Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

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Nathan Drake
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Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by Nathan Drake »

Little background, I'm mid 30s and reached Financial Independence 100% through a strict and simple adherence to Boglehead philosophy of index funds. It has given me a baseline standard of living that I could live off for the rest of my life.

Career wise, I'm in something slow and steady in STEM. It's a good upper middle class income, but there's literally no real chance at having any multipliers of salary due to bonus or otherwise. Essentially standard "living adjustments" yearly, with small promotions periodically. I didn't hit the lotto with a risky startup, nor am I in a highly lucrative field like Software Engineering that offers robust salaries or stock options.

I'm grateful for where I am, but I'm wondering if it makes sense to take a LITTLE more risk with a part of my portfolio? My NW is just a tad over 7 figures, so we would be talking about investing $50-100K in a risky basket of stocks, hoping to get a 10X multiplier over the coming decade in high-risk, high-potential companies that haven't already broken out completely (think: things that have recently IPO'd such as Palantir). If I lose that amount of money, then I'd be OK with that because it really doesn't meaningfully deplete the rest of my portfolio.

I know this is a very common topic, but I'm curious of those that have employed the strategy and whether they've been happy with the results (may be biased due to the performance of some hot stocks the past 10 years).
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David Jay
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by David Jay »

Nathan: Speaking as a recovering stock picker, make certain that you accurately track your performance.

You will hear lots of people say that they are “pleased” with their performance. I know I was. My portfolio was growing nicely.

Until I was challenged by an early back-and-forth with a regular here at BH to actually benchmark my performance. I was running a full percentage point per year behind the SP500 over the previous 5 years. But in the 2009 - 2015 period (rebounding from the financial crisis) that was still great growth so I thought I was a great stock picker.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
000
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by 000 »

I am fine with individual stocks, but not with the concept of Play Money.

All my money matters to me.

If I'm going to play with my money, it will be by spending it.

When I buy individual stocks, it is to implement a passive tilt not available in a low cost fund or because I believe I have found a truly compelling opportunity. It is never for fun.
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by flaccidsteele »

Why have play money when it’s so simple to make money without playing?

Spend it on something your family wants

Personally I wouldn’t consider $1m NW in mid-30s to be financially independent
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by luckyducky99 »

The problem is with this part:
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm "in a risky basket of stocks, hoping to get a 10X multiplier"
because you're never going to get 10x from the whole basket. If you're lucky, you get one or two winners. My dad does this. Yeah, he did really well investing in Amgen and Starbux in the late 90s and still holds them. He likes to talk about them. How many others does he still talk about? None. He also used to talk about a company called Evergreen Solar. It no longer exists (and not because it got bought out). I haven't asked because it's none of my business, but I suspect he's done worse than the market, and I know (based on my parents' lifestyle) that he never "hit it big".

Basically, the dispersion of outcomes from this kind of strategy skews overwhelmingly negative, because most of the time you don't even get the one or two winners.
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm If I lose that amount of money, then I'd be OK with that because it really doesn't meaningfully deplete the rest of my portfolio.
There's a cognitive / behavioral mistake hidden in here, which is that you're saying "I'm willing to take a lot of risk with 10% of my portfolio, but that's ok because the other 90% of my portfolio has the right amount of risk for me." This is mental accounting, arbitrarily and subjectively dividing your portfolio into parts with different characteristics. You should consider the risk of your whole portfolio instead. It sounds like you're willing to take an extra 10% loss, so the standard advice around here is to hold fewer bonds/cash and increase your equity allocation by 20%. If you're already at >80%, then leverage is what you want.

All of this advice assumes you're willing to pass on the possibility of winning the lottery. Again, most people around here are happy with that tradeoff -- investment vs speculation. And you will, on average, get a more reliably better return by just turning up equity allocation then trying to bet on risky individual stocks.

If you are determined to play a lottery, then it really comes down to luck I think. Good luck.
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Nathan Drake
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by Nathan Drake »

flaccidsteele wrote: Sun Oct 11, 2020 11:05 pm Why have play money when it’s so simple to make money without playing?

Spend it on something your family wants

Personally I wouldn’t consider $1m NW in mid-30s to be financially independent
The idea is to try and accelerate growth in NW since it’s not as possible with the career, and while BH is great for 90% of your investing as the bulk of our progression over time, the other 10% potentially hitting it big could have a very meaningful impact placed in the right assets.

My expenses have been less than <30k ever since I started working, so I consider a sub 3% SWR to be FI even though i don’t want to retire
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Nathan Drake
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by Nathan Drake »

luckyducky99 wrote: Sun Oct 11, 2020 11:15 pm The problem is with this part:
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm "in a risky basket of stocks, hoping to get a 10X multiplier"
because you're never going to get 10x from the whole basket. If you're lucky, you get one or two winners. My dad does this. Yeah, he did really well investing in Amgen and Starbux in the late 90s and still holds them. He likes to talk about them. How many others does he still talk about? None. He also used to talk about a company called Evergreen Solar. It no longer exists (and not because it got bought out). I haven't asked because it's none of my business, but I suspect he's done worse than the market, and I know (based on my parents' lifestyle) that he never "hit it big".

Basically, the dispersion of outcomes from this kind of strategy skews overwhelmingly negative, because most of the time you don't even get the one or two winners.
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm If I lose that amount of money, then I'd be OK with that because it really doesn't meaningfully deplete the rest of my portfolio.
There's a cognitive / behavioral mistake hidden in here, which is that you're saying "I'm willing to take a lot of risk with 10% of my portfolio, but that's ok because the other 90% of my portfolio has the right amount of risk for me." This is mental accounting, arbitrarily and subjectively dividing your portfolio into parts with different characteristics. You should consider the risk of your whole portfolio instead. It sounds like you're willing to take an extra 10% loss, so the standard advice around here is to hold fewer bonds/cash and increase your equity allocation by 20%. If you're already at >80%, then leverage is what you want.

All of this advice assumes you're willing to pass on the possibility of winning the lottery. Again, most people around here are happy with that tradeoff -- investment vs speculation. And you will, on average, get a more reliably better return by just turning up equity allocation then trying to bet on risky individual stocks.

If you are determined to play a lottery, then it really comes down to luck I think. Good luck.

