The Dangerous Allure of Individual Stocks

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Patzer
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The Dangerous Allure of Individual Stocks

Post by Patzer »

95% of my stocks are indexed and I have fun picking undervalued companies with the rest.
I and many others have stated that having a little bit of money in individual stocks is okay, but I think there is a larger risk to having them, especially if you do well.

My individual picks have outperformed the market by 11% so far in 2022.
It's temping to feel smug right now, and it's easy to forget the years where I underperformed the market when things are going well.
There is a little voice that says, "Maybe I do know more than the market".. "Maybe I should index less".
The dangerous allure of individual stocks is that when they do well, they are very good at feeding your ego and temping you to become a worse investor.

The reality is that it's easier to make data driven decisions when I am trading 0.5-1% of my portfolio in each stock, but I would probably not be able to avoid typical behavioral mistakes if I was trading larger positions. Even if I could, it would not be worth the risk, stress, and time.

Index investing will deliver my retirement goals, but it's almost too easy.
So, even though I don't need to outperform the market, I and many other very smart people can't help but try our hand at beating lots of other very smart people.

I won't listen to my ego and I will stick with indexing, and I want to reduce the biggest risk to my investment success, myself.

I am slowly winding down my individual stocks as they reach the end point of the various theses that I am operating on.
I ended 2020 with ~90% indexed.
I ended 2021 with ~95% indexed.
I hope to end 2022 with 97-98% indexed.
sonosoldi3112
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Re: The Dangerous Allure of Individual Stocks

Post by sonosoldi3112 »

Thanks for the reminder to stick with the Indexes and not get carried away random stock picks in good times.

Timely and much appreciated.
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Re: The Dangerous Allure of Individual Stocks

Post by NoRoboGuy »

One way to look at it is that you are paying for uncompensated risk (single company risk). While you might beat the market, you did so because you "overpaid" with a disproportionate amount of risk. There is no free lunch.
There is no free lunch.
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calmaniac
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Re: The Dangerous Allure of Individual Stocks

Post by calmaniac »

NoRoboGuy wrote: Fri Jan 07, 2022 4:44 pm One way to look at it is that you are paying for uncompensated risk (single company risk). While you might beat the market, you did so because you "overpaid" with a disproportionate amount of risk. There is no free lunch.
Another "overpayment" is time. Do you really want to spend the time needed to research individual companies and monitor their financial health? When to get in and get out? I would posit that your time is more valuable than that.
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Fallible
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Re: The Dangerous Allure of Individual Stocks

Post by Fallible »

Patzer wrote: Fri Jan 07, 2022 3:45 pm ...
Index investing will deliver my retirement goals, but it's almost too easy.
...
The longer I've been indexing and the longer I endure/suffer/survive crashes and the usual volatility, the more I wonder why indexing is often considered easy (see the less-than-easy principles of the Bogleheads' investment philosophy below). To be successful, both passive and active investing require intelligence, self-knowledge, sufficient rationality, good judgement, ability and desire to learn (all hopefully leading to wisdom), resilience, discipline, patience, common sense, and luck.

The Bogleheads' Investment Philosophy:

1. Develop a workable plan
2 Invest early and often
3 Never bear too much or too little risk
4 Diversify
5 Never try to time the market
6 Use index funds when possible
7 Keep costs low
8 Minimize taxes
9 Invest with simplicity
10 Stay the course

https://www.bogleheads.org/wiki/Boglehe ... philosophy
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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arcticpineapplecorp.
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Re: The Dangerous Allure of Individual Stocks

Post by arcticpineapplecorp. »

Patzer wrote: Fri Jan 07, 2022 3:45 pm 95% of my stocks are indexed and I have fun picking undervalued companies with the rest.
I and many others have stated that having a little bit of money in individual stocks is okay, but I think there is a larger risk to having them, especially if you do well.

My individual picks have outperformed the market by 11% so far in 2022.
It's temping to feel smug right now, and it's easy to forget the years where I underperformed the market when things are going well.
There is a little voice that says, "Maybe I do know more than the market".. "Maybe I should index less".
The dangerous allure of individual stocks is that when they do well, they are very good at feeding your ego and temping you to become a worse investor.

The reality is that it's easier to make data driven decisions when I am trading 0.5-1% of my portfolio in each stock, but I would probably not be able to avoid typical behavioral mistakes if I was trading larger positions. Even if I could, it would not be worth the risk, stress, and time.

Index investing will deliver my retirement goals, but it's almost too easy.
So, even though I don't need to outperform the market, I and many other very smart people can't help but try our hand at beating lots of other very smart people.

I won't listen to my ego and I will stick with indexing, and I want to reduce the biggest risk to my investment success, myself.

I am slowly winding down my individual stocks as they reach the end point of the various theses that I am operating on.
I ended 2020 with ~90% indexed.
I ended 2021 with ~95% indexed.
I hope to end 2022 with 97-98% indexed.
Yes, your thinking is correct regarding the allure. However here's how I would think about this:
if you gamble with 5% of your money and that 5% outperformed the other 95% of your portfolio by 11% then didn't that 5% only raise your OVERALL return by 0.55%?

the math:
.11 X .05 = 0.0055 (which is 0.55%)

Was the extra risk you took with the 5% of your money worth that extra 0.55% return? (that's half of 1 percent more than you would have had).

Is that 0.55% extra return really going to move the needle?
Is that 0.55% extra return going to mean the difference between retiring vs. not retiring?
Will that 0.55% extra return get you into the hedge fund hall of fame?

No, No and No.

Remember, it's not a foregone conclusion that you'll earn that 0.55% extra return every 7 days (you posted on Jan 7), or even every year. It's possible you might underperform the market and that 5% could be a drag on returns. You'll have tracking error and it could be more significant than a 0.55% difference. You could lose 100% of your 5% gambling money.

