Do Bogleheads Overstate Difficulty of Stock Picking?

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Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Petrocelli »

Last October 1, 2008, I decided to assemble a portfolio of 20 stocks. After some trial and error, I eventually assembled a portfolio of 19 stocks and 1 ETF. This portfolio is my large cap U.S. stock allocation. You can see the portfolio here.

http://socialize.morningstar.c....D47C472479

I selected stocks with a PE less than 20, a beta less than 1, a dividend yield of at least 2%, and a market cap of at least $10 billion. (I eventually replaced one of the stocks, Southern Company, with a utilities ETF.) I chose stocks after reading Stein/Demuth's "Yes, you can supercharge your portfolio!" I also read a lot of articles by Geoff Considine, and posts by statsguy. I used a Monte Carlo simulator called the Quantext portfolio planner to see how each individual stock impacted the returns and standard deviation of my portfolio.

When it comes to investing new money, I buy one of the 5 stocks with the lowest balance. This allows me to buy low.

After 1.25 years, here is the annualized return according to M* versus the 500 Index.

Total: 9.78%
Personal: 18.12%
500 Index: 8.12%

Thus, in an apples to apples comparison, my portfolio is outperforming the 500 Index by 1.66% annualized. When you consider the impact of new money, it is outperforming the 500 index by 10% annualized.

Here's the kicker: According to my Excel spreadsheet, when we compare the STD of the monthly returns of my portfolio to the 500 Index, its standard deviation is 47.51% lower! Put simply, these low beta stocks do not swing around as much as "the market."

Over the past few weeks, I have noted that there have been a lot of stocks on stock picking. However, do Bogleheads give short shrift to assembling a portfolio of low beta stocks? If you know what you are doing, and have patience, can buying and holding a portfolio of individual stocks be a good way to achieve diversification?
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Opponent Process »

Petrocelli wrote:an apples to apples comparison
maybe not true in this case. you may have used the wrong benchmark.
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Post by billspetrino »

as a person who has achieved financial indepence through my own stock picking my answer will surprise you.

I think that bogleheads are CORRECT to believe that MOST people can NOT outperform most index funds

Where I do not agree is with those who think NO ONE can do it

Fact is some people are able like Warren Buffett to be able to distingusih between a bad and good investment

As a person who has studied Mr Buffett for over 2 decades and managed my own and others investments I can assure you it is possible

However you need to do your due diligence in finding someone out of the 95% of the peopel who claim they can do it but can not

1) search engines will help you with research.Mark Hulbert tracks newsletters and is aperson of high integrity

2) personal tax returns should be provided by those who are serious so you can distinguish those who SELL advice with those who INVEST


Most GReat investors are VERY SKEPTICAL and most peopel I have found who"CLAIM" they can manage money are generally either mistaken or disingenious


The key to finding a great investor is like finding agreat spouse

It is difficult but worthwhile
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by richard »

Petrocelli wrote:If you know what you are doing, and have patience, can buying and holding a portfolio of individual stocks be a good way to achieve diversification?
You can achieve a fair amount of diversification with a relatively small number of stocks. You don't get as much diversification as with a larger number - you will likely miss one of the few stocks with enormous gains (as well as a few real losers, but while you can't lose more than 100%, you can gain more).

As has been stated many times, the average active investor equals the market before costs (by definition) and loses after costs. You may have gotten lucky - one year is a rather small sample size - or you may have genuine talent at beating the market. It can not, however, be the case that most have this talent. A massive body of empirical work shows that out-performance is very unlikely to persist (beyond that which would be anticipated by chance).

Congrats on your success picking stocks, but don't quit your day job.
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Post by billspetrino »

Thanks for the advice

First of all I have been allocating capital for 22 years now and have not had a day job

Diversification can achieved by a few stocks depending on the stocks themselves

Take Berkshire Hathaway for example

They own significant amounts of railroads financials ,bonds ,consumer goods ,Insurance etc

Their companies do business in almost EVERY country in the world and Mr Buffett has earned over 150 billion dollars for he and his investors over his 55 year period

Can you attribute his success to luck.I suppose but his "principals have done fine for me.

My point is that if your portfolio contains Berkshire Hathaway you do not NEED to hold as many stocks to be diversified

Hope this helps.peace
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Post by richard »

billspetrino wrote:Where I do not agree is with those who think NO ONE can do it
It's certainly possible. Whether it's luck or talent is an open question - there is not enough data to answer in a statistically significant manner (Fama has said this explicitly).

I'm one of the very few efficient market types here who believe some have talent. The real problem is identifying those individuals and separating talent from luck.

As has been stated many times, if enough people flip coins, someone will flip 20 heads in a row and believe themselves to be talented.

Trying can be expensive, as individuals usually sell losers (which go on to win) to buy winners (which go on to lose) while incurring costs. Odean had a good study of individual investor behavior which showed this.

