accounted for all the gains, which is cited in Larry's article, a portfolio of 15 randomly chosen stocks has an 82% probability of not including a single one of these stocks. Even for a portfolio of 30 stocks, the probability is still 67%. You would need 52 stocks in order to have a 50% probability of getting at least one. So unless you can beat the odds or get lucky, the probabilities don't appear to be in favor of those with 15-30 stocks even matching the performance of TSM over the long-term.
I just have to call these numbers out as baloney, even if Larry Swedroe cited them. This has not been my experience. Remember that most individual stock investors live in the area of Large Cap stocks which has a lot less of the risks cited in the thread. Don't know where the 1.33% figure comes from but it is pure baloney. Most folks aren't investing in the wild west of the NASDAQ Bulletin Board, The Pink Sheets, or the Vancouver Stock Exchange. If you are taking into account every stock that has ever been traded, there might be a grain of truth here but there are only about 3,500 stocks or so that are really investable. There might be 10,000 stocks listed somewhere but most probably don't trade or have very low trading volumes. Sorry, I just don't buy it.
I agree that the 1.33% number seems off (1 in 40 stocks), but I don't lend much credence to my intuition about such things. I wonder if that number refers to stocks held for the very long-term (i.e. 50 years or more) and so captures the entire life cycle, from boom to bust, of most publicly traded companies.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sat Sep 21, 2019 3:28 pm

willthrill81 wrote:
Sat Sep 21, 2019 2:53 pm

I agree that the 1.33% number seems off (1 in 40 stocks), but I don't lend much credence to my intuition about such things. I wonder if that number refers to stocks held for the very long-term (i.e. 50 years or more) and so captures the entire life cycle, from boom to bust, of most publicly traded companies.
Read what stlutz says above, it is in how you present the data. If only 1.33% of all stocks produced all of the returns, most individual stock portfolios would have returns ranging from maybe 1% to maybe -5% annually. What the research says is that most investors in individual stocks trail the indexes by 4% annually, if stock returns are 8% to 11% long term, this would imply that individual stock portfolios perform at 4% to 7% a year.

The reality is that you always have gainers and losers in the stock market, my guess is that in the universe of investable stocks (the top 3,000 to 3,500 stocks by market capitalization), probably 1/2 or more have positive gains over time, the higher up you go in market caps the higher the proportion of stocks with positive gains. My guess is that the 6,500 or so listed stocks that are illiquid and not investable, a small percentage of them would have positive returns over time, probably not even 1%. Just guessing here. Also, you always have wildly successful companies and companies that go bankrupt.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sat Sep 21, 2019 3:39 pm

Nedsaid owns 22 individual stocks.

As of right now, I have gains in 18 of those stocks and 4 stocks are worth less than what I paid for them. Not a bad ratio.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by abuss368 » Sat Sep 21, 2019 4:15 pm

Taylor Larimore wrote:
Sat Sep 21, 2019 1:18 pm
Bogleheads:

Long ago, and for many years, I tried my hand at stock-picking. I wish I had read what these experts say:

"David Swensen, Chief Investment Officer of Yale University: "There's no way that spending a few hours a week looking at individual securities is going to equip an investor to compete with the incredibly talented, highly qualified, extremely educated individuals who spend their entire professional careers trying to pick stocks."
I consider myself fortunate to have attend a lecture by David Swensen. I recall hearing Dr. Swensen say exactly that.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by bluquark » Sat Sep 21, 2019 4:50 pm

Here is another anecdote about individual stock investing for the long run: https://www.nytimes.com/2018/05/06/nyre ... nates.html
Even by the dizzying standards of New York City philanthropy, a recent $6.24 million donation to the Henry Street Settlement on the Lower East Side was a whopper — the largest single gift from an individual to the social service group in its 125-year history.

It was not donated by some billionaire benefactor, but by a frugal legal secretary from Brooklyn who toiled for the same law firm for 67 years until she retired at age 96 and died not long afterward in 2016.

Her name was Sylvia Bloom and even her closest friends and relatives had no idea she had amassed a fortune over the decades. She did this by shrewdly observing the investments made by the lawyers she served.

“She was a secretary in an era when they ran their boss’s lives, including their personal investments,” recalled her niece Jane Lockshin. “So when the boss would buy a stock, she would make the purchase for him, and then buy the same stock for herself, but in a smaller amount because she was on a secretary’s salary.”
We don't know how much she saved so we can't compare the performance of this to a broad market index. But clearly this portfolio, even though constructed of arbitrary "hot tip" stocks, did well enough, because she bought in and stayed the course for the long term, and avoided the exorbitant ERs of the mutual funds of this era.

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sat Sep 21, 2019 5:35 pm

I want to make clear that individual stock picking is not a particularly efficient way to invest. Even if you can match or beat the market a bit doing this, you don't get a good return when you take into account the time involved. If you want to invest according to a particular style, I suppose you could just find a low cost ETF that follows that style and let the ETF do all the research and screening for you. I have toyed with the idea of replacing my individual stock portfolio with the Vanguard High Dividend Index or the Vanguard Value Index as both are chock full of the kind of stocks that I like.