It's also possible you might just match the market's return, but you've spent more time and energy stock picking and you always have to ask yourself what was your RISK ADJUSTED return?

is it possible you took risk that wasn't rewarded? What if you took 5% higher risk than the market, but only received an additional 0.55%.

just some things to consider.
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chris319
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Re: The Dangerous Allure of Individual Stocks

Post by chris319 »

I live in Los Angeles. For me, owning individual stocks is like a trip to Las Vegas without the 4 1/2-hour drive and the heat, and the odds are better.

It's just as much fun, though.
The only person you have to please in life is yourself.
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krafty81
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Re: The Dangerous Allure of Individual Stocks

Post by krafty81 »

Me too!
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HomerJ
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Re: The Dangerous Allure of Individual Stocks

Post by HomerJ »

I've turned $200 of free sports betting money into $300 over the football season.

Doesn't mean I'm going to put $200,000 into the app, and see if I can grow it to $300,000.

What do you guys think? Can KC cover the spread? I need a "Lock of the Week!" fix!
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Patzer
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Re: The Dangerous Allure of Individual Stocks

Post by Patzer »

HomerJ wrote: Fri Jan 14, 2022 3:48 pm I've turned $200 of free sports betting money into $300 over the football season.

Doesn't mean I'm going to put $200,000 into the app, and see if I can grow it to $300,000.

What do you guys think? Can KC cover the spread? I need a "Lock of the Week!" fix!
I would certainly hope not, but I know several people who lost 10-100K on Poker, after the winning $5 sit-n-go tournaments 15-18 years ago.
With Draft Kings, I saw plenty of people win a few bucks in a beginner tournament only to go on to lose thousands before they quit.
A friend put his entire life savings into an investment asset that we don't talk about on this forum at it's peak in 2018, and the one they bought is still down 80% today from it's peak.
And.. once sports betting is legal in my state, I am confident at least one person I know will lose 6 figures on it.

None of these are great ideas, but they are all enticing if you get some degree of success in them.

After my post a week ago, I cut my individual stocks down to 3% of my portfolio in 3 positions. I am reluctant to cut those yet, because the investment thesis on them has a longer time horizon to play out, but all 3 have continued to beat the market even more dramatically.
Articulating my concerns about them made it easier to sell them.

I really think I should have 0 individual stocks, but I enjoy stock picking too much, so that is hard to do. Instead, I want to keep it small so if/when I do poorly that it doesn't impact my retirement goals.
It's a big like drinking though.. It's far easier to have 0 beers, than to just have 1 beer.
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Rainier
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Re: The Dangerous Allure of Individual Stocks

Post by Rainier »

What happens if you pick a 10 bagger for your 5% position in an individual stock. Do you let it ride or do you keep trimming down to 5% (this, mising out on the 10x return)?
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HomerJ
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Re: The Dangerous Allure of Individual Stocks

Post by HomerJ »

My point is it is just gambling.

Just like sports betting, just like Vegas.

Hoping to find a "10-bagger" to get rich is just gambling.

"After years of disappointment with get rich quick schemes, I know I'm gonna get rich with this scheme. And quick."
- Homer J. Simpson
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Re: The Dangerous Allure of Individual Stocks

Post by Reamus294 »

Patzer wrote: Fri Jan 07, 2022 3:45 pm
It's temping to feel smug right now, and it's easy to forget the years where I underperformed the market when things are going well.
There is a little voice that says, "Maybe I do know more than the market".. "Maybe I should index less".
The dangerous allure of individual stocks is that when they do well, they are very good at feeding your ego and temping you to become a worse investor.
We had this smug feeling with RSUs/ESPP when seeing it climb and climb with dreams of retiring even earlier than planned then they fell and fell all within a couple of months. We only have a small amount that is vested and able to actually be sold, but it is an early lesson in a lot of different ways. The psychology of gains and losses is very interesting.
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Re: The Dangerous Allure of Individual Stocks

Post by er999 »

There’s a lot of people at tech companies who got rich on individual stocks from their employer rather than selling at the first chance they got. Individual stocks give a chance of getting rich quickly but also a higher likelihood of getting poor than all
Indexing. No one is making 5x their money in broad indexing in 5 years (unless maybe with leverage). Also an index is unlikely to drop more than 50% or go to zero unlike individual stocks. Just depends on what stage of life you’re in and how easy it is to replace the money you lose.
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Patzer
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Re: The Dangerous Allure of Individual Stocks

Post by Patzer »

Rainier wrote: Fri Jan 14, 2022 4:27 pm What happens if you pick a 10 bagger for your 5% position in an individual stock. Do you let it ride or do you keep trimming down to 5% (this, mising out on the 10x return)?
At this point in my life, I am too risk adverse for that.
I usually only invest 0.5-1% per position and I am looking for strong companies that are undervalued, so after they go up 30-60% they are usually at or above what I consider fair value, so I sell them. I have missed holding onto a 5 bagger, because of that. :(

I do have one company that I bought at what I thought was 1/4th of it's fair market value.
I sold 60% of that position at 3.7X to take profits, and I think it's value has actually gone up, so I plan to hold the rest until it hits 5.7X.
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Re: The Dangerous Allure of Individual Stocks

Post by UpperNwGuy »

Dangerous allure? What dangerous allure? Individual stocks have never had an allure for me. Well, perhaps Schwab. I've often felt that I should buy one share of Schwab so I could say that I own the company. Unlike Vanguard where the investors THINK they own the company but they really don't.
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Re: The Dangerous Allure of Individual Stocks

Post by james22 »

Individual stocks are not all alike.
When people say things are different, 20 percent of the time they are right. John Templeton
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Re: The Dangerous Allure of Individual Stocks

Post by Grt2bOutdoors »

james22 wrote: Fri Jan 14, 2022 6:38 pm Individual stocks are not all alike.
Agree, some provide the 6 winning numbers to win.
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Re: The Dangerous Allure of Individual Stocks

Post by james22 »

Grt2bOutdoors wrote: Fri Jan 14, 2022 7:02 pm
james22 wrote: Fri Jan 14, 2022 6:38 pm Individual stocks are not all alike.
Agree, some provide the 6 winning numbers to win.
Are index funds all alike?
When people say things are different, 20 percent of the time they are right. John Templeton
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Re: The Dangerous Allure of Individual Stocks

Post by Ed 2 »

chris319 wrote: Fri Jan 14, 2022 2:48 pm I live in Los Angeles. For me, owning individual stocks is like a trip to Las Vegas without the 4 1/2-hour drive and the heat, and the odds are better.