What is clear is that past performance does not predict future results, so the possibility of talent does no good for 99+% percent of us.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Petrocelli »

richard wrote:You can achieve a fair amount of diversification with a relatively small number of stocks. You don't get as much diversification as with a larger number - you will likely miss one of the few stocks with enormous gains (as well as a few real losers, but while you can't lose more than 100%, you can gain more).

...

Congrats on your success picking stocks, but don't quit your day job.
Keep in mind that these stocks are part of a larger portfolio of mutual funds that hold several hundred stocks. You can see the larger portfolio here:

http://socialize.morningstar.com/NewSoc ... 1F768DB926

I don't worry about missing those stocks with large gains. I will leave it to the mangers at Capital Opportunity and Selected Value to find those stocks. I am just focusing on large caps.

As for my day job, I will have it for another 15 years.
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Post by billspetrino »

I agree with you TOTALLY

As you have accurately stated ,generally by the time you figure out someone is wise,their performance suffers

Buffett has not achieved the returns he used to achieve because he is managing close to 200 billion instead of when he managed just 30 million

Personally I do not believe that the average person could do as well as someone like myself

but i do BELIEVE they could do well by following a dozen or so basic premises

However like you have said as you "think" you know more you tend to try and reach outside your circle of competence or believe you can forecast the SHORT TERM direction of a stock which I have found to be impossible

I do know if you get your money in agreat stock at agreat price and use the power of reinvested dividends and compound interest you should beat the"averages"

Investing is 50% art( instinct) and 50% science ( numbers)

I AGREE that many "numbers" guys like jeremy siegel have not done well as wisdom tree has proven

You have touched on something i feel is IMPORTANT

The FEWER decisions you make the higher your chance of doing well would be

1983 when i was in college I picked aportfolio of Pepsi ,Exxon, Coke anheuser Busch General foods ,Rj Reynolds for aclass project i got a C on

The market was priced fairly then because interest rates were highs and bank cd'spaid 13%

If you just owned those stocks and reinvested dividends I imagine you did great

Im glad you believe that some people are able to select their own stocks,that separates you from many on this forum.peace
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Mel Lindauer »

Petrocelli wrote:Last October 1, 2008, I decided to assemble a portfolio of 20 stocks. After some trial and error, I eventually assembled a portfolio of 19 stocks and 1 ETF. This portfolio is my large cap U.S. stock allocation. You can see the portfolio here.

http://socialize.morningstar.c....D47C472479

I selected stocks with a PE less than 20, a beta less than 1, a dividend yield of at least 2%, and a market cap of at least $10 billion. (I eventually replaced one of the stocks, Southern Company, with a utilities ETF.) I chose stocks after reading Stein/Demuth's "Yes, you can supercharge your portfolio!" I also read a lot of articles by Geoff Considine, and posts by statsguy. I used a Monte Carlo simulator called the Quantext portfolio planner to see how each individual stock impacted the returns and standard deviation of my portfolio.

When it comes to investing new money, I buy one of the 5 stocks with the lowest balance. This allows me to buy low.

After 1.25 years, here is the annualized return according to M* versus the 500 Index.

Total: 9.78%
Personal: 18.12%
500 Index: 8.12%

Thus, in an apples to apples comparison, my portfolio is outperforming the 500 Index by 1.66% annualized. When you consider the impact of new money, it is outperforming the 500 index by 10% annualized.

Here's the kicker: According to my Excel spreadsheet, when we compare the STD of the monthly returns of my portfolio to the 500 Index, its standard deviation is 47.51% lower! Put simply, these low beta stocks do not swing around as much as "the market."

Over the past few weeks, I have noted that there have been a lot of stocks on stock picking. However, do Bogleheads give short shrift to assembling a portfolio of low beta stocks? If you know what you are doing, and have patience, can buying and holding a portfolio of individual stocks be a good way to achieve diversification?
When folks start picking individual stocks, they become nothing more than part-time active fund managers. We know that over the long haul, the majority of the very smart full-time active fund managers fail to outperform their appropriate benchmark. So what makes individual investors think they can do a better job doing active management as a sideline? Beats me, but good luck in your efforts. I'll take the market return, since that's good enough for me.

Investors need to remember that investing isn't a competitive sport.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Petrocelli »

Mel Lindauer wrote:We know that over the long haul, the majority of the very smart full-time active fund managers fail to outperform their appropriate benchmark. So what makes individual investors think they can do a better job doing active management as a sideline?
Active managers can't beat the market because they are hampered by costs. It's that simple. My expense ratio on this portfolio is under .005%.
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Post by Gary »

Petro:

If instead of calling this a “portfolio”, you called this an “index” that you constructed, you’ll win over all of us Bogleheads. :D

I know that I can’t outperform a low-cost index approach because I’ve tried. That doesn’t mean that someone else can't make it work. Good luck!

--Gary
Last edited by Gary on Sat Dec 26, 2009 11:59 am, edited 1 time in total.
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Post by Triple digit golfer »

"I'll take the market return, since that's good enough for me."