I see your point, but I am currently 100% stocks, and the idea of leverage on index funds or small cap tilts doesn’t interest me as much as holding onto a small group of stocks that are very high risk/ high reward plays
absolute zero
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by absolute zero »

luckyducky99 wrote: Sun Oct 11, 2020 11:15 pm
There's a cognitive / behavioral mistake hidden in here, which is that you're saying "I'm willing to take a lot of risk with 10% of my portfolio, but that's ok because the other 90% of my portfolio has the right amount of risk for me." This is mental accounting, arbitrarily and subjectively dividing your portfolio into parts with different characteristics. You should consider the risk of your whole portfolio instead. It sounds like you're willing to take an extra 10% loss, so the standard advice around here is to hold fewer bonds/cash and increase your equity allocation by 20%. If you're already at >80%, then leverage is what you want.
+1

Increasing equity (even if that means using leverage) would be the best option. Could also overweight equities that have historically had high returns (eg value and emerging markets).

OP, I hope you can clearly explain the difference between risks that are compensated, and those that are not? There’s a reason that the members of this forum who seek aggressive portfolios don’t typically try to pick individual stocks.
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by absolute zero »

Nathan Drake wrote: Sun Oct 11, 2020 11:23 pm
luckyducky99 wrote: Sun Oct 11, 2020 11:15 pm The problem is with this part:
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm "in a risky basket of stocks, hoping to get a 10X multiplier"
because you're never going to get 10x from the whole basket. If you're lucky, you get one or two winners. My dad does this. Yeah, he did really well investing in Amgen and Starbux in the late 90s and still holds them. He likes to talk about them. How many others does he still talk about? None. He also used to talk about a company called Evergreen Solar. It no longer exists (and not because it got bought out). I haven't asked because it's none of my business, but I suspect he's done worse than the market, and I know (based on my parents' lifestyle) that he never "hit it big".

Basically, the dispersion of outcomes from this kind of strategy skews overwhelmingly negative, because most of the time you don't even get the one or two winners.
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm If I lose that amount of money, then I'd be OK with that because it really doesn't meaningfully deplete the rest of my portfolio.
There's a cognitive / behavioral mistake hidden in here, which is that you're saying "I'm willing to take a lot of risk with 10% of my portfolio, but that's ok because the other 90% of my portfolio has the right amount of risk for me." This is mental accounting, arbitrarily and subjectively dividing your portfolio into parts with different characteristics. You should consider the risk of your whole portfolio instead. It sounds like you're willing to take an extra 10% loss, so the standard advice around here is to hold fewer bonds/cash and increase your equity allocation by 20%. If you're already at >80%, then leverage is what you want.

All of this advice assumes you're willing to pass on the possibility of winning the lottery. Again, most people around here are happy with that tradeoff -- investment vs speculation. And you will, on average, get a more reliably better return by just turning up equity allocation then trying to bet on risky individual stocks.

If you are determined to play a lottery, then it really comes down to luck I think. Good luck.

I see your point, but I am currently 100% stocks, and the idea of leverage on index funds or small cap tilts doesn’t interest me as much as holding onto a small group of stocks that are very high risk/ high reward plays
Well, if you’re just going for what “interests you” then it’s hard to give advice. Small value / emerging markets / leverage are all ways to couple the extra risk with extra *expected return*. I’m afraid that what you’re proposing is just to load up on idiosyncratic risk, which is kind of pointless IMHO. But if it’s just for fun, then go for it I guess.
000
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by 000 »

Small, value, and emerging are not good ways to increase expected return IMO.

It's unclear that small and value will offer a risk premium in the future.

The risk of emerging markets is not (fully) compensated by the market unless you live there.
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by JoMoney »

I had a portfolio of individual stocks for several years, early 2000's to 2008. My results were mixed, I did have slightly higher but close to market returns over that period, I don't know what the 'standard deviation' of the portfolio was, I expect I probably did have lower "risk adjusted returns" then the broad market even if I did have slightly higher absolute returns. I know I had a few stocks that took some wild rides. I also know that I didn't have any special information or any reason to believe my stock picks or ability to price things were at all better then a coin a flip. There was some fun in it, but it was the same rush that comes from making other sorts of gambling bets... not really the sort of thing I wanted in my investment portfolio. I had more than a handful of behavioral issues from stock picking and 'playing' with my portfolio. I think most people would be in the same boat, in that they don't have any special information or reason to believe their picks are giving them any sort of advantage - at best they're adding a coin-flip risk to the portfolio, and there is at least some chance they're at a disadvantage to people that do have better information.
I think people should take Benjamin Graham's advice...
Benjamin Graham in The Intelligent Investor wrote:Investment policy, as it has been developed here, depends in the first place on a choice by the investor of either the defensive (passive) or aggressive (enterprising) role. The aggressive investor must have a considerable knowledge of security values—enough, in fact, to warrant viewing his security operations as equivalent to a business enterprise. There is no room in this philosophy for a middle ground, or a series of gradations, between the passive and aggressive status. Many, perhaps most, investors seek to place themselves in such an intermediate category; in our opinion that is a compromise that is more likely to produce disappointment than achievement.
As an investor you cannot soundly become “half a businessman,” expecting thereby to achieve half the normal rate of business profits on your funds.
It follows from this reasoning that the majority of security owners should elect the defensive classification. ...
... and they should stoutly resist the recurrent temptation to increase this return by deviating into other paths.
"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: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by Exchme »

Nathan Drake wrote: Sun Oct 11, 2020 11:23 pm
luckyducky99 wrote: Sun Oct 11, 2020 11:15 pm The problem is with this part:
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm "in a risky basket of stocks, hoping to get a 10X multiplier"
because you're never going to get 10x from the whole basket. If you're lucky, you get one or two winners. My dad does this. Yeah, he did really well investing in Amgen and Starbux in the late 90s and still holds them. He likes to talk about them. How many others does he still talk about? None. He also used to talk about a company called Evergreen Solar. It no longer exists (and not because it got bought out). I haven't asked because it's none of my business, but I suspect he's done worse than the market, and I know (based on my parents' lifestyle) that he never "hit it big".

Basically, the dispersion of outcomes from this kind of strategy skews overwhelmingly negative, because most of the time you don't even get the one or two winners.
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm If I lose that amount of money, then I'd be OK with that because it really doesn't meaningfully deplete the rest of my portfolio.
There's a cognitive / behavioral mistake hidden in here, which is that you're saying "I'm willing to take a lot of risk with 10% of my portfolio, but that's ok because the other 90% of my portfolio has the right amount of risk for me." This is mental accounting, arbitrarily and subjectively dividing your portfolio into parts with different characteristics. You should consider the risk of your whole portfolio instead. It sounds like you're willing to take an extra 10% loss, so the standard advice around here is to hold fewer bonds/cash and increase your equity allocation by 20%. If you're already at >80%, then leverage is what you want.

