Why do investors say stock picking is risky?

[tvubpwcisla]

If investors were 90% low cost index funds and 10% companies they love (Disney, Google, Microsoft, Johnson & Johnson, to name a few)...how is that risky? I've heard from many investors that they would never consider holding even a single stock in their portfolio unless it was part of a fund.

[zuma]

From the wiki:

The risk of investing in a single risky security, such as a stock or corporate bond, is very high due to the company-specific risks. Any number of unfortunate events could impact the rate of return. In the worst possible case, the company could go bankrupt, and the investor could lose the entire value of the investment. Company-specific risk is generally referred to as unsystematic risk or nonsystematic risk. Other names are unique-risk, firm-specific risk, or diversifiable risk.

[Normchad]

If I were a stick picker, I would have picked Apple, because I love it. And they’re great.

I’d also have picked Kodak, because they invented the digital camera, and everybody would eventually buy one or two of those. And I’d have lost all my money.

I’d have also bought Digital Equipment Company, because the computing revolution was upon us, and they made the best stuff. I’d probably have bought Compaq too. And lost all my money.

Years ago, I worked at IBM and they sold us company stock at a 15% discount. I doubled my money and sold, smugly thinking I was the smartest guy in earth. It doubled again after I sold it, and then it doubled yet again.

That’s why I don’t do individual stocks.

Warren Buffet pulled a stunt once where he unfurled a list of (I think) 3000 car companies that used to exist. And he said only 3 of these survived. You can’t know now, which of the 3000 tech companies or whatever is going to survive).

[Clever_Username]

To me, it's not a matter of risk, it's a matter of who I'm betting on.

Total market index -- betting on the United States, collectively, improving and getting better. I think that's a good bet.

Individual stocks -- am I doing a better job picking one that (a) is better than the previous potential bet and (b) now I'm competing against people who get paid tons of money to spend 60+ hours a week trying to do this. No thanks.

I've made more money in the past decade betting on the Cleveland Browns than I have betting on individual stocks.

[Tamarind]

The whole portfolio might be less risky if only 10% were picked stocks, but the picked stocks themselves aren't any less risky for being only a small part of the portfolio.

I don't own stocks anymore except as part of a fund. I sell my options and RSUs the moment they are released to me. There are three reasons for this.

1) I don't want to take diversifiable risk. The research I have read suggests it should not be expected to pay off.

2) I don't think anyone should pick a stock because they "love" the company. A good product or a great company culture don't translate into good stock performance (and vice versa). If I were going to pick a stock, it would need to be based on close reading of their financial disclosures, plus additional information about their products and operations.

3) I work in a consulting field and have the opportunity to observe business leadership, including of public companies, close up. I have observed that there are usually only a vanishingly small number of people working for a company who have a good grasp on how the company will perform and what the stock might be expected to do. An investor working from only public information will be that much more clueless. So I don't believe that the requirement set in reason #2 is achievable for most investors, including me.

[rbaldini]

Single stocks are more volatile than an average of them. Sure, if you limit your stock-picking exposure to just 10%, you get less volatility. But here's a wild idea: what about 0%?

[whereskyle]

If investors were 90% low cost index funds and 10% companies they love (Disney, Google, Microsoft, Johnson & Johnson, to name a few)...how is that risky? I've heard from many investors that they would never consider holding even a single stock in their portfolio unless it was part of a fund.

I think picking stocks to hold for the long haul with 10% of your portfolio as a young wealth accumulator is tolerable. I do it myself but limit it to 5%. I wouldn't advise buying companies just because you love them though. Google and Msft are easy picks because each has more than $100bn on hand in addition to enviable profit margins and growing global business. That means they're relatively safe, not that they will outperform the market. I would also entertain buying Disney when it's cheap because of its IP horde.

The real problem is that you cannot say with much confidence that any single company will outperform the market, and you may end up spending a lot of time worrying about whether it is underperforming. (Example: I bought Google at $1025, which was very close to the bottom (so far) and was a popularly suggested buy point. Google has since lagged the S&P 500 by almost 5%.) I play with single stocks as long-term investments (mostly because Bogle analogizes the miracle of compounding in buying and holding stocks at random to the performance of index funds over the long haul), but I do so almost entirely as an experiment to prove to myself that total-market indexing works. If you want to do it, I can't blame you, but I would recommend capping it at 5% instead of 10%. If your picks do very well, then let them earn that 10% allocation.

[fwellimort]

If investors were 90% low cost index funds and 10% companies they love (Disney, Google, Microsoft, Johnson & Johnson, to name a few)...how is that risky? I've heard from many investors that they would never consider holding even a single stock in their portfolio unless it was part of a fund.

Stock picking isn't "necessarily" risky. Behind every stock is a real company.
And company's underlying value is its Equity = Assets - Liabilities.
If a stock is priced less than its equity value, then the stock is valued less than its intrinsic price: it's free money.

