I've been investing since I was 13, back in 1963. In all that time, I've been told that you should have a "basket" of stocks. The idea being that when half go down, the other half would go up, saving you from loss (that is the simplistic version I know).
I would never say that one should not have more than 5% of your stock portfolio in one stock. That's foolish advice. It assumes that you have made little investigation into any of the stock you buy. If that is so, don't invest in stocks at all.
My attitude has always been that I'm not investing so that my portfolio stays the same. I'm not interested in investing in 4 bad stocks as well as 4 good stocks. What they don't say about that strategy, is that you don't do well with it unless the market is also doing well.
etc etc.
You do make many great points, but just two parts I would comment on: the 'diversification' argument ("The idea being that when half go down, the other half would go up, saving you from loss.") and the implication that a well-researched stock-picking strategy is preferred to a diversification strategy since "What they don't say about that [latter] strategy, is that you don't do well with it unless the market is also doing well."
The main argument for diversification is that it is a relatively simple, cheap way to mimic the market, and it is a tough strategy to beat for most people (however, some do beat it). In the past 100 years, the US market has produced about 12% annual average returns (altho the expected returns going forward are lower, perhaps closer to 9% - 10%). That is quite a significant return. E.g., $1 invested in 1926 would be worth about $150,000 at the end of 2006 if someone had followed a simple diversified, market-mimicking strategy. Moreover, it won't save you from a loss, as your diversification advice seems to suggest -- there has been a standard deviation of roughly 20% per year around the 12%, meaning (roughly) that there is a two-third probability that in any given year, the return could be as low as -8% or as high as +32%. So you could certainly end up with a loss too, depending on when you get in/get out.
Re. the second point, even portfolios created by well-researched stock-picking strategies are not immune to market movements. Every stock has two sources of risk: The diversifiable or 'unsystematic' risk (which can be easily got rid of by diversification), and the non-diversifiable or 'systematic' risk (which results from systemic, market-wide, non-diversifiable factors). The latter, one can do little about (except to buy portfolio puts, which will naturally lower the return). Risks resulting from comovement with the market are necessarily a part of one's portfolio, regardless of whether the portfolio resulted from careful stock-picking or not. (For instance, I'd venture a guess that your portfolio also took some beating last week!).
Btw, I have absolutely nothing against picking stocks based on good research -- indeed, many people (including me) make money at it (sometimes because of skill, sometimes because of luck). But recognize that even in that situation, by the time one gets to a portfolio of 30 or so carefully picked stocks, one has de facto ended up with a (reasonably) diversified portfolio!
You do make many great points, but just two parts I would comment on: the 'diversification' argument ("The idea being that when half go down, the other half would go up, saving you from loss.") and the implication that a well-researched stock-picking strategy is preferred to a diversification strategy since "What they don't say about that [latter] strategy, is that you don't do well with it unless the market is also doing well."
The main argument for diversification is that it is a relatively simple, cheap way to mimic the market, and it is a tough strategy to beat for most people (however, some do beat it). In the past 100 years, the US market has produced about 12% annual average returns (altho the expected returns going forward are lower, perhaps closer to 9% - 10%). That is quite a significant return. E.g., $1 invested in 1926 would be worth about $150,000 at the end of 2006 if someone had followed a simple diversified, market-mimicking strategy. Moreover, it won't save you from a loss, as your diversification advice seems to suggest -- there has been a standard deviation of roughly 20% per year around the 12%, meaning (roughly) that there is a two-third probability that in any given year, the return could be as low as -8% or as high as +32%. So you could certainly end up with a loss too, depending on when you get in/get out.
Re. the second point, even portfolios created by well-researched stock-picking strategies are not immune to market movements. Every stock has two sources of risk: The diversifiable or 'unsystematic' risk (which can be easily got rid of by diversification), and the non-diversifiable or 'systematic' risk (which results from systemic, market-wide, non-diversifiable factors). The latter, one can do little about (except to buy portfolio puts, which will naturally lower the return). Risks resulting from comovement with the market are necessarily a part of one's portfolio, regardless of whether the portfolio resulted from careful stock-picking or not. (For instance, I'd venture a guess that your portfolio also took some beating last week!).
