Buying Individual Stocks Much Cheaper Than ETFs or Index Funds

[haha]

My costs for managing and doing a restricted amount of trading on my accounts is ~$300/yr. I also use Morningstar, Value Line, WSJ, NYT and FT.com. All of these are available in paper at my local library, or online free by using my library access code. So my overall costs are < than 15% of what they would be using the cheapest funds that I know about.

Additionally, I can buy or sell what I want when I want, or not buy or sell at all.

There are B/S spreads to consider, but if I buy an illiquid stock I try to be very careful to research it thoroughly before buying, and going in I expect it to be a very long term hold. (Some are approaching 30 years.)

Another appealing feature is that I get all my dividends, not only what is left over after fund costs, disclosed and not disclosed, are accounted for. It can be very interesting to look at the accounting in a fund annual report. An amazing % of their income disappears before it is paid out as dividends to the shareholders.

I know there are others on the board who follow this approach too. It takes more time, and of course you are making important decisions yourself rather than some fund manager or passive index following algorithm making them for you. To some people this may be a drawback, others, including me, see it as a benefit.


Ha

 

[braumeister]

I'm sort of the same way, although over a third of my portfolio is in mutual funds.

My overall investing cost for the last 12 months is nearly $500, and the vast majority of that is brokerage commissions.

Some years back, I remember having a period of a couple of years where I had the exact same fund in an IRA and in a 401(k) account. Looking at the quarterly reports was always fascinating, seeing how much was soaked up by the 401(k) administrator my company used. Just another layer on top of your point about owning individual stocks versus the same ones in a fund.

 

[FIREd]

I agree. I have been switching from mutual funds to individual stocks for the reasons you mentioned, and others.

 

[Bestwifeever]

I so admire people like Ha who continue to take the time to learn about individual stocks etc. so they know what they're doing and how to do it.

Even though we won't be those people any time soon, if ever, still admire the skill others have developed.

 

[wildcat]

I have been pretty inactive in terms of # of stocks purchased or sold (mostly same names bought or sold multiple times) but over the last 12 months my expenses have been $77 for all purchases/sales which is tiny relative to my portfolio. If stuff gets cheaper, I have tons of discounted trades available that I haven't used @ VG ($7) so I don't forsee the annual cost changing much.

Like Ha, I use free resources. In addition to his list, I read Barron's for some of the interviews and you can get all the stuff there free by just searching the article name + Barrons.com in Google. Gotta love Google.

I can control my yield (if I really had a targeted need) and all my selections. All dividends either sweep to the mm or are reinvested at no cost to me.

I do, however, hold funds in my 401k so I am not a 100% indiv stocks investor but it's smaller than my Roth IRA & Rollver IRA.

 

[travelover]

I'll soon be 60 and with my diminished financial skills, I'll be lucky to keep track of my Wellesley holdings.

 

[Free To Canoe]

Clearly this is a more evolved approach and I admire Haha and the others that are living in retirement doing this. I hope to go there some day. I also know many stock holders that are low on planning and high on bragging. One of my more recent accomplishments is to avoid being one of these.

 

[CyclingInvestor]

0.03% for the last 12 months (and I probably trade too much).

 

[brewer12345]

I do both funds and direct, although funds are a minority for me. I will pay up on expense ratio for certain strategies like merger arbitrage.

 

[FinanceDude]

If you know what you are doing, you can make WAY MORE in individual stocks than any mutual fund........

 

[carnivalday]

I enjoy tracking dividend stocks. I now have 40 different stocks, tho that does include a couple of bond ETFs and a Vanguard fund. All the rest are in dividend stocks. None of them constitute more than 5% of the total annual income of all holdings. I looked at several general mutual funds that were doing well, and looked at their highest holdings, and saw that I had several of those same holdings, so I figured I could also own those companies without the fees. Im no expert, far from it, but I listen and read to as many programs, podcasts and newsletters that I can.