If we lived back in the 80's/90's, there might have been quite a bit of companies in which there were price mismatches with the intrinsic price.
Peter Lynch always talked about Kaiser Aluminum and Taco Bell because of this. Companies in which the liquidated value was far far far higher than the stock price aka free money.

There might be companies out there today that are mis-priced from time to time (and potentially even less than the intrinsic price).
I hear Buffett relatively recently had a ~50+% increase in a year with a small korean stock in his personal account due to mispricing.
But it's not scalable and almost definitely not possible to find in the US Stock market (especially in the S&P500) anymore outside in giant drops such as the Financial Crisis.

Stocks all have a 'intrinsic price'. If you can buy a stock at around that price or less, then no, stock picking isn't risky. It's free money.
The problem is, that rarely happens and stocks are generally valued far higher than just the equity portion: usually it's equity + future potential returns + some additional speculation on top.
The average investor doesn't understand balance sheet and all that. You ask most people working in Wall Street firms and i can assure you if they have some shares in single stocks, they have them because "I see them everywhere" or "it goes up (in some convoluted speaking)".
When buying a single stock with more or less no knowledge of basic accounting, then yes, stock picking can be incredibly risky. Not only that, most people buy high sell low: even if they are good at finding 'companies that beat the market long term', more than likely, they will sell when it goes low or it goes too high (one of main reasons people underperform is they sell winners to buy losers).
Also, if you buy a single stock, you should ideally be checking the health of the company constantly: at least continuously follow the quarterly report. Most people don't have the time for that.

Anyways, single stocks are not always risky. If you ask me though if a single stock I pick would outperform the market, then now it's a completely different talk. I've no idea. If I go single stocks, I would stray from companies with much liabilities and produce much profits: only issue is, by picking those more 'stable' companies, I am more likely to underperform the market since I'm shielding myself from risk.

I personally think the notion that 'stock picking is risky' came from amateur investors. Just like 'don't catch the falling knife' is a horrible advice for those who know what they are doing, I feel many of these advice are from amateur investors to other amateur investors (an echo chamber of poor reasoning).
Stocks are just bonds without an explicit % number. If you can scratch the ticket (stock) and figure out the % number ahead of time, stocks can be a big wealth building tool without much risk.

[Bobby206]

If investors were 90% low cost index funds and 10% companies they love (Disney, Google, Microsoft, Johnson & Johnson, to name a few)...how is that risky? I've heard from many investors that they would never consider holding even a single stock in their portfolio unless it was part of a fund.

Lack of diversity. It's nothing more than that. If you have enough money to invest in 500 companies I think you'll end up doing just the same as a big ETF. However, it's a lot easier to just big a broad ETF.

The reality is stock pickers, and I have been one at times, have a long memory as to all their "wins" and never remember the losses. Just like a gambler!

[Jags4186]

Any deviation from the market is going to cause a variance in returns from the market. If you are comfortable with that then go ahead and use 10% of your portfolio to pick stocks.

There are great companies that have greatly outperformed and underperformed the market. Apple was a great stock until it was a dog stock until it was a great stock. It took nearly 40 years for that story to unfold. Can you mentally handle holding a single stock through its ups and downs, never knowing if the downs will turn to ups?

[Halicar]

If investors were 90% low cost index funds and 10% companies they love (Disney, Google, Microsoft, Johnson & Johnson, to name a few)...how is that risky? I've heard from many investors that they would never consider holding even a single stock in their portfolio unless it was part of a fund.

Maybe someone else can crunch the numbers, but a portfolio that's 100% VFIAX is pretty much identical to one that's 90% VFIAX and 10% DIS, GOOGL, MSFT, and JNJ, so it's not that risky. Now a portfolio that's 50% VFIAX and 50% SHLDQ, on the other hand...

[BillyK]

I have held individual shares of so called good companies drop down to $0.00 which isn’t going to occur by holding the market unless there is Armageddon. I haven’t owned an individual stock in well more than a decade which is a great feeling. I think back through the years of hearing friends, family and co-workers talking about can’t miss stocks that they heavily overweighted such a Lucent Technologies. Now you mention that name to them and they change the subject in a hurry. I remember owning Nokia when in it was super hot which helped Peter Lynch and his Magellan fund since it was a top holding. The small country of Finland was heavily reliant upon it since it was such a major part of their economy and many investors were heavily overweighting it as a can’t lose stock pick. Now just look at Nokia (NOK) today, it is trading at +/- $3.28 per share. Personally, I now prefer to easily diversify my risk away from individuals stocks by owning the broad market which is less stressful and has better odds for financial success.

[mega317]

Maybe someone else can crunch the numbers, but a portfolio that's 100% VFIAX is pretty much identical to one that's 90% VFIAX and 10% DIS, GOOGL, MSFT, and JNJ, so it's not that risky.