Btw, I have absolutely nothing against picking stocks based on good research -- indeed, many people (including me) make money at it (sometimes because of skill, sometimes because of luck). But recognize that even in that situation, by the time one gets to a portfolio of 30 or so carefully picked stocks, one has de facto ended up with a (reasonably) diversified portfolio!
Going by that strategy, you might as well have a portfolio with a market tracking strategy. That way their portfolio will mimic the market closely.
But, with anything else, you still must check the individual elements in your portfolio.
The idea of "well researched" varies. Some consider looking at the stock price for the last month as being "well researched".
I rarely look at indicators investment councillors attend to. I find they are too money oriented, and not enough product oriented, or oriented as to exactly where the company fits within the industry, or in the minds of the customer. I also look to where their R&D is going. Is it just just for product purposes, or do they have longer term goals in mind? Do they do some theoretical work, or is it all second source?
Even if you pick what seems to be a good portrayal of the market average, some of those stocks will turn into dogs, and bring the value of everything down.
I spend much more time on research in a much more limited area. That way I can understand that area far better.
I don't try to adjust to meet the market, I always aim to beat it.
When the market gets cold, I withdraw until such time I think I can make some investments that will move ahead.
Since I'm not investing for others, I don't have to worry about people pulling funds from their accounts. I'm responsible only to myself.
Btw, I have absolutely nothing against picking stocks based on good research -- indeed, many people (including me) make money at it (sometimes because of skill, sometimes because of luck). But recognize that even in that situation, by the time one gets to a portfolio of 30 or so carefully picked stocks, one has de facto ended up with a (reasonably) diversified portfolio!
Both you and melgross make good points. But your very last statement got me.
Unless you are a professional money manager of some kind, or you are retired and able to spend essentially full-time managing your investment portfolio, I posit that one cannot carefully manage that many different stocks. Keeping careful tabs on a company and its stock takes many, or at least several hours each month - if you're going to really do a good job. And if you're not going to do a good job, you might as well just buy a couple broad index funds. If you have 30 stocks and spend only 1.5 hours/week/stock doing your diligence, that's already more than a full-time job. Well, in some people's eyes anyway. ;-) Assuming those 30 stocks are in at least a half-dozen different industries, you need to keep up on industry-wide research as well. And unless you keep constant ratios in equty/bonds/cash, you need to keep up on macro trends as well, although that's probably less time-consuming.
This conversation reminds me of a friend, who a few years back fancied himself as an investor. Bought into a bunch of stocks. But his "research" was basically following a few analysts' "hot tips", reading a few articles and jumping in. He kept telling me how and why his stocks were going to do well. But he "invested" (gambled) in a wide variety of stocks over a wide variety of industries. While that's great for diversification, there are very, very few individuals who can keep abreast of more than a couple industries in a deep, meaningful way. And by that, I mean enough to be a step ahead of the general market. Because if, instead, you're a step behind, often that's all it takes to turn profits into losses.
As for my friend? He had some winners and some losers, but overall he lost a lot of money. Money he could ill-afford to lose. He still "invests", but I don't hear much about it anymore because he got tired of hearing "I told you so."
Me, I stick with just a couple industries where I have intimate knowledge. Outside of that, it's index funds. And yes, I've done quite well over the years. :-)
[Ok, I see melgross replied already, and as usual, we're pretty much on the same page]
Hey I lost half a years salary yesterday. It was awful, but it will recover.
I have faith in drjones. 160 by end of Oct.
We are green today, you know. The bottom was reached today at 127 and change.
Thank you, I have faith in Steve Jobs. 160 will be easy by halloween ,, and you can guess when to jump in and out but i find safe is buy and hold AAPL and hock yourself to your a-hole and back works real well lol .
Going by that strategy, you might as well have a portfolio with a market tracking strategy. That way their portfolio will mimic the market closely.
One can (either with luck or skill) end up with a diversified portfolio whose individual components are researched, screened, and selected, and still beats the market -- the strategy of a Peter Lynch at Fidelity Magellan comes to mind.