Last I checked, I trailed the Total Stock Market Index by about 1% over 15 years and the Vanguard Value Index by about 0.20% over that same time period. As I posted above, I have losses on only 4 of my 22 stocks. Don't chalk this up to brilliance or good looks, I just did the prudent things when picking stocks and exercising great patience. I did however do much better than most investors who try doing this, foggy memory says that individual investors who pick stocks trail the market by 4% a year. It came from Larry Swedroe but I couldn't find the article through a Google search.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by bluquark » Sat Sep 21, 2019 5:44 pm

nedsaid wrote:
Sat Sep 21, 2019 5:35 pm
I want to make clear that individual stock picking is not a particularly efficient way to invest. Even if you can match or beat the market a bit doing this, you don't get a good return when you take into account the time involved.
Speaking of time spent investing, without doing any individual stock picking, I have spent 10s of hours researching and discussing with Bogleheads higher-level matters such as factor exposure, tax efficient placement, risk tolerance, lifecycle AA curves, safe withdrawal rate, bond duration, and so on.

Individual stock pickers need to be learning about these topics as well. In practice, I suspect they are mostly "missing the forest for the trees" -- devoting time to researching things an investor cannot control, while under-researching matters one can control.

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Win/Loss Ratios

Post by Taylor Larimore » Sat Sep 21, 2019 6:47 pm

nedsaid wrote:
Sat Sep 21, 2019 3:39 pm
Nedsaid owns 22 individual stocks.

As of right now, I have gains in 18 of those stocks and 4 stocks are worth less than what I paid for them. Not a bad ratio.
Nedsaid:

If you owned a single Total Stock Market Index Fund you would enjoy a gain with a 100% ratio. :happy

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Jack Bogle's Words of Wisdom: "Wise investors won't try to outsmart the market, they'll buy index funds for the long term, and they'll diversify."
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by Rowan Oak » Sat Sep 21, 2019 7:15 pm

nedsaid wrote:
Sat Sep 21, 2019 5:35 pm
Last I checked, I trailed the Total Stock Market Index by about 1% over 15 years and the Vanguard Value Index by about 0.20% over that same time period. As I posted above, I have losses on only 4 of my 22 stocks. Don't chalk this up to brilliance or good looks, I just did the prudent things when picking stocks and exercising great patience. I did however do much better than most investors who try doing this, foggy memory says that individual investors who pick stocks trail the market by 4% a year. It came from Larry Swedroe but I couldn't find the article through a Google search.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sat Sep 21, 2019 10:06 pm

Rowan Oak wrote:
Sat Sep 21, 2019 7:15 pm
nedsaid wrote:
Sat Sep 21, 2019 5:35 pm
Last I checked, I trailed the Total Stock Market Index by about 1% over 15 years and the Vanguard Value Index by about 0.20% over that same time period. As I posted above, I have losses on only 4 of my 22 stocks. Don't chalk this up to brilliance or good looks, I just did the prudent things when picking stocks and exercising great patience. I did however do much better than most investors who try doing this, foggy memory says that individual investors who pick stocks trail the market by 4% a year. It came from Larry Swedroe but I couldn't find the article through a Google search.
Where can I sign up for your newsletter?
Well, you can read my posts for free. Quite frankly, there might be a business opportunity here writing a newsletter about my stock picks that didn't work out and my inaccurate market timing calls. :wink: I don't know, those darned markets just won't recognize my brilliance. Interest rates won't go up, Value stocks won't outperform, and International Mid/Small-Cap has been dead money for years. I have found that markets will do what markets will do.

Pretty much, I have told people how to put together an individual stock portfolio if they absolutely have to scratch that itch. But while my results were not world beating, I wasn't an idiot either. I could have saved all that trouble and just bought Vanguard Value Index or Vanguard High Dividend Index and probably achieved very similar results.

I will say that owning individual stocks has been a learning experience. You learn how to look at the financials, follow a company, follow an industry, follow the economy, and follow the markets. You also can gain insight into what a portfolio manager does. You also learn how darned hard it is to beat the market averages, the markets are pretty darned efficient. It was like getting a second business degree. My individual stocks taught me more than my best business or economics professor.

Also keep in mind that I am wrong about almost everything I say here, I am only right about anything around here only about every six months or so.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sat Sep 21, 2019 10:08 pm

bluquark wrote:
Sat Sep 21, 2019 5:44 pm
nedsaid wrote:
Sat Sep 21, 2019 5:35 pm
I want to make clear that individual stock picking is not a particularly efficient way to invest. Even if you can match or beat the market a bit doing this, you don't get a good return when you take into account the time involved.
Speaking of time spent investing, without doing any individual stock picking, I have spent 10s of hours researching and discussing with Bogleheads higher-level matters such as factor exposure, tax efficient placement, risk tolerance, lifecycle AA curves, safe withdrawal rate, bond duration, and so on.

Individual stock pickers need to be learning about these topics as well. In practice, I suspect they are mostly "missing the forest for the trees" -- devoting time to researching things an investor cannot control, while under-researching matters one can control.
That is another good point. So much to know about the economy, the markets, investing, and personal finance.
A fool and his money are good for business.

