Asset Allocation Theory vs. Individual Stocks

[Danny]

http://intelligentspeculation.blogsp...ndividual.html

[wildcat]

I will bite D-T. I stay in funds unless I see a buying opportunity - I always maintain a position in international, commodities, small value and micro but the allocation changes as I see fit. I am giving it a try, I will track my performance and if I severely lag a plain old index fund I will change my mind - I can admit when something isn't working for me. If I were retired, had a lot to do or I had a boat load of money, I would probably care less about individual stocks.

Also I, like you, try to stick with familiar names. I was working for a mega corp retailer prior to b-school and I was quite familiar with PAY - Verifone's products. We awarded them a rather large contract and I knew their business model quite well. I am sticking with them for the long haul and I will watch over it carefully.

Brew and I usually catch sh*t over it but as UM2 says - there is more than one way to skin a cat. I can't resist testing the water.

Quote:

Quite often I pick a few that I have been very intimate with

You still talking about stocks here

[Danny]

wildcat - I've had a few long term relationships, some quick in and outs, some I wished I never met - some that broke my heart...

[bpp]

I buy individual stocks for part of my portfolio, but for tax reasons. I would in principle prefer to use index funds all around. Accordingly, I pick my stocks in a semi-random fashion, and buy with the intention of holding them forever, or until they go bankrupt or get taken private. So my method is pretty different from yours.

However, it is fun to see the occasional skyrocket among my holdings. Which fun is somewhat tempered by the realization that by not holding an index, I am missing out on a bunch of other ones, too.

Bpp

[CyclingInvestor]

My investment approach is similar to DT. I generally own a small
collection of well-researched, high quality (IMO) stocks. The stocks
in my universe that I follow of about 30-40 rarely change (mostly
due to takeovers). The stocks that I own (anywhere from 5 to about
20) are always from this universe, but change when relative
under/over valuations (IMO) occur.

While I am willing to explain what I do to my friends, I always
recommend that they split their savings between a few index
funds. They always agree once I explain how I analyze stocks
(completely fundamentally, heavy on the 10K analysis, plus getting
a feel for how much I trust management), since none of them
are fascinated by numbers.

[wildcat]

Quote:

wildcat - I've had a few long term relationships, some quick in and outs, some I wished I never met *- some that broke my heart... *

You stud.


BTW - good point bpp. I hold my stocks in a tax sheltered account. ETFs in a regular account.

[LOL!]

Started out with no-load mutual funds. After a decade didn't like the tax consequences, so bought individual stocks after spouse joined investment clubs. Followed the tenets of NAIC and Better Investing for many years. But the stock portfolio only did about as well as index funds but with alot more work, so for the past 3-5 years, moved into ETFs. There has to be a very compelling reason for me to purchase a stock and I have learned to sell if my goal is not met and if my goal is met. Now hold only a handful of stocks comprising 12% of portfolio.

I found that I remembered all my great stock buys, the winners, and forgot about the losers. Fortunately, MS Money doesn't forget and presents factual stats.

[yakers]

Well, its just my opinion but I think there is plenty of room for both. My 401k type account (Govt TSP) is in index funds. I have a Vanguard managed fund in my Roth, some ibonds and several DRIP stocks. I expect the stocks will throw off some dividends and I will sell them off if needed or pass them on to the kids if they don't get spent.
I did pretty well in my stock trading account, at least beat the S&P500 but I didn't have enough money in stocks to make it owrth my time to manage those stocks so I turned them into DRIP funds. I don't think its any special ability but I was pretty well able to pick stocks what I have no skill at is figuring out when to sell so I only pick stocks I intend to hold a long time and sell when an event occurs (like needing a car) rather than trying to figure out when the market.says sell.

[Jeb-NY]

I'm a very consistent stock picker. Every stock I have bought over the years has went down. The best of them I only lost 50%, the worst went to zero. I currently hold one stock and plan to dump it soon, it has hovered at about 50% for several years. I only do mutual funds now and just started ETFs. I will be moving more into index funds over the next 12 months as I move money out of a company retirement plan.

I actually have monitored a few stocks that I thought I should buy instead of buying them and several of them have done well. But I have resisted. I don't want to curse another company by owning there stock.

By the way I have lost as much or more money on stocks picked by a financial advisor (long time ago) and my own picks.

Jeb

[BUM]

Hi Jeb,

We have similar experiences. Nearly all the individual worthless stocks I own are just sitting there waiting to be sold as soon as my dotcom tax (loss) carryforwards are exhausted.

Comparatively, my funds have slowly and steadily gained in value (faster than I'm spending). My heart can take that.

[brewer12345]

Like some others, I pursue a hybrid approach. I own some ETFs and funds, but the majority of my portfolio is in individual securities. I have the occasional implosion, but mostly I have done pretty well. No doubt I could avoid all implosions, but I am fairly aggressive and shooting for high returns, so I intentionally pass up on many of the "safer"choices because the expected return is too low.

[wabmester]

Many people have done well with concentrated positions. But we don't hear much about the ones who didn't do so well (except for Enron, WorldCom, etc). I estimated my long-term annualized returns a while back, and it came out to a bit north of 20%. I probably did a bit better than Warren Buffet over the last 20 years, but I wasn't nearly as consistent -- it just takes one lucky home run.

Now that I'm retired, I'm much more interested in consistency, capital preservation, and low volatility. I rarely pick stocks except for fun.