Well not identical, but it's going to be mighty close and replacing 10% of your portfolio with almost anything isn't really a big deal. Microsoft and google are over 8% of VFIAX already.
I wouldn't do it but I think the risk and reward are both very low compared to just the fund.

[Vanguard Fan 1367]

If investors were 90% low cost index funds and 10% companies they love (Disney, Google, Microsoft, Johnson & Johnson, to name a few)...how is that risky? I've heard from many investors that they would never consider holding even a single stock in their portfolio unless it was part of a fund.

Because it is risky.
My personal experience hasn't been so good with stock picking. When I last checked I put the 3 stocks I own the most of into the Boglehead Stock Picking Contest and I was about 65 out of 72. Other times when I have run the numbers on my basket of stocks they didn't do as well as the S & P 500.

My parents bought a couple of companies stock that went bankrupt (actually at least 3).

I like following John Bogle, he owns the whole haystack rather than looking for the needle.

[rustymutt]

Because more companies can play the Enron game nowadays. You can't have the diversification that's needed to insure your portfolio doesn't do it self in. Any company can fold. More likely to be bought out, but at a value price.

[averagedude]

Any single individual stock can go to zero. Of the top 50 companies that were on the original forbes list of 1917 survived operating under their same name- ATT and GE, and one of these companies was famously broken up by the federal government. It would take a major catastrophic event for a collection of the 500 largest companies to go to zero. Concentration can make you rich, but diversification helps you stay rich.

[illumination]

I don't even view the "main" problem with being a stock picker being an individual stock can go to zero. That can (and does) happen, but I wouldn't say it's "likely" to happen with larger blue chip companies. I see the main problem just being years of underperformance. Say you pick a stock and it returns 7% (which is good) over several decades but versus like 9% in an index fund, that's massively less money. And the odds are something like 90%+ you pick stocks that underperforms the index.

Plus if you own in a taxable account, and you've been sitting on stocks you picked for decades, you can have a huge "exit" tax if you decide you want out. Business models change massively, something like GE or IBM made all the sense in the world decades ago but I wouldn't want to touch them today. Had you stuck with those same companies since the 80's, your retirement would be like 75% less than had you dropped them in an index fund.

With an index fund, you can feel comfortable holding them in perpetuity because the market is picking the winners and losers and you basically own all of them.

[nisiprius]

If it's only 10% of your portfolio, then it isn't very risky.

There's a certain illogic here. If you believe that the stocks of a few "companies you love" is a worse investment than a total market index fund, why do it at all? If you truly believe it is better, why do it with only 10% of your portfolio--why not the full 100%?

One possibility is that you want something like lottery tickets. Lottery tickets have "positive skew." When you buy a lottery ticket, you are buying a near certainty of a small, highly affordable loss, with a microscopic probability of a huge win. I get it that somebody (not me) could certainly think it was worth the money in order to own the possibility of a fabulous win. This is still risk in the sense of great uncertainty, although it is not risk of catastrophic loss.

A traditional explanation, and one which I think makes a lot of sense, is that an individual stock's risk can be attributed to three risk factors common to all stocks, and one "idiosyncratic" risk that belongs to that stock alone. The biggest risk factor is just that it's a stock. The other two depend on the degree to which it is a large-cap or a small-cap stock, and the degree to which it is a growth or a value stock.

In this view, if you invest in, say, the Vanguard Value Index Fund, you get those characteristics common to all large-cap value stocks, but all of the idiosyncratic risks of the stocks in the fund have been averaged out, smoothed out, diversified away. When you invest in Disney, you just get the same thing plus idiosyncratic risk. The theory further goes that the market does not reward risks that can be diversified away.

Therefore, it is better to invest in the index fund than in Disney, because the fund gives you the risk and reward of stocks + large + value, while Disney gives you stocks + large + value + Disney-only-risk, but doesn't give you any extra return for that extra Disney-only risk.

[9-5 Suited]

Investing only 10% of your portfolio in virtually any legitimate investment - so long as it isn't highly leveraged - is not very risky. The question framing set up the answer. Doing it with 90% of your portfolio on the other hand ... well you can read some pretty heartbreaking stories of people who chose to do that with individual stocks.

[Jags4186]

One possibility is that you want something like lottery tickets. Lottery tickets have "positive skew." When you buy a lottery ticket, you are buying a near certainty of a small, highly affordable loss, with a microscopic probability of a huge win. I get it that somebody (not me) could certainly think it was worth the money in order to own the possibility of a fabulous win. This is still risk in the sense of great uncertainty, although it is not risk of catastrophic loss.