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Re: Win/Loss Ratios

Post by nedsaid » Sat Sep 21, 2019 10:12 pm

Taylor Larimore wrote:
Sat Sep 21, 2019 6:47 pm
nedsaid wrote:
Sat Sep 21, 2019 3:39 pm
Nedsaid owns 22 individual stocks.

As of right now, I have gains in 18 of those stocks and 4 stocks are worth less than what I paid for them. Not a bad ratio.
Nedsaid:

If you owned a single Total Stock Market Index Fund you would enjoy a gain with a 100% ratio. :happy

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "Wise investors won't try to outsmart the market, they'll buy index funds for the long term, and they'll diversify."
Remember Taylor that the Total Market Index and the S&P 500 can be essentially flat for years at a time. This is what you call a secular bear market. Even the broad indexes can be "losers". Stocks were essentially flat from 1929-1948?, from 1968-1984, and from 2000-2012. So depending upon time periods, even the S&P 500 and the Total Stock Market Index can seem to be poor investments. The risk of equity underperformance for years at a time is a big reason for the Equity Risk Premium in the first place.
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Re: Win/Loss Ratios

Post by willthrill81 » Sat Sep 21, 2019 10:16 pm

nedsaid wrote:
Sat Sep 21, 2019 10:12 pm
Taylor Larimore wrote:
Sat Sep 21, 2019 6:47 pm
nedsaid wrote:
Sat Sep 21, 2019 3:39 pm
Nedsaid owns 22 individual stocks.

As of right now, I have gains in 18 of those stocks and 4 stocks are worth less than what I paid for them. Not a bad ratio.
Nedsaid:

If you owned a single Total Stock Market Index Fund you would enjoy a gain with a 100% ratio. :happy

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "Wise investors won't try to outsmart the market, they'll buy index funds for the long term, and they'll diversify."
Remember Taylor that the Total Market Index and the S&P 500 can be essentially flat for years at a time. This is what you call a secular bear market. Even the broad indexes can be "losers". Stocks were essentially flat from 1929-1948?, from 1968-1984, and from 2000-2012. So depending upon time periods, even the S&P 500 and the Total Stock Market Index can seem to be poor investments. The risk of equity underperformance for years at a time is a big reason for the Equity Risk Premium in the first place.
:thumbsup

Many seem to assume that TSM will provide them with the returns that they need to achieve their goals and that any deviation from TSM is taking on uncompensated risk. Both of those assumptions are bona fide false.

TSM is a fine instrument, but it's not the be-all that ends-all.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sat Sep 21, 2019 10:22 pm

by nedsaid » Sat Sep 21, 2019 8:12 pm
Remember Taylor that the Total Market Index and the S&P 500 can be essentially flat for years at a time. This is what you call a secular bear market. Even the broad indexes can be "losers". Stocks were essentially flat from 1929-1948?, from 1968-1984, and from 2000-2012. So depending upon time periods, even the S&P 500 and the Total Stock Market Index can seem to be poor investments. The risk of equity underperformance for years at a time is a big reason for the Equity Risk Premium in the first place.
:thumbsup
willthrill81 » Sat Sep 21, 2019 8:16 pm
Many seem to assume that TSM will provide them with the returns that they need to achieve their goals and that any deviation from TSM is taking on uncompensated risk. Both of those assumptions are bona fide false.

TSM is a fine instrument, but it's not the be-all that ends-all.
Hint: this is a big reason that Larry Swedroe talks about diversifying across factors. It isn't the worst idea in the world to pair Value indexes with Total Stock Market Index. Sometimes Value zigs when the rest of the market zags. Just sayin'.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by willthrill81 » Sat Sep 21, 2019 10:25 pm

nedsaid wrote:
Sat Sep 21, 2019 10:22 pm
by nedsaid » Sat Sep 21, 2019 8:12 pm
Remember Taylor that the Total Market Index and the S&P 500 can be essentially flat for years at a time. This is what you call a secular bear market. Even the broad indexes can be "losers". Stocks were essentially flat from 1929-1948?, from 1968-1984, and from 2000-2012. So depending upon time periods, even the S&P 500 and the Total Stock Market Index can seem to be poor investments. The risk of equity underperformance for years at a time is a big reason for the Equity Risk Premium in the first place.
:thumbsup
willthrill81 » Sat Sep 21, 2019 8:16 pm
Many seem to assume that TSM will provide them with the returns that they need to achieve their goals and that any deviation from TSM is taking on uncompensated risk. Both of those assumptions are bona fide false.

TSM is a fine instrument, but it's not the be-all that ends-all.
Hint: this is a big reason that Larry Swedroe talks about diversifying across factors. It isn't the worst idea in the world to pair Value indexes with Total Stock Market Index. Sometimes Value zigs when the rest of the market zags. Just sayin'.
I agree that diversification across factors makes excellent sense, and the data robustly support it, IMHO.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sat Sep 21, 2019 10:57 pm

To get the thread back on track, my belief is that individual investors can build their own individual stock portfolios and achieve "good enough" results though they likely won't beat the market averages. The broad index funds like the S&P 500 and the Total Stock Market Index are much easier to invest in and you don't have to do all the analysis involved in picking stocks. You also avoid the single stock risk of having a stock blow up on you, not fun when this happens. I have had Lucent, AIG, and now GE blow up on me but I had my winners too. If you insist on a particular style of stock investing, there is an ETF that will meet your needs.