It's just as much fun, though.
I live in LA too but for me owning only Index Funds and not owning individual stocks is like saving on gas driving in LA since I stopped driving to work as I used too.
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Re: The Dangerous Allure of Individual Stocks

Post by JSPECO9 »

Nothing wrong with holding some individual stocks if you know what you're doing. I personally wouldn't do it because I'm not into analyzing companies. But not the end of the world or "dangerous" if you passively hold individual stocks.

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

**Note: indexing is the way to go in my opinion, it's just not as grave as you and other posters make it out to be.
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markjk
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Re: The Dangerous Allure of Individual Stocks

Post by markjk »

OP,

By your post, I think you already have your decision.

I'll start with I do not think it's bad to hold individual stocks as long as it's controlled. Why not take a chance now and then? I know of a few folks that nailed a trade and have really made out on one company (I'd consider a home run). I admit, it gets me thinking sometimes. But, indexing is popular because it wins out the majority of the time each year and closer to 100% of the time over long stretches. Most fund managers cannot beat indexes in a year and none do it consistently over long stretches of time. It's not even debatable, it's fact. If most fund managers can't do it, how likely is it for an individual trader?

But ... in a single year, over short timeframes, or even during a home run trade, there are legitimately people that win big. That's the truth. Some really do hit the lottery and cash out each year. So, there is always that allure of "I think I can beat the index" or "I think I can find the next Tesla early" to pull people in. The fact that it does happen is so enticing. The references to gambling and Vegas have already been made in the thread. I don't think stock picking is quite like gambling (depending on how it's done) but it's darn close and the emotional reaction to it is almost identical to gambling for some.

Know yourself and do the right thing for you. If you can keep to a fixed amount for trading, there is nothing wrong with holding individual companies. If you can't stay to that fixed amount and it starts to impact the rest of your portfolio, just get out. It's not worth it. You sound like a data guy so just look at the statistics to help you make a good decision for you.
MadAsgardian
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Re: The Dangerous Allure of Individual Stocks

Post by MadAsgardian »

Patzer wrote: Fri Jan 07, 2022 3:45 pm The dangerous allure of individual stocks is that when they do well, they are very good at feeding your ego and temping you to become a worse investor.
Is this issue really unique to individual stocks? See hedgefundie thread.
bdr1000
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Re: The Dangerous Allure of Individual Stocks

Post by bdr1000 »

A good reminder.

Personally I am struggling with RSUs I received from one large tech employer 5-10 years ago.

They now make up 21% of my investable assets, the rest is a simple 2 ETF global equity and bond index.

If I had trimmed earlier I would have missed significant growth. But that decision point remains, when to sell...
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Re: The Dangerous Allure of Individual Stocks

Post by DarkMatter731 »

MadAsgardian wrote: Sat Jan 15, 2022 6:09 am
Patzer wrote: Fri Jan 07, 2022 3:45 pm The dangerous allure of individual stocks is that when they do well, they are very good at feeding your ego and temping you to become a worse investor.
Is this issue really unique to individual stocks? See hedgefundie thread.
Exactly.

Leverage is incredibly, incredibly addictive.

It's so 'easy' and it's generating returns through beta, which requires very little skill so ordinary investors get sucked up in it. It's too difficult to generate alpha these days and so it 'looks' like smart beta strategies are the next best thing.

I've seen so many investors post on both here and reddit not understanding the products that they buy. For example, most of the people I've seen who're investing in LETFs don't even seem to understand why they don't track the underlying index exactly.

I even saw one post that had the audacity to argue that retail investors have access to the same tools and information that institutional investors do (and I can assure you, this is absolutely not the case). They even claimed that HFEA was going to end the hedgefund industry they were that a) confident it works in the future and b) they thought it was a revolutionary concept rather than something that's been known about for decades (Cliff Asness wrote a paper on it in 1995).
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Re: The Dangerous Allure of Individual Stocks

Post by vtsnowdin »

The wisdom of indexing is inescapable but you have to admit it is boring. Fully retired and 16 degrees below Zero F here today I have nothing better to do then read this Blog or research a stock pick to buy with next months beer allotment.
I suppose it matters how much your personal 5% amounts to. If it is more then say $25,000 you should pick stocks with less. And years where your picked account has a big gain sell off some losers and put the proceeds back into your index funds. Don't take money from your index funds to make up for a bad year.
Consider it cheap entertainment and a lot better odds then lottery tickets or horse racing. And never bet the rent. :beer
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Re: The Dangerous Allure of Individual Stocks

Post by investorpeter »

Investing 1-5% of net worth in undervalued individual stocks in the hopes of 30-60% gains and then selling once your valuation estimate is met is just not worth the time, effort and risk in my opinion. Even if successful, the returns won’t make any significant difference to your overall portfolio compared to investing in an index fund and you will spend an inordinate amount of searching and analyzing opportunities, and reading financial news and company reports for relatively little benefit. The only picks that will make a difference with a 1-5% initial investment will be those that gain 1000% (10 baggers). To me, that means essentially only investing in companies who are growing earnings rapidly (“growth” companies), rather than those who are simply undervalued. Perhaps the value plays would make more sense with larger initial investments or with leverage, but that would violate the 5% limitation. If you are going to buy a lottery ticket, you might as well buy when the jackpot is large enough to make a difference in your life.
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Re: The Dangerous Allure of Individual Stocks

Post by BogleFan510 »

Just have discipline. Not sure why you feel it is harder to be a disciplined investor, one who sticks with their investment plans, when ones stock picks actually meet their expectations.