 

[Brett_Cameron]

I'll soon be 60 and with my diminished financial skills, I'll be lucky to keep track of my Wellesley holdings.

 

[tightasadrum]

It is interesting that this post just showed up just as I have been questioning the wisdom of my "passive" investing methods. This may just be the inspiration I need to start withdrawing from some of these funds managed by others. I've never been convinced that the additional cost paid enough dividends. I always thought that I didn't have enough time to manage it myself. I suspect the managers I have hired don't spend much time at it either.

 

[ESRwannabe]

Very good points HAHA. I like to invest in individual stocks as well. I really don't think the stock market does a very good job at pricing stocks. Just as an example I have often found that when something bad happens to a particular company it often brings down that entire sector.

You could have, for example, Johnson & Johnson have some problem with a drug, let's say Tylenol. For no reason at all you will probably find this event also brings down the share price of Medtronic. The event has nothing to do with medical devices but everything will go down in that sector.

Another example is that I work in IT and understand the products. I find that very often I will read an analysts opinion on a technology product, and it is obvious to me that they don't know what they are talking about.

The more that I have paid attention to individual stocks the more apparent it becomes to me that stocks are often priced wrong.

 

[traineeinvestor]

I tend to do a mixed approach:

• mostly individual stocks for the markets I am most comfortable with
• index funds for markets I have less familiarity with (or a tax complication like the US)
• individual bonds
• bullion

If I didn't have the time or inclination to do the work, I'd go with all index funds on the equity side.

 

[Finance Dave]

I still prefer funds, although I'm more of an index person. Not so much from a price standpoint, but diversity mainly. I assume those of you buying individual stocks are diversifying through owning a variety or something similar.

I believe in semi-strong market efficiency. I don't think I'm any smarter than the people picking the investments, even though I have an MBA in Finance and work in a corporate Treasury department...a typical 10K is over 100 pages, and there's no way I want to read 20 of those annually and analyze the data. Too often the things that sink a stock are not in the 10K, but rather some industry force that's hard to pinpoint.

Example: I bought SIII back about 18 years ago. S3 was a video chip maker. The stock exploded, going from 4 to about 16 in just 9 months. Then, within about a month, it was down at 2. What happened? Intel figured out they could put video drivers right on the main chip, and there would no longer be a need for a separate video chip except in high-end applications...thus S3 lost 80% of it's value. I ended up about flat, as I had taken some money at 12...but the lesson was more valuable. I can't keep up with everything that goes on in each of those sectors.

If you've been successful picking individual stocks, I admire you. I've had some good ones, and some bad ones...but anymore I stay away. IMO owning individual stocks makes you one fraud, one lawsuit, one recall, or one CEO death away from losing a large portion of your investment.

 

[Dawg52]

Over the years I have slowly moved from stock funds to individual stocks. I certainly don't put the time and effort in to it like Ha and Brewer, but it is a more entertaining and interesting way to invest. But my equity allocation is small potatoes compared to the big boys.

 

[Ed_The_Gypsy]

I have never had the time to spend on a continuous basis to do a proper job on individual stocks. Slice-and-dice mutual funds, mostly index funds, has been good to me so far. I have bought a few energy stocks as I work in that business. When I no longer have to go to work every day, I will do a little more exploring. Like ESRwannabe, I think individual stocks offer good opportunities to buy on weakness. I am a buy-and-hold dividend type these days. It is worth noting that John Greany recommends index funds even though he ER'd on health care stocks weakened in the Clinton administration. He notes, like HaHa above, that in a large portfolio, mutual funds can eat more annual costs than individual stocks.

 

[clifp]

I believe in semi-strong market efficiency. I don't think I'm any smarter than the people picking the investments, even though I have an MBA in Finance and work in a corporate Treasury department...a typical 10K is over 100 pages, and there's no way I want to read 20 of those annually and analyze the data. Too often the things that sink a stock are not in the 10K, but rather some industry force that's hard to pinpoint.