My point was only that diversification can, by accident or design, end up being for all, while stock-picking is not for all. The latter is consistent your original point, and it is one that I agree with. The former was something that I was attempting to clarify, that's all. In addition, I was suggesting that all risky assets, including stocks, contain both unique risks and systemic (or market-comovement) risks.
Both you and melgross make good points. But your very last statement got me.
Unless you are a professional money manager of some kind, or you are retired and able to spend essentially full-time managing your investment portfolio, I posit that one cannot carefully manage that many different stocks. Keeping careful tabs on a company and its stock takes many, or at least several hours each month - if you're going to really do a good job. And if you're not going to do a good job, you might as well just buy a couple broad index funds. If you have 30 stocks and spend only 1.5 hours/week/stock doing your diligence, that's already more than a full-time job. Well, in some people's eyes anyway. ;-) Assuming those 30 stocks are in at least a half-dozen different industries, you need to keep up on industry-wide research as well. And unless you keep constant ratios in equty/bonds/cash, you need to keep up on macro trends as well, although that's probably less time-consuming.
This conversation reminds me of a friend, who a few years back fancied himself as an investor. Bought into a bunch of stocks. But his "research" was basically following a few analysts' "hot tips", reading a few articles and jumping in. He kept telling me how and why his stocks were going to do well. But he "invested" (gambled) in a wide variety of stocks over a wide variety of industries. While that's great for diversification, there are very, very few individuals who can keep abreast of more than a couple industries in a deep, meaningful way. And by that, I mean enough to be a step ahead of the general market. Because if, instead, you're a step behind, often that's all it takes to turn profits into losses.
As for my friend? He had some winners and some losers, but overall he lost a lot of money. Money he could ill-afford to lose. He still "invests", but I don't hear much about it anymore because he got tired of hearing "I told you so."
Me, I stick with just a couple industries where I have intimate knowledge. Outside of that, it's index funds. And yes, I've done quite well over the years. :-)
[Ok, I see melgross replied already, and as usual, we're pretty much on the same page]
I guess it must be in the points of emphasis, but I think you and I are saying the same thing! I certainly do not recommend that people spend/waste time picking stocks. Life is too short for that (unless that is one's job). In turn, that only heightens the importance of diversification. That said, it makes perfect sense to use one's unique experiences and knowledge to pick a circumscribed set within one's sphere of competence. Both diversification and limited asset selection are important to building one's portfolio. (And, I should add, buying-and-holding, so as to minimize the impact of transactions costs and taxes, whose compounding effects can be huge over time).
Indeed, your strategy of "Me, I stick with just a couple industries where I have intimate knowledge. Outside of that, it's index funds" is one that I would heartily endorse, and personally follow!
I was pointing out the irony in the view that some people have that stock-picking (as opposed to diversification) is a better strategy, by noting that, when you have picked enough stocks (and I should have added, across enough industries), you end up, by accident or design, with a diversified portfolio. And, the fact that, while diversification can be a sensible strategy for all, stock-picking is not necessarily so.
One can (either with luck or skill) end up with a diversified portfolio whose individual components are researched, screened, and selected, and still beats the market -- the strategy of a Peter Lynch at Fidelity Magellan comes to mind.
My point was only that diversification can, by accident or design, end up being for all, while stock-picking is not for all. The latter is consistent your original point, and it is one that I agree with. The former was something that I was attempting to clarify, that's all. In addition, I was suggesting that all risky assets, including stocks, contain both unique risks and systemic (or market-comovement) risks.
I don't recommend that everyone do as I do. In fact, I often recommend that people do NOT do as I do.
You have to be comfortable with your methodology and knowledge.
You also have to be comfortable with the fact that at some point you will make a big blunder.
Not selling Apple at 86 before it went down to 50 could be considered as being a blunder, as was buying more at 73 on the way down, instead of waiting.
But, I was certain it would go back again, so it didn't bother me, therefor, I didn't panic and sell lower.
