Stock Investing

[OldShooter]

Remember that over longer time periods all but a small percentage of stock picking funds fail to outperform their benchmarks. Study a few S&P SPIVA reports to see this. (https://www.spglobal.com/spdji/en/research-insights/spiva/)

Also remember that past performance is not predictive. Study a few S&P Manager Persistence reports to see this. (https://www.spglobal.com/spdji/en/spiva/article/us-persistence-scorecard/)

Bottom line is there is a very high probability of an investor failing to achieve market beating performance with a stock-picker fund. 70 years of research has shown this. There is also no known way to identify the lucky managers at the beginning of the period where they will emerge as winners.

So, in the end, Clint Eastwood/Dirty Harry's famous line applies: "...you've got to ask yourself one question: 'Do I feel lucky?' Well, do you, punk?"

 

[Finance Dave]

Right. That's my thinking. I don't want the agonizing challenge of which one to buy, when to sell it or hold, ugh. I like and want simplicity--market returns, minimal cost, tax efficient.

I understand your thinking on this, but by thinking this way you’re assuming that all stocks within that sector will do well. This assumes no difference in management, patents, barriers to entry, etc. There is also the concern of mergers and acquisitions.

When camera company Canon did well, what happened to Polaroid during the digital revolution of cameras? (just made that comparison up…I don’t know the real data but you get the point).

I’m not saying to avoid investing in entire sectors ( I actually own a small slice of the banking and health care sectors), but be aware of the limitations.

Good luck!

 

[FREE866]

I understand your thinking on this, but by thinking this way you’re assuming that all stocks within that sector will do well. This assumes no difference in management, patents, barriers to entry, etc. There is also the concern of mergers and acquisitions.

When camera company Canon did well, what happened to Polaroid during the digital revolution of cameras? (just made that comparison up…I don’t know the real data but you get the point).

I’m not saying to avoid investing in entire sectors ( I actually own a small slice of the banking and health care sectors), but be aware of the limitations.

Good luck!

I'm not betting on one sector. I have no idea which sectors will be bad or good. I'm not trying to decide what stocks within any sector will do better than others. I want US market representation and a combination of SPY, VTI, SCHG and IWM provides that.

 

[erkevin]

I have gone through several stock/market phases in my life; in the 80s, I was all mutual funds. In the 90s, mostly mutual funds and an occasional stock that I never seemed to own for an entire year. In the 2000s, began in mutual funds and individual stocks, but switched to ETFs and individual stocks. In the beginning of the 2010s, I was all ETFs, then I played with the Dividend Aristocrats (held about 15 of them as 100% of my portfolio). During the pandemic, I realized I was spending hours every day analyzing and over-thinking my portfolio, so as interest rates went up, my portfolio went to about 66% CDs and 34% ETFs (VTI and VXSUS). When interest rates drop, I am not sure what is next.

 

[OldShooter]

I understand your thinking on this, but by thinking this way you’re assuming that all stocks within that sector will do well. This assumes no difference in management, patents, barriers to entry, etc. There is also the concern of mergers and acquisitions. ...

Not at all. There are different ways to look at the indexing strategy but none would argue that the underlying assumption is that all the stocks will do well.

1) Assume that all stocks on average are fairly priced, including the weak players. This is the Efficient Market Hypothesis to various degrees.

2) Recognize that losers can go only to zero, while the sky is the limit for winners. So instead of looking for the needle, buy the haystack.

3) Recognize that stock prices are very, very close to random within a statistical distribution that has fat tails and a slight upward bias. In this view, one has to accept that stock-picking doesn't work, so simply board the upward bias train by buying everything and being patient.​

This kind of thinking is a little like trying to figure out how the watch works. I don't need to know that; I just need to know what time it is. Seventy years of studies and data have told me: Indexing beats well over 90% of investors and the evidence is strong that investors that beat indexing can only do it by being lucky.

 

[GrayHare]

Individual stocks give more control over the realization of capital gains. There are no cap gains until you sell. Most mutual funds instead pay out those gains annually in amounts that can vary significantly from one year to the next, which can play havoc with trying to stay clear of certain tax cliffs, such as IRMAA. Anyone who has not purchased individual stocks would do well to begin slowly. Watch an interesting stock for awhile before buying, and then dedicate only a tiny % of your investable assets to it until you grow more comfortable.

 

[MichaelB]

Individual stocks give more control over the realization of capital gains. There are no cap gains until you sell. Most mutual funds instead pay out those gains annually in amounts that can vary significantly from one year to the next, which can play havoc with trying to stay clear of certain tax cliffs, such as IRMAA. Anyone who has not purchased individual stocks would do well to begin slowly. Watch an interesting stock for awhile before buying, and then dedicate only a tiny % of your investable assets to it until you grow more comfortable.

