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Am I going through a phase?
Old 04-20-2008, 07:10 AM   #1
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Am I going through a phase?

I've seen several posters refer to "back when I was buying individual stocks". I started buying them 18 months ago using TMFs Stock Advisor and Global Gains services as my guides. I'm currently "playing" with 1/8 of our portfolio in this manner.

It's exciting and probably mildly addictive, but I am buying for the long-term. I put the most money in the losers and the only stock I've sold was Jet Blue.

My self-devised strategy is to spread the risk by holding small positions in lots of companies (anywhere from $2k-$10k in about 25 or more different stocks). I would appreciate any feedback on this strategy.

I'm still working and planning to FIRE before 50 (hopefully two more years of work).

My question is: Did you once by individual stocks and then stop because,

A) You realized it wasn't a sound strategy for the average investor, or

B) You moved from the investing to the withdrawal phase?
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Old 04-20-2008, 07:26 AM   #2
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Quote:
Originally Posted by Gazingus View Post
My question is: Did you once by individual stocks and then stop because,

A) You realized it wasn't a sound strategy for the average investor, or

B) You moved from the investing to the withdrawal phase?
In my case the answer is C) All the above. See my sig line for more details.
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Old 04-20-2008, 07:28 AM   #3
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We went through that phase and kept track of our performance. The thought in the '90s was that we could easily do better than the S&P500 by buying some of the top holdings in that index, but do better both on taxes and buying things when they were down. My spouse was in two different investment clubs at the time. In the end, her clubs did no better than just a money market fund despite owning some recognizable high flyers like Cisco, Starbucks, WholeFoods, etc.

Some years we did slightly better than the S&P500 and some years we did slightly worse. We even had international stocks (ADRs), small cap stocks, etc.

Then we became enlightened about asset allocation and along came ETFs. We adopted a Fama & French inspired slice-and-dice asset allocation (see, e.g. Asset allocation tutorial?) and started to make the big bucks.

Finally, at some point small positions are a pain in the butt. Once you have a couple million in investable assets, a 2% position is $100K. Anything smaller than a $100K position is just in the noise and kind of a bother to keep track of. That's where ETFs come in. You establish a position of a few hundred thousand dollars worth and do not really worry about it too much other than tax-loss-harvesting and rebalancing. That makes it very easy to sleep comfortably at night.
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Old 04-20-2008, 07:50 AM   #4
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I invest mostly in individual issues because I am in the business and have a very expensive degree (and experience) that should give me an edge over the hoi polloi. I am gradually transitioning to an index portfolio in my tax deferred accounts for two reasons: 1) it is still possible to make mistakes and 2) I am getting far enough along in my plan that I don't need to take as much risk to be reasonably assured of meeting my goals.

I think its fine to play with 10 or 15% of the portfolio in individual issues. But keep in mind that you are increasing risk vs. indexes. And if you are going to do this, start reading and learn to do financial stateement analysis, cash flow modelling, etc.
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Old 04-20-2008, 07:54 AM   #5
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I did it for awhile and it is mildly addicting . I made some good choices and I bought some real dogs . I still do it occasionally with a small amount of play money but mostly I'm an index , Etf person .
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Old 04-20-2008, 08:00 AM   #6
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I, too, switched away from buying individual stocks to purchasing mostly ETFs and mutual funds. The main reasons were:

1) We didn't have enough time to pay the level of attention that I felt was required to stay on top of things from a research and trending perspective, latest news/reports on the company, etc.

2) We realized that we didn't have to beat the market to achieve our dream. We can ride WITH the market and get where we need to be, with considerably less angst.

Charlotte
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Old 04-20-2008, 08:02 AM   #7
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Quote:
Originally Posted by Gazingus View Post
It's exciting and probably mildly addictive, but I am buying for the long-term.
This is not a good sign. The first law of investing in individual stocks is to have your emotions under control.
Other items to consider besides emotions are:
- Time involved in research and tracking
- Trading fees and the affect on returns

I knew a guy who had it made - good family; retired, kids college paid for; no debts; rich - lost it all - including the family due to day trading.
It may be an extream from what you are doing but it is the mindset and thought process that is relevant to you. Investing in the individual stocks takes you away from the proper mindset - a proper mindset and persepective on money and investing.
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Old 04-20-2008, 09:07 AM   #8
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Originally Posted by Gazingus View Post
My question is: Did you once by individual stocks and then stop because,

A) You realized it wasn't a sound strategy for the average investor, or

B) You moved from the investing to the withdrawal phase?
C) It was too damn much trouble!

I quickly tired of having to pay attention to the quarterly corporate info/analyst updates and the wild pattern of ups and downs that often had nothing to do with company performance. Decided to let a fund manager do it for me - I had better things to do.

Audrey
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Old 04-20-2008, 09:28 AM   #9
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I have moved out of all of my individual stocks except for a trivial amount of Bank of America left over in my taxable account. I just don't want to pay the capital gains (90% gain) and it pays a great dividend -- so far.