I guess it must be in the points of emphasis, but I think you and I are saying the same thing! I certainly do not recommend that people spend/waste time picking stocks. Life is too short for that (unless that is one's job). In turn, that only heightens the importance of diversification. That said, it makes perfect sense to use one's unique experiences and knowledge to pick a circumscribed set within one's sphere of competence. Both diversification and limited asset selection are important to building one's portfolio. (And, I should add, buying-and-holding, so as to minimize the impact of transactions costs and taxes, whose compounding effects can be huge over time).
We do agree, the difference is emphasis. But, that's natural. Everyone can't have the exact same strategy.
I keep pointing out the costs of trading. If it reduces your profits to just a few percent, considering that we are not money managers dealing with hundreds of millions to tens of billions, all of the work involved clearly doesn't pay. And the chance that one guessed wrongly, could easily wipe out all of the other small gains so laboriously managed.
Quote:
Indeed, your strategy of "Me, I stick with just a couple industries where I have intimate knowledge. Outside of that, it's index funds" is one that I would heartily endorse, and personally follow!
I was pointing out the irony in the view that some people have that stock-picking (as opposed to diversification) is a better strategy, by noting that, when you have picked enough stocks (and I should have added, across enough industries), you end up, by accident or design, with a diversified portfolio. And, the fact that, while diversification can be a sensible strategy for all, stock-picking is not necessarily so.
Stock picking, in and of itself, is no virtue. I don't recommend it for most people.
Even here, on this board, with Apple, most people are just buying it because of a sense of loyalty, or infatuation, the way people tend to buy the stock of the company they work for.
But, I was certain it would go back again, so it didn't bother me, therefor, I didn't panic and sell lower.
Nice. Although that comes with experience.
Anyway, just wanted to say that this analyst Richard Gardner is not someone I've cared to follow. He's always been scared to take a stand. He's mostly playing it safe whenever he comes out with a report with a Buy or Hold recommendation. He's never had the guts, or the belief, to predict anything solid with confidence. He's doing his job alright, but not doing it well. The only thing in his favor today is timing. The upgrade came out on a day when AAPL badly needed a boost.
BTW, here's what Gene Munster of Piper Jaffray had to say about Gardner:
--------------------
Gardner is a Chump
Sorry but that's the truth. The guy throws the Buy on after sell offs. He gets paid to tell people to initiate a position after irrational selling. Duh, yeah if you've been out of aapl, sure that would be a good time to move in.
Another well-crafted rumor play hits yesterday, so he removes the Hold rating. So now aapl is a Buy, but still sell it at $160. Right, sell it just like the $110 target you had on it until last week. His last Buy was in the low 80s after a 15% sell off.
So, in at $82, out at $110, in at $130, out at $160. Uh, OK. My people don't leave that kind of cash on the table, they add to their positions during nonsense like yesterday.
BTW, here's what Gene Munster of Piper Jaffray had to say about Gardner:
--------------------
Gardner is a Chump
Sorry but that's the truth. The guy throws the Buy on after sell offs. He gets paid to tell people to initiate a position after irrational selling. Duh, yeah if you've been out of aapl, sure that would be a good time to move in.
Another well-crafted rumor play hits yesterday, so he removes the Hold rating. So now aapl is a Buy, but still sell it at $160. Right, sell it just like the $110 target you had on it until last week. His last Buy was in the low 80s after a 15% sell off.
So, in at $82, out at $110, in at $130, out at $160. Uh, OK. My people don't leave that kind of cash on the table, they add to their positions during nonsense like yesterday.
Comments
I love capitalism!
Bank stockbroker buys Apple stock.
Bank analyst predicts good times for Apple.
Apple stock goes up.
Bank stockbroker sells Apple stock and makes a tidy profit.
Bank analyst predicts trouble for Apple.
Apple stock goes down.
The bank makes lots of money while everyone else gets screwed.
You forgot the part where they sell AAPL short after predicting trouble... so they make money both selling and buying.
I've been investing since I was 13, back in 1963. In all that time, I've been told that you should have a "basket" of stocks. The idea being that when half go down, the other half would go up, saving you from loss (that is the simplistic version I know).
I would never say that one should not have more than 5% of your stock portfolio in one stock. That's foolish advice. It assumes that you have made little investigation into any of the stock you buy. If that is so, don't invest in stocks at all.