Your point on gains from active mutual funds is correct. This can be offset by investing in passive funds or ETFs. They will throw off dividends, just like an individual stock, but no capital gains until one sells.

 

[OldShooter]

Individual stocks give more control over the realization of capital gains. ...

True, but it is very difficult to build a well diversified portfolio using individual stocks. I have seen arguments that it takes holding 60-100 stocks or even more. Too much work to create and monitor IMO for an individual investor.

It is also true that not all individual stocks will be winners, so for the losers there are no capital gains.

 

[Finance Dave]

Not at all. There are different ways to look at the indexing strategy but none would argue that the underlying assumption is that all the stocks will do well.

1) Assume that all stocks on average are fairly priced, including the weak players. This is the Efficient Market Hypothesis to various degrees.

2) Recognize that losers can go only to zero, while the sky is the limit for winners. So instead of looking for the needle, buy the haystack.

3) Recognize that stock prices are very, very close to random within a statistical distribution that has fat tails and a slight upward bias. In this view, one has to accept that stock-picking doesn't work, so simply board the upward bias train by buying everything and being patient.​

This kind of thinking is a little like trying to figure out how the watch works. I don't need to know that; I just need to know what time it is. Seventy years of studies and data have told me: Indexing beats well over 90% of investors and the evidence is strong that investors that beat indexing can only do it by being lucky.

I'm not betting on one sector. I have no idea which sectors will be bad or good. I'm not trying to decide what stocks within any sector will do better than others. I want US market representation and a combination of SPY, VTI, SCHG and IWM provides that.

Maybe I wasn't clear or didn't understand the comment on AI investing. I'm not arguing against indexing...but my comment was aimed at investing in many AI companies and the tradeoffs involved in doing so as opposed to finding the BEST AI company. I'm not saying one method is better than the other for that particular industry/sector, just pointing out the tradeoffs.

 

[FREE866]

Maybe I wasn't clear or didn't understand the comment on AI investing. I'm not arguing against indexing...but my comment was aimed at investing in many AI companies and the tradeoffs involved in doing so as opposed to finding the BEST AI company. I'm not saying one method is better than the other for that particular industry/sector, just pointing out the tradeoffs.

I can see how because I mentioned NVDA and AMD in prior post it got confusing. I merely mentioned those as names in the AI sector that could explode. My philosophy and practice is just buy ETFs, non sector ones.

 

[OldShooter]

I think this comment pertains particularly to AI:

William Bernstein: “You are not as good looking, as charming, or as good a driver as you think you are. The same goes for your investing abilities. In an environment filled with incredibly smart, hard-working, and well-informed participants the smartest trading strategy is not to trade at all.”

IMO results in AI are particularly likely to be random, based on players' luck and external events. For example, the story goes that Gary Kildahl, proprietor of DRDos, was gone on a fishing trip when IBM called, so they called their second choice, Bill Gates.

The other thing to recognize is that a good company is not necessarily a good investment. It depends on the price.

Here is investing patriarch Ben Graham (in "The Intelligent Investor") on the problem: " ... we hope to implant in the reader a tendency to measure or quantify. For 99 issues out of 100 we could say that at some price they are cheap enough to buy and at some other price they would be so dear that they should be sold. The habit of relating what is paid to what is being offered is an invaluable trait in investment. In an article in a women’s magazine many years ago we advised the readers to buy their stocks as they bought their groceries, not as they bought their perfume. The really dreadful losses of the past few years (and on many similar occasions before) were realized in those common-stock issues where the buyer forgot to ask “How much?"​

 

[pb4uski]

True, but it is very difficult to build a well diversified portfolio using individual stocks. I have seen arguments that it takes holding 60-100 stocks or even more. Too much work to create and monitor IMO for an individual investor.

It is also true that not all individual stocks will be winners, so for the losers there are no capital gains.

No, it more like 20-30 positions. not 60-100.

How many individual stocks would be needed to create a diversified portfolio?

The ideal number of individual stocks for a diversified portfolio depends on several factors, and there's no one-size-fits-all answer. However, some general guidelines and research can help you get started:

General Rule of Thumb:

• 20-30 stocks: This is a widely accepted number suggested by many financial experts and studies. It offers sufficient diversification across different companies and industries, reducing the risk of any single one significantly impacting your portfolio.

Other Factors to Consider:

• Portfolio size: A smaller portfolio might benefit from less diversification, perhaps around 15-20 stocks, to avoid over-diversification and ensure adequate exposure to chosen companies. Conversely, larger portfolios can handle more stocks (30+) while maintaining good diversification.
• Risk tolerance: If you're risk-averse, aiming for more diversification (30+) can offer greater peace of mind. Conversely, if you're comfortable with higher risk, a slightly less diversified portfolio (20-25) can potentially offer higher returns.
• Time and effort: Selecting and managing individual stocks takes time and effort. If you're not actively involved in research and analysis, a smaller number of well-chosen stocks might be more practical.