Don't you mean the mid-cap index return?
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Wagnerjb »

Petrocelli wrote:After 1.25 years, here is the annualized return according to M* versus the 500 Index.

Total: 9.78%
Personal: 18.12%
500 Index: 8.12%

Thus, in an apples to apples comparison, my portfolio is outperforming the 500 Index by 1.66% annualized. When you consider the impact of new money, it is outperforming the 500 index by 10% annualized.
I am not sure why the new money should matter. Your portfolio shows you slightly outperforming the S&P500. With one year of data, that is too soon to draw a conclusion.

Best wishes.
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Post by billspetrino »

Petrocelli: Are you related to Rico in any way? As a man who has made good money with sports memorbalia just curious

Mel: I believe that MOST peopel who dont have the time or tempermanent to do this should do as you advise and get the market's return over time

But I have helped thousands of people earn solid returns and while they are not genuises they use the power of compound interest and reinvested dividends to carve out solid returns

I enjoy this intelligent debate.peace
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Post by jenbcapecod »

http://socialize.morningstar.c....D47C472479

I selected stocks with a PE less than 20, a beta less than 1, a dividend yield of at least 2%, and a market cap of at least $10 billion. (I eventually replaced one of the stocks, Southern Company, with a utilities ETF.) I chose stocks after reading Stein/Demuth's "Yes, you can supercharge your portfolio!" I also read a lot of articles by Geoff Considine, and posts by statsguy. I used a Monte Carlo simulator called the Quantext portfolio planner to see how each individual stock impacted the returns and standard deviation of my portfolio.

When it comes to investing new money, I buy one of the 5 stocks with the lowest balance. This allows me to buy low.
Out of curiosity, how much time per month do you devote to the total task of actively managing your investments? Include research, reading, comparison, analysis, etc.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by White Coat Investor »

Petrocelli wrote:Last October 1, 2008, I decided to assemble a portfolio of 20 stocks. After some trial and error, I eventually assembled a portfolio of 19 stocks and 1 ETF. This portfolio is my large cap U.S. stock allocation. You can see the portfolio here.

http://socialize.morningstar.c....D47C472479

I selected stocks with a PE less than 20, a beta less than 1, a dividend yield of at least 2%, and a market cap of at least $10 billion. (I eventually replaced one of the stocks, Southern Company, with a utilities ETF.) I chose stocks after reading Stein/Demuth's "Yes, you can supercharge your portfolio!" I also read a lot of articles by Geoff Considine, and posts by statsguy. I used a Monte Carlo simulator called the Quantext portfolio planner to see how each individual stock impacted the returns and standard deviation of my portfolio.

When it comes to investing new money, I buy one of the 5 stocks with the lowest balance. This allows me to buy low.

After 1.25 years, here is the annualized return according to M* versus the 500 Index.

Total: 9.78%
Personal: 18.12%
500 Index: 8.12%

Thus, in an apples to apples comparison, my portfolio is outperforming the 500 Index by 1.66% annualized. When you consider the impact of new money, it is outperforming the 500 index by 10% annualized.

Here's the kicker: According to my Excel spreadsheet, when we compare the STD of the monthly returns of my portfolio to the 500 Index, its standard deviation is 47.51% lower! Put simply, these low beta stocks do not swing around as much as "the market."

Over the past few weeks, I have noted that there have been a lot of stocks on stock picking. However, do Bogleheads give short shrift to assembling a portfolio of low beta stocks? If you know what you are doing, and have patience, can buying and holding a portfolio of individual stocks be a good way to achieve diversification?
This is how lots of people used to invest. It wasn't a bad way given that most mutual funds had very high ERs and loads. If my only option was loaded funds, I'd give very serious consideration to picking individual stocks. But with the alternative of index funds like Vanguard offers or the TSP offers...that allow diversification and a portfolio as likely to meet your goals as anything a professional could assembly, with nearly zero effort, hard to get into the stock picking game.
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Post by billspetrino »

jenb I dont know if this is addressed to me but I spend about 25 hours aweek "studying" and staying up with my investmnets

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Post by tibbitts »

Triple digit golfer wrote:"I'll take the market return, since that's good enough for me."

Don't you mean the mid-cap index return?
The market return is really what everything depends on. Most of what we do is based on the market return being positive as it has been in the past. If we get another thirty or fifty years of 0% market returns like we've had for the past decade, it may be that we'll all come to accept that the only successful strategy is to try to beat the market.

I think it's that way with the financial services industry. It's really based on the markets returning 10%, so almost nobody (outside this forum) really cares or notices if 1% or 2% is missing from that. But after decades of 0% returns and losses, instead of gains, compounding, that might change.

The way things have been, 90% of investors have been successful, just to varying degrees. If 90% of investors become unsuccessful, it might be that we'll all accept that the only possibility of success is to take the risk we need to try to be in that other 10%.