My attitude has always been that I'm not investing so that my portfolio stays the same. I'm not interested in investing in 4 bad stocks as well as 4 good stocks. What they don't say about that strategy, is that you don't do well with it unless the market is also doing well.
etc etc.
You do make many great points, but just two parts I would comment on: the 'diversification' argument ("The idea being that when half go down, the other half would go up, saving you from loss.") and the implication that a well-researched stock-picking strategy is preferred to a diversification strategy since "What they don't say about that [latter] strategy, is that you don't do well with it unless the market is also doing well."
The main argument for diversification is that it is a relatively simple, cheap way to mimic the market, and it is a tough strategy to beat for most people (however, some do beat it). In the past 100 years, the US market has produced about 12% annual average returns (altho the expected returns going forward are lower, perhaps closer to 9% - 10%). That is quite a significant return. E.g., $1 invested in 1926 would be worth about $150,000 at the end of 2006 if someone had followed a simple diversified, market-mimicking strategy. Moreover, it won't save you from a loss, as your diversification advice seems to suggest -- there has been a standard deviation of roughly 20% per year around the 12%, meaning (roughly) that there is a two-third probability that in any given year, the return could be as low as -8% or as high as +32%. So you could certainly end up with a loss too, depending on when you get in/get out.
Re. the second point, even portfolios created by well-researched stock-picking strategies are not immune to market movements. Every stock has two sources of risk: The diversifiable or 'unsystematic' risk (which can be easily got rid of by diversification), and the non-diversifiable or 'systematic' risk (which results from systemic, market-wide, non-diversifiable factors). The latter, one can do little about (except to buy portfolio puts, which will naturally lower the return). Risks resulting from comovement with the market are necessarily a part of one's portfolio, regardless of whether the portfolio resulted from careful stock-picking or not. (For instance, I'd venture a guess that your portfolio also took some beating last week!).
Btw, I have absolutely nothing against picking stocks based on good research -- indeed, many people (including me) make money at it (sometimes because of skill, sometimes because of luck). But recognize that even in that situation, by the time one gets to a portfolio of 30 or so carefully picked stocks, one has de facto ended up with a (reasonably) diversified portfolio!
You forgot the part where they sell AAPL short after predicting trouble... so they make money both selling and buying.
you they make real bicks!!
you they make real bicks!!
Uh... heh, heh.... OK.
You do make many great points, but just two parts I would comment on: the 'diversification' argument ("The idea being that when half go down, the other half would go up, saving you from loss.") and the implication that a well-researched stock-picking strategy is preferred to a diversification strategy since "What they don't say about that [latter] strategy, is that you don't do well with it unless the market is also doing well."
The main argument for diversification is that it is a relatively simple, cheap way to mimic the market, and it is a tough strategy to beat for most people (however, some do beat it). In the past 100 years, the US market has produced about 12% annual average returns (altho the expected returns going forward are lower, perhaps closer to 9% - 10%). That is quite a significant return. E.g., $1 invested in 1926 would be worth about $150,000 at the end of 2006 if someone had followed a simple diversified, market-mimicking strategy. Moreover, it won't save you from a loss, as your diversification advice seems to suggest -- there has been a standard deviation of roughly 20% per year around the 12%, meaning (roughly) that there is a two-third probability that in any given year, the return could be as low as -8% or as high as +32%. So you could certainly end up with a loss too, depending on when you get in/get out.
Re. the second point, even portfolios created by well-researched stock-picking strategies are not immune to market movements. Every stock has two sources of risk: The diversifiable or 'unsystematic' risk (which can be easily got rid of by diversification), and the non-diversifiable or 'systematic' risk (which results from systemic, market-wide, non-diversifiable factors). The latter, one can do little about (except to buy portfolio puts, which will naturally lower the return). Risks resulting from comovement with the market are necessarily a part of one's portfolio, regardless of whether the portfolio resulted from careful stock-picking or not. (For instance, I'd venture a guess that your portfolio also took some beating last week!).