1. I would not buy an individual stock without a clear reason for why it might be able to outperform the overall market. I would not be suprised it is doing better, hence not tempted to increase exposure either. My current plan does not include either increasing individual stock exposure or profit taking until the funds are needed.
2. My plan for any single company stock would have a time horizon of not less than 10 years, so where it is priced now would not be relevant to my long term plan. Short term trading for both stocks and index funds is a losing game. One stock exceeded the 100x cost basis point this year, then declined by 20%. Ive done nothing. Ive held it over 20 years.

So I question your premise and conclusion. Personally, I have increased my NW about 20% vs the index only plan with my stock picks, all less than 1% of my portfolio at purchase. All are at over 10 years in my account. I have not bought a new share in over 5 years, other than reinvested dividends. My index invested funds are also doing very well and following the plan accordingly, 70/30, and above our written retirement plan goals. There is a lot of rhetoric in this thread, without good data behind it, like 'it wont make a difference, even if you pick successfully.'

I dont recommend the average investor try to pick stocks, but the expected return more or less matches indexing, just with higher variation. Some in this thread seem to forget that these individual stocks are exactly what they are holding within their favorite index via an intermediary. So how can a random selection of a smaller subset of the same assets be so horribly bad at performance? The answer is that they wont. On average you will match the typical index, but with higher variation of outcome. Also, one does not need to continuously research a position, once established, if the plan is to hold it long term and trust its management, once acquired.
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Re: The Dangerous Allure of Individual Stocks

Post by gougou »

You pick individual stocks for “fun”. That’s why you should never put more than 5% of portfolio to have fun.

If you are not going to spend enough effort to really analyze the companies you are buying, you probably shouldn’t even touch individual stocks at all.
Last edited by gougou on Sat Jan 15, 2022 3:45 pm, edited 1 time in total.
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Re: The Dangerous Allure of Individual Stocks

Post by rockstar »

gougou wrote: Sat Jan 15, 2022 3:44 pm You pick individual stocks for “fun”. That’s why you should never put more than 5% of portfolio to have fun.

If you are not going to spend enough effort to really analyze the companies you are buying, you probably should n’t even touch individual stocks at all.
The problem is when they grow to more than 5%. Then, you have to decide what to do. It's like forced rebalancing.
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Re: The Dangerous Allure of Individual Stocks

Post by gougou »

rockstar wrote: Sat Jan 15, 2022 3:45 pm
gougou wrote: Sat Jan 15, 2022 3:44 pm You pick individual stocks for “fun”. That’s why you should never put more than 5% of portfolio to have fun.

If you are not going to spend enough effort to really analyze the companies you are buying, you probably should n’t even touch individual stocks at all.
The problem is when they grow to more than 5%. Then, you have to decide what to do. It's like forced rebalancing.
If you did the research on the company, you should be comfortable holding it long term. Of course if it goes 10x like Tesla then you might want to take some profits off the table, but that’s a nice problem to have.
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Re: The Dangerous Allure of Individual Stocks

Post by nedsaid »

BogleFan510 wrote: Sat Jan 15, 2022 3:22 pm Just have discipline. Not sure why you feel it is harder to be a disciplined investor, one who sticks with their investment plans, when ones stock picks actually meet their expectations.

1. I would not buy an individual stock without a clear reason for why it might be able to outperform the overall market. I would not be suprised it is doing better, hence not tempted to increase exposure either. My current plan does not include either increasing individual stock exposure or profit taking until the funds are needed.
2. My plan for any single company stock would have a time horizon of not less than 10 years, so where it is priced now would not be relevant to my long term plan. Short term trading for both stocks and index funds is a losing game. One stock exceeded the 100x cost basis point this year, then declined by 20%. Ive done nothing. Ive held it over 20 years.

So I question your premise and conclusion. Personally, I have increased my NW about 20% vs the index only plan with my stock picks, all less than 1% of my portfolio at purchase. All are at over 10 years in my account. I have not bought a new share in over 5 years, other than reinvested dividends. My index invested funds are also doing very well and following the plan accordingly, 70/30, and above our written retirement plan goals. There is a lot of rhetoric in this thread, without good data behind it, like 'it wont make a difference, even if you pick successfully.'

I dont recommend the average investor try to pick stocks, but the expected return more or less matches indexing, just with higher variation. Some in this thread seem to forget that these individual stocks are exactly what they are holding within their favorite index via an intermediary. So how can a random selection of a smaller subset of the same assets be so horribly bad at performance? The answer is that they wont. On average you will match the typical index, but with higher variation of outcome. Also, one does not need to continuously research a position, once established, if the plan is to hold it long term and trust its management, once acquired.
Individual stocks CAN work, you have to be disciplined and follow some common sense guidelines. My take is that stock picking is time inefficient compared to indexing, most people trying to do this on their own will on average underperform the averages by 4% a year for various reasons. I have owned individual stocks since 1988, have achieved good returns, and for the most part had an enjoyable experience.

Some guidelines here: 1) buy good stocks at reasonable prices, 2) you want long holding periods for your stocks, 3) limit your trading, incorrect sell/buy decisions are the biggest drag on returns, 4) do your research, 5) invest across industry groups, 6) resist the temptation to buy "hot" stocks, performance chasing often results in tears, 7) monitor your portfolio, even if you trade little, a portfolio still needs a bit of maintenance, 8) use a good strategy and stick to it, I myself am Value oriented in my approach.

