I guess I don’t see it as an all or nothing.
Maybe a guy, or girl, could have a set amount (dollar cost averaging) going into a fund such as IJS as well as keeping portfolio of individual companies. As time goes by, can adjust amounts in each, learn from both, and reallocate.
Agree. Take 20% of your money and play with individual stocks. If you can beat the index over a 5-year period, then start expanding individual stocks at the expense of index investing.
Agree. Take 20% of your money and play with individual stocks. If you can beat the index over a 5-year period, then start expanding individual stocks at the expense of index investing.
Wow, I remember that I did something like that when I first started out. I put part in Mutual Funds (I don’t even think there were Index Funds back then in the age of the dinosaurs), and part in stocks. As I started realizing that the part I had in stocks was consistently doing better than the part I had in mutual funds, I gradually switched funds over (perhaps over the course of a year or two) to all stocks.
Saul
Dear YouAreNumberSix,
If you want to create wealth, you need to look no further. If you just want to play and gamble for the adrenaline rush, that’s a different story.
Gamble it may be, but suggesting that the only potential payoff is an adrenaline rush is not only disingenuous, but absurd. Wherever you put the odds of achieving it, the chance to do Saul has done stands as its own justification for taking increased risk.
Bear
“Agree. Take 20% of your money and play with individual stocks. If you can beat the index over a 5-year period, then start expanding individual stocks at the expense of index investing.”
Wow, I remember that I did something like that when I first started out. I put part in Mutual Funds (I don’t even think there were Index Funds back then in the age of the dinosaurs), and part in stocks. As I started realizing that the part I had in stocks was consistently doing better than the part I had in mutual funds, I gradually switched funds over (perhaps over the course of a year or two) to all stocks.
Saul
I wish I had started out with most of my hard earned cash in an index fund when I started out 16 yrs ago, “playing” with 20% to see how I would actually do before committing more. It can be a very expensive lesson figuring out if one is in the top 20% or bottom 80%. As Denny appropriately points out, which group is obviously the most likely camp we’ll fall into? This isn’t a defeatist attitude, but perhaps hard reality. Most of us feel we can be better than average (we’re all better than average drivers, right?), but the huge hurdle is that in this endeavor, we CAN be better than average and yet STILL under perform the indexes.
Furthermore, of those lucky enough (to be that smart, skilled, etc) to be in the top 20%, what are the odds people just starting out are going to be in that group?? If they are in that group, LUCK most likely does have a lot to do with it. With even 1-2 years of outperformance as in Saul’s case, it’s still likely due to luck. The long run is what matters.
As Charlie Munger was quoted in Howard Marks’ memo It’s Not Easy, he says, “It’s not supposed to be easy. Anyone who finds it easy is stupid.”
It’s a great read if you haven’t read it already:
https://www.oaktreecapital.com/docs/default-source/memos/201…
For Bear, it’s great that he’s being brave and whatnot to post his results. It’s a great way to track his progress and his thought process. For some of us it may appear as though he is wandering a bit and hasn’t found a clear strategy. This often doesn’t end well, and I had the same urge to offer some warnings or “advice.” Like, be careful out there, that looks dangerous!
Saul has been very generous with his time and I think offers some great advice with stock picking and selling. His timing for getting into and then out of certain stocks before they plummet has been pretty impressive. Unfortunately, it’s really hard to emulate. Is it luck? Is it skill? Hard to know. We’ve had a bull market now for the past 7 years, so his style is definitely geared towards a bullish slant. Will it do as well in a bear market?
Back to Bear. Here’s my unsolicited 2 cents:
-Keep an open mind when others offer advice and try not to be defensive.
-Don’t overestimate your own intelligence or edge in the market. There’s a whole crapload of other very smart folks out there on the other side of the trade. Pay head.
-Figure out some more objective rules with your stock picking, or perhaps longer term thoughts that aren’t swayed from one week to the next in order to reduce your turnover.
-Try not to anticipate things happening that have yet to be proved. We all want to get in early, but sometimes it’s wise to wait for earnings to start showing up before just assuming or hoping they will (thinking of SUNW here). There’s often plenty of time to enjoy the gravy train after it starts moving.
-Don’t get wrapped up into feeling like you need to tinker with your portfolio to best optimize it. Often the less you mess with it the better you’ll be.
-Keep most? half? of your money in some index fund of your liking while you can get an accurate assessment of where you’re going to fit in with regards to the 20/80 concept. You can still have lots of fun figuring this stuff out, but have some comfort knowing that you’ll match the market at the very least with most of your funds. And by that, you’ll be ahead of at least 75% of investors out there!
Good luck,
Jeff
Bear,
You’ve taken quite a bit of stick on this thread, and received some support also.
There are many smart people posting on this board - it is one of my favourite port of calls.
But don’t forget that we are all second rate in comparison to the really great investors like Warren Buffett, Peter Lynch or Shelby Davis - all of whom achieved greater than 20% plus returns over very long periods.
The great thing about these people is that their methods are all laid bare for us to study - in Buffett’s shareholder letters, in Lynch’s ‘One up on Wall Street’, and in John Rothchild’s book ‘The Davis Dynasty’.
There is also a great study in how amateur investors can achieve market beating returns in Guy Thomas’ book, ‘Free Capital’.
You may already be aware of all of these sources. But I am impressed by your youth and ambition, and I just wanted to make sure that you are taking your main guidance from the big hitters - rather than relying on the odd useful comment from our community of moderately successful amateurs.
Don’t be discouraged. Determination, a willingness to learn, and sheer ‘stickability’ will get you there in the end - and you will outperform the S&P by a mile.
Ian
Isn’t small caps performance very economic cycle dependent? I would think either measuring the performance from an inception point at a high in the economic cycle would give a misleading results. Small caps get hammered hard at the start of a recession usually - they do in the UK. I would think that would be the time to buy into an ETF.
JLodie,
“it’s great that he’s being brave and whatnot”
I did not say that JLodie.
I said this:
“I think Bear shows courage and refreshing transparency in his willingness to tell the flat-out truth about his portfolio.”
Frank.
I am not sure where 20% comes from. Over any serious investing timescale, say 20 years, the number of mutual fund managers beating the index for their investors (after all fees) is extremely low. One? It used to be Bill Miller but then he crashed and burned.
There was a wonderful book I read once, I think it was called ‘The Great Mutual Fund Trap’ which went into the statistics about how the outcome of successful managers after 20 years was exactly what random chance would predict! You could count them on the fingers of one hand.
I am not sure where 20% comes from
http://www.cheatsheet.com/business/why-you-cant-beat-warren-…
https://en.m.wikipedia.org/wiki/Peter_Lynch
http://csinvesting.org/2012/03/18/great-investor-series-shel…
According to this link which I found quickly Buffett only made a miserable 19.7%
But I’ve seen it quoted at over 20% elsewhere.
Ian
I am not sure where 20% comes from.
Initially from Pareto’s observation of the distribution of land in Italy. Later observers noticed the same distribution in other countries. Since then the power law distribution has been seen in many natural and human phenomena such as earthquakes and prices.
Denny Schlesinger