Yes -- I am one of those. I probably spend ~$400 a year on lottery tickets. I try to play every Megamillion, Powerball, and Pick-6 (but of course I do miss some drawings). Some people will say that's nuts and a waste of money. And I know it is. But to me a few bucks a week even for the slightest possibility of a huge hit keeps me coming. While I know I'm lighting that money on fire, I figure everyone has a vice or "waste" of money -- whether it be a somewhat regular $5 fancy Starbucks drink, smoking, a fancy gym membership, etc.

[birdog]

I've made more money in the past decade betting on the Cleveland Browns than I have betting on individual stocks.

Hmmm. You must be the worst stock picker on the planet.

[anonsdca]

If investors were 90% low cost index funds and 10% companies they love (Disney, Google, Microsoft, Johnson & Johnson, to name a few)...how is that risky? I've heard from many investors that they would never consider holding even a single stock in their portfolio unless it was part of a fund.

Because they equate it to "gambling".

I get so frustrated here and elsewhere when I hear investing concepts being compared to gambling or buying lottery tickets. Nothing is further from the truth. It is an old, and I mean OLD hold over from the Great Depression (and no, I am not talking about 2008). I am talking about 1929. This goes back to when they lived through this depression

My Dad is probably near Jacks age when he died, but he thinks (and his Dad thought, and many others think) ANY involvement in the stock market was/is gambling.

Bogleheads think its OK to invest in a basket of stocks or an EFT that tracks a basket of stocks, but individual stocks is gambling.

Others think real estate is gambling, gold--gambling, etc., etc., etc.

None of this is true. None of it is gambling at all. It is simply investing with different risk tolerances. Decide your risk tolerance and go for it.

Gambling is hoping you scratch off a puzzle with enough words to win back your money, or hoping black comes up so you double your money. Investing in individual stocks is NOT like that. Not like that at all.

[tibbitts]

If investors were 90% low cost index funds and 10% companies they love (Disney, Google, Microsoft, Johnson & Johnson, to name a few)...how is that risky? I've heard from many investors that they would never consider holding even a single stock in their portfolio unless it was part of a fund.

When people say stock picking is risky they don't mean with 10% (or .01%) of your portfolio. They mean you risk the money, however much, you invest in those particular stocks, whether you "like" them or not, to a far greater extent then when you invest in a broad index. This virus situation we have is an example where even a well-researched, reasonably well-managed company in a single sector could be destroyed by an external event.

[HomerJ]

Warren Buffet pulled a stunt once where he unfurled a list of (I think) 3000 car companies that used to exist. And he said only 3 of these survived. You can’t know now, which of the 3000 tech companies or whatever is going to survive).

Here's just the Bs (from wikipedia)... Look at those dates... When something new comes out, you might think, this new technology is totally going to change the world. And you could be 100% RIGHT.

But picking the company (and the stock) that will win the game? That's hard...