Seeing that my stocks are Value oriented, they have about matched the performance of the Vanguard Value Index. Right now, I have beat the index over a 15 year period. Sometimes I beat the benchmark a little and sometimes I trail it a little. The indexes are not easy to beat, don't get your expectations so high that you think you will beat them. Markets are pretty efficient, sometimes frighteningly so.

There actually are people out there who are good stock pickers. I probably am an average stock picker with very good investor behavior. Good investor behavior is very important, good behavior can often overcome less than optimal investments.
A fool and his money are good for business.
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HomerJ
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Re: The Dangerous Allure of Individual Stocks

Post by HomerJ »

gougou wrote: Sat Jan 15, 2022 3:54 pm
rockstar wrote: Sat Jan 15, 2022 3:45 pm
gougou wrote: Sat Jan 15, 2022 3:44 pm You pick individual stocks for “fun”. That’s why you should never put more than 5% of portfolio to have fun.

If you are not going to spend enough effort to really analyze the companies you are buying, you probably should n’t even touch individual stocks at all.
The problem is when they grow to more than 5%. Then, you have to decide what to do. It's like forced rebalancing.
If you did the research on the company, you should be comfortable holding it long term. Of course if it goes 10x like Tesla then you might want to take some profits off the table, but that’s a nice problem to have.
None of us here should ever be 100% confident in "the research we did on the company".

That's the real problem.

We can't ever do enough "research" to be sure.

And besides, "long-term", things can change... Shouldn't you take that into account? If laws change or demand for a product changes or management changes? So yet another thing to be unsure about.
Last edited by HomerJ on Sat Jan 15, 2022 11:18 pm, edited 1 time in total.
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HomerJ
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Re: The Dangerous Allure of Individual Stocks

Post by HomerJ »

nedsaid wrote: Sat Jan 15, 2022 10:30 pm
BogleFan510 wrote: Sat Jan 15, 2022 3:22 pm Just have discipline. Not sure why you feel it is harder to be a disciplined investor, one who sticks with their investment plans, when ones stock picks actually meet their expectations.

1. I would not buy an individual stock without a clear reason for why it might be able to outperform the overall market. I would not be suprised it is doing better, hence not tempted to increase exposure either. My current plan does not include either increasing individual stock exposure or profit taking until the funds are needed.
2. My plan for any single company stock would have a time horizon of not less than 10 years, so where it is priced now would not be relevant to my long term plan. Short term trading for both stocks and index funds is a losing game. One stock exceeded the 100x cost basis point this year, then declined by 20%. Ive done nothing. Ive held it over 20 years.

So I question your premise and conclusion. Personally, I have increased my NW about 20% vs the index only plan with my stock picks, all less than 1% of my portfolio at purchase. All are at over 10 years in my account. I have not bought a new share in over 5 years, other than reinvested dividends. My index invested funds are also doing very well and following the plan accordingly, 70/30, and above our written retirement plan goals. There is a lot of rhetoric in this thread, without good data behind it, like 'it wont make a difference, even if you pick successfully.'

I dont recommend the average investor try to pick stocks, but the expected return more or less matches indexing, just with higher variation. Some in this thread seem to forget that these individual stocks are exactly what they are holding within their favorite index via an intermediary. So how can a random selection of a smaller subset of the same assets be so horribly bad at performance? The answer is that they wont. On average you will match the typical index, but with higher variation of outcome. Also, one does not need to continuously research a position, once established, if the plan is to hold it long term and trust its management, once acquired.
Individual stocks CAN work, you have to be disciplined and follow some common sense guidelines. My take is that stock picking is time inefficient compared to indexing, most people trying to do this on their own will on average underperform the averages by 4% a year for various reasons. I have owned individual stocks since 1988, have achieved good returns, and for the most part had an enjoyable experience.

Some guidelines here: 1) buy good stocks at reasonable prices, 2) you want long holding periods for your stocks, 3) limit your trading, incorrect sell/buy decisions are the biggest drag on returns, 4) do your research, 5) invest across industry groups, 6) resist the temptation to buy "hot" stocks, performance chasing often results in tears, 7) monitor your portfolio, even if you trade little, a portfolio still needs a bit of maintenance, 8) use a good strategy and stick to it, I myself am Value oriented in my approach.

Seeing that my stocks are Value oriented, they have about matched the performance of the Vanguard Value Index. Right now, I have beat the index over a 15 year period. Sometimes I beat the benchmark a little and sometimes I trail it a little. The indexes are not easy to beat, don't get your expectations so high that you think you will beat them. Markets are pretty efficient, sometimes frighteningly so.

There actually are people out there who are good stock pickers. I probably am an average stock picker with very good investor behavior. Good investor behavior is very important, good behavior can often overcome less than optimal investments.
I suggest just make your life easy and go with the index.

Or make your life harder, and hope you are in top 10% of pickers or top 10% of investor behavior.

But you won't know until 20 years go by.
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theac
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Re: The Dangerous Allure of Individual Stocks

Post by theac »

gougou wrote: Sat Jan 15, 2022 3:54 pm
rockstar wrote: Sat Jan 15, 2022 3:45 pm
gougou wrote: Sat Jan 15, 2022 3:44 pm You pick individual stocks for “fun”. That’s why you should never put more than 5% of portfolio to have fun.

If you are not going to spend enough effort to really analyze the companies you are buying, you probably should n’t even touch individual stocks at all.
The problem is when they grow to more than 5%. Then, you have to decide what to do. It's like forced rebalancing.
If you did the research on the company, you should be comfortable holding it long term. Of course if it goes 10x like Tesla then you might want to take some profits off the table, but that’s a nice problem to have.
I wasn't going comment in this topic, but your short and sweet answer hooked me in! :happy

In the early 2000s I decided to give stocks a shot, so spent A LOT of time researching stuff, "thinking" I was learning something, and finally decided to start lightly, with an experiment.

