Indexers vs. Stock Pickers?

[asari]

Hi Everyone,

I've been picking my own stocks for quite sometime and absolutely love it. However, I hate it when I meet indexers who would just hate on people who pick their own stocks.

I've gotten the classic "Your so arrogant in believing you can beat the market... blah blah blah", "Who do you think you are!" "You will never be Warren Buffet" etc etc.

Have any of you gotten crap from indexers? Personally I have nothing against people who index invest and would never put them down. Indexing is but one strategy out of many, I just wish they would stop hating on us stock pickers.

Over the years I've followed strict stop losses and have done reasonably well picking my own stock but I still like to keep an open mind so I'm interested in hearing about what you guys think about index investing VS stock picking.

Happy Investing!

 

[ROE]

Keep your inner score, don't let other people bother you...do what works best for you.
someone cup of tea may be your cup of coffee.

In my experience people who usually try to talk you down are the people with problems not you.

Defensive, angry, arrogance and fearful are the trademark of Insecure People.

what they are doing as you describe is being defensive.

 

[DeepState]

Hi

Let's discuss a few angles:


Bogle at Vanguard is keen on this idea and, as ex-Vanguard, is probably the key protagonist in this argument. He is keen on pointing out that index beats most others. This is a tautology. The average will underperform the index due to transaction costs along with fees etc (not applicable to you).

Morningstar research by Kimmell, updated to 2014, demonstrates that things are worse than that because attempts to time the market are generally unfruitful and lead to even worse returns than the mutual funds themselves. This may be applicable to you.

Nonetheless, despite this, a proportion do outperform the index. Maybe 20%. You could be a person with self-attributed skill sufficient to get you there.

Additionally, who ever said the index even mattered to you? What relevance is the ASX 200 index to you if you cared about return in excess to cash over tight periods? Or are attempting to hedge a CPI basket (your retirement income to come) through stock selection in the share market amongst other places? In short, it doesn't. This is a concept of liability matching.

Also, you have to be aware of tax. Indices have no concept. They just blather along. You can trade according to your tax situation which is likely to produce an entirely different outcome and will increasingly do so with time. Tax aware index funds are very different to index funds managed over the same universe. Those that take into account cap gains end up 'locked' in a portfolio that depends very much on receipt of cashflow and the way markets moved about. This will be unique to you. Your tax rate will also affect your preference for dividends and franking.

It also turns out that indices are not very efficient in terms of lots of other angles: it is relatively easy to beat the index on a risk-adjusted basis ex ante (ie. without knowledge of the future or any information that is not accessible today). This is different from beating the index, but is arguably more relevant.

Finally, there is a concept called 'outrage'. Even if you might underperform the index, you might feel better taking control of your portfolio and managing it. If the market goes down and everything gets tanked, you will derive a psychological benefit from having tried vs watching the ship sink. Given we are human and hence not devoid of emotion - even insecurity and fear - this benefit is real and worth money.

Finally again, because I just thought of something else. Is it worth your time to seek to outperform? That's for you to judge. There is a dollar per hour concept. Also there is clearly as aspect of personal satisfaction which you derive from it.


The index vs you argument is presented as either or. In truth, the argument is richer and nowhere like the way it is presented by the indexers. Like RoE...everyone is unique and he has learned a lot from his experiences - it is obvious from his posts which are recommended reading. Index funds suit a lot of people. They may not suit you.

That is all.

No - it's not. F%$#. I just remembered...Bogle's son eschews indexing. He runs a hedge fund. He is killing the indices.. Got to love that, don't you?

 

[skc]

The index vs you argument is presented as either or. In truth, the argument is richer and nowhere like the way it is presented by the indexers. Like RoE...everyone is unique and he has learned a lot from his experiences - it is obvious from his posts which are recommended reading. Index funds suit a lot of people. They may not suit you.

You have made some truely insightful points, like you do in many other posts. Thanks for sharing.

 

[luutzu]

Hi Everyone,

I've been picking my own stocks for quite sometime and absolutely love it. However, I hate it when I meet indexers who would just hate on people who pick their own stocks.

I've gotten the classic "Your so arrogant in believing you can beat the market... blah blah blah", "Who do you think you are!" "You will never be Warren Buffet" etc etc.

Have any of you gotten crap from indexers? Personally I have nothing against people who index invest and would never put them down. Indexing is but one strategy out of many, I just wish they would stop hating on us stock pickers.

Over the years I've followed strict stop losses and have done reasonably well picking my own stock but I still like to keep an open mind so I'm interested in hearing about what you guys think about index investing VS stock picking.

