Gyroscopic Investing

My stock broker buddy (who likes the PP idea) repeatedly encourages me to buy and hold individual equities rather than an index. One feature is the added volatility which may provide discounts during rebalancing or even greater gains. I'm not talking about day trading, but just running the stock portion more akin to how the whole PP functions.

Feel free to track any of the top S&P 500 companies vs. the index as a whole to get an idea of performance comparison.

Another "feature" is higher fees and tax implications. You won't hear too many brokers pushing buy & hold indexing, because it means less money in their pockets. He has to stick to the narrative to keep his job.

Ha. Agreed.

But, he's not asking me to buy/sell through him. Rather just showing that increased stock volatility can be used to capture gains or buy at a discount more pronouncedly than a 500 Index.

Also, all this trading would be done in my Tax-sheltered space only.

Nevertheless, it's a terrible idea. The chances of beating the market with a hand-picked portfolio — over the long run — are very, very, very bad. Active investing takes on more risk for a lower expected return.

See: http://rickferri.com/books-by-rick-ferr ... -investing

The 4 PP components rise and fall in non-correlation for macroeconomic reasons.  Stocks may rise and fall in some limited non-correlation, but for no fundamental reasons that you can count on to reverse and create a rhythm you can build a portfolio on.

I agree it's a bad idea.  More taxes, time, and fees will result... and probably more risk.

Also, a great industry story can be derailed very quickly by black swan-type events.

A good example is the oil services industry.  The fundamentals of this area are strong and there are many great companies in this space.

However, when the Transocean rig sunk last spring it totally changed the outlook for this industry.

A very sound micro and macro analysis that would have called for investing in one of these companies could not have foreseen what actually happened last year.

The same would have been true of the financials back in 2007.

Stock picking is harder than it looks.

Thanks for the feedback guys.

I'm by no means a 'picker', and I work full-time, so choosing stocks, tracking and trading them isn't my cup of tea.

Also, good point about the unpredictability of stocks.

I'm happy watching my PP and my VP (Faber's GTAA) just do their thing.

SmallPotatoes wrote: My stock broker buddy (who likes the PP idea) repeatedly encourages me to buy and hold individual equities rather than an index. One feature is the added volatility which may provide discounts during rebalancing or even greater gains. I'm not talking about day trading, but just running the stock portion more akin to how the whole PP functions.

I think it depends on what you are trying to do.  For the VP I too believe it better to invest in individual stocks than in an index.  While statistically you may not be likely to beat an index over the long run, you at least have a chance of realizing spectacular gains.  I have done quite well with most of my individual stock picks (I am not bragging, as I chalk it up more to luck than anything).

I would never put money I couldn't afford to lose in a handful of individual stocks, but for the VP why not swing for the fences?

hey smallpotatoes

I have quite a few individual stocks left over from pre-boglehead days (and pre-pp as well). Right now, they're designated as part of the variable portfolio. I'm trying to discipline myself to direct any sales proceeds into my index funds and never into new individuals.
It's a terrible idea, like gumby said, but one can't blame a stock broker for suggesting it. 

dualstow wrote: I'm trying to discipline myself to direct any sales proceeds into my index funds and never into new individuals.
It's a terrible idea, like gumby said, but one can't blame a stock broker for suggesting it. 

It's like blaming a barber for saying your lid is looking a little shaggy.

I use my VP and pick stocks where I have industry knowledge, or know of long-term trends.  For example:  smartphones - they are all powered by ARM chips, whether it's the iPhone, Blackberry, or Android.  ARM chips also power tablets like iPads.  It doesn't take a rocket scientist to figure out that this company, ARM holdings (ARMH), might be as big or bigger than Intel someday.  Their stock has seen a nice little rise from $5 and change in the 2009 lows up to $30 a share now.  Also, look at AAPL from 2002 to now.

Anyone that used an iPod in the early 2000s or an iPhone in 2007 could have predicted these trends.  These are great picks for the VP, but for the PP, I only use index funds.

"It doesn't take a rocket scientist to figure out that this company, ARM holdings (ARMH), might be as big or bigger than Intel someday."

Companies like Intel are very very very rare.  In William Berstein's book, "The 4 Pillars of Investing," Berstein devotes a chapter or so to this. 

Companies that create new technologies do not usually profit very much from their innovation (if at all). It is usually the companies that use these new technologies that make money. 

I know you can point to companies like Intel, Microsoft, Apple, etc, but they are rare, and very difficult to pick before they are successful.

Adam

Adam1226 wrote:I know you can point to companies like Intel, Microsoft, Apple, etc, but they are rare, and very difficult to pick before they are successful.

Even if you do manage to pick the next Apple, you won't know how much money to risk on it or how long to hold it for. And there will be plenty of hand-wringing. Your brain will try to trip you up every step of the way. It's not nearly as easy to hold on to a high flying stock as you think it will be.

Gumby... unless it's part of the VP and you have a solid PP to help you forget about your gambles and look at them with interest, but not fear and anxiety.

... another wonder of having a solid core before taking risks.

moda0306 wrote: Gumby... unless it's part of the VP and you have a solid PP to help you forget about your gambles and look at them with interest, but not fear and anxiety.

... another wonder of having a solid core before taking risks.

True. But, I wasn't talking about fear and anxiety. I'm was referring to regret and second-guessing to maximize your return. It may be interesting to put a few thousand dollars into what may be the next Apple, but if you actually hit a home run, you'll constantly wonder why you didn't invest more than you did. And while it's going up you'll have no idea how to time it to get the greatest return. Should you sell at a 300% return? 400% return? 800% return? 1200% return? 2500% return? or 3200% return? If you do put a lot of money into that home run, you'll be tempted to take your money off the table sooner. That's what picking the next Apple is like. And it can be a decade long roller coaster ride. It's exciting and excruciating, but you'll almost always have some regret. It's emotionally draining.

And just when you have it figured out, something unexpected happens. It's far more difficult to maximize your return than it seems like it's going to be. Even if you have a PP, it's difficult not to get emotionally involved in a VP — even if it's just a tiny bit.

Every great trade has two parts: you must buy at the right time AND sell at the right time.

Lots of people get one out of two right; getting them both right is what's hard.

I have come to the conclusion that if one wants to hold individual stocks, he should never completely get out of them.  If you get lucky and hit a home run, sell half and keep half.  That way you are realizing some gains but still staying in the game.  This is of course no guarantee of success, but in my opinion stock picking is mostly luck anyway, and this approach minimizes regret on either side.

Of course it goes without saying that this is for money you can afford to lose.