What about individual stocks?

[LRAO]

It seems like they aren't big around here...

 

[haha]

The official and last word on individual stocks has been supplied by UncleMick, who opines that investing in them is an unavoidable but lamentable manifestation of testosterone overload.

Since I invest equity money almost entirely in stocks, I take that as a compliment.

Mikey

 

[BigMoneyJim]

Correct me if I'm wrong, but those of us who are lazy (er, I mean Bogleheads) prefer not to have to investigate and qualify stock purchases, and those who like to diversify in 10-20 asset classes tend to rebalance frequently (<cough> market timing <cough> ) and don't want the trading fees.

(Yeah, it's oversimplified.)

Actually, if I recall correctly, intercst has a majority of his investments in individual stocks, but the big ones ran up after he retired. A handful of Motley Fool REHP posters had significant individual stock holdings, but I don't think any of them wandered to Dory's board. Intercst's REHP site has an article about determining "SWR" based on a concentrated portfolio of 5-7 or so stocks.

 

[unclemick]

Frank Armstrong (Investor Solutions, DFA proponent) - had an on line book with the one line zinger buried within:

"the rich live off dividends"

Heh, heh, heh, - Duh? - so does the Norwegian widow and a few of us 'poor folks' (not entirely - but it's the thought that counts).

Hence - 40 Drips - mostly Norwegian type - with a few Monty Pythons.

Soooo - like the Dirty Harry movie - can you live off dividends? - Welll - can you?

 

[brewer12345]

I'm an individual stock type. I choose to do so because I find the portfiolio management process interesting and it is what I am trained for (top 10 MBA, one test away from a CFA, etc.). Around here, you have a lot of retorees and a lot of people who are not interested in devoting the time. Different strokes, that's all.

 

[Reader]

If you're one test away from a CFA, you should know that the low costs and diversification of index funds will beat 99% of all stock pickers. Of course, it will be hard to make money off your clients once they know how easy it is.

 

[cute fuzzy bunny]

I think its important to remember that ALL stocks are individuals. Each special in their own way.

 

[brewer12345]

If you're one test away from a CFA, you should know that the low costs and diversification of index funds will beat 99% of all stock pickers. Of course, it will be hard to make money off your clients once they know how easy it is.

What a nasty little mind you have. FWIW, I am not in the business of managing money for others, so the ethical conflict has happily never arisen. Even if I were to be managing money for others, I probably would not waste a lot of effort telling them that they would be better off indexes. Why? First, because in some asset classes you do better with good managers (fixed income that entails credit risk, for example). Second, becaues you often cannot get people to do what is clearly the smarter, better choice. If individuals make a conscious choice to do something dumb, who am I to disagree (more than once)?

 

[unclemick]

There's an irritating little thing about individual stocks - you can be wrong 99 of 100 times - and still tick yourself off.

Ben Graham's Post Script - 4th ed Intelligent Investor and buried in The Warren Buffett Way - one or a few stocks - can trump all your other investments in a lifetime.

Hence - male, not cured - 75% balanced index, 10% REIT Index, 15% dividend stocks - WITH perhaps a few Monty Python shots from time to time - with mad money only - of course - heh,heh,heh.

 

[John Galt]

One good woman can trump all the others also
(voice of experience).

John Galt

 

[Hyperborea]

FWIW, I am not in the business of managing money for others, so the ethical conflict has happily never arisen.

brewer,

I've wondered about this especially the more that I've learned about investing over the years. How can those who know the historical results of fund underperformance, market returns, random walk, etc. etc. etc. still reccomend the crap that they do? Do they really just disbelieve all of the data? Do they just say "what the f*ck let's take them for all they've got"? Is it unclemick's "too much testosterone"? I know that you can't answer for all the CFAs/MBAs but what do you see/hear?

Thanks

 

[brewer12345]

brewer,

I've wondered about this especially the more that I've learned about investing over the years.  How can those who know the historical results of fund underperformance, market returns, random walk, etc. etc. etc. still reccomend the crap that they do?  Do they really just disbelieve all of the data?  Do they just say "what the f*ck let's take them for all they've got"?  Is it unclemick's "too much testosterone"?  I know that you can't answer for all the CFAs/MBAs but what do you see/hear?

Thanks

I think the simple answer is that a sufficiently large ego obscures a multitude of one's foibles. I also think that there are indeed some professional investors who do indeed trounce the indexes on a regular and sustained basis. However, those people generally are not working for mutual fund companies. They are running hedge funds, running their own money, or working for those people and institutions that can afford them.

 

[brewer12345]

I thought of another reason why there are lots of active managers. These are the people who are out there setting prices for securities by dint of immense research efforts. If they were not out there buying and selling, the markets would be a LOT less efficient than they already are.

 

[haha]

I thought of another reason why there are lots of active managers.  These are the people who are out there setting prices for securities by dint of immense research efforts.  If they were not out there buying and selling, the markets would be a LOT less efficient than they already are.

Benoit Mandelbrot, in a new book "The Misbehavior of Markets', makes the claim that markets are already a lot less efficient than properly educated (indoctrinated) people think they are.