All of this advice assumes you're willing to pass on the possibility of winning the lottery. Again, most people around here are happy with that tradeoff -- investment vs speculation. And you will, on average, get a more reliably better return by just turning up equity allocation then trying to bet on risky individual stocks.

If you are determined to play a lottery, then it really comes down to luck I think. Good luck.

I see your point, but I am currently 100% stocks, and the idea of leverage on index funds or small cap tilts doesn’t interest me as much as holding onto a small group of stocks that are very high risk/ high reward plays
You seem t have already made up your mind. I agree with the other posters that you should track your performance. Most folks hold stinkers too long and sell winners too soon.

You are on your way to a good financial life with the discipline you have shown so far, personally I would dance with who brung ya and stick with the index funds.
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by FrugalInvestor »

I had a little "play money" once. I retired early, but it was due to living beneath my means (which translated to a high savings rate) and investing in a Boglehead fashion, not my play money. Fortunately I tired of the idea pretty quickly and went back to the slow and steady approach exclusively.

I don't recommend trying to strike it rich quick with even a small portion of your investments, but if you must keep the bet to 5% or less and plan on losing most of it.

See the following thread for more discussion on the topic....
viewtopic.php?p=5543148#p5543148
Have a plan, stay the course and simplify, but most importantly....Ignore the Noise!
hnd
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by hnd »

If the work is fun have at it. track your outcomes. if you succeed at beating the rest of your portfolio congrats! if you don't but had fun doing it, thats how life works.
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by jebmke »

flaccidsteele wrote: Sun Oct 11, 2020 11:05 pm Why have play money when it’s so simple to make money without playing?
It is also simple to play without money.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by flaccidsteele »

jebmke wrote: Mon Oct 12, 2020 8:16 am
flaccidsteele wrote: Sun Oct 11, 2020 11:05 pm Why have play money when it’s so simple to make money without playing?
It is also simple to play without money.
+1 true!
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by 260chrisb »

000 wrote: Sun Oct 11, 2020 9:27 pm I am fine with individual stocks, but not with the concept of Play Money.

All my money matters to me.

If I'm going to play with my money, it will be by spending it.

When I buy individual stocks, it is to implement a passive tilt not available in a low cost fund or because I believe I have found a truly compelling opportunity. It is never for fun.
I agree with this in total. Having 5-10% of your portfolio in stocks may be a bit strong and I wonder how you got to the point of a NW of just over seven figures at your age to begin with. You've done well; perhaps more of the same is in order. The other problem is what your mindset becomes if you actually lose half or more of this "play money" if your picks don't work out? Generally the reaction is to pick some more stocks to make up for the losses. Buy some stocks, but by them for the long term and as an investment and not as "play money". Good luck.
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by ChrisBenn »

I don't like representing this as part of the AA. Are you going to rebalance into/out of it each year? (if so, it's now much more than 5-10% over your lifetime potentially).

If this is a one time thing does that mean if you go bust you are swearing this off in perpetuity? I am dubious that this is true.

I would instead budget for this like you would any hobby. That probably means a fixed $$$ expense instead of a percentage. Have fun with it with no rationalization needed.
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by MrBeaver »

Here is what I do, in case it helps:
  • N% play money initially sequestered
  • Each year, if it falls below N% of my portfolio, I will contribute up to N% of my yearly contributions only up to the point where it represents N% of my portfolio. For example, if my portfolio is $1M and N = 5%, then if the balance is 46k, I will contribute a maximum of $4k to get to the $50k target balance, or the maximum of say, $2.5k because my total long-term savings that year was $50k, so I will contribute no more than 5% of that. In this case, I'd contribute $2.5k to a balance of $48.5k. Likewise, if the balance was >$50k, I would not contribute anything.
  • I spend no more than 2 hours per quarter 'looking at' or 'deciding' what to do with this portion of my portfolio. I don't want another job, and I don't want to become a day trader.
  • If the balance ever falls below 75% of my N% target allocation, I will stop, abandon this, and dump it back into my indexed portfolio.
For me, the motivation is actually to give me a 'release valve' for emotionally thinking I can beat the market. That release valve helps me stay committed to my indexed asset allocation. If I can get better returns (or much more likely, get lucky), then it doesn't ever hurt me. If I can't, then it hurts me by a maximum of 25% of my chosen N%. Since I started this five years ago, this portion of my portfolio is about 1.2x of N% after not contributing to it for the last two years. I freely admit that's probably mostly luck. But the rationale is it allows me to more confidently stick to my long-term indexed AA and rebalancing plan even when I have 'emotional' swings that "I know better than myself".
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by MarkRoulo »

Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm I'm grateful for where I am, but I'm wondering if it makes sense to take a LITTLE more risk with a part of my portfolio? My NW is just a tad over 7 figures, so we would be talking about investing $50-100K in a risky basket of stocks, hoping to get a 10X multiplier over the coming decade in high-risk, high-potential companies that haven't already broken out completely (think: things that have recently IPO'd such as Palantir). If I lose that amount of money, then I'd be OK with that because it really doesn't meaningfully deplete the rest of my portfolio.
It does NOT make sense because investing in individual stocks gets you uncompensated stock market risk. Which means that your risk/reward ratio goes in the wrong direction.

So if you are just trying to maximize your expected return then this is a sub-optimal strategy.

If your motivation is something else then this might make sense, just don't fool yourself about it making sense from a strictly financial return standpoint.

And, to provide some humble-brag (as well as a funny story illustrating the best way to do stock market analysis), my last adventure doing something like this:

http://mistybeach.com/mark/#How_To_Pick_Stocks
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by David Jay »

Nathan Drake wrote: Sun Oct 11, 2020 11:23 pm
luckyducky99 wrote: Sun Oct 11, 2020 11:15 pm The problem is with this part:
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm "in a risky basket of stocks, hoping to get a 10X multiplier"
because you're never going to get 10x from the whole basket. If you're lucky, you get one or two winners. My dad does this. Yeah, he did really well investing in Amgen and Starbux in the late 90s and still holds them. He likes to talk about them. How many others does he still talk about? None. He also used to talk about a company called Evergreen Solar. It no longer exists (and not because it got bought out). I haven't asked because it's none of my business, but I suspect he's done worse than the market, and I know (based on my parents' lifestyle) that he never "hit it big".

