Three reasons why I no longer buy or sell individual stocks
My luck (read: skill) buying and selling individual stocks sucks. As best I can tell I am not alone. This post lists three reasons why, a number of years ago, I decided to leave the buying and selling of stocks in the hands of professionals (managed accounts and mutual funds).
1. I have the wrong temperament to buy and sell individual stocks: As a financial guardian, I can get pretty nervous when a stock slides. I often feel compelled to get out while I can -- many times at a loss. With managed accounts and mutual funds, I have a level of comfort knowing there are professionals on my side.
2. I believe that there are better uses for my time: Being a savvy stock picker requires a significant amount of time in terms of education, research, execution and monitoring. Over the years I chose instead to invest this time into my career and other areas of my personal life.
3. In managed accounts and mutual funds, I have a great alternative: I feel that the percent or so charged by managed funds and mutual fund companies is a fair value for the services they provide.
Read about my mutual funds
Dodge & Cox Balanced Fund: '05 Mid-year Review (this post has links to all of my funds)
10 Reasons Why I Like My Dodge & Cox Fund
about - portfolio - feedback - disclaimer
• VirtualBank gives you up to 5.13% APY for your savings!
• Blue Cash from American Express: 5% Back on Gas, Up to 5% cash back on eligible purchases, No Annual Fee, 0% Introductory APR for 6 months, Pay over time
• Try Starwood Preferred Guest Credit Card from American Express. Great rewards and first year fee free!
• Bad Credit Home Loans
• Life Insurance in 10 minutes if qualified. No medical exam.
In the latter half of the '90s I had an S&P 500 index fund, which I exited as the market went south. This post lists the rationale behind my decision to -- at least for now -- avoid S&P 500 index funds. Note: The S&P ... Read
In our household, my wife has taken the leadership role in terms of providing relief to hurricane victims. Here are a few things shes doing I thought worth sharing: - We are donating used clothing and personal items to a local church that will transport ... Read
If you are lucky enough to be part of the mass affluent -- that is a household with $100K - $1 million to invest -- you may be finding publications like Money & Smart Money sometimes too basic to really help with some of the ... Read
Lets say theres an aspect of personal finance, investing or your career that you find new or a bit confusing -- heres something to consider... Find a mentor. That is someone who can give you advice without wanting to sell you something. Certainly family and ... Read
Here are a few more reasons not to buy or sell individual stocks:
1. Individuals trading stocks believe in the triumph of hope over reason.
2. There is an overwhelming body of evidence to support the view that stockpicking to "beat the market" is a loser's game after factoring in transaction costs, the cost of cash, and taxes. Not to mention the time, energy and expense pursuing this stockpicking hobby!
3. There is absolutely no evidence to support the view that markets systematically misprice securities.
4. Individual investors (and their investment clubs) aren't as bad at stock-picking as many people think. They're worse!
5. Trading is hazardous to your financial health.
6. Investment industry trade publications make more money selling their advice than investors do by following it.
7. The small investor cannot achieve adequate diversification in a cost effective manner by purchasing individual securities.
8. The small-time stockpicker confuses investing with speculation. If he manages to outperform the market, it is highly likely that the success is a result of luck. His outperformance cannot be sustained in the long-term.
There are many more reasons to avoid stockpicking as a longterm investment solution. But that's enough for now...
JC
Alternatively,
Those same reasons are likely the ones why you won't ever become super rich. People like Buffet and Soros made most of their fortunes betting on single stocks or currencies (not mutual funds or index funds).
If you don't have the time, discipline or patience to thoroughly research, learn how to calculate and purchase stocks then don't do it.
Following the "conservative" strategy will eventually pay off but it won't pay off in the multiples to make you a billionaire.
-Guest
P.S. I only invest in individual stocks and avoid all types of funds - I didn't lose a single penny during the dot com bubble and I'm up 12% this year.
When it comes to buying INDIVIDUAL STOCKS, I believe that there are 3 types of investors:
1.) Consciously Incompetent: Someone like myself who doesnt have the patience, discipline and / or investment personality needed to PERSONALLY invest in individual stocks.
2.) Consciously Competent: Savvy stock pickers who KNOW WHAT THEY ARE DOING.
3.) Unconsciously Incompetent: People who have little or no idea what they are doing, but buy individual stocks anyway.
I think that aggressive vs. conservative should be thought of as a separate issue. There are plenty of aggressive mutual funds / hedge funds / managed accounts for someone who does not want to make their own stock picks.
Conversely, it would be entirely possible for a conservative investor who knows what they are doing to make their own stock picks.
