Here's some observations I've made over the years, and at least in retrospect, they seem as though I could have beaten the market. My theory is that I can identify large cap stocks that will fail, and ones that will succeed, based on personal observation. Here's some examples:
Apple: I've been using Apple computers for 11 years. Their switch to Unix-based OS X in the early 2000's pushed me towards using them, and I owned the first gen iPod. I knew they were vastly superior to PCs at the time, and I took a lot of abuse and ridicule for several years.
Microsoft: Look at how much money they've been wasting trying to enter new markets like video games. It's ridiculous. How much did they pay for Skype? FFS, they are going to fall harder than they have.
Google: I've been using it for about 7 years. Imagine if I started investing in it when I started using it regularly?
Target (Stores): I've been shopping there and spending about 30% of my non-housing budget for about 10 years. Amazing store. Very clean. Much superior to Wal Mart. Middle class people in non-rural areas hate Wal Mart because they equate it to lower class people. If I invested in them back in the day...
Yahoo: Another company doomed for failure. Once Google took over 5 years ago, it was obvious Yahoo would be worthless eventually. If I shorted them at the time...
Sears Holding/KMart: If anyone didn't see that failure as early as 10 years ago, then you're crazy. KMarts in most areas looked horribly under maintained. They dont get lower class support (because those shoppers go to Wal Mart) and they don't get middle class support (who go to Target). It's a failing straddle.
All Airliners: If the government didn't keep bailing them out every few years, we wouldn't have airliners. They treat people like shit, and they let the government force TSA down their throats. No one is traveling for leisure anymore, and businesses are starting to use Go To Meeting type services a lot more. They will all fail and will require another bailout in a few years... unless Ron Paul takes over as POTUS, abolishes the TSA, and makes air travel friendlier again. (Interesting side-thought, if Ron Paul does win the Republican primary, then time to buy airliner stocks).
Utilities: No one gave a shit about these until the market crashed. I liked them, and frequently argued on Bogleheads to overweight them slightly because TSM only has about 4% utilities in them. Due to the government monopoly, they can't fall to zero. That also implies there's a ceiling to their profits, but during bad economic times, they are a stable safehaven where dividend-chasing idiots flock. Look at the returns in 2011.
Financials/Banks: It's obvious to me that Dodd-Frank and other big-government nonsense is forcing consolidation within financials. Smaller banks are getting absorbed by bigger banks. We have so few "big" banks anymore, that the government can't let any of them fall. Buy Bank of America, Wells Fargo, and Citigroup and you're guaranteed to get huge returns above the SP500 index once the economy recovers.
REITs: It's obvious to me that residential RE is in huge trouble and when interest rates rise, will be in even more trouble, especially with the threat of cutting the mortgage interest tax break, and the threat of consolidated banking system that drives more power to the banks, and thus less to the consumer, and makes housing less attractive. This means apartment rental REITs will go up.
Best Buy: It's going bankrupt within 10 years. Go to their store and look at the assclownery that goes on. They have a price match policy that their cashiers are specifically trained to not give. They have an intranet with one set of prices and an internet with another set so people in the store have to pay more for products. People buy stuff on Amazon to avoid sales tax, and go to BBY just to look at something and then order it online cheaper, and tax-free.
Firearms: The 2 publicly traded US firearms company have had booming years. Anyone who follows firearms knew that gun purchases would skyrocket around the 2008 elections, and will skyrocket again with the risk of Obama being re-elected and imposing gun restrictions.
Here's the problem with having these observations. Just because I know apartment REITs will go up significantly compared to the REIT index, I have no way of investing in the "right" ones. There's an apartment REIT ETF but it's shit and is over 10% Public Storage, on the theory that people moving from houses into apartments will need to store their crap. My theory is that people will throw their shit away and not store it. I don't want 10% Public Storage. That means I have to read through a few dozen 10-Ks just to find "good" apartment REITs that have a found business strategy, and that are in diversified areas of the country. i.e. I don't want an apartment REIT that is predominantly in Michigan.
The second problem is that a lot of things I believe to be true, are based on short bets. I believe BBY will go bankrupt. The problem is that I can't short BBY forever, and it may not go bankrupt before my short position is insolvent. It might go up 50% before it goes bankrupt. I don't know. I just know it will fail. So it's not actionable in the traditional sense.
However, what I am considering doing, according to Modern Portfolio Theory, is to pick 30 stocks from the SP500, and "avoid" the ones that I believe will fail. I believe Facebook is going to get put on the SP500 and will crash and burn. I can avoid investing in FB simply by not picking it as part of my 30 stocks portfolio.
I can still use sector indexes in some cases, such as utilities, where I don't feel it appropriate to pick and choose utilities. I can put 10% of my stock money into VPU, the Vanguard Utility ETF, for example. That's overweight the 5% in TSM, but not so far overweight that it will do harm when it stabilizes.
I can put 3% of my stock money into 30 different stocks, and 10% into VPU. I specifically avoid stocks that I believe will fail. I can essentially do an "SP500 ex-Shitty Stock" parallel. Even if one of my stocks pulls a Lehman Bros, then I only lost 3%.
What I'd likely do is put 10% of my equity position into small cap index, 10% into mid cap index, and 80% into the levels I described above (i.e. 10% utilities of an 80% position is 8% of equities as utility ETF).
I'd predominantly pick companies that I used daily like Apple and Target. This would let me see first hand if they are starting to slip. I'd avoid too much concentration in any one sector. For example, I might put 3% into BAC, 3% into WF and 3% into C, but no other financials. That would be 9% of my "stock-pick" portfolio, which seems reasonable for financials. I wouldn't put too much more into financials, because that would be too much of a sector bet.
When it comes to stock picking, to succeed, one has to have non-efficient information, such as congressmen. I believe my source of competitive advantage is how "picky" I am in what I buy and do. I walk out of stores with long lines, even if I spent 20 minutes filling my cart. That would be an indication that the management is poor, and the company will perform poorly in the future, if that is something that continues to happen. My obvious problem is that I am one person and in select geographic areas, so just noting a few stores are operating poorly, doesn't mean the whole country's national stores are doing bad.
Go ahead PPers. Talk me out of this crazy idea, or get me to do it in VP instead
I just really hate looking in my portfolio and thinking "I own 1% of my stock money in Best Buy, knowing they are doomed to bankruptcy." That's my problem with index investing.