But there is risk in the stock market as a whole. Secular bear markets, as I described above, are a real thing. The stock market as a whole can seem to be a poor investment for years at a time, these periods of underperformance can last as long as 20 years. You have to have the virtue of patience and investment at regular intervals to make all this work.

So I am not saying that people should be doing what I have done myself. I suppose I am a bit old fashioned.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by Park » Sat Sep 21, 2019 11:16 pm

https://www.forbes.com/sites/rickferri/ ... 9dc646630a

The following though is from an article by Rick Ferri, an indexing advocate, in Forbes. He's quoting work done by Research Affiliates.

"the company randomly selected 100 portfolios containing 30 stocks from a 1,000 stock universe. They repeated this processes every year, from 1964 to 2010, and tracked the results

"on average, 98 of the 100 portfolios beat the 1,000 stock capitalization weighted stock universe each year"

the average portfolio "outperformed the index by an average of 1.7 percent per year since 1964"

"From 1964 to 2011, the annualized return for the 1,000 stocks used by Research Affiliates was 9.7 percent. The 30 largest companies in the 1000 made up about 40 percent of the capitalization weight, but their return was only 8.6 percent annually. The other 970 stocks made up 60 percent by capitalization weight and their return was 10.5 percent annually. That’s a 0.8 percent per year premium return for smaller stocks over the 1,000 stock universe and a 1.9 percent premium return over the largest stocks. Any portfolio of 30 stocks randomly selected from the list of 1,000 stocks is bound to include mostly smaller companies."

"the 30 stocks in the portfolio were equally weighted. This technique reduced the average market cap relative to the cap weighted index and helped boost the return. In addition, equal weighting “tilted” the portfolio toward value stocks, which earned a higher return than growth stocks over the 1964 to 2011 period."

There would be increased transaction costs and taxes. If it's from the largest 1000 US stock (that's unstated), the transaction costs wouldn't be too high.

But the important point is that a random 30 equal weighted stock portfolio turned over every year beat the market on average by 1.7% on a precost basis. That's due to a tilt towards small and value.

What's to stop any investor from selecting the 30 most valuey stocks out of the 1000, based on a value composite? And since scalability is likely less of an issue to you versus Vanguard, DFA etc, why not use the 3000 largest stocks instead of the 1000 largest? After all, the data for the value premium is stronger in small caps than large caps. And you have an ability to combine value and momentum that a fund with billions in assets can only dream of.

IOW, with your 30 stock portfolio, you could probably have stronger factor tilting than any ETF or MF will give you.

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by Park » Sat Sep 21, 2019 11:22 pm

From Patrick O'Shaughnessy's blog:

http://investorfieldguide.com/2014115ho ... portfolio/

"I set up portfolios which bought the absolute cheapest stocks trading in the U.S. (including ADRs). Portfolios ranged from 1 stock to 100 stocks, and stocks needed to have a minimum market cap of $200MM (inflation adjusted). Cheapness is defined as an equal weighted combination of a stock’s price/earnings, price/sales, EBITDA/EV, Free Cash Flow/EV and total (shareholder) yield. Each portfolio was rebalanced on a rolling annual basis (meaning 1/12 of the portfolio is rebalanced every month. Think of it like maintaining 12 separate, annually rebalanced portfolios). This means that the “one stock portfolio” will have more than one stock, because different stocks rise to the top through the months. This process removes any seasonal biases and makes the test more robust.

Here are the results, including return and Sharpe ratio. The best returns came from a 5 stock (!) portfolio. The best Sharpe ratio came from the 15 stock version. Both return and Sharpe degrade after 15 stocks."

Image

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by willthrill81 » Sat Sep 21, 2019 11:25 pm

Park wrote:
Sat Sep 21, 2019 11:16 pm
But the important point is that a random 30 equal weighted stock portfolio turned over every year beat the market on average by 1.7% on a precost basis. That's due to a tilt towards small and value.
The tilt (compared to a market-cap weighted index) would be toward small; I don't believe that it would tilt toward value much.

You can achieve a similar portfolio very easily and cheaply with a 1/3 allocation to large caps, mid caps, and small caps via index funds. Using Portfolio Visualizer, this would have outperformed TSM by 1.06% annualized since 1972 with only slightly higher volatility but a nearly identical maximum drawdown.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by Park » Sat Sep 21, 2019 11:42 pm

willthrill81 wrote:
Sat Sep 21, 2019 11:25 pm
Park wrote:
Sat Sep 21, 2019 11:16 pm
But the important point is that a random 30 equal weighted stock portfolio turned over every year beat the market on average by 1.7% on a precost basis. That's due to a tilt towards small and value.
The tilt (compared to a market-cap weighted index) would be toward small; I don't believe that it would tilt toward value much.

You can achieve a similar portfolio very easily and cheaply with a 1/3 allocation to large caps, mid caps, and small caps via index funds. Using Portfolio Visualizer, this would have outperformed TSM by 1.06% annualized since 1972 with only slightly higher volatility but a nearly identical maximum drawdown.
Market cap weighting results in owning somewhat more of the overpriced stocks and somewhat less of the underpriced stocks. Equal weighting removes that tendency to owning overpriced stocks, so the contribution of overpriced and underpriced stocks to the portfolio is similar.