Basically, the dispersion of outcomes from this kind of strategy skews overwhelmingly negative, because most of the time you don't even get the one or two winners.
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm If I lose that amount of money, then I'd be OK with that because it really doesn't meaningfully deplete the rest of my portfolio.
There's a cognitive / behavioral mistake hidden in here, which is that you're saying "I'm willing to take a lot of risk with 10% of my portfolio, but that's ok because the other 90% of my portfolio has the right amount of risk for me." This is mental accounting, arbitrarily and subjectively dividing your portfolio into parts with different characteristics. You should consider the risk of your whole portfolio instead. It sounds like you're willing to take an extra 10% loss, so the standard advice around here is to hold fewer bonds/cash and increase your equity allocation by 20%. If you're already at >80%, then leverage is what you want.

All of this advice assumes you're willing to pass on the possibility of winning the lottery. Again, most people around here are happy with that tradeoff -- investment vs speculation. And you will, on average, get a more reliably better return by just turning up equity allocation then trying to bet on risky individual stocks.

If you are determined to play a lottery, then it really comes down to luck I think. Good luck.

I see your point, but I am currently 100% stocks, and the idea of leverage on index funds or small cap tilts doesn’t interest me as much as holding onto a small group of stocks that are very high risk/ high reward plays
You are starting from the assumption that you can select a small group of stocks that will outperform the market. Having tried, I can tell you that the odds of getting even one “ten bagger” is low. And if you hold 10 stocks, then one 10x stock will only double your money. And if that money is only 5% of your portfolio then you have only increased your portfolio earnings by 10%.

You are buying into a dream, just like buying a lottery ticket. But it’s your money and your choice, clearly you are enamored with this thought such that it doesn’t matter what folks say on this thread.

Keep good records and re-evaluate after 5 years. It won’t look as appealing by then if you actually keep good records. See you in 2025 :wink:
Last edited by David Jay on Mon Oct 12, 2020 9:54 am, edited 1 time in total.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by pasadena »

000 wrote: Sun Oct 11, 2020 9:27 pm All my money matters to me.

If I'm going to play with my money, it will be by spending it.
Of course it does matter. I consider my "play money" as an actual expense. I spent it by buying some stocks, and I'm enjoying the game.
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by TheoLeo »

Over the last decade, the total return of the S&P 500 provided a 4x on your initial investment. How many stocks within the universe of stocks you would chose from (US total stock market?) provided a total return of >4x within the last decade? Maybe it helps to actually know the chance of picking a winner.
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by hagridshut »

Nathan Drake wrote: Sun Oct 11, 2020 3:16 pmwe would be talking about investing $50-100K in a risky basket of stocks, hoping to get a 10X multiplier over the coming decade in high-risk, high-potential companies that haven't already broken out completely (think: things that have recently IPO'd such as Palantir).

I know this is a very common topic, but I'm curious of those that have employed the strategy and whether they've been happy with the results (may be biased due to the performance of some hot stocks the past 10 years).
I recommend only doing this with companies in industries where you have very detailed knowledge that may not be apparent to others, and in which you have very high conviction. It is mentally very difficult to stick with a stock that may underperform for years, like AMZN, before the market wakes up and realizes that they have built something very valuable.

I know people who've owned shares of AMZN or TSLA, but they didn't have the knowledge or conviction to hold the shares long enough to realize any big gains. They got impatient, or scared by fearmongering Mainstream Media reports, or rattled by Wall Street "analysts" on TV who bashed the stock.

I don't discourage people from investing in game changing companies, but I do think that everyone should know that it is not an easy or quick process to get a 10x ROI. Results are also never guaranteed.
First Principles: (1) Diversify (2) Low Cost (3) Stay the Course | 3-Fund Index Portfolio
Topic Author
Nathan Drake
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by Nathan Drake »

David Jay wrote: Mon Oct 12, 2020 9:52 am
Nathan Drake wrote: Sun Oct 11, 2020 11:23 pm
luckyducky99 wrote: Sun Oct 11, 2020 11:15 pm The problem is with this part:
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm "in a risky basket of stocks, hoping to get a 10X multiplier"
because you're never going to get 10x from the whole basket. If you're lucky, you get one or two winners. My dad does this. Yeah, he did really well investing in Amgen and Starbux in the late 90s and still holds them. He likes to talk about them. How many others does he still talk about? None. He also used to talk about a company called Evergreen Solar. It no longer exists (and not because it got bought out). I haven't asked because it's none of my business, but I suspect he's done worse than the market, and I know (based on my parents' lifestyle) that he never "hit it big".

Basically, the dispersion of outcomes from this kind of strategy skews overwhelmingly negative, because most of the time you don't even get the one or two winners.
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm If I lose that amount of money, then I'd be OK with that because it really doesn't meaningfully deplete the rest of my portfolio.
There's a cognitive / behavioral mistake hidden in here, which is that you're saying "I'm willing to take a lot of risk with 10% of my portfolio, but that's ok because the other 90% of my portfolio has the right amount of risk for me." This is mental accounting, arbitrarily and subjectively dividing your portfolio into parts with different characteristics. You should consider the risk of your whole portfolio instead. It sounds like you're willing to take an extra 10% loss, so the standard advice around here is to hold fewer bonds/cash and increase your equity allocation by 20%. If you're already at >80%, then leverage is what you want.

All of this advice assumes you're willing to pass on the possibility of winning the lottery. Again, most people around here are happy with that tradeoff -- investment vs speculation. And you will, on average, get a more reliably better return by just turning up equity allocation then trying to bet on risky individual stocks.

If you are determined to play a lottery, then it really comes down to luck I think. Good luck.

I see your point, but I am currently 100% stocks, and the idea of leverage on index funds or small cap tilts doesn’t interest me as much as holding onto a small group of stocks that are very high risk/ high reward plays
You are starting from the assumption that you can select a small group of stocks that will outperform the market. Having tried, I can tell you that the odds of getting even one “ten bagger” is low. And if you hold 10 stocks, then one 10x stock will only double your money. And if that money is only 5% of your portfolio then you have only increased your portfolio earnings by 10%.

