individual stocks vs index funds,stocks poor choice

[haha]

This quote form MathJak's reference shows why this guy and everybody else who proves why you can't make money with individual stocks is wrong.

First, let’s talk individual stocks, even though it is hardly worth our time. What are you thinking when you browse through Value Line’s stock summary? That you are the next Warren Buffett[sic], and that you are going to hunt down the top performing companies and turn yourself into a millionaire next door?

There is one little problem with this method. It doesn’t work, and the reason why it doesn’t work is that everyone else is trying to do the same thing, and as a result, you and all your like-minded Wall Street millionaire-wannabe buddies bid up the price of these great companies to the point that, collectively, you are paying a lot more for a dollar earned than you would for a company that no one wants to own.

So "everybody" is looking for bargains? I don't think so. A huge slug of what is traded is in index ETFs . A huge slug of what is held is in ETF and mutual fund indexes. Buy side research has been gutted at many firms. Some hedge funds do it- others mostly make macro bets.

Likewise, the above comments from forum members show that individual stocks are an aberrant approach that people feel vulnerable about mentioning. "Oh sure, I own a few, but only a few and I realize it's just hormones." Like, "OK, I admit I toked, but I didn't inhale." Or, "Bless me father for I have sinned against the 6th Commandment, but only alone, never with others."

I feel that it is much safer retired or not, to have >=50% in TIPS or other CPI indexed bonds, and what is left in carefully chosen, well financed businesses with strong business franchises, low cost advantage, or et., etc. It wouldn't hurt if a good portion of these paid meaningful and growing dividends.

It is true that in a statistical sense one is not “rewarded for choosing individual stocks”; but he can be rewarded for choosing individual companies well.

Of course this is not for a coffee table guy. It's for a man or woman who enjoys the process as well as the outcome of investing, and realizes that it takes time and effort to achieve success.

Ironically, probably the most rational use of index funds and ETFs is in market timing, where one is making a forecast for the whole market, rather than trying to find a well financed company with good and secure cash flows.

Ha

[mathjak107]

I find it difficult and trying at times to make money in my vast diversified mix of funds and thats with pretty much only market risk and sector risk without worrying about individual company risk.I dont believe you can diversify enough owning 10 or 20 individual stocks .There is far to much individual company risk there for my taste.

[CyclingInvestor]

I feel much more comfortable with a collection of 6-20 carefully chosen,
well managed, consistent dividend paying/raising individual stocks which
provide a dividend stream sufficient to live on (as I will be doing after
Oct 20, finally). The sleep-at-night factor is large here (I do not feel
comfortable with investments other than stocks). I have never
trusted others to select my investments, expecially when they charge
1-1.5% to do so, and I do not like to own stock in poorly managed
companies (inevitable with index funds). I feel comfortable enough with
my results using this approach (used since 1993, although with dividends
reinvested) to retire on it.

[AltaRed]

Originally Posted by CyclingInvestor

I feel much more comfortable with a collection of 6-20 carefully chosen,
well managed, consistent dividend paying/raising individual stocks which
provide a dividend stream sufficient to live on (as I will be doing after
Oct 20, finally). The sleep-at-night factor is large here (I do not feel
comfortable with investments other than stocks). I have never
trusted others to select my investments, expecially when they charge
1-1.5% to do so, and I do not like to own stock in poorly managed
companies (inevitable with index funds). I feel comfortable enough with
my results using this approach (used since 1993, although with dividends
reinvested) to retire on it.

So you are certain you can do this without any Enrons, WorldComs, etc.? Even the auditors, fund managers and analysts didn't catch these. I hope you are right but I wouldn't bet a dime you won't have a flameout or two. And it is a whole lot more significant in a portfolio of 6-20 stocks than it is in an index.

[bpp]

I almost feel comfortable with 60 nearly randomly selected individual stocks, but will feel much more comfortable when I get to 2 or 3 times that number.