Happy Investing!

Benjamin Graham, some 60 years ago, and Warren Buffett, I think Phillip Fisher also advise or implied... that for an average person with savings they want to put to better use, higher return, than a bank's interest account... The best thing to do is to either buy a representative portfolio of stocks to the market, or buy into a low cost index fund.

What is an average person? Ones whose job is not a professional investment analyst and who have no interest in investment analysis.

So for these people, it's better to index because, as all three masters, and I am sure others i don't know about... sensibly advised.. that while it's relatively easy to average the market's performance, it's incredibly difficult to beat the market, consistently, by a few percentage points. That is, to beat the market takes a lot of work, and unless you want to apply yourself and do it properly, it's not worth it.

So the indexers are also following Buffett's advise, they just don't know it.

And if they are indexing for no other reason than they just give up on trying to think... then that's just laziness.

------

Having encouraged indexing as a first option, Graham, Fisher, Buffett etc... spend most of their time NOT indexing, teaching us how to select stocks. That it's doable, if we want to do it.

The four main financial statements alone have some 500 items (give or take depend on the size of the company)... and to have any reasonable understanding of its performance, putting the current year into context, we need to look at 5 or more years... So that's at least 2500 figures we need to look at, and to get the margins, the ratios, the growth rate etc... that 2500 soon becomes 10 000 calculations.

Then there's the other qualitative factors to consider..

Then after all that, the price might be too high to buy into...

So it's doable, just a lot of work... and that's why there's only a few Buffetts in the world... the rest either index, or chartists, or salesman.

 

[DeepState]

So it's doable, just a lot of work... and that's why there's only a few Buffetts in the world... the rest either index, or chartists, or salesman.

Hi.

That's fantastic Luu. Thanks for continuing to share your fabulous thoughts.

I am curious for your views on hard work and investment outcomes.

Berkshire Hathaway, prior to transition concerns for Buffett and Munger, only has a small staff and an investment team consisting largely of Buffett who checked his thinking against Munger. Both guys get 24 hours in a day like everyone else. Lots of other people in investments pull monster hours and work alone, in duos or larger teams.

The two newer portfolio managers work as loners, each being responsible for a separate pool of money and they are doing better than Buffett himself (who manages a much larger portfolio and may be more constrained in other ways).

So:

1. Does hard work link to investment outcomes? How and why?

2. If it does, what do you think makes Buffett/Munger so special that they can overcome time limitations to produce such outstanding results?

Best.

 

[burglar]

... 2. If it does, what do you think makes Buffett/Munger so special that they can overcome time limitations to produce such outstanding results?

Best.

If I may offer an opinion:

Munger stops Buffett from making mistakes.

 

[luutzu]

If I may offer an opinion:

Munger stops Buffett from making mistakes.

From Snowball and other writings i can't remember, Munger convinced Buffett to invest in growth, to buy not just based on value as defined by asset backing.. to do that too, but to also consider a higher price for growth potentials.

So that stopped Buffett from making mistakes in term of letting go of opportunities that would otherwise be save and profitable, and fair value.. just not too strictly consersative as Graham, and Buffett, has practised.

In their word, i think, through Munger and also from his own experiences, Buffett stopped what he called the cigar butt approach to investing. This was taught by Fisher. To be fair, Graham does know of these approaches and has clearly advised of it, just he himself, probably having gone through the Great Depression, are very conservative and valued-based in his practice... Which have done himself and a lot of people well, just not as well as it could be.

 

[luutzu]

Hi.

That's fantastic Luu. Thanks for continuing to share your fabulous thoughts.

I am curious for your views on hard work and investment outcomes.

Berkshire Hathaway, prior to transition concerns for Buffett and Munger, only has a small staff and an investment team consisting largely of Buffett who checked his thinking against Munger. Both guys get 24 hours in a day like everyone else. Lots of other people in investments pull monster hours and work alone, in duos or larger teams.

The two newer portfolio managers work as loners, each being responsible for a separate pool of money and they are doing better than Buffett himself (who manages a much larger portfolio and may be more constrained in other ways).

So:

1. Does hard work link to investment outcomes? How and why?

2. If it does, what do you think makes Buffett/Munger so special that they can overcome time limitations to produce such outstanding results?

Best.

I'm way too young, have too few experiences, to be preaching anything original and useful. Though that hasn't stopped me before, hehe... or now... but pretty much all I've been saying are from reading and a bit of thinking or just digesting so here it is.


1. Like most things, investment outcome results from hard work and opportunity. Not hard work alone.

What is hard work? While it relates to the hours we put into our efforts, if our methods are illogical, if our work are inconsistent and haphazard, long hours simply mean unproductive hours, not hard work. That's a long way of saying, work smarter not harder.