You are buying into a dream, just like buying a lottery ticket. But it’s your money and your choice, clearly you are enamored with this thought such that it doesn’t matter what folks say on this thread.

Keep good records and re-evaluate after 5 years. It won’t look as appealing by then if you actually keep good records. See you in 2025 :wink:

Good point.

I guess what started this thread is the fact that I’ve been a fan of Tesla since their inception, but decided to not invest because at the time (2008) I was just starting my career and went 100% boglehead (the right move) to get a firm financial foundation

Seeing their meteoric rise has left me with some regret about not putting in a very small allocation to companies I truly believe in, and holding them through thick and thin.
tesuzuki2002
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by tesuzuki2002 »

David Jay wrote: Sun Oct 11, 2020 9:17 pm Nathan: Speaking as a recovering stock picker, make certain that you accurately track your performance.

You will hear lots of people say that they are “pleased” with their performance. I know I was. My portfolio was growing nicely.

Until I was challenged by an early back-and-forth with a regular here at BH to actually benchmark my performance. I was running a full percentage point per year behind the SP500 over the previous 5 years. But in the 2009 - 2015 period (rebounding from the financial crisis) that was still great growth so I thought I was a great stock picker.
I second this!!! Make sure you are tracking performance and after 5 years see if you are beating "the market"

Reevaluate from there...
RickyAZ
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by RickyAZ »

It's fine. Keep the % modest, best to do it in an account outside your safe $. Never raid that part of your portfolio. Create some rules and stick to them. Use limit orders to protect against the downside. Take some profits from part of your winners Sounds like you don't even care if you beat the market but are more interested in focusing in on specific companies. You'll likely have a few winners and some stinkers but that's part of the process.
You are way ahead of most people in your age bracket. Enjoy your life
KlangFool
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by KlangFool »

Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm
My NW is just a tad over 7 figures, so we would be talking about investing $50-100K in a risky basket of stocks, hoping to get a 10X multiplier over the coming decade in high-risk, high-potential companies that haven't already broken out completely

Nathan Drake,


Just do some calculations and you will know that it is waste of time.


Let's assume that you put 1% on each stock and you have 10 stocks. Total = 10%.


Let's assume that you are lucky and 50% of the stock works out and you get 10X in 10 years and the other 50% goes to zero.


So, you get 5% X 10 = 50% over 10 years. Aka, you get 5% extra per year over 10 years. How does this matter? It would not improve your financial well being at all. It is a non-starter.


If you want to gamble, make sure that the reward is worth your effort. If not, just buy a lottery ticket.


KlangFool
Keenobserver
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by Keenobserver »

How about higher risks ETFs? Still better than individual stocks. Disclaimer: I have some airline stocks plus GE..up between 26% to 10 % minus GE..ARKK perhaps?
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Brianmcg321
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by Brianmcg321 »

Get a boat if you want something to play with.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
rockstar
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by rockstar »

The problem is when the play money grows faster than the rest of your portfolio. I put 5% into AMZN. It's now 9% of my portfolio. I put 5% into TQQQ. It's now 7% of my portfolio. The challenge is when to sell these.
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goingup
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by goingup »

Nathan Drake wrote: Mon Oct 12, 2020 10:33 am Seeing their meteoric rise has left me with some regret about not putting in a very small allocation to companies I truly believe in, and holding them through thick and thin.
Holding individual stocks takes a certain faith, or composure that I don't have. Many of us were like you and had FOMO. I bought tech stocks and go-go Janus funds around 2000. When my stocks/funds plummeted I couldn't decide if I should buy more, hold or exit. Now we hold only broad market index funds and never have that anxiety.

I personally don't think there's much harm in using 5-10% of your investable assets to buy stocks. You'll figure out in a year or two if you like the constant refrain of either buy, sell or hold. :wink:
GoldenGoose
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by GoldenGoose »

Nathan Drake wrote: Sun Oct 11, 2020 11:23 pm I see your point, but I am currently 100% stocks, and the idea of leverage on index funds or small cap tilts doesn’t interest me as much as holding onto a small group of stocks that are very high risk/ high reward plays
If you know what you are doing and be careful about what you are going to do, then go for it! Some people prefer the boring passive index fund investing. Some people are more adventurous. It's your money.
langlands
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by langlands »

You need to explain your aversion to leverage. Leverage is much much more likely to bring you success than randomly picking a group of high risk stocks. If you're not comfortable taking actual leverage, consider a fund like UPRO or TQQQ. There are only two reasons to buy individual stocks: you think you know how to pick winners or you simply like following individual companies. If you just want to make a speculative play, leverage is the obvious choice.

This is especially so because of two reasons:

1) When I hear "play money," I presume the idea is the person wants to take a bit of risk so that there's a good chance there's going to be a large pot of gold at the end of the rainbow (in say 20-30 years). Historically, the leverage ratio on the S&P 500 that optimized the geometric growth rate was somewhere between 1.5 and 2. It turns out that geometric growth rate is exactly the thing that maximizes the median outcome.

2) Since you are young, financially secure, and have a steady job, you are a perfect candidate for lifecycle investing. Long story short, lifecycle investing tells you to use more leverage when young and to slowly deleverage as you get older or approach your financial goals.

In short, there are very good non-speculative reasons to use leverage, especially for someone in your position. The fact that you want to speculate makes the decision that much easier.
KlangFool
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by KlangFool »

rockstar wrote: Mon Oct 12, 2020 11:09 am The problem is when the play money grows faster than the rest of your portfolio. I put 5% into AMZN. It's now 9% of my portfolio. I put 5% into TQQQ. It's now 7% of my portfolio. The challenge is when to sell these.

rockstar,

You need a trading rule to play this kind of game. In my case, when it triples, I sell half of my holding.

KlangFool
BogleFan510
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by BogleFan510 »

hagridshut wrote: Mon Oct 12, 2020 10:23 am
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pmwe would be talking about investing $50-100K in a risky basket of stocks, hoping to get a 10X multiplier over the coming decade in high-risk, high-potential companies that haven't already broken out completely (think: things that have recently IPO'd such as Palantir).

I know this is a very common topic, but I'm curious of those that have employed the strategy and whether they've been happy with the results (may be biased due to the performance of some hot stocks the past 10 years).
I recommend only doing this with companies in industries where you have very detailed knowledge that may not be apparent to others, and in which you have very high conviction. It is mentally very difficult to stick with a stock that may underperform for years, like AMZN, before the market wakes up and realizes that they have built something very valuable.