So that's where the tilt to value would come from.

Regardless, it wouldn't be difficult to select 30 stocks on the basis of value criteria. Compared to selecting random 30 stock portfolios, that would give a strong tilt to value, as well as a small tilt. And you could add in a momentum screen as well.

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by stlutz » Sat Sep 21, 2019 11:45 pm

nedsaid wrote:
Sat Sep 21, 2019 10:22 pm

Hint: this is a big reason that Larry Swedroe talks about diversifying across factors. It isn't the worst idea in the world to pair Value indexes with Total Stock Market Index. Sometimes Value zigs when the rest of the market zags. Just sayin'.
Actually it's the "factor" investors who are looking for more complex selection criteria that I've been thinking about some on this thread. They often complain that combining, say, IJS and MTUM doesn't really give them the super-high factor exposures they want. The way to get there is drop the funds/ETFs and just screen for the stocks that the score highly on multiple different types of metrics and just buy those (e.g. small value stocks with high momentum that are also high quality and aren't too volatile). When you run that type of screen you don't end up with very many stocks, so it's not that hard to put the portfolio together.

Disclaimer: I don't think beating that market is that simple so I won't be pursuing that strategy myself. But it is a valid approach for those who think differently than I do on that matter.

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by JoMoney » Sun Sep 22, 2019 12:08 am

Park wrote:
Sat Sep 21, 2019 11:42 pm
... Market cap weighting results in owning somewhat more of the overpriced stocks and somewhat less of the underpriced stocks...
That should make for a pretty good composition when I'm in a withdrawal stage I guess, since I'll be selling off ..."somewhat more of the overpriced stocks, and somewhat less of the underpriced ones"...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sun Sep 22, 2019 1:28 am

stlutz wrote:
Sat Sep 21, 2019 11:45 pm
nedsaid wrote:
Sat Sep 21, 2019 10:22 pm

Hint: this is a big reason that Larry Swedroe talks about diversifying across factors. It isn't the worst idea in the world to pair Value indexes with Total Stock Market Index. Sometimes Value zigs when the rest of the market zags. Just sayin'.
Actually it's the "factor" investors who are looking for more complex selection criteria that I've been thinking about some on this thread. They often complain that combining, say, IJS and MTUM doesn't really give them the super-high factor exposures they want. The way to get there is drop the funds/ETFs and just screen for the stocks that the score highly on multiple different types of metrics and just buy those (e.g. small value stocks with high momentum that are also high quality and aren't too volatile). When you run that type of screen you don't end up with very many stocks, so it's not that hard to put the portfolio together.

Disclaimer: I don't think beating that market is that simple so I won't be pursuing that strategy myself. But it is a valid approach for those who think differently than I do on that matter.
stlutz, I have been talking about the frustrating nuances in trying to implement factor tilting and how the "bad" factor products have been beating the "good" factor products. Tilting not so easy to implement. I was an idiot for picking the "bad" Vanguard Small Cap Value Index ETF until I learned that the "bad" Vanguard product based on the CRSP indexes was performing better than the "good" product from Dimensional Funds. I must be Forrest Gump, who made a mint buying Apple stock even though he thought it was a fruit company. In similar fashion, I bought Vanguard Small Cap Value Index ETF believing it really was a Small Value product. Silly me.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sun Sep 22, 2019 1:41 am

Park wrote:
Sat Sep 21, 2019 11:16 pm
https://www.forbes.com/sites/rickferri/ ... 9dc646630a

The following though is from an article by Rick Ferri, an indexing advocate, in Forbes. He's quoting work done by Research Affiliates.

"the company randomly selected 100 portfolios containing 30 stocks from a 1,000 stock universe. They repeated this processes every year, from 1964 to 2010, and tracked the results

"on average, 98 of the 100 portfolios beat the 1,000 stock capitalization weighted stock universe each year"

the average portfolio "outperformed the index by an average of 1.7 percent per year since 1964"

"From 1964 to 2011, the annualized return for the 1,000 stocks used by Research Affiliates was 9.7 percent. The 30 largest companies in the 1000 made up about 40 percent of the capitalization weight, but their return was only 8.6 percent annually. The other 970 stocks made up 60 percent by capitalization weight and their return was 10.5 percent annually. That’s a 0.8 percent per year premium return for smaller stocks over the 1,000 stock universe and a 1.9 percent premium return over the largest stocks. Any portfolio of 30 stocks randomly selected from the list of 1,000 stocks is bound to include mostly smaller companies."

"the 30 stocks in the portfolio were equally weighted. This technique reduced the average market cap relative to the cap weighted index and helped boost the return. In addition, equal weighting “tilted” the portfolio toward value stocks, which earned a higher return than growth stocks over the 1964 to 2011 period."

There would be increased transaction costs and taxes. If it's from the largest 1000 US stock (that's unstated), the transaction costs wouldn't be too high.

But the important point is that a random 30 equal weighted stock portfolio turned over every year beat the market on average by 1.7% on a precost basis. That's due to a tilt towards small and value.