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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Petrocelli »

Wagnerjb wrote:
I am not sure why the new money should matter.
Because the stocks are highly uncorrelated, you can get more of a "rebalancing bonus" when you invest new money. I think that is why the personal returns are so much higher than the total return.
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Post by Petrocelli »

billspetrino wrote:Petrocelli: Are you related to Rico in any way?
No.
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Post by Petrocelli »

jenbcapecod wrote:
Out of curiosity, how much time per month do you devote to the total task of actively managing your investments? Include research, reading, comparison, analysis, etc.
I read the S&P 500 reports on each stock when they come out. I probably spend about 2 hours a month on research. Given that it is kind of a hobby, I don't even mind doing it.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Petrocelli »

Mel Lindauer wrote:
Investors need to remember that investing isn't a competitive sport.
I agree.

However, most people on this forum invest differently. If someone assembles a portfolio using any combination of index funds, no one bats an eye because they can cite some article that supports what theya re doing. Posters can assemble portfolios using microcap indexes, commodities indexes, midcap indexes, emerging markets small cap value indexes, etc., and it's all good. Just make sure the word "index" is found somewhere in the name of your fund or ETF.

However, if someone assembles a portfolio of conservative blue chip stocks (as I have done) it is viewed as being somewhere between goofy and gambling.

Yet, a person who buys and holds a portfolio of stocks can have lower costs than an index fund, can have a portfolio of lower beta stocks with lower standard deviations, and can really take advantage of rebalancing.

As a group, I think the Bogleheads cannot look objectively at a portfolio such as mine. I offer my initial post simply as a counter-point which may encourage a few people to think outside the box.
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Post by jenbcapecod »

Hi - you said...
jenb I dont know if this is addressed to me but I spend about 25 hours aweek "studying" and staying up with my investmnets
Do you factor in the hourly rate that your time is worth when calculating the investment gain?
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by KyleAAA »

Petrocelli wrote: Here's the kicker: According to my Excel spreadsheet, when we compare the STD of the monthly returns of my portfolio to the 500 Index, its standard deviation is 47.51% lower! Put simply, these low beta stocks do not swing around as much as "the market."
I don't believe you have enough data points to accurately calculate standard deviation after just 1.25 years. I would try to use daily returns. Since stock returns distribute themselves in a Levy distribution and it is a stable distribution, daily returns will give you far more data points and, even better, those results should scale. But maybe they won't. In any case, standard deviation is unlikely to be usable in the form you've currently calculated it.
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Post by nisiprius »

My mantra is "it probably doesn't matter much."

A diligent picker of a diversified portfolio of twenty or more stocks, or a good active fund, or an MPT-maven slicer and dicer using asset category index funds, or a total market index fund, or a single Target Retirement fund...

...over periods of time of up to a decade, some will do better than others, and we will hear about the ones that do better, and the people that are doing better are likely to think it's because they have the right philosophy.

And there's so much fluctuation in stocks that even over a decade the noise completely overwhelms the signal and there's never any way to be sure whether the superior results were just luck or not.

Pick a number, any number, between 25 and 75. Put that part of your portfolio into stocks in some sensible, levelheaded way that tries to capture a broad chunk of the market, is diversified, and perhaps includes some kind of rational assessment of value. After two or three decades, it's very unlikely that you'll be worse off than if you had no stocks at all, and there's a pretty good chance that you'll be better off, by a worthwhile amount, than if you had no stocks at all. I really doubt you can say anything more than that.

I agree with Petrocelli to this extent: someone who wants to invest in individual stocks and does so in a way that includes a diligent attempt to value those stocks by direct research (clicking on a Fidelity stock screener is not research) is probably not making any terrible mistake. Any more than someone who invests in Wellington rather than Balanced Index (or, ahem, vice versa). And the indexers are probably not making any terrible mistake by not doing what Petrocelli does.

Now I'm about to say something horrifying. It's difficult to keep good records over a period three or four decades. So it's very likely that after three decades of investing, you'll never even know how well you did. I can be quite sure this is true for me. :oops: I'll bet there are many Bogleheads who think they are going to keep adequate records. I'll bet there are a few who actually have kept good enough records for three decades... but I'll bet it's very few.

My spreadsheet entries only go back to 1986. I can make a pretty graph of how my total portfolio grew over the years, including contributions of course. But they are no good because I completely failed to keep an accurate month-by-month record of every single time I contributed or withdrew from an investment account. I only have my last ten years of tax returns, and they are wildly incomplete because they don't show Roth withdrawals, nor do they show 401(k) contributions (which just show up as salary reductions). And I've changed brokerages several times (Merrill Lynch, Dean Witter, Schwab to name some old ones). And don't forget all my wife's stuff. Some of that stuff might be available in brokerage records, but I'm not going to spend hours trying to find out how to contact Dean Witter, just to satisfy my curiosity about how well I've done over my lifetime.
Last edited by nisiprius on Sat Dec 26, 2009 1:13 pm, edited 5 times in total.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Opponent Process »

Petrocelli wrote:Yet, a person who buys and holds a portfolio of stocks can have lower costs than an index fund, can have a portfolio of lower beta stocks with lower standard deviations, and can really take advantage of rebalancing.

