Stock picking prowess?
Individual investors often have the discussion or debate over whether stock picking or just sticking with the low expense ratio indexes is the best approach to having equity market exposure. The view here is that well managed low expense index funds like those run by Vanguard and Fidelity are valuable to any portfolio. Stock picking, however, can be advantageous as well.
For stock picking, the issue of expense is more or less moot if an investor is not a constant trader. With $8 commissions widely available for almost any trade, cost is not a big factor for those who intend to buy and hold unless a gain or loss threshold is reached or there's a fundamental change in the security's prospects. During the turmoil and terror of the last year both sides of the index versus independence choice could have been experienced. On the downside if a stock picker had a portfolio with an unfortunate percentage of firms like AIG, CIT, WM, LEH, or other names that are irreparably damaged or done, an index performance would look like heaven. On the other hand, watching a group of stocks that one knows well and being able to pare back a few early on and increase positions in the gloomy times of those firms with a solid balance sheet and a viable business long term could have led to significant outperformance over an index approach.
The safest approach to not feeling stupid is the index one. Pare back the index if it seems appropriate and add when the time seems right. For the individual investor with no insomnia issues, the more entertaining approach can be to follow a group of stocks regularly, make informed decisions, and keep a rabbit's foot in a jacket pocket. All of this, however, can mostly feel like a crap shoot for the individual and even for those on the institutional side with the exception of those who are either brilliant(a few) or are playing a rigged game(they far outnumber the brilliant).
What's done here is clear from this commentary, some indexes, some stock picking, and overall porfolio diversification. While relative results are ok, there are occasions when it becomes clear how opaque the world of investing can be, how luck can be important, and how little I know.
A month or so ago I was traveling in a land without wireless where there were limited periods of access to a shared computer. Information about one of my equity investments disturbed me. It was an investment made eight months before and it had a slight gain. It was a spur of the moment decision and when my turn at the computer came I sold the entire position, locked in the gain and removed loss exposure that I felt was probable near term, or so I thought.
When I returned home a few days later and reviewed my portfolio I was shocked to see that I had actually and accidentally bought the stock a few days before and doubled my position. I was also surprised to see that the stock had risen 5% in the days since the trade. At this point the stock is up 25% since the day I "astutely" doubled the position. Nailed it.
It's easy to laugh at this now, and write about it, but if things had gone the other way you the reader would never know --- stock picking prowess? --- LUCK!
For stock picking, the issue of expense is more or less moot if an investor is not a constant trader. With $8 commissions widely available for almost any trade, cost is not a big factor for those who intend to buy and hold unless a gain or loss threshold is reached or there's a fundamental change in the security's prospects. During the turmoil and terror of the last year both sides of the index versus independence choice could have been experienced. On the downside if a stock picker had a portfolio with an unfortunate percentage of firms like AIG, CIT, WM, LEH, or other names that are irreparably damaged or done, an index performance would look like heaven. On the other hand, watching a group of stocks that one knows well and being able to pare back a few early on and increase positions in the gloomy times of those firms with a solid balance sheet and a viable business long term could have led to significant outperformance over an index approach.
The safest approach to not feeling stupid is the index one. Pare back the index if it seems appropriate and add when the time seems right. For the individual investor with no insomnia issues, the more entertaining approach can be to follow a group of stocks regularly, make informed decisions, and keep a rabbit's foot in a jacket pocket. All of this, however, can mostly feel like a crap shoot for the individual and even for those on the institutional side with the exception of those who are either brilliant(a few) or are playing a rigged game(they far outnumber the brilliant).
What's done here is clear from this commentary, some indexes, some stock picking, and overall porfolio diversification. While relative results are ok, there are occasions when it becomes clear how opaque the world of investing can be, how luck can be important, and how little I know.
A month or so ago I was traveling in a land without wireless where there were limited periods of access to a shared computer. Information about one of my equity investments disturbed me. It was an investment made eight months before and it had a slight gain. It was a spur of the moment decision and when my turn at the computer came I sold the entire position, locked in the gain and removed loss exposure that I felt was probable near term, or so I thought.
When I returned home a few days later and reviewed my portfolio I was shocked to see that I had actually and accidentally bought the stock a few days before and doubled my position. I was also surprised to see that the stock had risen 5% in the days since the trade. At this point the stock is up 25% since the day I "astutely" doubled the position. Nailed it.
It's easy to laugh at this now, and write about it, but if things had gone the other way you the reader would never know --- stock picking prowess? --- LUCK!
posted by John Borden at 2:28 PM
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