I know people who've owned shares of AMZN or TSLA, but they didn't have the knowledge or conviction to hold the shares long enough to realize any big gains. They got impatient, or scared by fearmongering Mainstream Media reports, or rattled by Wall Street "analysts" on TV who bashed the stock.

I don't discourage people from investing in game changing companies, but I do think that everyone should know that it is not an easy or quick process to get a 10x ROI. Results are also never guaranteed.
+1

I dont think as an earlier poster said that these bets skew negative, they are just higher varience (assuming one buys and never sells until money needed).

Agree patience is needed.

decided to remove too much personal info about 2 50x plus gains I held.
Last edited by BogleFan510 on Mon Oct 12, 2020 11:47 am, edited 2 times in total.
rockstar
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by rockstar »

KlangFool wrote: Mon Oct 12, 2020 11:36 am
rockstar wrote: Mon Oct 12, 2020 11:09 am The problem is when the play money grows faster than the rest of your portfolio. I put 5% into AMZN. It's now 9% of my portfolio. I put 5% into TQQQ. It's now 7% of my portfolio. The challenge is when to sell these.

rockstar,

You need a trading rule to play this kind of game. In my case, when it triples, I sell half of my holding.

KlangFool
I have one for TQQQ. I don't have one for AMZN. I'll figure it out.
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firebirdparts
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by firebirdparts »

I do a lot of things that are interesting to me, and it costs money. In fact, I do a lot of things that cost money that I don't even want to do. To me, unwise investing can be put in a place where it's not really a special category of entertainment. There have been times that investing was interesting to me, and times when it's not. Right now, it's interesting to me.

Your question about "makes sense," I would not have asked. I would not put it in those terms. I just do it because I think it's interesting, and I never defend what I do. It's just a waste of time. Somebody is going to crap on whatever you do.

I have been trying to learn how options "work" and particularly how the prices move. This is basically degenerate gambling. I would never recommend nor defend doing that, but it's not boring. I think I am readily able to limit the downside, and in fact, I don't even use margin. I don't think I'm a natural born gambling addict, but I could be proved wrong.
A fool and your money are soon partners
BogleFan510
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by BogleFan510 »

firebirdparts wrote: Mon Oct 12, 2020 12:03 pm I do a lot of things that are interesting to me, and it costs money. In fact, I do a lot of things that cost money that I don't even want to do. To me, unwise investing can be put in a place where it's not really a special category of entertainment. There have been times that investing was interesting to me, and times when it's not. Right now, it's interesting to me.

Your question about "makes sense," I would not have asked. I would not put it in those terms. I just do it because I think it's interesting, and I never defend what I do. It's just a waste of time. Somebody is going to crap on whatever you do.

I have been trying to learn how options "work" and particularly how the prices move. This is basically degenerate gambling. I would never recommend nor defend doing that, but it's not boring. I think I am readily able to limit the downside, and in fact, I don't even use margin. I don't think I'm a natural born gambling addict, but I could be proved wrong.
As a note. Indvidual stock picking with about 5% of assets and holding 10+ yrs has added roughly 20% to our net worth. Options writing on that 5% play money on those investments cost me roughly an additional 20% upside of net worth that would have been on top of the 20%.

Investing and holding is generally a fair, efficient and open market for you to use your brain and gain value from it. You might be right or wrong and varience is high, but you have a fair shot.

Options markets are shark filled pools, not efficient, and filled with pros with superior information who know how to price and manipulate the inefficiencies. Despite having worked for and with large trading institutions in my job, I stupidly participated in those spaces with 'play money.' I lost significant value overall with options (made money, but gave up upside worth more by writing covered calls). Be very careful with options. I don't recommend it.
Last edited by BogleFan510 on Mon Oct 12, 2020 12:12 pm, edited 1 time in total.
langlands
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by langlands »

BogleFan510 wrote: Mon Oct 12, 2020 12:09 pm
firebirdparts wrote: Mon Oct 12, 2020 12:03 pm I do a lot of things that are interesting to me, and it costs money. In fact, I do a lot of things that cost money that I don't even want to do. To me, unwise investing can be put in a place where it's not really a special category of entertainment. There have been times that investing was interesting to me, and times when it's not. Right now, it's interesting to me.

Your question about "makes sense," I would not have asked. I would not put it in those terms. I just do it because I think it's interesting, and I never defend what I do. It's just a waste of time. Somebody is going to crap on whatever you do.

I have been trying to learn how options "work" and particularly how the prices move. This is basically degenerate gambling. I would never recommend nor defend doing that, but it's not boring. I think I am readily able to limit the downside, and in fact, I don't even use margin. I don't think I'm a natural born gambling addict, but I could be proved wrong.
As a note. Indvidual stock picking with about 5% of assets and holding 10+ yrs has added roughly 20% to our net worth. Options writing on that 5% play money on those investments cost me roughly an additional 20% upside of net worth that would have been on top of the 20%.

Investing and holding is generally a fair, efficient and open market for you to use your brain and gain value from it. You might be right or wrong and varience is high, but you have a fair shot.

Options markets are shark filled pools, not efficient, and filled with pros with superior information who know how to price and manipulate the inefficiencies. Despite having worked for and with large trading institutions in my job, I stupidly participated in those spaces with 'play money.' I lost significant value overall with options (made money, but gave up upside worth more by writing covered calls). Be very careful with options. I don't recommend it.
Efficiency and bid/ask spread usually go hand in hand no? I don't think there's much to worry about buying SPY calls or puts for instance. You do have to be a bit careful about your limit orders (market orders can often be a bad idea). I think there are enough options market makers around so that on the liquid underlyings, the market is fairly efficient. What I mean by this is that buying LEAPs that expire in a year or two on SPY or even on AAPL or AMZN is perfectly fine. Yes, you will get absolutely fleeced if you try to day trade options or mess around with 0 DTE (days to expiration) options that a particular subreddit likes to do.
Topic Author
Nathan Drake
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by Nathan Drake »

langlands wrote: Mon Oct 12, 2020 11:32 am You need to explain your aversion to leverage. Leverage is much much more likely to bring you success than randomly picking a group of high risk stocks. If you're not comfortable taking actual leverage, consider a fund like UPRO or TQQQ. There are only two reasons to buy individual stocks: you think you know how to pick winners or you simply like following individual companies. If you just want to make a speculative play, leverage is the obvious choice.