 

[FLSUnFIRE]

No, it more like 20-30 positions. not 60-100.

That assumes that the 20-30 are really diversified and not correlated. Most people have biases that they are not even aware of (or perhaps are). It would be hard for most of us to pick 20-30 companies that we will invest in that are truly diversified and not correlated -and how would you weight them?. If one were to throw darts then 20-30 darts are probably sufficient but who does that; us humans are going to want to choose those 20-30 and will introduce a lot of bias!

 

[OldShooter]

No, it more like 20-30 positions. not 60-100.

I have seen that number argued but larger numbers seem to be more popular. 30 seems very small to me. At 30, can you really diversify across all major sectors and across a good range of company sizes? Some sectors and company sizes probably end up being represented by just one or two stocks. And overall, each stock will be 3% +/- of the total portfolio. Where is your quotation from?

 

[KingMota]

Interesting thread. I really believe in index funds and know I personally cannot beat the market. That said, I am excited about AI and I put about 1.5% of my NW in a wide variety of AI focused indexed ETF's. I researched these funds and picked ones focused on specific industry sectors and certain types of hardware. I invested an additional 2% of my NW in the stock of one individual AI market company. I consider keeping up with every aspect of this company a hobby of mine. It is kind of exciting to own a single stock that could potentially increase 20X to 30X in the next 10 years, but I know that is a long shot. If it goes to zero, it won't be a major hit and I have enjoyed the ride.

Don't take my post to be pushing current large language model AI as the next big thing as I believe the whole ChatGPT craze is way overblown.

 

[Al18]

I checked and nearly everyone participating in this thread has been retired 5-10 years, myself included. Which begs the question - if you’ve already won the game - why are you still playing? I’ll answer first - it’s a “hobby”. Only about 10% of my investable assets are in a brokerage account in stocks. I’m selling some to fund my pre SS retirement. If I dabble in buying a new stock, I pay no more than $1000.


The vast majority of my money is in mostly index funds and CD’s.

 

[Dash man]

We’ve have both individual stocks and ETFs. Our most successful individual stocks have been AVGO, LLY, MSFT, COR, AAPL, HD, ADP and SBUX. They’ve all grown very well and paid growing dividends along the way. Our newest holding of those is AAPL. We added to AVGO last year and has since doubled. I’ve had losers along the way, but I don’t hold on very long when they go south. That keeps me from taking big losses, but I also sold NVDA twice after it dropped 20% after I bought it. Can’t win every time.
ETFs include SCHA SCHB SCHD SCHF VOO SPYD JEPQ. Just a small amount in JEPQ.
I currently get about $130k in dividends each year, $42k in taxable accounts. I could never understand why there are so many people on this forum against dividend investing.
Life is good.

 

[Qs Laptop]

We’ve have both individual stocks and ETFs. Our most successful individual stocks have been AVGO, LLY, MSFT, COR, AAPL, HD, ADP and SBUX. They’ve all grown very well and paid growing dividends along the way. Our newest holding of those is AAPL. We added to AVGO last year and has since doubled. I’ve had losers along the way, but I don’t hold on very long when they go south. That keeps me from taking big losses, but I also sold NVDA twice after it dropped 20% after I bought it. Can’t win every time.
ETFs include SCHA SCHB SCHD SCHF VOO SPYD JEPQ. Just a small amount in JEPQ.
I currently get about $130k in dividends each year, $42k in taxable accounts. I could never understand why there are so many people on this forum against dividend investing.
Life is good.

WOW! You are looking real good! '

I think there's a lot more growth to be had in AVGO, LLY, MSFT. I suspect AAPL will be treading water for awhile. Their earnings reports have not impressed lately and their revenues aren't growing. They need a new product. SBUX, ADP, HD have probably had their high growth days behind them. But you are getting dividends and they aren't losing value.

The reason some people aren't wild about dividend investing is that a lot of well know dividend stocks are stagnant and the only thing that's good about them is the dividend. That's OK for income, not so great if your goal is total returns.

 

[Dash man]

Dividends are part of total returns. And there are some good companies whose stock price appreciation may not look impressive, but grow their dividends impressively at 5-20%. In a bear market, dividend stocks who grow their dividends each year, and keep a reasonable payout ratio, can outperform many other stocks. And they not as volatile. I’ve been retired nearly eleven years, and those regular payments of dividends mean a lot.