Decided on 4 "dependable" and well-establish stocks at $2,000 each:

Citibank--long time in the business

Peabody Energy BTU--long time in the business, largest coal miner in the world, US or somewhere (I don't remember)

DOW Chemical--long time in the business, like "forever"

Conoco-Philips--Oil Refinery, been around "forever"

Anyway, Citibank went to zero (bankrupt), washed its hands of the stock holders (but kept their money) and are back in "business"

BTU, eventually went to zero also, total loss for stock holders, back in business

DOW Chemical, eventually dropped, and for a long time the $2k hung around $700 or $800 range, and just figured I'd let that experiment also run its way down to zero, but it "miraculously" recovered and sold it a year or two ago for like $2,200 (don't remember).

Conoco-Philips, I think that too ended up a bit above the $2k when I sold a year or two ago

So I feel I learned a lot from that "experiment!" :D

But soon after I started this experiment in the early 2000s, since all 4 of the above stocks were up as high as $3,000 for a time (and paying dividends) I bought a couple of more stocks:

SJT (Nat Gas Trust) I think I put $2,000 into it, and it was paying a monthly dividend of like 12% and also went up in value per share (for a while). Still have it today, and a year or 2 ago it was at like $2 a share, and I was just laughing it off and waiting for zero, but the paramedics arrive, and got its pulse going :D .

It's at $7.27 so a bit over $1k now and dividend which was next to nothing, and even at zero for a short time, but up to like $20 a month now IIRC (don't even really care). :D

Then got 100 shares of Microsoft (in 2005) at about $27. For years was flat, paying a small dividend, and I just let it ride. A few years back it started coming to life, and about a year ago I "got scared" by its sudden rise and decided I better get rid of it before it turns around. Sold it for like $170 a share. Then watched it continue to rise, so dropped it from my Yahoo Homepage portfolio, just to avoid a case of the "I shoulda." Just had a look, it's at $310, but has been up to $350. Still, at least it helped make up for the losses of Citibank etc so that's good. (I know, the pandemic had been good for some tech stocks, and I got rid of it during that time).

SLV (Silver) Also in the early 2000s got 300 shares at $10. It eventually skyrocketed later so sold it at $28, then watched it go to like $48, then fall like a rock and decided I better buy back in "a little" at $28, then a bit more at low $20s, then at like $16?

So I'm at about break-even on that right now IIRC, about $6,200, roughly the house money I got when I sold the original shares at $28.

Oh, one day soon after I sold at $28 and it's shooting way up now, talking to a friend I told him the whole story, he thought I did great and at least made a profit (plus no taxes in a ROTH) but I didn't really feel so great about it. Still, could have been a lot worse.

TGP (Nat Gas Transport) I think I put $3k in that, was paying a great quarterly dividend for a long time, cut back for a while, and is back up with pretty good dividend. It's at like $5,800 now, and I believe there was a time it was up much more than that, like $12k or $13k I forget now. I think it was 200 shares at $15 when I got it, and have reinvested the Div at times, and other times just taken as cash. So more than $5,800 I guess.

Anyway, what "I" learned from stocks, "They're not for me."
Stick to Mutual Funds, and actually, I don't even care to be "an investor" anymore.
I'm happy with "low stress" boring old bonds, and if I get negative return, hey I sleep fine every night (and not under a bridge), whatever I want is in my fridge, nobody knocks at my door saying I owe them money, life is good. :happy

I'm comfortable with my pension, will get SS in the near future. Haven't taken because what to do with the money? Just more numbers on a computer screen. And my portfolio is just "insurance" or a cushion, just in case.

For those who are into stocks, whether individual or in a fund, to each his own.
I really don't have the stomach for it (nor the interest) anymore.

But it was an interesting experience! :D

And if I had to pick between individual stocks and diversified low-cost funds,
it's definitely the funds.

P.S. Opps, forgot to mention the Gold Funds I still have:

In early 2000s put $3k into TGVBX (I think, has changed), and was later as high as $13k, but is down at about $7k or $8k now.

In 2008 put $5k into USAA (IIRC) gold fund, was down for a long time, is a bit above the $5k now.

As you can see, it's a fairly long story so didn't really want to bore anyone with it, or take up too much thread-space, but there it is.
Last edited by theac on Sun Jan 16, 2022 6:33 am, edited 4 times in total.
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vtsnowdin
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Re: The Dangerous Allure of Individual Stocks

Post by vtsnowdin »

gougou wrote: Sat Jan 15, 2022 3:44 pm You pick individual stocks for “fun”. That’s why you should never put more than 5% of portfolio to have fun.

If you are not going to spend enough effort to really analyze the companies you are buying, you probably shouldn’t even touch individual stocks at all.
Having a limit on how much you will risk on stock picks does not mean you don't thoroughly research the stocks before you buy them. Actually as you want to make the best return on limited funds it increases how hard you try to find stocks with real growth potential and or enduring success and good dividend payouts. Out of thirty two stocks in my pick account ten of them are up twenty percent or more from my cost basis and one of those is up 225%. Then if I add up the red ink in the losers column it adds up to just -$150 at present vs. a net gain of $6100.
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Re: The Dangerous Allure of Individual Stocks

Post by EdNorton »

I think the subject should be "The slightly riskier allure of individual stocks". Dangerous is betting with a bookie.
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Re: The Dangerous Allure of Individual Stocks

Post by vanbogle59 »

nedsaid wrote: Sat Jan 15, 2022 10:30 pm There actually are people out there who are good stock pickers.
I agree.
I also think there are people out there who are good poker players.
Both games are zero sum. And I have no special skills in either domain.
So, I don't play.