Thanks for your comments - 1stMill
As this is a place where we share ideas and information, can you, GUEST, share with us, what are your guidelines / parameters / etc to BUY or SELL a stock? not to lose $$$ is rule number one here...we'll be glad to hear how you did it...
:)
Guest makes a good point. Indeed, I will never be "super-rich". I'll have to settle for an estate in the mid 7 figures. That suits me fine.
However, I did NOT say that speculators cannot get super-rich. Indeed they can. But it's more likely they will bust before they do. Or at least end up with far less than what they could have if they managed risk more prudently.
I take issue with 1stMil's "conciously competent" category. I think it's an illusion. When the speculator succeeds, he attibutes it to skill. When he fails, it was bad luck. There is no evidence of investors having consistently superior stock selection skill. It seems to be a common human trait for individuals to be overconfident of their skills when it comes to stockpicking expertise.
It's not enough to brag about winners and conveniently forget to mention the losers. What matters is the total after-tax return on the entire portfolio. Often, after the math is done, and taxes and expenses are taken into consideration, one would have been better off in an index fund.
Put it this way, "if you take all the money you've made through your stock-picking adventures, minus your losses, commissions & taxes, and if you divide that by the number of hours you've spent working on it and worrying about it, what have you been making an hour?" Are you SURE this stockpicking stuff is the way to go?
What about behavioral finance and the fact the the stockpickers greatest enemy is likely to be himself? That he will sabatoge his own portfolio? There are volumes written about this in investor psychology. Will you beat the odds and succeed where the vast majority fail? What makes you so special anyway? Are you smarter than the market? Have more information? Can capitalize on opportunities more efficiently? Why do you think you can consistently beat the market again?
I found it amusing when guest said that the prudent investor will never be "super-rich". Let's face it, only one in a million stockpickers will ever be "super-rich" too. That doesn't seem to be much of an argument.
If anyone is "consciously competent" it would be the large institutions, right? They've got Stanford MBA and Harvard Business School grads on their payroll. How do the institutions fare at this stockpicking game? Usually they trail the market and none of them show any consistent ability to outperform the market. Perhaps the smalltime investor has better resources than the large institutions. Maybe he's smarter. Maybe he's better at qualitative and quantitative analysis than the largest pension funds? Sound reasonable? If so, I've got a bridge that I'd like to sell you...
Consider this: is it logical for you to think that you can predict which stocks will outperform the market? Or are you overconfident of your skills? What logic is there in playing a game at which others with superior resources and intellect have consistently failed? Or is it that you believe that you can interpret the data more correctly than have others with far more resources?
I would recommend reading anything by Burton Malkiel or Larry Swedroe on the subject.
Consider the comments of Daniel Kahneman, professor at Princeton University:
"What's really quite remarkable in the investment world is that people are playing a game which, in some sense, cannot be played. There are so many people out there in the market; the idea that any single individual without extra information or extra market power can beat the market is extraordinarily unlikely. Yet the market is full of people who think they can do it and full of others who believe them. This is one of the great mysteries of finance..."
My 2 cents,
JC
What it all boils down to (at least for me) is that for all the "research" and MBA "professionals" don't do a better job than anyone who simply sits down and does a little research.
I don't recall the group, but every year some Wall Street firm has a monkey picks stocks randomly out of a list vs. 10 of their "best" professionals. I think the monkey comes in 2nd or 3rd almost every time.
For me, Wall Street = Casino. You place your bet on those "games" you think will make the most money for you.
My "secret" for stock picking? I let the big boys do it for me (Warren Buffet, Soros, etc). Then I selectively pick the ones I want to own.
My strategy is simple - I look for "trifecta" stocks:
1. Stock that pays dividend at least 4% or greater.
2. Stock that trades options (I write covered calls to earn an additional 4-6%
3. Stock that has potential for growth and appreciation.
4. Lastly, must have low/reasonable P/E
That's it - the big secret. And I never said I don't lose money, I just don't lose it at the rate everyone else in mutual funds does.
My biggest problem with Mutual funds is that there are millions of people that are in them and the name of the game is to out do all the others in your category.
Much like school, my goal wasn't to be an "A" student (takes too much time to study), it was simply to be ABOVE AVERAGE.
Mutual funds = AVERAGE
Successful stock picks = ABOVE AVERAGE
I did 32.9% this year. All you have to do is look at what "proffessionals" have said about Apple over the years to know they don't know squat. "Hold" as it goes from 15 to 80 and splits! Nice call boneheads.
