DIY individual stock fund

Discussion of the Stock portion of the Permanent Portfolio

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dualstow
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Re: DIY individual stock fund

Post by dualstow » Wed Sep 25, 2019 8:42 am

Poor Corning. I hope they recover.
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sophie
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Re: DIY individual stock fund

Post by sophie » Wed Sep 25, 2019 9:22 am

Pet Hog, how come you want to do this in the first place? As in what's your goal?

Emulating an index fund is going to be difficult, costly because of trading fees, and frankly a royal PITA that will eventually get old. I'm happy to "hire" someone else to do that job, via an index fund.

However, I'm buying some individual stocks myself, as "deep stocks" but it will be limited to one quarter of my total stock holdings. I'm not going to try to rebalance them, it's purely an old-fashioned buy and hold strategy. My motivation is to have some portion of my stock savings outside of traditional index funds, and to get closer to full control. I expect and accept that there will be some tracking error compared to indexes, but that doesn't bother me. I'm not going to get anywhere near 50 stocks - Harry Browne's initial recommendation for the PP in the pre-index fund era was to pick out a basket of "10-20" stocks, so that's the ballpark I'm going for.
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Kbg
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Re: DIY individual stock fund

Post by Kbg » Wed Sep 25, 2019 4:46 pm

Sophie sums it up nicely. My comments were not meant to be positive or negative...just to point out the PITA factor.
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Re: DIY individual stock fund

Post by Pet Hog » Wed Sep 25, 2019 6:04 pm

I guess, Sophie, that my motivation is a lot like yours. I want to cut out a level of bureaucracy and get closer to direct ownership of the shares. I felt my PP was much more bulletproof, and I was more in control, once I ditched TLT and started buying 30-year treasuries at auction. I haven't owned an individual stock for probably 10 years, but I think there might be a similar feeling of calm ditching the total market indices. But also, I guess, I think there's a chance to get a better return with equal-weighting, hence all this modeling. I haven't convinced myself that I'm not data-mining, so these posts have been me talking out loud and trying not to fool myself. I'm very happy with holding VTI and ITOT, and unless the numbers are undeniable, I'll keep them.

May I ask how you're going to select your 10-20 stocks? Will you hold them equal-weighted? I've had to defend myself a few times already in this thread that it is not my intention to trade excessively, but also to buy and hold, so you and I seem to be on the same page.

Kbg, I don't think it would be that bad. There wouldn't be a lot of trading, but I agree that holding just one or two stock indices provides the PP with elegance and simplicity.
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Kriegsspiel
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Re: DIY individual stock fund

Post by Kriegsspiel » Thu Sep 26, 2019 7:34 am

I still don't get the fixation on random, or "every 14th company in a list" method of choosing which companies to invest in. If you're planning on buying shares in a small bucket of companies to hold for the long term, I can't see randomness being a good criteria. Thinking of people who do invest in a relatively small number of companies, they all seem to be Graham or Buffet like in most ways, educating themselves then buying solid companies with good leadership and holding them for a long time, periodically adding to them if they can. Why wouldn't you set up some simple kind of stock screen for the SP500, instead of eensy meensy miney mo? Especially for long term investing.
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Re: DIY individual stock fund

Post by Pet Hog » Thu Sep 26, 2019 12:42 pm

Kriegsspiel, I have no fixation with randomness. I'm wondering if a small equal-weighted portfolio might match or out-perform a market-cap-weighted index. I can't buy every stock in, say, the SP500 (I'm not that rich), so the challenge would be buy a subset and get similar (hopefully superior) returns. (Like an opinion poll -- survey a small number of people at random to gauge the mood of the masses.) If picking stocks at random turns out to be a winning strategy, then there might really be something going on. Then when putting the plan into practice, I could be more selective with my strategy. But first, I would want to show that it works because of some fundamental advantage of equal-weighting. Ergo, randomness. I could backtest the portfolio by hand-selecting some stocks that I think I might have bought five years ago, but I don't trust myself to be objective. Also, I'm terrible at stock-picking, that's why I'm in the PP to begin with!

From the few portfolios that I have modeled in this thread, I'd say the results are promising but unconvincing. So I'm unlikely to put this plan into action.
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Re: DIY individual stock fund

Post by sophie » Fri Sep 27, 2019 8:13 am

Pet Hog, I'm not doing any kind of quantitative analysis because I don't think that would improve results over random picks. Broadly, I'm going for what I think are solid "value" stocks that have a record of increasing dividend payouts, have a relatively low P/E (or at least not too high), and are in businesses that won't be going away anytime soon and could survive a recession. I try to spread the choices among sectors. I also "cheat" by looking up holdings and recent purchasing by Berkshire Hathaway, to get a short list of ideas. I'm looking at Southwest Airlines or Coca Cola for the next time I have money to sink into stocks, for example.

It's fun to watch the stocks go up and down, and overall they do track the indexes reasonably well. I forgot to mention another plus of doing this: more opportunities to tax loss harvest and avoiding unwanted capital gains like you get with index funds.

I put about $5K into each one, and eventually will start buying more of the ones I have (lagging asset) once I have enough of a collection. Meantime, I'm reinvesting dividends. Like I said, nothing fancy. This is how our parents and grandparents invested in stocks, and it worked just fine.
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Re: DIY individual stock fund

Post by dualstow » Fri Sep 27, 2019 8:35 am

sophie wrote:
Fri Sep 27, 2019 8:13 am
Pet Hog, I'm not doing any kind of quantitative analysis because I don't think that would improve results over random picks. Broadly, I'm going for what I think are solid "value" stocks that have a record of increasing dividend payouts, have a relatively low P/E (or at least not too high), and are in businesses that won't be going away anytime soon and could survive a recession.
...
That's pretty much what I did. I started that in '99 or 2000. Would have started sooner, but I didn't have access to my own finances before that, and not enough money to really start. I've got a nice bit of supplemental income now, over 8% yield on cost as of this season. Strictly VP category for me, and more recently I was buying corporate bonds, not more dividend-raising stocks.
(And here we are posting VP stuff in the non-VP section, just like we encouraged others not to do ??? )

EDIT: I still think you should use an index fund in the pp, Pet Hog, for rebalancing.
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sophie
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Re: DIY individual stock fund

Post by sophie » Sun Sep 29, 2019 4:47 pm

That's right, I remember you did that too dualstow!

I don't have it as a VP. I've got it within the PP stock allocation. I'm not trying to beat index funds, I just wanted to have a piece of my stock allocation under my own control. Among other things, this is just in case something in the fast-growing index fund market blows up unexpectedly.
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Re: DIY individual stock fund

Post by ochotona » Sun Sep 29, 2019 4:57 pm

Buy the Dow Jones Industrial Average stocks? That's a known yet manageable lot.
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Re: DIY individual stock fund

Post by ochotona » Sun Sep 29, 2019 10:21 pm

WHOA! Unexpected! If you equal-weight the Dow 30, and rebalance annually, it's really kick-a$$. I had to omit DOW and V because they don't go back far enough in time.
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Re: DIY individual stock fund

Post by sophie » Mon Sep 30, 2019 6:29 am

Slight logic problem!

Apple was added to the Dow in 2015, and Cisco in 2009. So you're not comparing Dow stocks to the DJIA, you're comparing the DJIA to companies that started small and grew big enough to be elevated to Dow status. In short, you would need Dr. Who's Tardis in order to get a result like this.

It is however a good illustration of a worst-case tracking error of the basket of stocks strategy to an index fund. It can definitely be sizeable and can go either way.
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