Babcock, H.H. Company (1909–1913)[27]
Babcok Electric Carriage Co. (1906–1912)
Baby Moose (1914)
Bachelle Electric (1900–1903)[10]
Bacon (1901, 1919–1920)[10]
Badger (1910–1911)[28]
Based in Wisconsin
Bailey (1907–1910)[10]
Baker Electric (1899–1916)[29]
Based in Cleveland
Balboa (1924–1925)[10]
Baldner (1900–1903)[10]
Baldwin (1899–1901)[10]
Ball Steam (1868, 1902)[10]
Balzer (1894–1900)
Banker (1905)[10]
Bantam (1914)[30]
Distinct from American Bantam
Barbarino (1923–1925)[10]
Barley Motor Car Co. (1916–1929)
Barrows Electric (1895–1899)[31]
Bates Automobile Company (1904–1905)
Bauer (1914–1916)[10][where?]
Bay State (1907–1908)[10]
Bean-Chamberlain Manufacturing Co. (1901–1902)
Hudson model
Beardsley (1914–1917)[10]
Beechcraft (1946)[32]
Beggs (1919–1923)[10]
Belden (1907–1911)[10]
Bell Motor Car Company (1916–1922)[33]
Based in Pennsylvania
Belmont Electric Auto Co. (1909–1910)
Belmont (1916)[34][where?]
Bendix (1908–1909)[10]
Benham Manufacturing Co. (1914)
Ben Hur (1917–1918)[35]
Based in Cleveland
Benner (1909)[10]
Berg (1903–1905)[36]
Based in Cleveland
Bergdoll (1910–1913)[10]
Berwick Auto Car Co. (1904)
Berkshire (1905–1912)[10]
Berliet[10][when?]
Bertolet (1908–1910)[10]
Bethlehem[37][when?]
Beverly (1904)[10]
Bi-Autogo (1908–1912)[38]
Biddle (1915–1922)
Beisel Motorette Company (1914)
Bimel (1916–1917)[10]
Binghamton Electric (1920)
Binney & Burnham (1901–1902)
Birch Motor Cars (1916–1923)[12]
Birmingham Motors (1921–1923)[10]
Black (1893, 1896–1900)[where?]
Black Motor Company (1908–1910))[39] Renamed to 'Black-Crow' in 1909
Blackhawk (1903)[10]
Blackhawk (1929–1930)
Bliss (1906)
B.L.M. (1906–1907)[10]
Blomstrom (C.H.) Motor Co. (1902–1903)[10][where?]
Blomstrom Manufacturing Co. (1907–1908)[10]
Gyroscope model, based in Michigan.
Blood Brothers Auto and Machine Company (1902–1906)
BMC (1952)[40]
Distinct from the British brand
Boardman (1946)[32]
Bobbi-Kar (1945–1947)[32]
Boisselot (1901)[10]
Borbein Electric (1900, 1904–1909)[10]
Borland Electric (1910–1916)[10]
Boss Steam Car (1897–1909)[41]
Boston-Amesbury (1902–1903)[10]
Boston High Wheel (1907)[10]
Bour-Davis Co. (1915–1922)
Bournonville[10][when?]
Bowman Motor Car Company (1921–1922)[10]
Bramwell (1904–1905)[10][where?]
Bramwell-Robinson (1899–1902)[10][where?]
Brasie (1914–1916)[10]
Brazier (1902–1903)[10]
Brecht (1901–1903)[41]
Brennan (1902–1908)[10]
Brew-Hatcher (1904–1905)
Brewster & Co. (1915–1925, 1934–1937)
Briggs and Stratton (1919–1923)[10]
Smith Flyer model
Briggs-Detroiter Motor Car Co. (1912–1917)
Brightwood[10][when?]
Briscoe Motor Co. (1913–1923)
Bristol (1903–1904)[41]
Broc Electric (1909–1916)[42]
Based in Cleveland
Brogan (1946–1950)[32]
Brook (1920–1921)[10]
Brooks Steamer (1927)[10]
Brown (1914)[10]
Brownie (1916)[43]
Browniekar (1908–1911)[43]
Brush Motor Car Company (1907–1912)
Bryan Steam Car (1918–1923)
Buckeye (1895)[44]
Based in Indiana
Buckmobile (1903–1905)
Buffalo Automobile and Auto-Bi Company (1900–1902)[10]
Buffalo Electric (1912–1915)
Buffum (1901–1907)
Buggy Car Company (1908–1909)[10]
Bugmobile (1907–1909)[45]
Based in Chicago
Burdick (1909)[43]
Burg (1910–1913)[43]
Burns (1908–1912)[43]
Burrows (1914–1915)
Burtt Manufacturing Co. (1902–1906)[10]
Cannon model
Bush (1916–1924)

[Normchad]

Perfect! Thanks HomerJ. For me, that is such a powerful message and example. (And Buick isn't even on the list).

[firebirdparts]

What happens is, the individual company stock goes down and you decide to hang on for it to come back. And instead, it never comes back. Some of your money's gone, and maybe you won't get it back, whether you hold or sell. Sometimes, when hard times hit, the company just closes down and gets dissolved. All your is money is gone and it you don't get it back.

In a total market fund, you'd still have to eat that with 0.0001 of your portfolio, but in a S&P500 index fund you'd have a "winner bias". When the company fell to the point that it's the 501 biggest company, they'd sell it. They wouldn't hang on hoping for it to bounce back.

[HomerJ]

Perfect! Thanks HomerJ. For me, that is such a powerful message and example. (And Buick isn't even on the list).

Just a list of failed car companies...

I liked this one...

Barrows Electric (1895–1899)

Those guys were 110 years ahead of their time.

[jjface]

Maybe you thought cruises would be a good buy at the start of the year....

[anonsdca]

Maybe you thought cruises would be a good buy at the start of the year....

I am sure all the cruise ship stocks are in all the holdings of most Bogleheads. They must be because they buy the "whole market".

[1789]

Gambling is more exciting than picking stocks

[fwellimort]

If you haven't noticed, majority of "investors" don't bother learning to read financial statements and understanding how companies were valued (at least in the past).
And people love to buy high sell low. It's a thing you know.

Get those two together and people buy stocks at literally any price that's priced in the market (and base their judgements off the movement of the stock price).
"Oh stock price went from $142 to $100. It must be a good buy" and so on.

That said, I'm sure you could go around picking stocks that are 'not as risky'. But doing so would most likely lead returns lower than the market return (cause less risk).
So to beat the market, most of the time in the US market, you now have to take 'bets' end of day. And when taking 'bets' that don't seem as probable, it's hard not to buy high sell low when times get rough.

But individual stock picking is not as 'risky' if done properly. Of course, it could also mean sometimes holding onto your money indefinitely if you cannot find deals. And very few have the patience to do such (cause what if the market never falls to the price you want).
You could argue you could place your money in the S&P500 in the meantime but what if you find a deal in a downturn and you calculate it will return 7%: do you sell from the S&P500 and then move to the 7%? What if the market moves up 12% afterwards and your stock only returns that 7%. Was it worth it?
Individual stock picking is riskier however if you are randomly selecting companies in the publicly traded stock list (out of speculation).