What's to stop any investor from selecting the 30 most valuey stocks out of the 1000, based on a value composite? And since scalability is likely less of an issue to you versus Vanguard, DFA etc, why not use the 3000 largest stocks instead of the 1000 largest? After all, the data for the value premium is stronger in small caps than large caps. And you have an ability to combine value and momentum that a fund with billions in assets can only dream of.

IOW, with your 30 stock portfolio, you could probably have stronger factor tilting than any ETF or MF will give you.
Maybe DFA, Bridgeway, and the creators of other factor products ought to fire all their managers and analysts and save money by hiring monkeys to throw darts. You could pay the monkeys with bananas and save millions in the process. No need for fancy, smancy computers and software. Just monkeys, stock pages, and darts.

Seriously, you bring up a great point about random sampling. The sample size needed to represent the population as a whole might be smaller than we think. The performance of the S&P 500 isn't dramatically different than the Dow 30. You are also pointing out that there are a whole lot more Mid/Small Cap stocks than Large Cap stocks, so darts thrown at a dartboard ought to give you a Small Cap tilt. Not sure how darts would give you a Value tilt unless there are more Value stocks than Growth stocks.

You also point out that there is a diminishing diversification benefit to increasing the number of stocks in a portfolio. You probably don't get much additional benefit beyond 50 stocks.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by rossington » Sun Sep 22, 2019 3:33 am

What is the difference between owning VTSAX or JNJ over the last 15 years?
Quality counts as to where to put your money...Beyond quality you are speculating with fragile assumptions to try to beat the market.
Historically well managed quality companies drive the broad market indexes and one must understand this fact.
Nothing wrong with investing in them individually or collectively.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by Park » Sun Sep 22, 2019 8:14 am

nedsaid wrote:
Sun Sep 22, 2019 1:41 am
Maybe DFA, Bridgeway, and the creators of other factor products ought to fire all their managers and analysts and save money by hiring monkeys to throw darts...You are also pointing out that there are a whole lot more Mid/Small Cap stocks than Large Cap stocks, so darts thrown at a dartboard ought to give you a Small Cap tilt. Not sure how darts would give you a Value tilt unless there are more Value stocks than Growth stocks.
Assume you are picking 30 random stocks from the largest 1000 stocks. Divide the largest 1000 stocks into 500 value stocks and 500 growth stocks. So with your 30 stock portfolio, you'll tend to own 15 growth stocks and 15 value stocks. But you're going to equal weight those 30 stocks. In the 1000 stock universe you're drawing from, growth and value stocks are not equally weighted; they're market cap weighted. With market cap weighting, growth will be more than half of your 1000 stock universe. So with your 30 stock portfolio, you've got a value tilt, relative to the 1000 stock universe.

DFA, Bridgeway etc shouldn't fire their managers etc. Their problem is scalability. The stronger their factor tilts, the smaller their funds can be. IIRC, DFA a few years ago weakened their factor tilts, in order to increase scalability. In other words, they made market cap indexing a greater part of their strategy. Other than market cap indexing, the scalability problem occurs with just about every investment strategy. But for an individual investor with a 30 stock portfolio, it's much less of a problem.

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by JoMoney » Sun Sep 22, 2019 8:24 am

nedsaid wrote:
Sun Sep 22, 2019 1:41 am
... there are a whole lot more Mid/Small Cap stocks than Large Cap stocks, so darts thrown at a dartboard ought to give you a Small Cap tilt. Not sure how darts would give you a Value tilt unless there are more Value stocks than Growth stocks...
If the 'dart' portfolio used a rebalancing scheme that equal-weighted, or something that pushed against market cap weighting, price-weighting, relative-strength, or general momentum/growth... that type of mean-reversion strategy pushes more to value (relative to the market). It's selling off more of the stuff going up to buy more of the stuff that hasn't gone up or is going down.
Some followers of 'value' or mean-reversion strategies like to believe the stuff not going up is cheaper, implying some presumption of stocks being mis-priced that will be corrected. I don't believe that could possibly be the case on a broad scale... but some people like that story, despite it completely contradicting the idea of being a "risk premium"... but, either way it does kind of tilt more to a "value" style relative to a market where the things going up are garnering more weight.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sun Sep 22, 2019 11:38 pm

Park wrote:
Sun Sep 22, 2019 8:14 am
nedsaid wrote:
Sun Sep 22, 2019 1:41 am
Maybe DFA, Bridgeway, and the creators of other factor products ought to fire all their managers and analysts and save money by hiring monkeys to throw darts...You are also pointing out that there are a whole lot more Mid/Small Cap stocks than Large Cap stocks, so darts thrown at a dartboard ought to give you a Small Cap tilt. Not sure how darts would give you a Value tilt unless there are more Value stocks than Growth stocks.
Assume you are picking 30 random stocks from the largest 1000 stocks. Divide the largest 1000 stocks into 500 value stocks and 500 growth stocks. So with your 30 stock portfolio, you'll tend to own 15 growth stocks and 15 value stocks. But you're going to equal weight those 30 stocks. In the 1000 stock universe you're drawing from, growth and value stocks are not equally weighted; they're market cap weighted. With market cap weighting, growth will be more than half of your 1000 stock universe. So with your 30 stock portfolio, you've got a value tilt, relative to the 1000 stock universe.