If you don't know who the sucker is in the zero sum game....
Weil, you know the rest.
:sharebeer
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Randtor
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Re: The Dangerous Allure of Individual Stocks

Post by Randtor »

if one enjoys going to a casino now and then, playing with a limit depending on what you can afford to lose without affecting your psyche or lifestyle, than sure, go pick stocks and see how it goes. I know when I occasionally accompany DW to a casino, I go fully expecting to lose, and I am sometimes pleasantly surprised to win. In the latter case I usually end up buying a fancy dinner on the way home.So either way, I go home with a good feeling. Lose some -I had some fun (meh) for short money. Win some, I do something fun with the winnings.

If you have self control and can gamble with an amount that doesn't bother you in any way, then go have fun if you enjoy the thrill of gambling. But don't 'expect' to win. Casinos are not built with their own money.
"Whats done is done, and can't be undone"
BogleFan510
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Re: The Dangerous Allure of Individual Stocks

Post by BogleFan510 »

HomerJ wrote: Sat Jan 15, 2022 11:13 pm
gougou wrote: Sat Jan 15, 2022 3:54 pm
rockstar wrote: Sat Jan 15, 2022 3:45 pm
gougou wrote: Sat Jan 15, 2022 3:44 pm You pick individual stocks for “fun”. That’s why you should never put more than 5% of portfolio to have fun.

If you are not going to spend enough effort to really analyze the companies you are buying, you probably should n’t even touch individual stocks at all.
The problem is when they grow to more than 5%. Then, you have to decide what to do. It's like forced rebalancing.
If you did the research on the company, you should be comfortable holding it long term. Of course if it goes 10x like Tesla then you might want to take some profits off the table, but that’s a nice problem to have.
None of us here should ever be 100% confident in "the research we did on the company".

That's the real problem.

We can't ever do enough "research" to be sure.

And besides, "long-term", things can change... Shouldn't you take that into account? If laws change or demand for a product changes or management changes? So yet another thing to be unsure about.
These same challenges can be posed at index investing and market timing, which we agree is the wrong approach.

For example, a poor economic outlook will cause the overall market index to drop, so shouldnt index owners be researching the economy constantly? Of course the answer is no, we shouldnt. This is because we rely on market cycles to grow over long time periods to achieve our goals, not superior research skills and constant adjustments.

My picks were all growth stories based on my understanding of the company strategy, market position, and potential valuations, if successful.

So overall I agree that the average retail investor should not be picking individual stocks, unless in their own industry where they have an insider advantage with respect to values to be realized. Few have the behavioral discipline to hang on after 100x or not give up when a huge market cap disappears to 0, including myself. Have made plenty of mistakes and have also hopefully learned over time.
Last edited by BogleFan510 on Sun Jan 16, 2022 10:41 am, edited 2 times in total.
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nedsaid
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Re: The Dangerous Allure of Individual Stocks

Post by nedsaid »

vanbogle59 wrote: Sun Jan 16, 2022 10:10 am
nedsaid wrote: Sat Jan 15, 2022 10:30 pm There actually are people out there who are good stock pickers.
I agree.
I also think there are people out there who are good poker players.
Both games are zero sum. And I have no special skills in either domain.
So, I don't play.

If you don't know who the sucker is in the zero sum game....
Weil, you know the rest.
:sharebeer
One of the problems individuals face is that institutions, at least until the Robin Hood craze, owned 90% of the stocks and individuals own 10%. The other side of the trade is a big institution, you aren't likely to outsmart them. There was a time when the numbers were reversed, 90% of stocks were owned by individuals, markets were much less efficient and there were more naive investors to take advantage of.
A fool and his money are good for business.
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vanbogle59
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Re: The Dangerous Allure of Individual Stocks

Post by vanbogle59 »

nedsaid wrote: Sun Jan 16, 2022 10:39 am
vanbogle59 wrote: Sun Jan 16, 2022 10:10 am
nedsaid wrote: Sat Jan 15, 2022 10:30 pm There actually are people out there who are good stock pickers.
I agree.
I also think there are people out there who are good poker players.
Both games are zero sum. And I have no special skills in either domain.
So, I don't play.

If you don't know who the sucker is in the zero sum game....
Weil, you know the rest.
:sharebeer
One of the problems individuals face is that institutions, at least until the Robin Hood craze, owned 90% of the stocks and individuals own 10%. The other side of the trade is a big institution, you aren't likely to outsmart them. There was a time when the numbers were reversed, 90% of stocks were owned by individuals, markets were much less efficient and there were more naive investors to take advantage of.
I don't expect to win at poker when I play with a bunch of drunk softball buddies. I stink.
I would certainly expect to lose if I joined a tournament full of professionals.
And if the professionals had access to information I didn't have? Oh my.

It is a miracle that I can get the haystack market return for free without having to play that game.
Thank you modern finance.
:beer
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nedsaid
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Re: The Dangerous Allure of Individual Stocks

Post by nedsaid »

vanbogle59 wrote: Sun Jan 16, 2022 10:53 am
nedsaid wrote: Sun Jan 16, 2022 10:39 am
vanbogle59 wrote: Sun Jan 16, 2022 10:10 am
nedsaid wrote: Sat Jan 15, 2022 10:30 pm There actually are people out there who are good stock pickers.
I agree.
I also think there are people out there who are good poker players.
Both games are zero sum. And I have no special skills in either domain.
So, I don't play.

If you don't know who the sucker is in the zero sum game....
Weil, you know the rest.
:sharebeer
One of the problems individuals face is that institutions, at least until the Robin Hood craze, owned 90% of the stocks and individuals own 10%. The other side of the trade is a big institution, you aren't likely to outsmart them. There was a time when the numbers were reversed, 90% of stocks were owned by individuals, markets were much less efficient and there were more naive investors to take advantage of.
I don't expect to win at poker when I play with a bunch of drunk softball buddies. I stink.
I would certainly expect to lose if I joined a tournament full of professionals.
And if the professionals had access to information I didn't have? Oh my.