How do we work smarter? First by learning from others, select what we think are rational, sensible, practicable lessons and advices... then apply them and constantly retest and rethink if these are right or wrong, should they be updated or modified or adapted to our resources, our ability, our situation. Then keep learning and refining as we go along.

Once this foundation, which, unlike a building's foundation, can be strengthen and reworked once built... the hard work comes in applying it.

Without a strong foundation to frame our thinking, we could spend all our efforts on the wrong thing, or worst, be swayed whichever way the wind blows, and devote our hours towards something fruit-less, chasing whatever it is that is popular.

Then what really matter will be the opportunities. In other words, luck. You could be a genius at stock valuation, could do it in seconds and get it all right... but if no opportunities come to you, if no stocks are selling at 'a reasonable price' or none worth owning, your outcome will be very poor.

This is assuming that we're all in a position to work hard applying our trade, have the opportunities, and are in a position (have enough cash) to take advantage of it as it come.

Given the nature of the stock market, where there are literally millions of buyers and sellers in thousands of businesses around the country/world. Luck and opportunities are widely available - sometimes more freely than others, but supply is always quite good.

I believe that with hardwork, a good supply of opportunities, a person's position (capital base) will take care of itself... Some starts at a better position than others, but in the end, as Thomas Edison said - the harder you work the luckier you get.

-----

2. The traits that make Buffett and Munger so successful (defined here as rich) is no different from the traits that make any one who's successful at what they do. That is, they start out making mistakes, learn from those mistakes, know what they know and what they do not know, constantly practice and apply their understanding... starts out working countless hours to gain knowledge and understanding, slowly reduce those to certain short hands, mental framework and just apply and find opportunities.

A student once asked Buffett how he pick good stocks... he said to start reading from company A to Z - research.

What stock to buy? 'Buy a good business, with able and honest management, selling at a reasonable price.'

What is a good business? among other factors, will include something like... ones with good return on equity, requiring little capital expenditure, has a strong competitive position like market share, brand names; good profit with little debt etc.

Management: don't pay themselves too much, think like an owner, treat people right... these are shown by such things as options, making intelligent investment decisions with shareholder's money etc. etc.

Price... once you know its earnings, real earnings... don't over pay, pay at value or lower than value.
How do you know its value? By knowing its business like you know your own business.


Of course i don't know that's what or how Buffett does it. But that's what i would do.
I mean i've only ever really studied 1 company to that amount of detail... but already i found i got a bit smarter about it. Still no reference library in my head, but there's a page or two there.

And with enough practice and experience, you don't need to be a genius to know a good company when you see one. With a sensible approach to pricing, you don't need to do cash flow analysis or dividend policies and industry growth rate and all that to know a good price when you hear one.

I honestly doubt if a company's CFO could tell you how much his company is worth or could grow by, let alone an analyst with a few spreadsheets and dozens of companies to look at.

-----

As Fisher said, once your requirements are to that extend, opportunities doesn't come every day. And once you've work hard enough to understand your business and its environment... it doesn't need that much time to think or decide, much like a good butcher not needing to use a scale to cut you 1 kg of beef.

 

[stevealimore]

Hi Everyone,

I've been picking my own stocks for quite sometime and absolutely love it. However, I hate it when I meet indexers who would just hate on people who pick their own stocks.

I've gotten the classic "Your so arrogant in believing you can beat the market... blah blah blah", "Who do you think you are!" "You will never be Warren Buffet" etc etc.

Have any of you gotten crap from indexers? Personally I have nothing against people who index invest and would never put them down. Indexing is but one strategy out of many, I just wish they would stop hating on us stock pickers.

Over the years I've followed strict stop losses and have done reasonably well picking my own stock but I still like to keep an open mind so I'm interested in hearing about what you guys think about index investing VS stock picking.

Happy Investing!

Hi,

I agree with you that it is very important to keep an open mind to expand our knowledge.

There are several investment strategies that can produce very satisfying returns over long term and indexing happens to be one of them. For an average investor, who is not interested in picking individual stocks, index investing (ETF) is far more superior investment vehicle as opposed to other active mutual fund. Contrary to what asset management companies like us to believe, the truth is only a very tiny (1%) of mutual funds manage to outperform the market with reasonable degree of consistency due to high fees and charges. For the average investor, the odds to identify such funds in advance are very low. Hence, investing in very low cost (ETFs) is a superior option.