I used to be a technical trader of stocks I had researched to be sound fundamental buys. I worked at this 10 to 20 hours per week. In the late 90's with several years of Quicken history I compared my labor intensive approach to a Vanguard S&P (80%) and LT bond fund (20%). I slightly underperformed this pretty simple index.

I then started doing some reading with the idea of buying ETF's which were just coming out in reasonable diversity of asset classes. I stumbled upon Scott Burns and some others.

Eventually, I've decided that index mutual funds are the way to go. I've become more conservative with a 60/40 split with equities mostly divided between Vanguard's Total Stock Market Index, Vanguard Small Cap, Vanguard Emerging Markets and Dodge & Cox International. I still have some residual SPY and IWD in my taxable account that I'm sitting on because of significant capital gains I'm deferring and they are close enough to the Total Stock Market Index to be counted in my large cap allocation.

Buying individual stocks is a lot of work if done "properly." You're also in competition with "professionals." All the research shows that very few "professionals" beat the market index over a long period of time.

If you are entertaining yourself with individual stocks I think you are buying that entertainment with what I suspect will be a lower return. I suggest you keep very good records of your profits and losses so you can do a comparison with a broadly diversified index fund. I thought I was doing really well until I actually compared the real numbers.
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Old 04-20-2008, 09:43 AM   #10
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Originally Posted by Charlotte View Post
I, too, switched away from buying individual stocks to purchasing mostly ETFs and mutual funds. The main reasons were:

1) We didn't have enough time to pay the level of attention that I felt was required to stay on top of things from a research and trending perspective, latest news/reports on the company, etc.

2) We realized that we didn't have to beat the market to achieve our dream. We can ride WITH the market and get where we need to be, with considerably less angst.

Charlotte
Exactly!! And to expand on 1) above, mutual funds generally spread the risk over a large number of equities (for example, 3544 stocks for VTSMX, Vanguard's Total Stock Market Index), spreading the risk in a way that is difficult for most owners of individual stocks to approach.
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Old 04-20-2008, 09:44 AM   #11
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You should also go read Jason Zweig's Your Money & Your Brain which may help explain the
Quote:
It's exciting and probably mildly addictive
comment.
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Old 04-20-2008, 10:12 AM   #12
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i stopped buying individual stocks when i realized i wasnt smart enough to pick just the right company in just the right sector at just the right time in just the right market sentiment.

and then even if i got all of the above correct i still didnt know what the competitors had planned. lets not even talk about a missed earmings report knocking you down 20 or 30%.

did i tell ya how much i looove funds. no individual company risk......
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Old 04-20-2008, 10:24 AM   #13
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Gambling is mildly addictive and lots of fun!

Too much work, too much trouble, all it takes is a lying/thieving bunch of executives to make your well thought out and analyzed purchase turn to crap, and most of the time when you hit a big one, you just got lucky.

Plus I did a tax return once with a stack of trade sheets that came up to my kneecap.

Heck, look at the well regarded super blue chip stocks everyone was recommending you load up on...around 1998. Tyco, Enron, Worldcom, Sprint, AIG, etc.

Shoot, you couldnt even trust Martha Stewart to not go off the deep end.
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Old 04-20-2008, 10:35 AM   #14
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The definite answer is A)

After I graduated Wharton business school -- I thought it was easy to be smarter than the market on a few hours a week. After 10 years, realized that smart asset allocation was much easier.

I also could see in my day job where knowledge of a specific industry really can give you an advantage -- however, I am not allowed to trade on that industry for good reason and ethics. As a result, the difference between true inside information and outside in knowledge no matter how hard someone works has become readily apparent.

As a result, I've become a true index fund fan (Vanguard / DFA). I do however, believe in buying with hiring active management when it could really make a difference (e.g. funds that are locked up for periods of time such as hedge funds, private equity). If you look at the Yale / Harvard endowment portfolios that get the best world-class management thats what they do.
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Old 04-20-2008, 10:56 AM   #15
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I tried trading individual stocks right out of graduate school. People were constantly talking about their portfolio around the office, so I opened an account with Etrade and started buying and selling. I soon realized that I was not willing to do the homework on each individual stock and I often bought stocks on tips I received from colleagues. Even though I made a bit of money, a good chunk of it vanished in the form of trading fees and taxes. After only 8 months, I realized that my 401K, invested in passive mutual funds with a proper asset allocation, had greatly outperformed my Etrade account. So I closed my Etrade account and that was the last time I ever bought an individual stock. This experience also taught me that fees can really kill returns, and therefore it accelerated my quest for low cost investing. Today I am an unconditional Vanguard investor.
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Old 04-20-2008, 10:57 AM   #16
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I was 100% invested in equities until my mid-40's and don't regret it. I have a high risk tolerance but I am not a gambler at all (both are key IMHO) and I'm an engineer by profession so numbers/analysis are great fun to me. If you are going to do well in individual stocks, you are going to have to do your homework and make your own decisions (not what you read/hear - 'something that everyone knows isn't worth knowing' --- I think it's Bernard Baruch). If you're going to pick by reading magazines, watching CNBC and/or following a broker, you will have your head handed to you by a Couch Potato investor in the long run.

