Warning To Prospective Individual Stock Pickers

[TripleB]

Keeping with the theme of PP, here is a warning to people who think they can pick stocks. A good friend of mine a few years ago "invested" heavily into tanker stocks like FRO. They were paying high dividends (about 10%) and were doing around 30% stock price gains per year for a couple years. When the 2008/2009 crash occurred, they dropped around 80% to 90%.

The reason they did so well back then is because oil was peaking around $140/barrel and people were buying oil in advance but had to store them in the tanker ships because they didn't need to take delivery of it yet. Essentially they were renting the ships to store oil to hedge future rises. When oil dropped, there was no need for the tanker ships anymore and the stock price plummeted.

For the hell of it, I type FRO into the daily ticker every so often to see how it's doing. I figure with the recent increase in oil prices it might be doing well. On Thursday it went up around 13% in one day. On Friday it went up about another 25% in one day.

All I have to do is remember how it fell 90% in 2008/2009 to remember why individual stock picking is a bad idea even if it looks tempting and easy. For the record, I never invested in any of the tanker stocks that my friend suggested. The irony is that I chose not to invest for the wrong reasons.

I had the misconception at the time that in all cases dividend-paying stocks were "stupid" in that the company should use the cash to expand and grow. And that if a stock was paying a 10%+ dividend, it must be "cheating" and returning the principal back to the investor, just to incite people to invest.

What I didn't realize is that in the tanker stock world, it would be have been ridiculous and probably impossible to take the huge influx of cash they were earning and use it to buy new ships. It takes time to build ships and with demand forecasting uncertainties, they might build all the ships and then have them sit unused. The reason they could afford to pay a 10%+ dividend is because they had all this cash with nothing good to do with it.

This story of my friend losing his shirt is a good remembrance of why investing is different from speculating. Fortunately he was in retirement age in the public sector and eligible to receive a ridiculous pension.

[lazyboy]

That's good advice. And it reinforces why I index the stock portion of my PP. I know just enough to be dangerous to myself. For those who are good at picking and managing stocks, I hope you are successful.

[dualstow]

Hah! I remember FROntline from my silly pre-boglehead days. Good times.