It is a miracle that I can get the haystack market return for free without having to play that game.
Thank you modern finance.
:beer
The one advantage an individual might have is not having to report results quarterly, institutions do not always have long holding periods. I have seen account statements for individuals who use a manager and I will see a stock bought and then sold just a few months later. If you couldn't hold a stock for more than a few months, there must not have been much conviction or belief behind the purchase. The problem of incorrect sell/buy decisions affects the professionals too.
A fool and his money are good for business.
gougou
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Re: The Dangerous Allure of Individual Stocks

Post by gougou »

theac wrote: Sun Jan 16, 2022 12:53 am
gougou wrote: Sat Jan 15, 2022 3:54 pm
rockstar wrote: Sat Jan 15, 2022 3:45 pm
gougou wrote: Sat Jan 15, 2022 3:44 pm You pick individual stocks for “fun”. That’s why you should never put more than 5% of portfolio to have fun.

If you are not going to spend enough effort to really analyze the companies you are buying, you probably should n’t even touch individual stocks at all.
The problem is when they grow to more than 5%. Then, you have to decide what to do. It's like forced rebalancing.
If you did the research on the company, you should be comfortable holding it long term. Of course if it goes 10x like Tesla then you might want to take some profits off the table, but that’s a nice problem to have.
I wasn't going comment in this topic, but your short and sweet answer hooked me in! :happy

In the early 2000s I decided to give stocks a shot, so spent A LOT of time researching stuff, "thinking" I was learning something, and finally decided to start lightly, with an experiment.

Decided on 4 "dependable" and well-establish stocks at $2,000 each:

Citibank--long time in the business

Peabody Energy BTU--long time in the business, largest coal miner in the world, US or somewhere (I don't remember)

DOW Chemical--long time in the business, like "forever"

Conoco-Philips--Oil Refinery, been around "forever"

Anyway, Citibank went to zero (bankrupt), washed its hands of the stock holders (but kept their money) and are back in "business"

BTU, eventually went to zero also, total loss for stock holders, back in business

DOW Chemical, eventually dropped, and for a long time the $2k hung around $700 or $800 range, and just figured I'd let that experiment also run its way down to zero, but it "miraculously" recovered and sold it a year or two ago for like $2,200 (don't remember).

Conoco-Philips, I think that too ended up a bit above the $2k when I sold a year or two ago

So I feel I learned a lot from that "experiment!" :D

But soon after I started this experiment in the early 2000s, since all 4 of the above stocks were up as high as $3,000 for a time (and paying dividends) I bought a couple of more stocks:

SJT (Nat Gas Trust) I think I put $2,000 into it, and it was paying a monthly dividend of like 12% and also went up in value per share (for a while). Still have it today, and a year or 2 ago it was at like $2 a share, and I was just laughing it off and waiting for zero, but the paramedics arrive, and got its pulse going :D .

It's at $7.27 so a bit over $1k now and dividend which was next to nothing, and even at zero for a short time, but up to like $20 a month now IIRC (don't even really care). :D

Then got 100 shares of Microsoft (in 2005) at about $27. For years was flat, paying a small dividend, and I just let it ride. A few years back it started coming to life, and about a year ago I "got scared" by its sudden rise and decided I better get rid of it before it turns around. Sold it for like $170 a share. Then watched it continue to rise, so dropped it from my Yahoo Homepage portfolio, just to avoid a case of the "I shoulda." Just had a look, it's at $310, but has been up to $350. Still, at least it helped make up for the losses of Citibank etc so that's good. (I know, the pandemic had been good for some tech stocks, and I got rid of it during that time).

SLV (Silver) Also in the early 2000s got 300 shares at $10. It eventually skyrocketed later so sold it at $28, then watched it go to like $48, then fall like a rock and decided I better buy back in "a little" at $28, then a bit more at low $20s, then at like $16?

So I'm at about break-even on that right now IIRC, about $6,200, roughly the house money I got when I sold the original shares at $28.

Oh, one day soon after I sold at $28 and it's shooting way up now, talking to a friend I told him the whole story, he thought I did great and at least made a profit (plus no taxes in a ROTH) but I didn't really feel so great about it. Still, could have been a lot worse.

TGP (Nat Gas Transport) I think I put $3k in that, was paying a great quarterly dividend for a long time, cut back for a while, and is back up with pretty good dividend. It's at like $5,800 now, and I believe there was a time it was up much more than that, like $12k or $13k I forget now. I think it was 200 shares at $15 when I got it, and have reinvested the Div at times, and other times just taken as cash. So more than $5,800 I guess.

Anyway, what "I" learned from stocks, "They're not for me."
Stick to Mutual Funds, and actually, I don't even care to be "an investor" anymore.
I'm happy with "low stress" boring old bonds, and if I get negative return, hey I sleep fine every night (and not under a bridge), whatever I want is in my fridge, nobody knocks at my door saying I owe them money, life is good. :happy

I'm comfortable with my pension, will get SS in the near future. Haven't taken because what to do with the money? Just more numbers on a computer screen. And my portfolio is just "insurance" or a cushion, just in case.

For those who are into stocks, whether individual or in a fund, to each his own.
I really don't have the stomach for it (nor the interest) anymore.

But it was an interesting experience! :D

And if I had to pick between individual stocks and diversified low-cost funds,
it's definitely the funds.

P.S. Opps, forgot to mention the Gold Funds I still have:

In early 2000s put $3k into TGVBX (I think, has changed), and was later as high as $13k, but is down at about $7k or $8k now.

In 2008 put $5k into USAA (IIRC) gold fund, was down for a long time, is a bit above the $5k now.

As you can see, it's a fairly long story so didn't really want to bore anyone with it, or take up too much thread-space, but there it is.
The lesson is “been in business like forever” or “12% dividend yield” isn’t a good enough criteria to pick stocks. I think you’ll do well with your index funds. But my experiment is ongoing and we’ll see how it goes for the next 10 or 20 years.
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