This is especially so because of two reasons:

1) When I hear "play money," I presume the idea is the person wants to take a bit of risk so that there's a good chance there's going to be a large pot of gold at the end of the rainbow (in say 20-30 years). Historically, the leverage ratio on the S&P 500 that optimized the geometric growth rate was somewhere between 1.5 and 2. It turns out that geometric growth rate is exactly the thing that maximizes the median outcome.

2) Since you are young, financially secure, and have a steady job, you are a perfect candidate for lifecycle investing. Long story short, lifecycle investing tells you to use more leverage when young and to slowly deleverage as you get older or approach your financial goals.

In short, there are very good non-speculative reasons to use leverage, especially for someone in your position. The fact that you want to speculate makes the decision that much easier.
I guess my aversion to leverage is not fully understanding the mechanics. I’ve avoided it due to perceived risks of margin calls, etc.

If there’s an easy way to add leverage in a Bogleheads manner, I’m all ears
Topic Author
Nathan Drake
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by Nathan Drake »

BogleFan510 wrote: Mon Oct 12, 2020 11:39 am
hagridshut wrote: Mon Oct 12, 2020 10:23 am
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pmwe would be talking about investing $50-100K in a risky basket of stocks, hoping to get a 10X multiplier over the coming decade in high-risk, high-potential companies that haven't already broken out completely (think: things that have recently IPO'd such as Palantir).

I know this is a very common topic, but I'm curious of those that have employed the strategy and whether they've been happy with the results (may be biased due to the performance of some hot stocks the past 10 years).
I recommend only doing this with companies in industries where you have very detailed knowledge that may not be apparent to others, and in which you have very high conviction. It is mentally very difficult to stick with a stock that may underperform for years, like AMZN, before the market wakes up and realizes that they have built something very valuable.

I know people who've owned shares of AMZN or TSLA, but they didn't have the knowledge or conviction to hold the shares long enough to realize any big gains. They got impatient, or scared by fearmongering Mainstream Media reports, or rattled by Wall Street "analysts" on TV who bashed the stock.

I don't discourage people from investing in game changing companies, but I do think that everyone should know that it is not an easy or quick process to get a 10x ROI. Results are also never guaranteed.
+1

I dont think as an earlier poster said that these bets skew negative, they are just higher varience (assuming one buys and never sells until money needed).

Agree patience is needed.

decided to remove too much personal info about 2 50x plus gains I held.
Interested in hearing more about your 50X plays....can you comment without it being too personal?
langlands
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by langlands »

Nathan Drake wrote: Mon Oct 12, 2020 12:47 pm
langlands wrote: Mon Oct 12, 2020 11:32 am You need to explain your aversion to leverage. Leverage is much much more likely to bring you success than randomly picking a group of high risk stocks. If you're not comfortable taking actual leverage, consider a fund like UPRO or TQQQ. There are only two reasons to buy individual stocks: you think you know how to pick winners or you simply like following individual companies. If you just want to make a speculative play, leverage is the obvious choice.

This is especially so because of two reasons:

1) When I hear "play money," I presume the idea is the person wants to take a bit of risk so that there's a good chance there's going to be a large pot of gold at the end of the rainbow (in say 20-30 years). Historically, the leverage ratio on the S&P 500 that optimized the geometric growth rate was somewhere between 1.5 and 2. It turns out that geometric growth rate is exactly the thing that maximizes the median outcome.

2) Since you are young, financially secure, and have a steady job, you are a perfect candidate for lifecycle investing. Long story short, lifecycle investing tells you to use more leverage when young and to slowly deleverage as you get older or approach your financial goals.

In short, there are very good non-speculative reasons to use leverage, especially for someone in your position. The fact that you want to speculate makes the decision that much easier.
I guess my aversion to leverage is not fully understanding the mechanics. I’ve avoided it due to perceived risks of margin calls, etc.

If there’s an easy way to add leverage in a Bogleheads manner, I’m all ears
That is perfectly understandable. As I said in my post, UPRO and TQQQ make a lot of sense then. From a mechanics standpoint, it's just an ETF and there's no risk of losing more than you put in. You can also buy call options on QQQ or SPY if you are comfortable with that (also no margin risk).

A reasonable mathematical understanding of how leverage affects returns is probably a good idea. The most important concept is volatility drag. If you don't understand this, you will probably be surprised by how the returns of the leveraged product relate to the underlying unleveraged one. A good thing to figure out is why VOO is back to all time highs this year but UPRO is not. Having said all this, I believe that even if you don't understand any of this, a 50/50 initial allocation to UPRO/TQQQ without any sort of rebalancing has a much higher chance of becoming a 10x bagger than a random selection of risky stocks.
Bill2020
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by Bill2020 »

Brianmcg321 wrote: Mon Oct 12, 2020 11:08 am Get a boat if you want something to play with.
Having owned a few boats...

BOAT = Break out another thousand.

Two best days owning a boat - the day you buy it and the day you sell it.
GoldenGoose
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by GoldenGoose »

KlangFool wrote: Mon Oct 12, 2020 11:36 am
rockstar wrote: Mon Oct 12, 2020 11:09 am The problem is when the play money grows faster than the rest of your portfolio. I put 5% into AMZN. It's now 9% of my portfolio. I put 5% into TQQQ. It's now 7% of my portfolio. The challenge is when to sell these.

rockstar,

You need a trading rule to play this kind of game. In my case, when it triples, I sell half of my holding.

KlangFool
Why would you want to sell solely based on price alone? If so then you would miss out a lot on MSFT, AAPL, AMZN when these companies were still in their growth trajectory.
GoldenGoose
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by GoldenGoose »

Bill2020 wrote: Mon Oct 12, 2020 1:33 pm
Brianmcg321 wrote: Mon Oct 12, 2020 11:08 am Get a boat if you want something to play with.
Having owned a few boats...

BOAT = Break out another thousand.