As a group, I think the Bogleheads cannot look objectively at a portfolio such as mine. I offer my initial post simply as a counter-point which may encourage a few people to think outside the box.
the debate is over what advantage this activity has, other than entertainment purposes.

a vast amount of research indicates that there is no advantage to stock picking in terms of adding to risk-adjusted returns in a portfolio long-term. real money. which is a (the?) primary aim of investing. all of the studies have been done, a long time ago. is it fun, yes? a great hobby. I don't think it's goofy or gambling. I guess the standard Boglehead argument would be that it does not represent a free lunch, though. any temporary outperformance is luck, not skill. and at the end of the day, you're probably not looking at the right benchmark. in reality, you're hugging a low beta, good dividend benchmark, and your returns will match this benchmark over time. you're saving maybe 20 or 30 bp over a similar ETF, but you're taking on a lot more risk. this risk might show up in year 1 or year 10 of this strategy.

to convince Bogleheads (objectively), you'd have to match your returns to an appropriate benchmark (or ETF), and (if you still outperform) convince us that your concentrated picks are not exposing you to more risk over time.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Matty G »

Petrocelli wrote:Yet, a person who buys and holds a portfolio of stocks can have lower costs than an index fund, can have a portfolio of lower beta stocks with lower standard deviations, and can really take advantage of rebalancing.
Neither beta nor standard deviations are good measures of actual risk. It just measures volatility, and past volatility at that. By picking a few stocks, you open yourself up to the risk that any one or more of the companies you pick will go Enron/Worldcom/AIG on you, and you will lose a significant amount of your portfolio.

That is not quite as relevant to you, since individual stocks are only a relatively small part of your portfolio, but someone who has all of their retirement savings in 20 companies takes a big hit when one of those companies happens to go bankrupt.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Qtman »

Petrocelli wrote:Last October 1, 2008, I decided to assemble a portfolio of 20 stocks. After some trial and error, I eventually assembled a portfolio of 19 stocks and 1 ETF. This portfolio is my large cap U.S. stock allocation. You can see the portfolio here.

http://socialize.morningstar.c....D47C472479

I selected stocks with a PE less than 20, a beta less than 1, a dividend yield of at least 2%, and a market cap of at least $10 billion. (I eventually replaced one of the stocks, Southern Company, with a utilities ETF.) I chose stocks after reading Stein/Demuth's "Yes, you can supercharge your portfolio!" I also read a lot of articles by Geoff Considine, and posts by statsguy. I used a Monte Carlo simulator called the Quantext portfolio planner to see how each individual stock impacted the returns and standard deviation of my portfolio.

When it comes to investing new money, I buy one of the 5 stocks with the lowest balance. This allows me to buy low.

After 1.25 years, here is the annualized return according to M* versus the 500 Index.

Total: 9.78%
Personal: 18.12%
500 Index: 8.12%

Thus, in an apples to apples comparison, my portfolio is outperforming the 500 Index by 1.66% annualized. When you consider the impact of new money, it is outperforming the 500 index by 10% annualized.

Here's the kicker: According to my Excel spreadsheet, when we compare the STD of the monthly returns of my portfolio to the 500 Index, its standard deviation is 47.51% lower! Put simply, these low beta stocks do not swing around as much as "the market."

Over the past few weeks, I have noted that there have been a lot of stocks on stock picking. However, do Bogleheads give short shrift to assembling a portfolio of low beta stocks? If you know what you are doing, and have patience, can buying and holding a portfolio of individual stocks be a good way to achieve diversification?
Your last paragraph is telling - how many would buy and hold? Also since Oct 08, it looks easy, wonder what your average vs the indexs will be after, 5 years, 10 years?
Don’t wear yourself out trying to get rich; be wise enough to control yourself. | Wealth can vanish in the wink of an eye. It can seem to grow wings and fly away | like an eagle. - King Solomon
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Mel Lindauer
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Post by Mel Lindauer »

Hi Petro:

Before you go too far down this "I'm good at stock picking" or "stock picking is easy" road, you may want to read what Bill Bernstein reported on this matter in his The 15-Stock Diversification Myth. Here's his summary:
So, yes, Virginia, you can eliminate nonsytematic portfolio risk, as defined by Modern Portfolio Theory, with a relatively few stocks. It’s just that nonsystematic risk is only a small part of the puzzle. Fifteen stocks is not enough. Thirty is not enough. Even 200 is not enough. The only way to truly minimize the risks of stock ownership is by owning the whole market.
Disagree with Bill at your own peril. You can read Bill's research here: http://www.efficientfrontier.com/ef/900/15st.htm
Best Regards - Mel | | Semper Fi
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Post by billspetrino »

Jen : I figure between my consulting clients and newsletter and my own return my time is probably worth at least 100$ per hour but thats probbaly underestimating it.the point is I enjoy doing it so its kinda not as relevant for me as it would be for those who do not enjoy it