 

[pb4uski]

I have seen that number argued but larger numbers seem to be more popular. 30 seems very small to me. At 30, can you really diversify across all major sectors and across a good range of company sizes? Some sectors and company sizes probably end up being represented by just one or two stocks. And overall, each stock will be 3% +/- of the total portfolio. Where is your quotation from?

From Bard but the ~30 ticker result was consistent with other things that I have read over the years.

 

[Montecfo]

I checked and nearly everyone participating in this thread has been retired 5-10 years, myself included. Which begs the question - if you’ve already won the game - why are you still playing? I’ll answer first - it’s a “hobby”. Only about 10% of my investable assets are in a brokerage account in stocks. I’m selling some to fund my pre SS retirement. If I dabble in buying a new stock, I pay no more than $1000.


The vast majority of my money is in mostly index funds and CD’s.

Won the game. Yes.

But you must continue to invest.

So not sure I am following your point.

UNLESS you have been taught that investing in individual stocks is "risky" and should not be attempted?

I hope you do not believe that.

 

[GrayHare]

I can think of many reasons to continue investing. To learn, keep up with inflation, exercise the mind, track current economics, not waste skills, build a richer future for beneficiaries, etc.

 

[Dash man]

Won the game. Yes.

But you must continue to invest.

So not sure I am following your point.

UNLESS you have been taught that investing in individual stocks is "risky" and should not be attempted?

I hope you do not believe that.

Inflation has me wanting to accumulate more to give/leave to family and charity. I even tip more to help those who need it. Investing in stocks has done well for us, so no need to quit. We keep enough in CDs, treasuries and cash to survive any prolonged market catastrophe.

 

[Closet_Gamer]

Not at all. There are different ways to look at the indexing strategy but none would argue that the underlying assumption is that all the stocks will do well.

1) Assume that all stocks on average are fairly priced, including the weak players. This is the Efficient Market Hypothesis to various degrees.

2) Recognize that losers can go only to zero, while the sky is the limit for winners. So instead of looking for the needle, buy the haystack.

3) Recognize that stock prices are very, very close to random within a statistical distribution that has fat tails and a slight upward bias. In this view, one has to accept that stock-picking doesn't work, so simply board the upward bias train by buying everything and being patient.​

This kind of thinking is a little like trying to figure out how the watch works. I don't need to know that; I just need to know what time it is. Seventy years of studies and data have told me: Indexing beats well over 90% of investors and the evidence is strong that investors that beat indexing can only do it by being lucky.

Super sensible. I will add this:

I think of indexing as free-riding on the time/money/expense others are investing in price discovery.

Price discovery is critical. They can fight it out and I'm thankful that they do that...with their money. They can sort out whether Boeing is worth $10, $50 or $100/share. They can take the trading costs, the tax costs, the gain & losses, etc. They can sweat bullets over the pricing implications of the FAA expanding the 737 inspections. They can seek alpha through satellite photes, read the bond offerings, listen to the earnings calls, etc.

I skip all of that.

This means that I wasn't the person to figure out 18 months ago to buy NVDA (but I've gotten to enjoy some of that ride) and that I 've been buying GE way back when Jack Welch was CEO and having ridden out all of its trials and tribulations since then. It means that I'm certainly over-paying for something in the DIA I bought a few days ago but I"m also under-paying for something in the QQQ I bought on the same day. I have no clue which is which, of course.

But on balance, the costs I skip by not being part of price discovery are higher than the foregone gains I might get by participating in price discovery and (maybe) making better choices.

In most of my life, I like to think I'm not a freeloader.

But I'm happy to be freeloader on this one!

 

[GhostofTomJoad]

Retired 11 years. Wife works, she's much younger.
Only a couple of years ago, I started a taxable brokerage account. Everything was pretty much in retirement, tax sheltered mutual funds. Now I own just 5 single stocks in taxable. I've decided to reduce that to 4, after I cash-out #5, which has proven to be a loser.

I tried some ETFs. I don't like the way they behave. Maybe I was in the wrong ones. As part of my bond sleeve, I'm considering FALN. "Fallen Angels:" bonds from companies which WERE IG, now slipped into HY territory. Monthly dividends.

I take a chunk early each year from the IRA. Have not taken the whole chunk yet, this year. Hedging my bets, too many balls in the air right now. Still reinvesting all dividends. My best performer has been ET Energy Transfer, a Limited Partnership. Favorable tax treatment. Oil/gas midstream. My aluminum outfit is my laggard. I would not be surprised if the dividend gets reduced in May. Hoping for a mini-surge in that one so I can dump it. Already down -12% for me. NHYDY. Norsk Hydro. Don't buy that booger! The Norwegian gov't takes 25% of dividend before you ever see it. Another reason for me to be rid of it. Smid-sized bank BHB has been good to me, too. Bar Harbor Bank. Maine.