I’m conflicted. Lots of people trade individual stocks. I do. My friends do. Maybe you do. I used to dream of watching CNBC tickers, making quick trades on my PDA, getting in on IPOs. But so far, I’ve just made the occasional trade based on some loose predictions, a good story, or love for their product. But the more I read, the more I think – why bother at all? The average active mutual fund manager cannot beat the market over time. These people have finance degrees, experience, lots of underlings, and I’m sure some smidgen of intelligence for them to be managing millions of dollars in capital. I don’t see myself as any better.
So my question is – why do you do it? Is it entertainment value? Maybe you work in the industry so you know it better than the managers? Do you believe the articles from a $5 subscription to Forbes are actually cutting edge advice? Maybe everyone else just didn’t read enough Benjamin Graham or Berkshire Hathaway annual reports? What makes you think that you can beat the market? Even though I used some sarsasm back there, I really do want to know.
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I guess Peter Lynch’s “One up on wall street” can answer your question. Basically he tells you that you should trade on the stocks you have an edge over those fund managers, how to find these stocks, and how to decide which ones to invest in. I am reading it now. Very informative. Now that you’ve read a lot of books, this one should be on your list.
I myself is subscribing to a newsletter service for $200/year (now $300). The owner uses value investing method (which is used by Benjamin Graham, Peter Lynch, Warren Buffet, etc) to find undervalued/depressed stocks, buy and hold. The annual performance of the owner’s portfolio is pretty impressive (I am not trying to solicit or anything). Although my own portfolio is still a couple of percents under (due to the timing of entry) so far, I am very confident that I will make profit in the longrun. More over, learning about this method is beneficial.
bzsmile, interesting. Your are paying $200/year for a newsletter you use to decide how you will invest & , while you admit your portfolio is still a couple of percents under, you are confident.
I am curious as to how long you have held these underperforming stocks.
I entered at Aug 2005, built up a portfolio proportional to that of the portfolio owner, and basically followed the newsletter to transact. What I love this newsletter service is that it is for long term investment, rather than speculative day trading. Stock picks were based on the fair price of the stocks and their current market price. While I am learning to do it myself, for now I think it’s worth it to have some expert do it for me.
One successful pick of that newsletter service is USG. The owner entered in 2003, paid
I think the simple answer is We do it for the money.
With no guarantee, we’re only hoping to be lucky enough to make a profit. However, the answer is still the same. It’s all about the greenbacks.
I get into trading stocks because they become an investment. I think a lot of people can get caught up in day trading and cashing out whenever they please. That’s not really a great investment considering the risks. If I ever placed large sums of money, it would be in company’s whose growth will increase year by year, and they will issue dividends. I would then have the dividends reinvested while keeping a watchful eye to make sure things don’t go sour. Too many people are into getting rich quick.
As far as company’s performances, I really think the market is pimping companies. Why should I bust my ass and put you as my first priority when most of the stock I issue is owned by a hedge fund that holds it for 6 months to cash out? Companies really need to focus on customers, products, then investors. This whole idea of maximizing shareholder wealth only creates Enron scandals.
Trading in indivudual stocks with little information isn’t very different than gambling. It can also be likened to consumerism of the finance world. Forbes magazine, and others are no different than most other consumer magazines. The articles and advertisements are designed to get you to buy stuff you can do without, in this case, to trade.
The majority of individual stock traders lose the game. Sure, they get one or two winners that they talk about but they forget the losers. Add in trading costs and margins and it’s a suckers game.
What do I do? Our portfolio is split in two: part in an asset allocated portfolio of ETF’s which I rebalance about once a year; the other part is invested in 40 stocks using a couple of old “screens” and rebalance once a year. Besides low trading costs, it’s so much peace of mind. Recent annual returns: 15%, 50%, 18%, 11% since 2002. “Past returns do not guarantee
furture returns.”
I don’t trade. I invest. For me personally, I have no problem beating the market averages. Been doing it a long time. I buy growth stocks based on the NAIC philosophy. Read, study, form your own opinions. NEVER follow the crowd! The “experts” are few, and the “experts” are not the real experts. I never recommend people do what I do. You need to commit the time, energy, and discipline to beat the market. 99%+ of the investing public would do much better if they dollar cost average into Vanguard’s Total Stock Market Index Fund (VTSMX). Good blog; I enjoy reading it.
There is some lure to trade and try to be like the “big wheels” but I seem to always be a day late and a dollar short on the next Walmart. I bought Haliburton at $9.90 sold at $20 now its $75. But I have made a little over time just reading and watching. Lately I have tried to build a portfolio of solid consistent dividend payers most have been in the the finanical area. I have also just read “The little book that Beats the Market” and I am thinking of trying the stratagy. Wondering what others think of this?