[Bama12]

My circle of friends do not feel stock picking is risky at all.

We all have made very good money since March 1.

[Northern Flicker]

If investors were 90% low cost index funds and 10% companies they love (Disney, Google, Microsoft, Johnson & Johnson, to name a few)...how is that risky? I've heard from many investors that they would never consider holding even a single stock in their portfolio unless it was part of a fund.

:?

Two problems. First, the risks unique to an individual stock, normally called unsystematic risk or security-specific risk, may be diversified away. You do not need to take this risk. Second, if you do choose to take security-specific risk, you are not compensated with additional expected return. Thus, it is a bad bet.

[KEotSK66]

hi

regarding...

Second, if you do choose to take security-specific risk, you are not compensated with additional expected return. Thus, it is a bad bet.


don't many invest in value (deep) funds which are loaded with unsystematic risk even after diversifying ?

aren't those investors sort of betting on that unsystematic risk ?

a whole asset class based on scaring people away

[bberris]

If investors were 90% low cost index funds and 10% companies they love (Disney, Google, Microsoft, Johnson & Johnson, to name a few)...how is that risky? I've heard from many investors that they would never consider holding even a single stock in their portfolio unless it was part of a fund.

Stock picking isn't "necessarily" risky. ...

Right. Individual stocks are only risky if they go down.

[deltaneutral83]

One thing that hasn't been mentioned that I think is significant is that a stock price does not necessarily have to be tied to how successful the company is. Bad management can tank a company. So "Everyone is using Company X's products and will for years so the price will continue to rise" is a fallacy most of us learned the hard way. All info is baked into the price before you buy and the seller is probably an institution who have a team of guys that do 12 hours of research a day to your 30 minutes once off reading an article.

[birdog]

My circle of friends do not feel stock picking is risky at all.

We all have made very good money since March 1.

Got any examples of how you've made good money in these last 5 weeks?

[mega317]

My circle of friends do not feel stock picking is risky at all.

We all have made very good money since March 1.

Care to share some examples of how you've made good money in these last 5 weeks?

This question will not necessarily lead to valuable information. More important would be sharing every trade made over a longer period of time and comparing it to the poster's benchmark. But we never get that.

[Ferdinand2014]

“We study compound returns to nearly 62,000 global common stocks during the 1990 to 2018 period, documenting that the majority, 56% of US stocks and 61% of non-US stocks, under perform one-month US Treasury bills over the full sample. Focusing on aggregate shareholder wealth creation measured in US dollars, we find that the top-performing 1.3% of firms account for the $US 44.7 trillion in global stock market wealth creation from 1990 to 2018. Outside the US, less than one percent of firms account for the $US 16.0 trillion in net wealth creation. These results highlight the practical implications of the fact that the distribution of long-run stock returns is strongly positively skewed.“

Do Global Stocks Outperform US Treasury Bills?


Hendrik Bessembinder
Arizona State University

Te-Feng Chen
Hong Kong Polytechnic University

Goeun Choi
Arizona State University (ASU) - Finance Department

K.C. John Wei
Hong Kong Polytechnic University

[birdog]

My circle of friends do not feel stock picking is risky at all.

We all have made very good money since March 1.

Care to share some examples of how you've made good money in these last 5 weeks?

This question will not necessarily lead to valuable information. More important would be sharing every trade made over a longer period of time and comparing it to the poster's benchmark. But we never get that.

I agree. However, I was curious to hear the case be made for how a five-week individual stock picking plan would provide any evidence for superiority over a forty-year or so indexing approach. Also, I'm curious if the recent (last three-weeks) stock picks even out-performed the S&P 500, which has gained 25% in that same time period.

[nedsaid]

If investors were 90% low cost index funds and 10% companies they love (Disney, Google, Microsoft, Johnson & Johnson, to name a few)...how is that risky? I've heard from many investors that they would never consider holding even a single stock in their portfolio unless it was part of a fund.

Stock picking isn't "necessarily" risky. Behind every stock is a real company.
And company's underlying value is its Equity = Assets - Liabilities.
If a stock is priced less than its equity value, then the stock is valued less than its intrinsic price: it's free money.

If we lived back in the 80's/90's, there might have been quite a bit of companies in which there were price mismatches with the intrinsic price.
Peter Lynch always talked about Kaiser Aluminum and Taco Bell because of this. Companies in which the liquidated value was far far far higher than the stock price aka free money.

There might be companies out there today that are mis-priced from time to time (and potentially even less than the intrinsic price).
I hear Buffett relatively recently had a ~50+% increase in a year with a small korean stock in his personal account due to mispricing.
But it's not scalable and almost definitely not possible to find in the US Stock market (especially in the S&P500) anymore outside in giant drops such as the Financial Crisis.