Btw, I have absolutely nothing against picking stocks based on good research -- indeed, many people (including me) make money at it (sometimes because of skill, sometimes because of luck). But recognize that even in that situation, by the time one gets to a portfolio of 30 or so carefully picked stocks, one has de facto ended up with a (reasonably) diversified portfolio!
Going by that strategy, you might as well have a portfolio with a market tracking strategy. That way their portfolio will mimic the market closely.
But, with anything else, you still must check the individual elements in your portfolio.
The idea of "well researched" varies. Some consider looking at the stock price for the last month as being "well researched".
I rarely look at indicators investment councillors attend to. I find they are too money oriented, and not enough product oriented, or oriented as to exactly where the company fits within the industry, or in the minds of the customer. I also look to where their R&D is going. Is it just just for product purposes, or do they have longer term goals in mind? Do they do some theoretical work, or is it all second source?
Even if you pick what seems to be a good portrayal of the market average, some of those stocks will turn into dogs, and bring the value of everything down.
I spend much more time on research in a much more limited area. That way I can understand that area far better.
I don't try to adjust to meet the market, I always aim to beat it.
When the market gets cold, I withdraw until such time I think I can make some investments that will move ahead.
Since I'm not investing for others, I don't have to worry about people pulling funds from their accounts. I'm responsible only to myself.
A) Completely silly and worthless, or
Am I the only one noticing that whenever one of these 'analysts' speaks, what comes out is consistently either:
A) Completely silly and worthless, or
AppleInsider: The Analyst's Secret Reference.
Btw, I have absolutely nothing against picking stocks based on good research -- indeed, many people (including me) make money at it (sometimes because of skill, sometimes because of luck). But recognize that even in that situation, by the time one gets to a portfolio of 30 or so carefully picked stocks, one has de facto ended up with a (reasonably) diversified portfolio!
Both you and melgross make good points. But your very last statement got me.
Unless you are a professional money manager of some kind, or you are retired and able to spend essentially full-time managing your investment portfolio, I posit that one cannot carefully manage that many different stocks. Keeping careful tabs on a company and its stock takes many, or at least several hours each month - if you're going to really do a good job. And if you're not going to do a good job, you might as well just buy a couple broad index funds. If you have 30 stocks and spend only 1.5 hours/week/stock doing your diligence, that's already more than a full-time job. Well, in some people's eyes anyway. ;-) Assuming those 30 stocks are in at least a half-dozen different industries, you need to keep up on industry-wide research as well. And unless you keep constant ratios in equty/bonds/cash, you need to keep up on macro trends as well, although that's probably less time-consuming.
This conversation reminds me of a friend, who a few years back fancied himself as an investor. Bought into a bunch of stocks. But his "research" was basically following a few analysts' "hot tips", reading a few articles and jumping in. He kept telling me how and why his stocks were going to do well. But he "invested" (gambled) in a wide variety of stocks over a wide variety of industries. While that's great for diversification, there are very, very few individuals who can keep abreast of more than a couple industries in a deep, meaningful way. And by that, I mean enough to be a step ahead of the general market. Because if, instead, you're a step behind, often that's all it takes to turn profits into losses.
As for my friend? He had some winners and some losers, but overall he lost a lot of money. Money he could ill-afford to lose. He still "invests", but I don't hear much about it anymore because he got tired of hearing "I told you so."
Me, I stick with just a couple industries where I have intimate knowledge. Outside of that, it's index funds. And yes, I've done quite well over the years. :-)
[Ok, I see melgross replied already, and as usual, we're pretty much on the same page]
Hey I lost half a years salary yesterday. It was awful, but it will recover.
I have faith in drjones. 160 by end of Oct.
We are green today, you know. The bottom was reached today at 127 and change.
Thank you, I have faith in Steve Jobs. 160 will be easy by halloween ,, and you can guess when to jump in and out but i find safe is buy and hold AAPL and hock yourself to your a-hole and back works real well lol .
I love capitalism!
Bank stockbroker buys Apple stock.
Bank analyst predicts good times for Apple.
Apple stock goes up.
Bank stockbroker sells Apple stock and makes a tidy profit.
Bank analyst predicts trouble for Apple.