Greg
Mutual fund managers have to manage millions/billions of dollars. They cannot get in and out of stocks quickly. Most probably don’t use options or margin either.
You can also time tax gains/losses to suit your needs.
PS I also bought the Peter Lynch book and tried that but I missed something cause I got burned on several stocks. The neat thing though is how easy and cheap it is to trade stocks and get info via internet vs when I first started out in the very early 80’s.
Greg
I subscribe to Valueline (50% off for Fidelity account holders) and i have invested (not traded) a certain amount back in 2005 and YTD has a 12% return which is alot better than what the market is doing so far. I don’t believe in stock trading period.
Curious, I know you said you are not looking to pump this particular news letter, but Id be interested in knowing the name of it so I can look into it for myself.
Thanks
Jonathan:
I buy a mixture of stocks and ETFs for my portfolios. I benchmark my portfolio against a passive portfolio of ETFs representing various asset classes. My aim (and so far it has worked out) is to beat my benchmark by 2% long-term (before taxes but after commissions). If I can’t do it, I might as well invest in the benchmark.
I don’t buy any newsletter and I almost never buy stock based on a magazine column. The only newsletters I use are The Investment Reporter (a highly ranked Canadian newsletter) and Value Line. Both are available free in my local library.
My suggestion to all active investors is to benchmark their performance. If they are beating their benchmark handily, great. Otherwise, it is best to just track the benchmark.
I invest in stocks because although for the most part markets are efficient, there are stil some inefficiencies I’d like to take advantage of and magnify my exposure through stock purchases. For example, there’s no reason what so ever a stock should react to a stock split announcement…nothing at the company has changed. Yet, analysis would show there is more stock activity around such announcements (usually a higher movement). Another example is stock breakups. The recent Time Warner Icahn episode shows this perfectly. A company should be valued as the sum of the parts. It doesnt matter how you divide the pie, it should add up to the same total…but the markets move on breakup news, which also shows inefficiency. Investing in index funds can only be rationalized based on the assumption that markets are efficient…i dont think that assumption is totally true. SO, invest in an index fund and you’ll get, by definition, the average return. For the most part, thats the best one can hope to do over the long run while minimizing associated fees. But inefficiencies like the one described, or the general belief that markets overreact (like Merck when Vioxx was pulled off the shelves-way too much panic–shares moved up from 27 to 36 in the last quarter)(and like Apple while the Mac World show was going on-way too much optimism–shares shot to 85 at the time…now, a month later, sell for around 70).
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Ray Miz
I personally trade stocks for the money to be made. When I invest in the stock market, I invest for two types of income. They are passive income, and capital gains. For passive income, I look for a high-quality stock with little to no debt, and it has a generous dividend (above 5%). Those kind of stocks don’t really move much, but the passive income is there and I get a dividend check every 3 months.
When I invest for capital gains, I look for new and emerging companies that have very promising products, primarily in the medical field. For example, one of the first stocks I bought was Given Imaging (GIVN). They make a camera pill that is an alternative to the endoscopy. Their product seemed really promising so I bought some of their stock at $9.73 a share. I sold my stock at $26.85 two years later.
Another stock I bought was Vital Images (VTAL). That company makes software that can take 4D pictures of the body. I bought VTAL at $9.35, and still currently own it at $34.00 a share.
Last week I bought stock in Texas Roadhouse at $15.81 a share. This is the first time I bought stock in a restaurant, But I think Texas Roadhouse is an excellent buy.
BTW I started investing when I was 16 years old, I had to really convince my dad to open a custodial account for me, but he’s glad he did. Because I used some of the money I made in the stock market to buy a new car, and pay for my college (I’m 19 now).
We keep a small brokerage account for my wife to run investments in. Its mostly for her to learn skills to trade equities. (She is, however, an experienced debt/credit analyst for a hedge fund.)
Most mostly, we agree. Frankly, even making asset allocation decisions among mutual funds/ETFs is hard.
We have outsourced some of our investments to professionals with total discretion (1 hedge fund, one SMA). We run a basket of ETFs passively. And we make 401k asset allocations once a year.
I personally don’t trade stocks, but I believe others do because maximum potential returns are higher. Mutual funds are groups of stocks so there is a lot less risk in buying them BUT you also can’t double your money in a year in a mutual fund. It’s just higher risk, higher reward than buying mutual funds. Not that I agree that the risk is worth it to “get rich quick”, but I am sure others do. That’s just my take on it.