Stocks all have a 'intrinsic price'. If you can buy a stock at around that price or less, then no, stock picking isn't risky. It's free money.
The problem is, that rarely happens and stocks are generally valued far higher than just the equity portion: usually it's equity + future potential returns + some additional speculation on top.
The average investor doesn't understand balance sheet and all that. You ask most people working in Wall Street firms and i can assure you if they have some shares in single stocks, they have them because "I see them everywhere" or "it goes up (in some convoluted speaking)".
When buying a single stock with more or less no knowledge of basic accounting, then yes, stock picking can be incredibly risky. Not only that, most people buy high sell low: even if they are good at finding 'companies that beat the market long term', more than likely, they will sell when it goes low or it goes too high (one of main reasons people underperform is they sell winners to buy losers).
Also, if you buy a single stock, you should ideally be checking the health of the company constantly: at least continuously follow the quarterly report. Most people don't have the time for that.

Anyways, single stocks are not always risky. If you ask me though if a single stock I pick would outperform the market, then now it's a completely different talk. I've no idea. If I go single stocks, I would stray from companies with much liabilities and produce much profits: only issue is, by picking those more 'stable' companies, I am more likely to underperform the market since I'm shielding myself from risk.

I personally think the notion that 'stock picking is risky' came from amateur investors. Just like 'don't catch the falling knife' is a horrible advice for those who know what they are doing, I feel many of these advice are from amateur investors to other amateur investors (an echo chamber of poor reasoning).
Stocks are just bonds without an explicit % number. If you can scratch the ticket (stock) and figure out the % number ahead of time, stocks can be a big wealth building tool without much risk.

I have a lot of sympathy for this view, trouble is that finding that "intrinsic price" for the company isn't easy. There is judgment involved in valuing the company, particularly evaluating management and other intangible factors. Proper valuation of a company is more than just crunching numbers thus there are differing opinions on what a company is worth. I saw Professor Damodaran give a talk on the life cycle of companies and he made a comment that behind every good valuation is a good story. He told about how the value of Uber went up billions of dollars when it redefined itself as a logistics company instead of a taxi company. This reminded me of Peter Lynch saying that you need a narrative for every stock that you own. That narrative makes all the difference.

[TomatoTomahto]

[snip...]So "Everyone is using Company X's products and will for years so the price will continue to rise" is a fallacy most of us learned the hard way. All info is baked into the price before you buy and the seller is probably an institution who have a team of guys that do 12 hours of research a day to your 30 minutes once off reading an article.

Even when you know more than a 30-minute researcher, as my wife does regarding her company, you can’t buy or sell based on your insider information (unless you’re a member of Congress ). And, even if you could, while you might have some insight about the company, you can’t predict the economy in general, the stock market‘s appetite for your particular company (risk on or risk off), whether a pandemic is brewing somewhere, etc.

[Clever_Username]

I've made more money in the past decade betting on the Cleveland Browns than I have betting on individual stocks.

Hmmm. You must be the worst stock picker on the planet.

Perhaps. It's also when I bet on football, I don't have to bet pick 'em. I can take the Browns and the points.

[JoMoney]

To the extent that you don't have unique/special information about the stock, you would be taking more risk with your pick(s), then if you had diversified among several stocks with similar characteristics. This can be demonstrated on a casino roulette wheel, where you can pick any of the 36 numbers (0 to 35) on a wheel, and after the wheel is spun, if your number is hit you win. If you knew for certain which number would come up, playing any other numbers would be more risky, but if you didn't have any advantage with extra information, the least risky bet would be to bet on all 36 numbers so that you're guaranteed not to lose. The way roulette is played in a casino, they typically only pay 35-to-1 if you pick the right number, so if you bet on all 36 numbers you would lose one betting unit every spin. The game has a negative expectation for the person making the bet, and a positive expectation for the casino offering the game. On average the casino will average a profit of 1/36 multiplied by however much money is bet on every spin.

Stocks, ownership of businesses, is believed to be an investment with positive expectations for those willing to "bet" on business. Similar to the roulette game, if you don't know which stock will be a winner, the least risky way to play it is to bet on all of them.
The winners and losers however, are not evenly distributed in the stock market. As a rough approximation, using something economists call a Pareto distribution 80% of the stocks will be relatively losers and 20% will be relatively winners.
There is a clear relationship between the size of a company, and how risky it is. There are fewer losers in the larger stocks than there are in smaller stocks... but there are fewer of the larger stocks. The Russell Top 200 index of stocks represents more than half of the entire Russell 3000 total stock index by weight. If you were to make your stock picks out of the Top 200, it would be less risky than if you picked from the smallest 2000 stocks.