DFA, Bridgeway etc shouldn't fire their managers etc. Their problem is scalability. The stronger their factor tilts, the smaller their funds can be. IIRC, DFA a few years ago weakened their factor tilts, in order to increase scalability. In other words, they made market cap indexing a greater part of their strategy. Other than market cap indexing, the scalability problem occurs with just about every investment strategy. But for an individual investor with a 30 stock portfolio, it's much less of a problem.
Okay, I see it now. Growth companies would tend to have larger market caps than Value companies. Makes sense. An equal weighting strategy, even with the same number of Growth and Value stocks in the portfolio would give you a Value tilt. I wondered how that worked, thanks. Also excellent point about scalability and DFA. Thank you.

By the way, I was kidding about the monkeys, but still you have to wonder.
Last edited by nedsaid on Sun Sep 22, 2019 11:49 pm, edited 1 time in total.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Sun Sep 22, 2019 11:43 pm

JoMoney wrote:
Sun Sep 22, 2019 8:24 am
nedsaid wrote:
Sun Sep 22, 2019 1:41 am
... there are a whole lot more Mid/Small Cap stocks than Large Cap stocks, so darts thrown at a dartboard ought to give you a Small Cap tilt. Not sure how darts would give you a Value tilt unless there are more Value stocks than Growth stocks...
If the 'dart' portfolio used a rebalancing scheme that equal-weighted, or something that pushed against market cap weighting, price-weighting, relative-strength, or general momentum/growth... that type of mean-reversion strategy pushes more to value (relative to the market). It's selling off more of the stuff going up to buy more of the stuff that hasn't gone up or is going down.
Some followers of 'value' or mean-reversion strategies like to believe the stuff not going up is cheaper, implying some presumption of stocks being mis-priced that will be corrected. I don't believe that could possibly be the case on a broad scale... but some people like that story, despite it completely contradicting the idea of being a "risk premium"... but, either way it does kind of tilt more to a "value" style relative to a market where the things going up are garnering more weight.
I can see that the definition of Value needs to be further defined. It is more than the stocks that didn't go up. I see Value in terms of metrics and how those metrics compare to Growth stocks. Value is also relative. Also, Value stocks have been going up but not as much as Growth stocks over the last decade.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by rossington » Mon Sep 23, 2019 3:22 am

nedsaid wrote:
Sun Sep 22, 2019 11:43 pm
JoMoney wrote:
Sun Sep 22, 2019 8:24 am
nedsaid wrote:
Sun Sep 22, 2019 1:41 am
... there are a whole lot more Mid/Small Cap stocks than Large Cap stocks, so darts thrown at a dartboard ought to give you a Small Cap tilt. Not sure how darts would give you a Value tilt unless there are more Value stocks than Growth stocks...
If the 'dart' portfolio used a rebalancing scheme that equal-weighted, or something that pushed against market cap weighting, price-weighting, relative-strength, or general momentum/growth... that type of mean-reversion strategy pushes more to value (relative to the market). It's selling off more of the stuff going up to buy more of the stuff that hasn't gone up or is going down.
Some followers of 'value' or mean-reversion strategies like to believe the stuff not going up is cheaper, implying some presumption of stocks being mis-priced that will be corrected. I don't believe that could possibly be the case on a broad scale... but some people like that story, despite it completely contradicting the idea of being a "risk premium"... but, either way it does kind of tilt more to a "value" style relative to a market where the things going up are garnering more weight.
I can see that the definition of Value needs to be further defined. It is more than the stocks that didn't go up. I see Value in terms of metrics and how those metrics compare to Growth stocks. Value is also relative. Also, Value stocks have been going up but not as much as Growth stocks over the last decade.
I don't see the logic in attempting to pick value stocks in today's markets ....that is surely searching for the needle in the haystack. Why even discuss this? It is purely speculation don't you think?
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by nedsaid » Mon Sep 23, 2019 9:05 am

rossington wrote:
Mon Sep 23, 2019 3:22 am

I don't see the logic in attempting to pick value stocks in today's markets ....that is surely searching for the needle in the haystack. Why even discuss this? It is purely speculation don't you think?
Actually Value investing has been a very successful method to invest over the years. These things come in and out of style, we have been in a Large Growth market for the last 10 years, Value stocks have been going up during that time but not by as much as Growth stocks. Over much longer periods of time, Value stocks tend to do better than the market itself, all kinds of research on this, this effect is seen all over the world. The Value effect is most pronounced in Mid/Small Cap stocks. Why does this work? Value stocks have unique economic risks, more volatile earnings and weaker balance sheets than Growth stocks. Wall Street is an expectations game, Value stocks have lower expectations built into them than Growth stocks, low expectations are easier to beat than high expectations. Over time, investors tend to be too optimistic about Growth stock earnings and too pessimistic about Value stock earnings.

So no, this is not speculation. It is a style of investing that has worked forever, as long as there have been markets. You don't have to pick individual Value stocks to invest this way, there are low cost Value index funds and ETF products that do the screening for you. You buy such stocks by the hundreds rather than one at a time.
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by 1789 » Mon Sep 23, 2019 4:18 pm

nedsaid wrote:
Sat Sep 21, 2019 5:35 pm
I want to make clear that individual stock picking is not a particularly efficient way to invest. Even if you can match or beat the market a bit doing this, you don't get a good return when you take into account the time involved. If you want to invest according to a particular style, I suppose you could just find a low cost ETF that follows that style and let the ETF do all the research and screening for you. I have toyed with the idea of replacing my individual stock portfolio with the Vanguard High Dividend Index or the Vanguard Value Index as both are chock full of the kind of stocks that I like.