Apple stock goes down.
The bank makes lots of money while everyone else gets screwed.
And then the stockbroker buys back twice as much and then recommends it again as in today.
Going by that strategy, you might as well have a portfolio with a market tracking strategy. That way their portfolio will mimic the market closely.
One can (either with luck or skill) end up with a diversified portfolio whose individual components are researched, screened, and selected, and still beats the market -- the strategy of a Peter Lynch at Fidelity Magellan comes to mind.
My point was only that diversification can, by accident or design, end up being for all, while stock-picking is not for all. The latter is consistent your original point, and it is one that I agree with. The former was something that I was attempting to clarify, that's all. In addition, I was suggesting that all risky assets, including stocks, contain both unique risks and systemic (or market-comovement) risks.
you they make real bicks!!
Uh... heh, heh.... OK.
Ermm....You know....the Pickles...
Both you and melgross make good points. But your very last statement got me.
Unless you are a professional money manager of some kind, or you are retired and able to spend essentially full-time managing your investment portfolio, I posit that one cannot carefully manage that many different stocks. Keeping careful tabs on a company and its stock takes many, or at least several hours each month - if you're going to really do a good job. And if you're not going to do a good job, you might as well just buy a couple broad index funds. If you have 30 stocks and spend only 1.5 hours/week/stock doing your diligence, that's already more than a full-time job. Well, in some people's eyes anyway. ;-) Assuming those 30 stocks are in at least a half-dozen different industries, you need to keep up on industry-wide research as well. And unless you keep constant ratios in equty/bonds/cash, you need to keep up on macro trends as well, although that's probably less time-consuming.
This conversation reminds me of a friend, who a few years back fancied himself as an investor. Bought into a bunch of stocks. But his "research" was basically following a few analysts' "hot tips", reading a few articles and jumping in. He kept telling me how and why his stocks were going to do well. But he "invested" (gambled) in a wide variety of stocks over a wide variety of industries. While that's great for diversification, there are very, very few individuals who can keep abreast of more than a couple industries in a deep, meaningful way. And by that, I mean enough to be a step ahead of the general market. Because if, instead, you're a step behind, often that's all it takes to turn profits into losses.
As for my friend? He had some winners and some losers, but overall he lost a lot of money. Money he could ill-afford to lose. He still "invests", but I don't hear much about it anymore because he got tired of hearing "I told you so."
Me, I stick with just a couple industries where I have intimate knowledge. Outside of that, it's index funds. And yes, I've done quite well over the years. :-)
[Ok, I see melgross replied already, and as usual, we're pretty much on the same page]
I guess it must be in the points of emphasis, but I think you and I are saying the same thing! I certainly do not recommend that people spend/waste time picking stocks. Life is too short for that (unless that is one's job). In turn, that only heightens the importance of diversification. That said, it makes perfect sense to use one's unique experiences and knowledge to pick a circumscribed set within one's sphere of competence. Both diversification and limited asset selection are important to building one's portfolio. (And, I should add, buying-and-holding, so as to minimize the impact of transactions costs and taxes, whose compounding effects can be huge over time).
Indeed, your strategy of "Me, I stick with just a couple industries where I have intimate knowledge. Outside of that, it's index funds" is one that I would heartily endorse, and personally follow!
I was pointing out the irony in the view that some people have that stock-picking (as opposed to diversification) is a better strategy, by noting that, when you have picked enough stocks (and I should have added, across enough industries), you end up, by accident or design, with a diversified portfolio. And, the fact that, while diversification can be a sensible strategy for all, stock-picking is not necessarily so.
One can (either with luck or skill) end up with a diversified portfolio whose individual components are researched, screened, and selected, and still beats the market -- the strategy of a Peter Lynch at Fidelity Magellan comes to mind.
My point was only that diversification can, by accident or design, end up being for all, while stock-picking is not for all. The latter is consistent your original point, and it is one that I agree with. The former was something that I was attempting to clarify, that's all. In addition, I was suggesting that all risky assets, including stocks, contain both unique risks and systemic (or market-comovement) risks.
I don't recommend that everyone do as I do. In fact, I often recommend that people do NOT do as I do.