Two best days owning a boat - the day you buy it and the day you sell it.
I don't know but 2 of my neighbors have brand new, cool looking boats sitting in their driveway. They seem to enjoy owning their boat.
KlangFool
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by KlangFool »

GoldenGoose wrote: Mon Oct 12, 2020 1:33 pm
KlangFool wrote: Mon Oct 12, 2020 11:36 am
rockstar wrote: Mon Oct 12, 2020 11:09 am The problem is when the play money grows faster than the rest of your portfolio. I put 5% into AMZN. It's now 9% of my portfolio. I put 5% into TQQQ. It's now 7% of my portfolio. The challenge is when to sell these.

rockstar,

You need a trading rule to play this kind of game. In my case, when it triples, I sell half of my holding.

KlangFool
Why would you want to sell solely based on price alone? If so then you would miss out a lot on MSFT, AAPL, AMZN when these companies were still in their growth trajectory.
GoldenGoose,

I would not miss out on MSFT, AAPL, and AMZN since I would not buy them anyhow. I only buy stock that has the potential to go up 10X to 30X in less than 5 years.


KlangFool
rockstar
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by rockstar »

Bill2020 wrote: Mon Oct 12, 2020 1:33 pm
Brianmcg321 wrote: Mon Oct 12, 2020 11:08 am Get a boat if you want something to play with.
Having owned a few boats...

BOAT = Break out another thousand.

Two best days owning a boat - the day you buy it and the day you sell it.
I know someone that owns a boat. She loves it. She tells anyone that buys a boat that it's a bigger money pit than a home. But she loves it.

Another person I know belongs to a boat club that owns a bunch of boats. He pays a monthly membership fee for the club. He loves boating, but he doesn't want to make a huge commitment.

Sometimes you have to spend money on stuff that makes you happy but costs a lot. For me that's outdoor gear. My big splurge is cottage industry backpacking gear. DCF gear isn't cheap. But it's nowhere near as expensive as owning a plane or boat. I'd rather spend that money traveling to places to go exploring. I spend a lot in airfare every year.

It's important to know what makes you happy. I'm most happy when I'm on a trail, which happens to be really cheap. If I really want to spend a lot, I could get an off road capable vehicle, which is on my list. Thinking about getting a nice off road truck for my 50th.
Bill2020
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by Bill2020 »

Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm ...

I'm grateful for where I am, but I'm wondering if it makes sense to take a LITTLE more risk with a part of my portfolio? My NW is just a tad over 7 figures, so we would be talking about investing $50-100K in a risky basket of stocks, hoping to get a 10X multiplier over the coming decade in high-risk, high-potential companies that haven't already broken out completely (think: things that have recently IPO'd such as Palantir). If I lose that amount of money, then I'd be OK with that because it really doesn't meaningfully deplete the rest of my portfolio.

I know this is a very common topic, but I'm curious of those that have employed the strategy and whether they've been happy with the results (may be biased due to the performance of some hot stocks the past 10 years).
Nathan,

I agree with others above that this isn't play money for me. But I disagree with those that say it's impossible to beat the market. I consider myself boglehead-ish, mainly that I have always preferred indexed funds over managed funds (although I struggle to get down to 3 funds). But I also think it's possible to beat the market if you put in the work.

I started with a little less than 10% of my portfolio in 2015 and I'm current around 20% of total portfolio. My return during this time is 167% versus 65% for VTI. I have a couple of stocks up over 300% and three stocks that I lost money on. The largest loss was -83% and occurred when I was very busy with work and was not monitoring the stocks when bad news came out on that company and I didn't have a stop-loss set up.

If you are going to "play the market", I suggest you educate yourself on how to evaluate stocks/companies. To do it right you have to do your due diligence which includes listening to the earnings call (or read the transcript). You can throw darts and end up with a risky basket of stocks, but likely not going to beat the market let alone make 10x. If you educate yourself and do the analysis, you will still have a risky basket of stocks but with a much greater chance of beating the market.

Hope this helps.
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willthrill81
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Re: Individual Stocks - 5-10% of Portfolio "Play Money" - YES or NO?

Post by willthrill81 »

absolute zero wrote: Sun Oct 11, 2020 11:31 pm
Nathan Drake wrote: Sun Oct 11, 2020 11:23 pm
luckyducky99 wrote: Sun Oct 11, 2020 11:15 pm The problem is with this part:
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm "in a risky basket of stocks, hoping to get a 10X multiplier"
because you're never going to get 10x from the whole basket. If you're lucky, you get one or two winners. My dad does this. Yeah, he did really well investing in Amgen and Starbux in the late 90s and still holds them. He likes to talk about them. How many others does he still talk about? None. He also used to talk about a company called Evergreen Solar. It no longer exists (and not because it got bought out). I haven't asked because it's none of my business, but I suspect he's done worse than the market, and I know (based on my parents' lifestyle) that he never "hit it big".

Basically, the dispersion of outcomes from this kind of strategy skews overwhelmingly negative, because most of the time you don't even get the one or two winners.
Nathan Drake wrote: Sun Oct 11, 2020 3:16 pm If I lose that amount of money, then I'd be OK with that because it really doesn't meaningfully deplete the rest of my portfolio.
There's a cognitive / behavioral mistake hidden in here, which is that you're saying "I'm willing to take a lot of risk with 10% of my portfolio, but that's ok because the other 90% of my portfolio has the right amount of risk for me." This is mental accounting, arbitrarily and subjectively dividing your portfolio into parts with different characteristics. You should consider the risk of your whole portfolio instead. It sounds like you're willing to take an extra 10% loss, so the standard advice around here is to hold fewer bonds/cash and increase your equity allocation by 20%. If you're already at >80%, then leverage is what you want.

All of this advice assumes you're willing to pass on the possibility of winning the lottery. Again, most people around here are happy with that tradeoff -- investment vs speculation. And you will, on average, get a more reliably better return by just turning up equity allocation then trying to bet on risky individual stocks.

If you are determined to play a lottery, then it really comes down to luck I think. Good luck.

I see your point, but I am currently 100% stocks, and the idea of leverage on index funds or small cap tilts doesn’t interest me as much as holding onto a small group of stocks that are very high risk/ high reward plays
Well, if you’re just going for what “interests you” then it’s hard to give advice. Small value / emerging markets / leverage are all ways to couple the extra risk with extra *expected return*. I’m afraid that what you’re proposing is just to load up on idiosyncratic risk, which is kind of pointless IMHO. But if it’s just for fun, then go for it I guess.
Agreed. Using leveraged ETFs seems far more likely to lead to outsized returns than stock picking. For instance, FNGU is up over 200% this year. Very few stocks this year can make that claim.
“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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