Last I checked, I trailed the Total Stock Market Index by about 1% over 15 years and the Vanguard Value Index by about 0.20% over that same time period. As I posted above, I have losses on only 4 of my 22 stocks. Don't chalk this up to brilliance or good looks, I just did the prudent things when picking stocks and exercising great patience. I did however do much better than most investors who try doing this, foggy memory says that individual investors who pick stocks trail the market by 4% a year. It came from Larry Swedroe but I couldn't find the article through a Google search.
Nedsaid,

I agree. I stopped chasing individual stocks not because returns or etc, but because the time it takes to think about them. For me it was waste of my time and energy. Now, I do not care about which company will be the next one to file bankruptcy
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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by larryswedroe » Tue Sep 24, 2019 7:23 am

Thought some perspective might help re this post
"I don't see the logic in attempting to pick value stocks in today's markets ....that is surely searching for the needle in the haystack. Why even discuss this? It is purely speculation don't you think?"

Try this
I think most people would say Buffett is one of if not the best investors of all time. He is attempting to pick what he considers value stocks. Pretty smart guy.
Not looking for a needle in a haystack at all. In fact buying the whole VALUE haystack with many thousands of stocks in a global only value portfolio.

It has literally nothing to do with speculation, but investing based on evidence that is persistent, pervasive, robust and survives transactions costs across sectors, countries, regions and even asset classes as what is cheap has tended to outperform expensive over time by significant margins

Larry

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by larryswedroe » Tue Sep 24, 2019 7:23 am

Thought some perspective might help re this post
"I don't see the logic in attempting to pick value stocks in today's markets ....that is surely searching for the needle in the haystack. Why even discuss this? It is purely speculation don't you think?"

Try this
I think most people would say Buffett is one of if not the best investors of all time. He is attempting to pick what he considers value stocks. Pretty smart guy.
Not looking for a needle in a haystack at all. In fact buying the whole VALUE haystack with many thousands of stocks in a global only value portfolio.

It has literally nothing to do with speculation, but investing based on evidence that is persistent, pervasive, robust and survives transactions costs across sectors, countries, regions and even asset classes as what is cheap has tended to outperform expensive over time by significant margins

Larry

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by Random Walker » Tue Sep 24, 2019 9:29 am

I thought this was a highly valuable article. I have a friend (I’m sure all of us do) who talks confidently about his individual stock successes. Makes it sound so easy. Impossible not to be influenced by talk like that and second guess the diversified passive investing mutual fund path. Great to have real data. The knowledge really strengthens the fortitude to stick to plan. Funny how those friends don’t seem to talk as much about their individual stock flops :-)

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by willthrill81 » Tue Sep 24, 2019 9:39 am

Random Walker wrote:
Tue Sep 24, 2019 9:29 am
I thought this was a highly valuable article. I have a friend (I’m sure all of us do) who talks confidently about his individual stock successes. Makes it sound so easy. Impossible not to be influenced by talk like that and second guess the diversified passive investing mutual fund path. Great to have real data. The knowledge really strengthens the fortitude to stick to plan. Funny how those friends don’t seem to talk as much about their individual stock flops
Buying individual stock has several semblances to playing the slots (although the big difference is that stock has an expected positive return, whereas gambling has an expected negative return). You never know what's going to happen on any given pull (stock), and over the long-term, most of your bets don't really do much. But every now and then, you hit a 'jackpot'. By its very nature, winning the jackpot tends to be much more memorable than all the times that nothing much happened, and the hope of it happening (again) is often enough to make the player continue. However, when we examine the data, individual stock investing is often more than a bit of a loser's game. Yes, it's likely to yield a positive outcome but less so than had funds been used.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by Park » Tue Sep 24, 2019 9:44 am

Many financial assets are hybrids of underlying assets. An example would be corporate bonds being a hybrid of government bonds and stocks.

When you buy VBR (Vanguard small cap value fund), you're buying a hybrid. You're buying a market cap fund and a small cap value portfolio of stocks. This applies not just to VBR, but probably just about any of the factor funds.

At least in the US stock market, it's possible to create your own small cap value portfolio of stocks. You can then mix it with market cap funds as per your taste.

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Re: Larry Swedroe: Individual Stock Investing Increases Risk

Post by abuss368 » Tue Sep 24, 2019 9:50 am

Random Walker wrote:
Tue Sep 24, 2019 9:29 am
I thought this was a highly valuable article. I have a friend (I’m sure all of us do) who talks confidently about his individual stock successes. Makes it sound so easy. Impossible not to be influenced by talk like that and second guess the diversified passive investing mutual fund path. Great to have real data. The knowledge really strengthens the fortitude to stick to plan. Funny how those friends don’t seem to talk as much about their individual stock flops :-)

Dave
Agreed. The cocktail hour always has room for successes. Never losses.
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