MattyG :Excellent POINT beta and standard deviation is NO measure of risk

Risk is 1) buying a poor security with an uncertain or poor economic moat 2) buying agreat company at an in appropriate or poor price like most investors did in 1999-2004

Generally" I do not recommend owning more than 25 stocks .In theory it may be "better" but in reality like children there is a optimal amount

Personally I have never owned more than 9 stocks at atime. The fact is there is a HUGE difference in stock 9 and stock 1 or 2 and you would be "hurting" your returns by doing that

Obviously MOST peopel do not have the tempermant or ability to allocate capital and to those folks i recommend the vanguard fund

But i believe that ANY person who has the DESIRE and temperment and patience to use compound interest and reinvested dividends to select LARGE Cap multinational stocks at GREAT prices should be able to earn 8-12% compounded annually over a 25-60 year period provided they do not attempt to TIME the market or try and "speculate" on stocks that are either"too new" or stocks like financials and cyclicals that do not control their own destiny to acertain degree

Hope all this helps.I really enjoy the intelligent civil debate here

Even with those who I do not agree i have found this to be very educational.peace
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Post by grayfox »

Many good points made, especially by EmergDoc about using individual stocks if the only other choice was 8% load funds, and tibbits comments that people are happy with the market return as long as it is positive, but not if it is zero or negative.

I know I can't pick stocks. Funny thing is I was a great stock picker from 1982 to 2000. I had a method that seemed to be foolproof. But for some reason it stopped working in the past decade.

My only advice to Petrocelli would be to plan on at least a few of your stocks loosing 90% if not 100% at some point in the future. So if you had no more than 1% in each stock then most you could loose by one event would be 1%.
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Post by billspetrino »

grayfoxgreat comment about being great from 1982-2000

In fact my returns in those times was much worse than it has been in the past decade

many think i have gotten"wiser" but it is much "depper"

The effects of compound interest and reinvested dividends are more powerful over time

In 1990 Gold was 400$ per ounce and Coca Cola was about 5 dollars per share and was paying about a 4% dividend and a 30 year treasury was probably about 7%

The gold has appreciated about 175% but has NO reinvested ividends

The person with the treasury who bought and held has been earning 7% per year but after 30 years will get no appreciation

The Coke stock without reinvested dividends is paying you about 32% on your money in 2009 which

The Coke stock is actually LESS than it was 12 years ago but the appreciation is still almost 1100%

In the past 10 years the dividends have totaled about 3 times the total amount invested

Of course those who bought Coke 12 years ago at a PE ratio of 60 have not done so well

They did not realize that buying agreat company at the "wrong price" is risky contrary to popular belief

Also if you owna stock for a short period of time ( less than 3-5 years) you a involving yourself ina risky transaction.

enjoy this discussion.peace
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by mda42 »

Mel Lindauer wrote: We know that over the long haul, the majority of the very smart full-time active fund managers fail to outperform their appropriate benchmark. So what makes individual investors think they can do a better job doing active management as a sideline?
I am a big believer in indexing because, as Mel said, you can "take the market return" with almost no work. This is probably the best strategy for most poeple.

However, I also believe that an individual investor can outperform "professional" analysts if the individual investor is willing to devote a lot of time (20+ hours per week) to analysis. The individual has a huge advantage over active fund managers: an individual investor is only accountable to himself or herself. With all the constraints on fund managers, there is no way they can implement a winning strategy similar to Buffet's (buy a very small number of stocks, very infrequently). The professional managers probably spend most of their time worrying about raising capital and looking good rather than doing what is actually best from an investing point of view.
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Post by billspetrino »

mda42 i agree 100%

The professional fund manager has alot more money to manage and has a major problem

A hedge fundinvestor DOES NOT want to make 10-15% annually,even though that is great

They instead want highe returns which means higher volume of trades which "drastically" increases' the degree of risk

Thats why i have decided to do the newsletter thing instead of startinga fund

Also the fact is I want investors who do not"blindly" follow me but instead read my"argument" for a stock and decides to buy it themselves

The best idea one gets is generally one of their own

At least thatswhat they think.haha

love this discussion.peace
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Post by sschullo »

I could pick stocks easily, but then lost a bundle in the tech crash.
I have to admit that my mother picked one stock 50 years ago and she got it right. Her tip was 3M and her skill was so right that I still own 25 shares that I inherited. While I learned about shares and stocks as a kid from her, and did some good picking myself, I am terrible at making money, actually lost money. Remember making money is the point.
This is my strategy; I just kept her stock picking skills for half century and made 100% because she paid for it, not me.
Steve
"We have seen much more money made and kept by “ordinary people” who were temperamentally well suited for the investment process than by those who lacked this quality." Ben Graham
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Post by billspetrino »

sschullo :Your mom showed you the MOST IMPORTANT THING every investor should see

Buying agreat company at a great time ( the stock market in 1960 was not overvalued) that combines reinvested dividends and compound interest is a GREAT INVESTMENT

Each investor needs to find the "large cap" multinational that will continue to grow like MMM has