You have to be comfortable with your methodology and knowledge.
You also have to be comfortable with the fact that at some point you will make a big blunder.
Not selling Apple at 86 before it went down to 50 could be considered as being a blunder, as was buying more at 73 on the way down, instead of waiting.
But, I was certain it would go back again, so it didn't bother me, therefor, I didn't panic and sell lower.
I guess it must be in the points of emphasis, but I think you and I are saying the same thing! I certainly do not recommend that people spend/waste time picking stocks. Life is too short for that (unless that is one's job). In turn, that only heightens the importance of diversification. That said, it makes perfect sense to use one's unique experiences and knowledge to pick a circumscribed set within one's sphere of competence. Both diversification and limited asset selection are important to building one's portfolio. (And, I should add, buying-and-holding, so as to minimize the impact of transactions costs and taxes, whose compounding effects can be huge over time).
We do agree, the difference is emphasis. But, that's natural. Everyone can't have the exact same strategy.
I keep pointing out the costs of trading. If it reduces your profits to just a few percent, considering that we are not money managers dealing with hundreds of millions to tens of billions, all of the work involved clearly doesn't pay. And the chance that one guessed wrongly, could easily wipe out all of the other small gains so laboriously managed.
Indeed, your strategy of "Me, I stick with just a couple industries where I have intimate knowledge. Outside of that, it's index funds" is one that I would heartily endorse, and personally follow!
I was pointing out the irony in the view that some people have that stock-picking (as opposed to diversification) is a better strategy, by noting that, when you have picked enough stocks (and I should have added, across enough industries), you end up, by accident or design, with a diversified portfolio. And, the fact that, while diversification can be a sensible strategy for all, stock-picking is not necessarily so.
Stock picking, in and of itself, is no virtue. I don't recommend it for most people.
Even here, on this board, with Apple, most people are just buying it because of a sense of loyalty, or infatuation, the way people tend to buy the stock of the company they work for.
But, I was certain it would go back again, so it didn't bother me, therefor, I didn't panic and sell lower.
Nice. Although that comes with experience.
Anyway, just wanted to say that this analyst Richard Gardner is not someone I've cared to follow. He's always been scared to take a stand. He's mostly playing it safe whenever he comes out with a report with a Buy or Hold recommendation. He's never had the guts, or the belief, to predict anything solid with confidence. He's doing his job alright, but not doing it well. The only thing in his favor today is timing. The upgrade came out on a day when AAPL badly needed a boost.
BTW, here's what Gene Munster of Piper Jaffray had to say about Gardner:
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Gardner is a Chump
Sorry but that's the truth. The guy throws the Buy on after sell offs. He gets paid to tell people to initiate a position after irrational selling. Duh, yeah if you've been out of aapl, sure that would be a good time to move in.
Another well-crafted rumor play hits yesterday, so he removes the Hold rating. So now aapl is a Buy, but still sell it at $160. Right, sell it just like the $110 target you had on it until last week. His last Buy was in the low 80s after a 15% sell off.
So, in at $82, out at $110, in at $130, out at $160. Uh, OK. My people don't leave that kind of cash on the table, they add to their positions during nonsense like yesterday.
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BTW, here's what Gene Munster of Piper Jaffray had to say about Gardner:
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Gardner is a Chump
Sorry but that's the truth. The guy throws the Buy on after sell offs. He gets paid to tell people to initiate a position after irrational selling. Duh, yeah if you've been out of aapl, sure that would be a good time to move in.
Another well-crafted rumor play hits yesterday, so he removes the Hold rating. So now aapl is a Buy, but still sell it at $160. Right, sell it just like the $110 target you had on it until last week. His last Buy was in the low 80s after a 15% sell off.
So, in at $82, out at $110, in at $130, out at $160. Uh, OK. My people don't leave that kind of cash on the table, they add to their positions during nonsense like yesterday.
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When/where did he say this?
When/where did he say this?
It does seem unlikely.
When/where did he say this?
It does seem unlikely.
Chump
Chump
Ok, surprising, but I can see that he's labels "other analysts" as chumps. All of them.