When I started in my early 30's I owned nothing but individual stocks except for my 401k. I had almost 30 individual holdings at one point, but closer to 10-15 most of the time. I learned a lot about investing and business in general and I did very well although in retrospect I was lucky in terms of timing. ie, I started investing by going "all in" the day after Black Monday, you can't plan opportunities like that. I was bright enough to recognize it for what it was even though most of my co-workers thought I was crazy and they we're doing just the opposite...but a big chunk of luck nonetheless.

I was very good at picking stocks and when to buy, my weakness was when to sell (I usually held on too long to to avoid CG taxes and commissions). I rode a position in CSCO from $20K to $155K and back down to $60K before I sold (sigh). In my early 40's I started to add mutual funds and selectively sell off my individual stocks, my last individual holding was MSFT which I sold a few years ago, also not at it's peak but still with a big gain.

I am all funds now, large positions in less than 10 funds and I am content to beat 75-80% of investors (read Bogle, Bernstein et al) and not spend as much time researching my holdings like I had to when I was younger. YMMV, best of luck...
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Old 04-20-2008, 10:59 AM   #17
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I also could see in my day job where knowledge of a specific industry really can give you an advantage
It all seems so logical, doesnt it?

Yet in my last job I was a very well established expert in my field and I had enough visibility to the company operations to know how all the products were doing in terms of development cycles, quality levels, manufacturing yields, revenues, bottom line numbers and partnerships/alliances well before they were announced to the public. But I was just a notch or so down the food chain from where any legal or ethical limits would be put on my stock trading of the company or any of its partners.

I should have been able to make a killing trading the company stock.

How did that work out? Well, we'd announce record earnings and that we were moving up some new highly profitable products earlier than expected. The stock would go up! Six months later we'd have the same type of announcement. The stock would go down! We'd announce a great new partnership. Stock would go down! We'd announce a massive failure of a long running partnership. Stock would go up! We'd announce a shortfall in revenues. Stock would go up! Six months later, same thing...stock would go down!

Analysts would capriciously raise and lower ratings, then reward or punish results that differed from their WAGS (oh hey, I just got that), so they were unreliable.

All the while the talking heads provided an array of excuses as to why the stock went up or down in line with or contrary to the announcements and data.

I'll refer again to Bernsteins example of the man walking to the park with his dog. Stock picking and trading are like trying to predict which way the dog is going to go during the course of the walk.

Good luck with that.

I did make some money on that stock, but a lot of times I had to mutter "WTF?!?" and hang onto it for six to twelve months to bring in a profit.
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Old 04-20-2008, 11:30 AM   #18
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My question is: Did you once by individual stocks and then stop because,
A) You realized it wasn't a sound strategy for the average investor, or
B) You moved from the investing to the withdrawal phase?
During the withdrawal phase I've worked my way full circle, including shorting, although thankfully I was able to avoid any tuition experiences involving options trading. The most illuminating skill was realizing when I was stepping outside my circle of competence.

I shut down my account and we're slowly closing out our remaining individual stocks (Intel, Superior Industrial, and Tate & Lyle) in favor of index ETFs.

The research was interesting and we were making good money near the end of the learning curve but (1) it's a lot of work to do it "right" and (2) personally there's no profit motive anymore.

I'm still exploring the process of angel investing, but my initial conclusions are (1), (2), and mostly a desire to inoculate myself against the "What if...?" curiosity.
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Old 04-20-2008, 12:08 PM   #19
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All this talk makes me nostaglic for the late 90's early 2000's when everybody was day trading and thought they were geniuses . It was all the buzz at parties . Similar to the recent real estate hype where everybody thought they could flip houses. There should be warning signs " Danger this could be harmful to your financial health " Long term effects may include divorce , bankruptcy and foreclosure .
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Old 04-20-2008, 12:08 PM   #20
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I only invest in individual stocks. I couldn't get excited about paying a pro to invest my money when most of them can't beat the dart board method. In their defense, fund managers have to diversify to a degree that makes it hard to beat the market.

My views are probably contrary to most here but I think that a little diversification is a good thing but a lot of diversification is a bad thing (when capital appreciation is your goal). If you have made your money and capital preservation/inflation protection is your main goal then mutual funds are probably a good way to go.

It is too hard to keep track of 25 companies. It is even harder to find 25 winners. I am not smart enough to find that many but I can find 4 or 5. I find that if I own more than that I end up with almost as many losers as winners.

I prefer to focus on one or two good sectors and limit my portfolio to a handful of companies in these sectors. I started five years ago focusing on energy. Last year I was mainly in base metal companies as well as energy. This year I am mainly in agriculture and still some energy.

I don't recommend my strategy to anyone unless they have a lot of time to devote to research. I love it. I can't wait for earnings and conference calls, etc.

It can be a real roller coaster ride but I enjoy it. Last year I was up almost 100% halfway through the year but finished the year only up about 47%. My 5 year average gain is around 30%. This year I am up 30% year to date. I hope this doesn't sound as though I am bragging. I am just trying to make the point that it is possible to beat the market, despite what many in the financial media would have you believe.
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