I trade as part of the “core & explore” theory. I never put more than 10% of my portfolio into trades and never more than 2% of my portfolio into one trade. I agree that the big guys have more access and info, but you’re playing on a different field. Most fund managers are limited in what they can buy, and they have to either sell when they don’t want to (outflows) and/or keep buying winning picks (inflows). For example, you can buy gold, energy, housing, bonds, whatever you want; most fund manager can’t.
Of course, the other side of that coin is that most of us don’t have the time to trade like this; it takes a lot of time to pick a stock, then pick entry and exit points. So, I’ve been looking at using technical indicators, charts, etc. So far, so good but I think I’m gonna stick to bull markets for now. When the next Bear comes, I’ll wait to pick a few quality companies at good P/Es and then just sit on them until the market turns back.
The lesson from Berkshire is that you should buy and never sell. Buffett only buys stocks he doesn’t intend to ever sell, so the company can plan for the long-term and provide consistent profits and growth. It’s hard, because you have to find companies that are both good and cheap.
The stock thing is a classic case of overconfidence. Humans like to think that they know more or have an edge over others. It’s sort of like he lottery for people who can do math. We like to believe that we caused the win, but that chance caused the loss. To quote someone else, “Boring is so good in investing.”
See the book ‘Why Smart People Make Big Money Mistakes and How To Correct Them : Lessons From the New Science of Behavioral Economics’ for more.
the average fund manager manages way too much money and it is hard for them to get in and out of stocks when they want to without significantly changing the price. but an indvidiual person, it is easier to manage, although most people cannot do well because they cannot control their emotions of fear and greed .
Stock trading is a zero sum game ( at least in short term ).
For somebody to win $100 , somebody else has to lose $120 ($20 for comission). Not much different than casino. Only casinos make money from gambling. Same way only brokers make consistent money from short term stock trading.
This is great. Nice variety of thoughts thrown out here.
If someone wins $100 only at the expense of someone else’s $120, it would be a non-zeo sum game.
People trade stocks for the same reasons they go to vegas. 🙂
Personally, I think the best money to be made, is selling newsletters, books, seminars, etc to traders.
I agree with Denon. We do it because we feel the rush. We always ‘think’ we can beat the system. And that thought gives a little rush.
I used to day trade everyday…..as soon as I make $20 to $50 a day, i quit. This could be done from 1 trade or 3-4 trades (by buying and selling within 2-5 minutes). This was going GREAT for 2-3 months UNTIL….one crash and u lose everything. Its that ONE single greed that can cost you all that u made over the 2-3 months period.
I broke even….BUT what hurts was that a single WRONG trade can cost you all that u made. I was VERY disciplined but still lost everything.
From my very limited experenice of trading stocks I definitly did better with stocks than funds. All my stocks :retk,ansi,grmn,ebay and a couple others went up more than my funds. The only exception is kkd which I bought on emotion rather than research. My new stock is smf which I got in a couple weeks ago and is up over 5%. With the tools you have on the net, I think if you have time you can get decent returns.
I think you have to distinguish the difference between stock traders (which I am not) and stock investors (which I am). Traders will buy and sell the same stock frequently whereas an investor will buy a stock he or she believes in and hold it for a long time. I buy into one or two stocks at a time few and far between. The stocks that I buy I have a huge amount of confidence in and am willing to stake 10-20% of my whole portfolio on. I have a 50% track record of picking stocks that beat the S&P 500. My worst pick ever only fell 20% before I sold and my best is up over 600% in 18 months. That stock I still own. My annualized total return since I started investing 26 months ago is 55% per year. Individual stock investing is much more lucrative for the diciplined, patient, and knowledgable person. Soon I’m sure to have a correction but I don’t expect to lose ground to the S&P 500.
My core investments are mutual funds and closed end funds. Some of the latter are really listed hedge funds. I do market timing and playing between my investments in Australia and the US to take advantage of exchange rate changes over the longer term. I do do short-term trading using technical analysis primarily. My track record is about breakeven on that. But I have learnt an immense amount about investing, finance, and business in the process that I wouldn’t have learnt as purely a passive index fund investor. I use some of this experience in my teaching as an economics professor. My performance has also improved over time. I own very few ordinary non-fund stocks that I plan to hold long term. A few % points of my portfolio. What people have said about the difficulties of large mutual funds to enter and exit the market is very important. And they have a mandate usually to remain true to label and fully invested. Really what you want is a hedge fund or be your own hedge fund by at least engaging in a little market timing.
I do it to supplement my earned income and retire sooner.
The reason why MF managers don’t beat the market is that they buy the companies after the big money has already been made.