As I mentioned earlier, indexing is not the only strategy that works. All sorts of strategies, whether it be momentum, growth, value, dividend growth or indexing work, if only you stay the course since, all strategies may go through long periods if under performance. The most important characteristic of a sound investment strategy are: 1) Consistent or Rule based. This will investor hold their nerve when markets go through significant decline. 2) Rules should be based on sound/fundamental principles. 3) Cost effective, so as to keep turnover, fees and taxes low.

As they say, best diet is the one you would stick to. Along the same lines, best investment strategy is the one you would stick with.

Cheers,
Steve Alimore

 

[waimate01]

The important thing is not to be like people who punt on the horses and think they do really well because they remember theirs wins more than their losses and keep no accurate figures.

Keep a detailed spreadsheet that takes everything into account (buy, sell, dates, transaction costs, dividends, franking, splits, SPPs, etc, etc) and come up with your own performance figure which you can compare to the index.

It really isn't much work, as you need to keep this data anyway for tax purposes. I find Excel or Google Sheets works just fine.

You should aim to generate one figure (or maybe two) that shows your annual performance. If it beats the index, then hooray for you and you can rebut the haters. If it doesn't, then maybe you should be an indexer.

But either way, it'll be based on solid data.

 

[Bill M]

You should aim to generate one figure (or maybe two) that shows your annual performance. If it beats the index, then hooray for you and you can rebut the haters. If it doesn't, then maybe you should be an indexer.

But either way, it'll be based on solid data.

You are on the money waimate01, time and time again it has been shown that around 75% of professional fund managers can't beat the index and of course the Index Fund Managers use this as a guide as to why ETF's are a better option.

I totally agree, if you can not beat the index then perhaps you are better off just buying it. I wonder how many people "really" returned 14.55% per annum for the last 3 years through their stock picking. In the following table, look at VAS which is Vanguards Australian Shares Index ETF.

https://www.vanguardinvestments.com.au/retail/ret/investments/etfs.jsp#performancetab

 

[shouldaindex]

Shopping and gambling is more fun than looking at a number once every 3 months.

 

[So_Cynical]

I wonder how many people "really" returned 14.55% per annum for the last 3 years through their stock picking. In the following table, look at VAS which is Vanguards Australian Shares Index ETF.

I just had a look, my return for the last 3 years to yesterday is a touch under 11% PA.
`

 

[stevealimore]

I just had a look, my return for the last 3 years to yesterday is a touch under 11% PA.
`

Ditto! I was quite confident on my ability to pick individual stocks but I controlled myself and only invested 10% of my portfolio into individual stocks and put the rest in ETFs.

Eighteen months later, I am convinced that I am not ready to pick individual stocks. It's a shame though, because I really love love analysing companies.

Ah well, Rule no.1 - Don't lose money. Rule no.2 - Don't forget rule no.1.

Regards,
Steve

 

[sydbod]

One can always use the hybrid approach.
Pick an index, eg: ASX20 and just strip out of it those sectors that one knows will be flops in the foreseeable future eg: mining and energy.

You just strip out WPL,RIO,ORG,BHP and purchase the remaining 16 shares.

Doing this gives you a high probability or doing better than the market.

 

[StockTrader010]

One can always use the hybrid approach.
Pick an index, eg: ASX20 and just strip out of it those sectors that one knows will be flops in the foreseeable future eg: mining and energy.

You just strip out WPL,RIO,ORG,BHP and purchase the remaining 16 shares.

Doing this gives you a high probability or doing better than the market.

I doubt that would work. The sectors you think are flops are the ones everyone currently thinks are flops. Chances are you'll do worse than the market, since you'll overweight the 'hot sectors'.

 

[sydbod]

I doubt that would work. The sectors you think are flops are the ones everyone currently thinks are flops. Chances are you'll do worse than the market, since you'll overweight the 'hot sectors'.

You could be correct, but so far (for me) this strategy has been working very well. Give it another about 3 quarters (when the blood is in the streets) then it should be time to buy again. Likewise, as they say ..... "don't fight the market" .... just lead it a little bit.

 

[shouldaindex]

$1000 over 20 years @ various performance rates:

5% - $2,600
10% - $6,700
15% - $16,300

Stock pickers see the 16 bagger, and think they can hit them.

Indexers see the 14 bagger gap between 5% and 15% and prefer more stability.

 

[StockTrader010]

You could be correct, but so far (for me) this strategy has been working very well. Give it another about 3 quarters (when the blood is in the streets) then it should be time to buy again. Likewise, as they say ..... "don't fight the market" .... just lead it a little bit.

Keep up posted! Nice to hear it's working out for you .