Like finding the right spouse it is one of the most important thing you will have to do.peace
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Post by Ariel »

I too am enjoying this discussion. billspetrino: would you care to share your favorite 5 picks for the long run? (As of this point looking forward, not back in time.) Thanks!
Last edited by Ariel on Sat Dec 26, 2009 2:44 pm, edited 1 time in total.
Do what you will, the capital is at hazard ... - Justice Samuel Putnam (1830), as quoted by John Bogle (1994)
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Post by billspetrino »

Hi ariel glad you are enjoying it

Iam not at liberty to give Individual stock picks as it is not fair to my personal clients and my newsletter clients as well

However I can give you "general guidelines" that have worked well for me

1) pick a stock which you"understand'

2) follow a stock for at least 2 weeks before actually buying it

3) I personally like large cap multinationals which have a market cap of at least 1 billion or more especially for those who not"experts'

4) Look at the company's historic dividend yield and price earnings ratio and study the companys' financials over the past 10 years.valueline has the Dow 30 for you complimentary

5) Determine whether a company's economic moat can be or has been destroyed by technology or increased competition

6) is the dividend likely to be continued ?

7) how predictible are the earnings

8) do any gurus like Buffett or Paulson own the stock and at what price did they buy.I do not buy a stock BECAUSE of a guru but the railraods caught my attention because of Buffett

9) investing is 50% art ( instinct) and 505 science ( numbers)

10) If there is ONE reason you feel you should not own a stock than SELL IT ASAP

When i found out that GE did business with Iran I told my clients to sell the stock( i never owned it) late the CEo did some really foolish things and if I hadnt been so turned off by his past conduct I would have been burned.Also maybe 10 years ago Buffett who was the largest owner of fannie mae liquidated his entire position because he felt they were managing risk "incorrectly" .I got out of my and my clients positions and was vindicated when these stocks imploded although for many years i was told i was "too cautious'

Hope this helps.peace
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Post by Ariel »

Thanks, Bill. That's pretty similar to the way I've been selecting stocks for the last few months.

My 12 main holdings are ABT (Abbott), CVX (Chevron), JNJ (Johnson & Johnson), KMB (Kimberly Clark), KO (Coca Cola), LLY (Lilly), LMT (Lockheed Martin), MCD (McDonalds), NVS (Novartis), PM (Philip Morris Intl), T (AT&T), and XLU (Utilities ETF). I also have half-postions in two other stocks, BCE (Bell Canada) and RAI (Reynolds American).

This approach has done very well over these few months. However, I'm trying to decide for the new year, once and for all, whether to switch to a passive approach. Decisions, decisions ...
Do what you will, the capital is at hazard ... - Justice Samuel Putnam (1830), as quoted by John Bogle (1994)
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Post by billspetrino »

Ariel it is clear you have put a considerable amount of thought into your portfolio and believe you will beat most index funds over time

My advice to you is to NOT listen to any"experts" and keep doing what "ariel" thinks is best

continued good "skill" in your capital allocation decisions.peace
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Post by neverknow »

..
Last edited by neverknow on Mon Jan 17, 2011 7:52 am, edited 1 time in total.
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Post by Robert T »

.
Here is my attempt at security selection (tracked in M* mainly for learning purposes, not actual), set up about 1 yr ago. 12 month portfolio returns = 47.1%, compared to my ETF index 'benchmark' return of 30.2%.

Security Selection
ETF

Few observations over the last year: Individual company volatility is high (idiosyncratic risk), and developing the resolve to stick with companies during inevitable downturns (poor stretches of relative returns, high tracking error relative to market indexes) IMO will require an depth understanding of the companies business model, future prospects, competitors etc. IMO this takes time to do well. An example is Chieftan Capital (used by Yale University), that invests in only 6 to 12 companies, but has 3 to 4 full time staff to do the indepth company due diligence.

Robert
.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by sschullo »

neverknow wrote:
Petrocelli wrote:I offer my initial post simply as a counter-point which may encourage a few people to think outside the box.
For the vast majority, I think the Boglehead way is the best way.
I always get a chuckle when Petro and other active manager aficionados talk about their active strategy as "thinking outside the box." They never get that the Boglehead way is thinking outside the box. Active investors and their failed strategies have been around since the ancient Babylonians (The Richest Man in Babylon).