[haha]

Originally Posted by AltaRed

So you are certain you can do this without any Enrons, WorldComs, etc.? Even the auditors, fund managers and analysts didn't catch these. *I hope you are right but I wouldn't bet a dime you won't have a flameout or two. And it is a whole lot more significant in a portfolio of 6-20 stocks than it is in an index.

I have done this for may years. And you are right; I have had two bankruptcies among my investees, and several take-unders which caused permanent losses. This can be avoided, but only if you stick with very established and trouble free companies, and stay with large enough companies that management take-unders in bad markets are not a problem.

But if you are a decent analyst you will have fewer of these than an index fund. The ones you do have however will make a bigger hole in your portfolio than they will make in an index. I looked at but did not buy Enron or WorldCom; many funds as you know did hold them.

So if you have say 40% safe fixed, any belly-flops will occur in the 60% of your portfolio that is exposed. If you never invest more than 5% of that 60% equity allocation going in to any position, you are never risking more than 3% on any initial position. Through success, any one position may get much larger, but that is a different, rather pleasant problem that you can make your own guidelines about. I tend not to add money to a stock in the fashion of momentum traders.

So actually, by far the greatest drawdown risk to the above equity portfolio is not from individual company risk, but from general market risk which the indexer is running anyway- and maybe actually accepting even more of it.

This doesn't bother me at all, and I consider myself careful and risk averse.

Ha

[maddythebeagle]

I really like the additional comments from Ha, Brewer and Nords....it is really great how this board has some good discussions even when this topic has been brought up a brazilion times

Another point on my investments that I think Nords kinda addressed is that it just becomes too much work to invest in individual stocks with such large portfolios when you want to do other stuff...that's one of the main reasons that I will always have a significant amount in index funds...

So you are certain you can do this without any Enrons, WorldComs, etc.? Even the auditors, fund managers and analysts didn't catch these.*

I am sorry but I really hate this argument....The only worldcom and enron stock that I had in my port. was through an index :P. People were only investing in these because the stock was going up....call it what you want....people being greedy and not understanding their investments...

[CyclingInvestor]

Originally Posted by AltaRed

So you are certain you can do this without any Enrons, WorldComs, etc.? Even the auditors, fund managers and analysts didn't catch these. I hope you are right but I wouldn't bet a dime you won't have a flameout or two. And it is a whole lot more significant in a portfolio of 6-20 stocks than it is in an index.

One of the requirements for companies I invest in is that they must be successful
(earnings, dividends, reputation) in the same business for at least 10 years or so.
Companies that change businesses like Enron are not eliglble. Only small, slow changes
are acceptable. The dividend requirement would have kept me from WorldCom.

There is always a possibillity of a single company collapsing, but I think the chances
are smaller by screening for quality first. I think the chances of <GGP, KIM, WRE,
C, FO, GE, ITW, JNJ, KO, MMM etc> collapsing are considerably smaller than
my chances of buying it in an accident or medical condition, and therefore below
my consideration. If I owned an index fund full of <F, GM, INTC, ORCL, SIRI,
AAPL, EBAY etc> I would be far more worried. I consider my sleep-at-night
factor to be important, and am willing to spend a few hours each month for it.

[Spanky]

Originally Posted by ben

Now for my "fun-money" I hold only 1 single stock currently; WisdomTree Investments (WSDT.pk)

I also play with a penny stock, CAMH.OB. This is a highly speculated stock that might give you that 100x return.

[JB]

Thank you to all the smart stock pickers out there. Without you indexing wouldn't be such an attractive option.

[brewer12345]

Originally Posted by JB

Thank you to all the smart stock pickers out there.* Without you indexing wouldn't be such an attractive option.

We might say the reverse to you. Most of the stuff I own is not included in the major indexes, which is why it is available inexpensively.

[JB]

If I had your skills I'd do the same. Gotta know your strengths and mine isn't stock picking. Although my testosterone money (10% of portfolio) is up 17% ytd. Dumb luck.