To make money in individual stocks, you not only need to pick the right stocks, but also pick the right entry, and the right exit. And anybody who has ever been an insider knows that company financials and market trends are completely opaque to outsiders. In other words, you have to guess about a lot of factors. Even the insiders are guessing about a lot of factors, and they have much less control over stock prices than they'd like to believe.

And, when you come down to it, even indexing is risky. You are fundamentally betting on continued strong GDP growth, and there are lots of signals out there that suggest we're not going to have the same sort of GDP growth we had historically.

So, DT, what are some of your picks? I recall you getting excited about TGT many months ago. I couldn't understand why then, and I still don't now.

[Danny]

Quote:

Originally Posted by wab So, DT, what are some of your picks? I recall you getting excited about TGT many months ago. I couldn't understand why then, and I still don't now.

No Mr wabinson, indexing isn't for me, but listen carefully Mr wabinson, I have one word for you and one day you'll thank me or curse yourself for not understanding it - Target

[yakers]

Quote:

Originally Posted by wab Many people have done well with concentrated positions.

Quite true, and maybe they were lucky. My FIL worked for Atlantic Oil which became ARCO which was bought by BP. He was just a mid level professional but over about 30 years he bought all the employee stock he could. Only stock he owned. And it so far surpassed the S&P500 its not funny. His $100 a month contributions over that time left him with $400K. A few years back, before he died he diversified, BP is only about 10% of my MIL account. Had all the funds been kept in BP it would have grown far beyond the diversified portfolio. I understand the decision and do not disagree. Enron and World Com did not work but concentrated portfolios have worked for a lot of people.

[Arif]

The small portion of my portfolio that is not in real estate is in individual stocks. I run a stock screen once a year in January in my IRA (no taxes) and it has beaten the S&P by atleast 10% each year. I generally stick with value screens that look for stocks that have been beaten down but still have enough cash to avoid bankruptcy. The problem with these returns is it is very hard for me to put money in an index funs (unless it's my TSP) seeing returns like that year after year.
I think at this point my portfolio will always be comprised mostly of real estate because I know how to determine its value unlike stocks (which change on a daily basis). When I start hearing stock guys talk about discounted cashflows it makes my head hurt

[Nords]

Quote:

Originally Posted by DanTien I have typically picked a few well researched stocks and piled into them and watched them carefully, and gotten out of them if their situation changed, and then looked for a new one. Quite often I pick a few that I have been very intimate with, sometimes worked for and I've traded them over time in ranges. I'm convinced it was this method that allowed me to increase my net worth and retire early. I'm not telling the forum they should do this....but there is another way for some of us. Are there any others that have done this?

Sure... although now it's mostly for education & longboard money.

I have one foot in UncleMick's camp-- I think 99% of guys believe that they're brilliant investors. So rather than spending the rest of my life on coulda/woulda/shoulda, I fenced off a small sum and started doing brilliant things with it. As soon as the rest of the market recognizes my omniscience, Warren Buffett will ask me to join his board to help keep his successors on the path to righteousness.

But until everyone else is enlightened it's been a lot of work to learn, analyze, and beat the market averages. Interesting & educational but not particularly fun of late. There are too many other fun things to do in the world to spend my time chasing endorphin rushes from doubling my money. The important lesson from this experience has been learning that I won't be tempted to sit around in my 80s or 90s trying to relieve the boredom by daytrading options & futures.

My other foot is firmly on the side of retail capitalism. An educated & experienced investor working with between $1000-$5M is able to build a diversified portfolio that outperforms any large-cap value mutual fund over the long term. The market (especially small caps) is inefficient enough at that level to render the efficient market hypothesis irrelevant. But, like any other successful project, it's work. If it's not fun, it won't be successful.

[Danny]

Quote:

Originally Posted by Nords I fenced off a small sum and started doing brilliant things with it. As soon as the rest of the market recognizes my omniscience, Warren Buffett will ask me to join his board to help keep his successors on the path to righteousness.

I'm doing the same except not so brilliantly

Quote:

Originally Posted by Nords There are too many other fun things to do in the world to spend my time chasing endorphin rushes from doubling my money. The important lesson from this experience has been learning that I won't be tempted to sit around in my 80s or 90s trying to relieve the boredom by daytrading options & futures.

My life is pretty boring, considering all the time I'm on this forum. You know what I mean? Endorpins is just about all I got man. I'm a month trader by the way.
Most of my money right now is in sexy CDs, CEFs, and MMF 's, but what I do have in stocks I concentrate and ride the waves.

[Cool Dood]

I buy and hold stocks instead of indexes for the long term. Instead of putting a paycheck into an index, I just look for a not ridiculously priced stock that looks like it'll stick around for many years, and buy that. I'm sure I wind up with about the same diversification and returns as an index, but (I think) the expenses will come out a lot lower, since there's a small one-time commission and then nothing after that.

[SteveR]

I started out with a couple of individual company stocks and over time moved into other ones; bought and held for the most part. My vision was and still is long term. My current 401k is nothing buy index funds and sector funds. My IRA has no individual stocks..that is where I do my asset allocation.
My after tax portfolio has 15 individual stocks, a sector fund and a tax exempt local bond fund. Some are up, some are down, and most are moving sideways. I claim no expertise...just pick companies I know or ended up with due to mergers. I take out the trash about once a year and buy new stuff from time to time but not like I used to. New stuff is now in more conservative areas since I will soon need to live on that money and my risk tolerance with it is far less than it once was. My high risk stuff is in my current 401k where I can afford to be more aggressive. It might even buy a pizza or two when I have to start RMDs.