The strangest thing to me is those who confidently if unknowingly rely on returns being more or less normally distributed. Flash-- they are not. Easy to check for yourself with some very simple and robust checks like a histogram or box and whisker plot of monthly returns.

Way too many away from the center.

Mikey

 

[wabmester]

The strangest thing to me is those who confidently if unknowingly rely on returns being more or less normally distributed. Flash-- they are not.

OK, Mikey, name names. Who among us would think such a thing?! And what does it mean?

OK, I think I know what you mean. Market returns are lognormally distributed, meaning that the distribution has "fat tails", meaning simply that "unlikely" events are more likely than we'd like to think. Is that it?

 

[unclemick]

I have no idea - but 'fat tails' and the 'value premium' still bother Bernstein enough to write about it on occasion.

Buffett expressed hope in 1984 that value investing practiced by Graham in the past would persist in some form - even though Ben weakened a couple times later in his career and said markets were becoming more efficient with the advent of better financial information.

Me - I'll stick with incurable - heh,heh - just try to keep it under control.

 

[brewer12345]

I think that the markets are a lot less efficient than the standard CAPM dogma suggests, but the amount of inefficiency seems to vary by sector. The most liquid, heavily watched sectors (large cap stocks, some midcaps, gummint bonds, MBS) tend to be more efficient, while the sectors without liquidity and attention tend to be pretty inefficient (small caps, corporate bonds with significant credit risk, LPs, an increasing number of midcaps, many heavily shorted stocks). As an educated investor with the ability to analyze a company reasonably effectively and not being constrained by liquidity issues, I try to stack the deck in my favor by investing mostly in sectors that are inefficient. As a result, I tend to pick small companies, LPs, heavily shorted names and the like. I stay away from bonds because A) I don't want fixed income exposure and B) retail investors generally get screwed by the brokers when they buy bonds.

 

[wabmester]

Maybe that partially explains why small caps tend to provide better returns -- fewer analysts means less efficiency.

 

[brewer12345]

I certainly think so. Although there has been a lot of money flowing into small caps lately, there are still bargains to be had if you look carefully because so many companies are losing analyst coverage.

 

[haha]

...while the sectors without liquidity and attention tend to be pretty inefficient (small caps, corporate bonds with significant credit risk, LPs, an increasing number of midcaps, many heavily shorted stocks).

Brewer, Could you comment on the rationale for heavily shorted stocks trading in an inefficient market? Just off the top of my head, if by heavily shorted you mean stocks with a relatively large fraction of float shorted, then I can't figure what a reason might be. Some of the most thorough researchers around are the shorts. Maybe if you are including stocks which are subject to some sort of arbitrage against another security?

Mikey

 

[brewer12345]

Brewer, Could you comment on the rationale for heavily shorted stocks trading in an inefficient market? Just off the top of my head, if by heavily shorted you mean stocks with a relatively large fraction of float shorted, then I can't figure what a reason might be. Some of the most thorough researchers around are the shorts. Maybe if you are including stocks which are subject to some sort of arbitrage against another security?

Mikey

No, I am not talking about arbitrage shorts. I am talking about large, plain old short positions that amount to a big chunk of the float and prerably many days to cover. I currently have one of my largest positions in the company with the highest days to cover on the NYSE as of the August reporting date (PPD, with over 140 days to cover). Some of the biggest killings I have ever made (PLMD, CTAC, MINI, with NLS, MOVI and PPD in the process) have come courtesy of the shorts. I tend to treat the top 10 days to cover lists as a shopping list, or at least a prospects list.

You would think that the shorts would A) do their research and B) have the sense to take profits when they get the chance. However, time and time again, I see big short positions maintained in (especially smaller) companies long after the issues that attracted the shorts have been nullified or dealt with. Take PLMD, for example. The are a Medicare beficiary supplier of diabetic testing supplies (surely you have seen the Wilford Brimley cable TV ads) and they came under investigation for Medicare fraud via a qui tam suit. It was pretty clear to me that this was a minor issue at most, but the stock plunged, especially when some of the more unscrupulous short mouthpieces began bashing the company in public (Manuel Asensio, Herb Greenberg, et al.). I bought a truckload. Long after it was apparent that the Feds were not going to shut the company down (haven't even fined them yet years later) the short position was maintained and even increased. Guess what? My basis is about 1/3 the current price and PLMD now pays nice dividends.

Everyone says that the shorts have the best reserch on Wall St. I certainly cannot agree, at least not in all cases. They also don't seem to have adequate risk controls in place to get out of a short squeeze. PPD is staring down the barrel of a tender offer that I think is aimed at rectifying the excessive short position. NLS has been performing beautifully of late and the shorts are trying to get out. MINI appears to have one big hedge fund (pennant) trapped as the fund has a big shoprt position in the stock but couldn't hope to buy it all back without rocketing the share price upwards. MOVI is spewing out cash to beat the band and could go private tomorrow at a nice premium to market. Do these sound like situations in which you'd like to be short? Not me.