I buy stocks that have 50 mil dollar cap that I think have potential to go to 500mil. Once they reach that, that’s when MF managers buy it.
MF managers don’t invest 50k or 100k, they invest 10-50mil. Imagine investing 50mil in a 50mil company!
I had a 10 bagger and 5 baggers last year, and a 20 bagger this year. I actually make more money in stocks than in my full time job.
Another thing, stock investing isn’t a zero sum game, please take some time to educate yourself before you invest.
http://www.investopedia.com/terms/z/zero-sumgame.asp
Because I can and dwarf the gains of the market, it is as simple as that. There are a small percentage of people that can do this for a living through integrating derivative plays, options, futures, bonds and currencies- not just the simple minded buy-and-hold which does work, but cannot compare to the sophisticated *Successful investor/trader. These successful active investors/traders are the brokerage houses dream because they are used as a benchmark and an example which will present a commercial with success as the theme when the fact of the matter is unintelligent lemmings jump into the market and churn their account away thinking they can be just like them- but most people are too thick, stupid, ignorant to understand that.
I’m dabbling in low-priced stocks.
High risk = High returns or losses.
In the last few months I have spent the money on some newsletters. I purchased International Speculator, Casey Energy Speculator, The Complete Investor, and Martin Weiss’s Safe Money Report.
I am exploring right now, but do believe some newsletters can be helpful. They do not “tell me” what to invest so much as they provide ideas on which companies might be good prospects. YOU still need to read the company’s prospectus and know something about the sector you would like to invest.
The International Speculator focuses on junior gold and silver mining companies, but these can be very volatile but the gains really tremendous.
I don’t not necessarily have the money to invest in every recommendation, but I am interested in the ideas presented so that in the future I can reallocate some capital to other sectors.
Also, all of the newsletters I mentioned post past newsletters on-line for the subscription price, so you can read a newsletter from a couple of years ago and follow up on the whether the recommendation was a winner or a loser.
I subscribe to Forbe’s and Fortune magazines. I don’t know whether I would invest in every stock recommendation even if I could, but the information provided is helpful. For example, Forbe’s had a recent issue showing the performance of funds in stock, bond, etc. I noted that Vanguard was a frequent member of these lists. Guess where I will first CONSIDER putting my mutual fund investments in the future?
The writer of this blog is right though, you do have spend much time and effort reading. Even though I believe he has been of some help, there is more to stock investing than “booya!”.
Trading individual stocks over indexes or funds makes sense for two reasons:
1. There are market inefficiencies that exist. They don’t exist for blue-chips and large market cap companies that have lots of analysts following them. You can’t hope to out-analyze these full-time professionals. What you can do is find smaller companies that aren’t tracked my analysts that are undervalued.
2. Mutual funds have higher transaction costs than we do as individuals. Not transaction costs in terms of commissions, but in terms of moving the market. If fund manager A wants to get in on Genentech or some other big cap, they will move the market up in doing so. As an individual, I can get as many shares as I want for a small flat commission.
These are the two primary reasons why I invest in individual stocks.
To the individual who said that a company value should equal the sum of its parts – any Finance 101 class will tell you that is not true. Statistics show that conglomerates trade at a 15% discount to the sum of the parts. The market puts a penalty on diversification within a firm.
We do it because it makes us feel empowered. Simple as that. The perception might be flawed, the choice of security might be flawed, the timing might be flawed, but, the sense of empowerment is overriding and intoxicating. We feel in control, and we love it. I, personally, am making a statement on Walmart, Chlorox, Morgan Stanley, Ford…pick your poison. A thumbs up or thumbs down from me, the man, a solid decision, a vote of confidence or a quick dump. Never mind that it’s one billionth of the company, or that they might reverse teh loss-inducing trend over time. The power is mine, to exercise and demonstrate to the world. That’s the real psychological babble behind the trade. It’s good to be king. Trading allows you to be your own CEO.
Feel out of touch with the economy and world events? Start trading/investing. You’ll be forced to learn world events and economics very quickly. In addition, you will be forced to stay current.
This is the #2 reason why I trade. To satisfy the number 1 reason ($$), I subscribed to a newsletter for a paltry $99/year. I highly highly recommend you do the same. Find a good newsletter. My newsletter (Leeb Complete Investor) has paid for itself 50 times over in the past 5 months.
I do it because it’s like a video game. Usually managers don’t do much better than the market since their portfolios are so diversified, but if you’re lucky enough to get in on one or two stocks that make 30%+ that year, then what’s not to like about that. As for forbes and such, read it online or read it in the bookstore, no need to pay.