I do believe that with a little discernment, the average person could pick a collection of stocks that wasn't any more risky than the broad market, with the caveat that the stocks are significantly large... the thing about large stocks though, is there isn't very many of them, so it's relatively easy to "diversify" enough across large stocks to ensure you're likely to capture the broad returns of the stock market... The big question, is why bother with stock picking at all when it's so cheap and easy these days to buy a portfolio that covers the broad market?

[JonnyDVM]

I've made more money in the past decade betting on the Cleveland Browns than I have betting on individual stocks.

Hmmm. You must be the worst stock picker on the planet.

Perhaps. It's also when I bet on football, I don't have to bet pick 'em. I can take the Browns and the points.

You must have really hammered the under for win totals

[Tellurius]

If investors were 90% low cost index funds and 10% companies they love (Disney, Google, Microsoft, Johnson & Johnson, to name a few)...how is that risky? I've heard from many investors that they would never consider holding even a single stock in their portfolio unless it was part of a fund.

Stock picking isn't "necessarily" risky. Behind every stock is a real company.
And company's underlying value is its Equity = Assets - Liabilities.
If a stock is priced less than its equity value, then the stock is valued less than its intrinsic price: it's free money.

If we lived back in the 80's/90's, there might have been quite a bit of companies in which there were price mismatches with the intrinsic price.
Peter Lynch always talked about Kaiser Aluminum and Taco Bell because of this. Companies in which the liquidated value was far far far higher than the stock price aka free money.

There might be companies out there today that are mis-priced from time to time (and potentially even less than the intrinsic price).
I hear Buffett relatively recently had a ~50+% increase in a year with a small korean stock in his personal account due to mispricing.
But it's not scalable and almost definitely not possible to find in the US Stock market (especially in the S&P500) anymore outside in giant drops such as the Financial Crisis.

Stocks all have a 'intrinsic price'. If you can buy a stock at around that price or less, then no, stock picking isn't risky. It's free money.
The problem is, that rarely happens and stocks are generally valued far higher than just the equity portion: usually it's equity + future potential returns + some additional speculation on top.
The average investor doesn't understand balance sheet and all that. You ask most people working in Wall Street firms and i can assure you if they have some shares in single stocks, they have them because "I see them everywhere" or "it goes up (in some convoluted speaking)".
When buying a single stock with more or less no knowledge of basic accounting, then yes, stock picking can be incredibly risky. Not only that, most people buy high sell low: even if they are good at finding 'companies that beat the market long term', more than likely, they will sell when it goes low or it goes too high (one of main reasons people underperform is they sell winners to buy losers).
Also, if you buy a single stock, you should ideally be checking the health of the company constantly: at least continuously follow the quarterly report. Most people don't have the time for that.

Anyways, single stocks are not always risky. If you ask me though if a single stock I pick would outperform the market, then now it's a completely different talk. I've no idea. If I go single stocks, I would stray from companies with much liabilities and produce much profits: only issue is, by picking those more 'stable' companies, I am more likely to underperform the market since I'm shielding myself from risk.

I personally think the notion that 'stock picking is risky' came from amateur investors. Just like 'don't catch the falling knife' is a horrible advice for those who know what they are doing, I feel many of these advice are from amateur investors to other amateur investors (an echo chamber of poor reasoning).
Stocks are just bonds without an explicit % number. If you can scratch the ticket (stock) and figure out the % number ahead of time, stocks can be a big wealth building tool without much risk.

The problem is that this is a dynamic equation. Liabilities might increase and Assets decrease and you have to monitor it and choose again and again what to do. It takes a lot of time and offers potential for error.

[jjface]

Maybe you thought cruises would be a good buy at the start of the year....

I am sure all the cruise ship stocks are in all the holdings of most Bogleheads. They must be because they buy the "whole market".

Yes but not a concentrated overweight position. That is the beauty of diversification though buying the market. You will always get some companies tanking and others skyrocketing. Picking which is which is similar to rolling dice. I'd rather earn the market growth than risk picking bad stocks.

[Brianmcg321]

Picking stocks is easy. Just pick the ones that go up in value.

If it goes down in value, don’t buy it.

[birdog]

Picking stocks is easy. Just pick the ones that go up in value.

If it goes down in value, don’t buy it.

Agree. Do that and you should be fine.

[Northern Flicker]

hi

regarding...

Second, if you do choose to take security-specific risk, you are not compensated with additional expected return. Thus, it is a bad bet.


don't many invest in value (deep) funds which are loaded with unsystematic risk even after diversifying ?

aren't those investors sort of betting on that unsystematic risk ?

a whole asset class based on scaring people away

Factor risk premia are considered systematic risk by factor theorists. If they are unsystematic, factor theory heads for the dust bin.

PS it is not customary to change the title to a poster’s screen name. You can use the quoting facility to reference someone.