The problem with active management strategy is that their unique individual "strategy" can never be replicated identically to others. Even when asked, billspetrino can only give general advice. So the person who takes the advice of Petro and billspetrino thoughts cannot replicate in a strategic way what they did, never. From all that I have read from Petro over the years is that he claims he was successful, good for him, but the strategy he used cannot be replicated even with the VG active management funds because going forward, the managers have traded shares, during the time the Petro made money, the future will be different for a new investor. All that people can do is look forward. While Petro and billspertrino can do is generalize, the power of indexing is its exact replication with all investors but also represents the economy in general and it guarantees the market averages at extremely low costs. I love the averages and the low costs but it’s the best way that an ordinary investor like myself can play the market and the economy. I wish I had earned the averages all of these years, my already good portfolio will be great if I did. But it did not work out that way. When I invest in the s&p 500, extended market index, TSM, TBM, international index and investor x does the same, we have the same portfolios. Not so with active management; no two portfolios are exactly the same. Those portfolios represent more of the individual investor than a strategy, thats the downfall. Its been good for Petro and billspertrino, but it would be a disaster for me to even try and copy what they did. Impossible.
But the debate continues as this topic has been discussed over and over again since 1998.
Steve


Steve
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Wagnerjb »

Petrocelli wrote:
Wagnerjb wrote:
I am not sure why the new money should matter.
Because the stocks are highly uncorrelated, you can get more of a "rebalancing bonus" when you invest new money. I think that is why the personal returns are so much higher than the total return.
Petro: I cannot get the link in your original post to open. However, I looked at your portfolio on M*, and it shows you beat the S&P500 in 2008 and lost to it in 2009, for a total return that - as you say - is very close to the index. I don't know how you can get a 10% outperformance from those figures. I strongly suspect the 18% return is because you added money to the portfolio, not because the stocks you chose did better. M* may be calculating the ending dollar value as compared to the original dollar value, and that may be where the 18% return comes from.

I also hold individual stocks, only slightly more than your 20. Studies have shown that you should expect tracking error of at least 6% on average. That means you might outperform by 6% one year, underperform by 3% the next year, outperform by 1%, underperform by 5%, etc. My personal portfolio has shown returns similar to my example, and over a half dozen years I am about tied with my benchmark. I suspect you will be too.

Best wishes.
Andy
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Post by sschullo »

billspetrino wrote:sschullo :Your mom showed you the MOST IMPORTANT THING every investor should see

Buying agreat company at a great time ( the stock market in 1960 was not overvalued) that combines reinvested dividends and compound interest is a GREAT INVESTMENT

Each investor needs to find the "large cap" multinational that will continue to grow like MMM has

Like finding the right spouse it is one of the most important thing you will have to do.peace
My mother, bless her soul, was an Italian immegrant who knew nothing about picking companies. She worked as a assembly person for 3M and making .50 cents an hour. She bought some 3M shares because somebody told her it was a good way to save. That was her strategy and she never sold them. I keep them for sentimental reasons. Its the only stock I own now.
I bought some great companies too, Intel, Cisco Systems, Applied materals, Phizer, Microsoft, UPS. All profitable companies and I barely made money when I sold them all after the market recovered in 2003. Since then their stock has been absolute crap and yet they continue to make money. Go figure. Ill stick with the averages from now on. End of discussion.
Steve
"We have seen much more money made and kept by “ordinary people” who were temperamentally well suited for the investment process than by those who lacked this quality." Ben Graham
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Post by stratton »

Petro's stocks look remarkably like the holdings of Vanguards:

Dividend Appreciation etf (VIG)

Dividend Growth fund (VDIGX)

Both appear to be paying dividends around the S&P 500, but unlike the S&P 500 both funds look for histories of increasing dividends over long periods.

Paul
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Post by LHerr »

"After 1.25 years, here is the annualized return according to M* versus the 500 Index.

Total: 9.78%
Personal: 18.12%
500 Index: 8.12%"

When I see posts such as this one, questions pop to mind. Here are a few.

1) Is 1.25 years meaningful? What will the portfolio look like after 10 years or 30 years?
2) Is the 500 Index an appropriate benchmark? Maybe it is, maybe it is inappropriate. Peter Lynch used the S&P 500 at at time when he was 25% in international stocks.
3) What is the risk measurement for this portfolio? How is the risk measured?
4) Was there any cash flowing in or out of the portfolio over over the 1.25 years?

Most of us remember Bill Miller's great record over many years - until it was not great.

I will not deny there are investors who do very well picking individual stocks. The laws of probability would have it no other way.

LHerr
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Post by gkaplan »

as a person who has achieved financial indepence through my own stock picking
Could you be more pompous?
Gordon
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Beagler »

Petrocelli wrote: As a group, I think the Bogleheads cannot look objectively at a portfolio such as mine. I offer my initial post simply as a counter-point which may encourage a few people to think outside the box.
Over 40 responses (mostly taking you to task) in less than a day. I'd say your opinion of The Group is correct.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.
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Re: Do Bogleheads Overstate Difficulty of Stock Picking?

Post by Mel Lindauer »

Beagler wrote:
Petrocelli wrote: As a group, I think the Bogleheads cannot look objectively at a portfolio such as mine. I offer my initial post simply as a counter-point which may encourage a few people to think outside the box.
Over 40 responses (mostly taking you to task) in less than a day. I'd say your opinion of The Group is correct.
Did you ever stop to think that perhaps the "group" has it right, Beagler?

Perhaps you failed to check the link I provided to Bill Bernstein's excellent research on this very topic? So you can add Bill B to the "group" you seem to be belittling.
Best Regards - Mel | | Semper Fi
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