I found I can skim 10K pretty quickly, I know I miss things, but there are plenty of tools on the internet to help you analyze stocks. I also cheat and rely on investment newsletter for a lot of my work. Once you get in 30-50 stock range the diversification risk significantly reduced. Psst Wellesley has only 57 stocks in the equity proportion, and there is almost no stock that Wellesley owns that I don't either hold, use to hold, or am actively considering buying. So I really consider that I am constructing a Wellesley portfolio with less bonds.

One of the things HaHa's has mentioned in the past about individual stocks is you can avoid the bad ones. I really had no desire to own Netflix at $250/share or Saleforce.com at $130, or BofA at practically any price, or GM since 2000. I still have index funds but with 40% in individual stocks, my weighting of these dogs is lot less than it is for most people.

My concern is also what happens when I get older, so HaHa is somewhat of inspiration that I won't have sell everything and move into Psst Wellesley in 10 years.

 

[justplainbll]

Re. individual issues versus mutual funds, I think there is a place for each. As of 2 November, 10% of my portfolio was in mutual funds.
It seems Vanguard makes it tough to hold individual issues in IRA accounts while Fidelity doe not.

 

[l2ridehd]

I have moved in the other direction. I am trying very hard to simplify my investments so I can spend more time doing fun stuff. lazytraders.com and I are becoming good friends. I to used to spend lots of time researching individual stocks and I had a strong focus on dividend stocks. As I started down the path of total market indexing, I looked at Vanguard dividend growth fund and I owned 9 of their top ten holdings. That was the final convincing piece of information. So over the past year have sold all dividend stocks and bought the fund. Also wanted more diversification so bought total stock market, total bond and emerging markets. Yes my investment expenses will be about 25 times what they were, (although still very low using Vanguard index funds) but also my risk is spread 1000 times more. And I get to play a lot more golf and other fun stuff.

 

[justplainbll]

Diversification and access to investments not readily available to retail investors can make mutual funds attractive. However Enron exemplifies the 'expertise' of some mutual funds-
http://crab.rutgers.edu/~mchugh/enron.txt

 

[lowflyer]

Investing on your own requires time and effort in order to stay on top of things. For me, it’s probably my most important “hobby”. Most people I associate with (including my family) clearly don’t understand my “obsession” with money and investing. On the other hand, I don’t understand how they can go day-by-day and not have any idea what is going on in the world of money and finance.

I am not an aggressive investor, but invest primarily in conservative income generating stocks and a couple ETF’s. I do research and often listen to conference calls for more info. I don’t know the exact numbers, but I suspect my brokerage commissions and minor ETF fees will be less than if I was using mutual funds.

Regardless of your use of individual stocks, ETF’s or mutual funds, I still think you gotta stay engaged to some extent in the markets, the Fed and the economy. Just seems smart to me.

Ha – Please tell more about using library access codes for online publications.

 

[Lsbcal]

I have a reasonable size portfolio that trades index ETF's, averaging about 3 trades/year, ER = 0.2%. So almost buy-hold. It's carefully backtested (datamined) and value tilted. Trades involve moving from the value bias to growth temporarily. Also moving some assets between US and international, currently no international. Based on trend analysis using unpublished methods.

Still it's tough to beat Wellington. Backtesing shows it has beat Wellington about 2% per year since 1993 but only 0.8%/year since 2002. Wellington is winning year to date.

Individual stocks are tempting but I don't think I have the knowledge or temperament to do a good job. I'd worry too much. Last stock I sold was Johnson and Johnson beginning of 2005 and had held since 1994.

 

[haha]

Ha – Please tell more about using library access codes for online publications.

It depends on whether your library subscribes to these electronic services, and makes them available to library patrons.

Usually if you go to your library website you will find all the information you need. If not, the central library usually has a reference librarian for electronic services who can help you.

With recent budget cuts some of these things are perhaps threatened, but so far I have seen no changes.

Ha