Selected excerpts from the Knowledgebase -5

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Selected excerpts from the Knowledgebase -5

I’ve decided to do a daily small excerpt from the Knowledgebase as sort of a thought for the day. In many cases they will have extra thoughts of mine, or small updates. I hope you’ll find them interesting.

Saul

Here’s the fifth:

The last excerpt was pretty long, so here’s one that’s short and simple:

You don’t have to be right about the stocks you sell, just the ones you hold in your portfolio.

Think about that! It simply doesn’t matter what happens to a stock after you sell it. The only thing that matters to you financially is what happens to the stocks that you are now holding. You can’t hold all the stocks in the market that are going to go up. You will always miss hundreds, if not thousands, of stocks that will go up. This means that you will frequently hear about a winner that you missed. So what? You can’t invest in all of them. You don’t have to chase every story out there. And once you sell out of a stock it’s just another one of those thousands of stocks out there that may go up (as some have pointed out) or may go down, but that DON’T MATTER to your personal finances. What matters is whether the stocks in your portfolio go up!

This is a very important post. Again: Think about it!

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board

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“… What matters is whether the stocks in your portfolio go up!”

Saul:

why watch the portfolio like a hawk and see what ‘needs to be done’ when you can buy an index? Look at the S&P500 it has gone up since its inception more than 50 or 60 years ago.
That will make it go up.

do you feel sometimes that so many decisions or actions in the stock market are the results of considerations of the moment and looking back those considerations were not important at all?
and doing nothing could have been (even) better?

tj

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when you can buy an index?

An index is a mix of the good and the bad. If you want to outperform you have to separate the wheat from the chaff. If you don’t know how or don’t have the time, the index is the second best choice.

Denny Schlesinger

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“An index is a mix of the good and the bad. If you want to outperform you have to separate the wheat from the chaff. If you don’t know how or don’t have the time, the index is the second best choice.”

well there lies the rub. Even if you have all the time of the world, you think looking at all the news you can distinguish the outperformers and pick them out consistently over a long period?

sometimes in this pursuit, you do worst than an index despite spending more time ‘doing your homework’.

tj

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you think looking at all the news you can distinguish the outperformers and pick them out consistently over a long period?

Yes, I think so, otherwise I would be investing in an index fund. But not “looking at all the news,” only at pertinent news and I can guarantee that upward of 90% of what goes for news is anything but.

I can also guarantee that the daily gyration of prices is meaningless but when assembled into long term charts meaning can be discerned.

Non news includes Cramer, CNBC, Zacks, most analysts, Briefing.com, Market Realist, Capital Cube, Benzinga, Insider Monkey, Gurufocus, 24/7 Wall St.

News include Business Wire, PR Newswire, 10-K, 10-Q.

The Superinvestors of Graham-and-Doddsville

Superinvestor” Warren E. Buffett, who got an A+ from Ben Graham at Columbia in 1951, never stopped making the grade. He made his fortune using the principles of Graham and Dodd’s Security Analysis. Here, in celebration of the 50th anniversary of that classic text, he tracks the records of investors who stick to the “value approach” and have gotten rich going by the book.

COLUMBIA BUSINESS Warren Buffett May 17, 1984

http://www8.gsb.columbia.edu/articles/columbia-business/supe…

and pick them out consistently…

What do you mean by consistently? 100%? No.

Suppose you pick just two stocks and one is an Amazon and the other is a Bust. You put $1000 in each. You lose $1000 on Bust and make $5000 on Amazon. How is that for consistency?

BTW, if you only have ten or twelve stocks in the portfolio there is very little news that you need to follow. If you have a wish list with around 50 stocks, they don’t put any pressure on you. You can leisurely follow them on the off chance that something in your portfolio needs replacing.

Denny Schlesinger

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when you can buy an index?.. you think looking at all the news you can distinguish the outperformers and pick them out consistently

Hi tj.
Based on my own results over time, I’m sure that stock picking works and that you CAN beat an index. Look, the S&P is made up of good companies, mediocre companies and poor companies. Averaging them you get mediocre results. Here’s a little quote from the KnowledgeBase:

At this point I have a little reminiscing: I remember in 2010 there was a lot of talk in the media about the “Lost Decade” for the stock market, which apparently had finished roughly unchanged after 10 years. At this point I was up 570% in those same 10 years, in spite of 2008, so I was wondering what they were talking about.

I believe you can beat mediocre results. If YOU don’t, why are you investing in anything but indexes? And why are you in discussions on a board that discusses individual stocks? I suspect that you think you can beat the indexes too.

You don’t have to pick outperformers “consistently.” Just more than average, because the Indexes are just average.

Best,

Saul

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At the same time, one should remember that most people can’t and don’t beat the indexes and would be better off just investing in the indexes. It is not as if beating the indexes is trivial or easy.

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“At the same time, one should remember that most people can’t and don’t beat the indexes and would be better off just investing in the indexes. It is not as if beating the indexes is trivial or easy”.

So then does it make sense to invest a portion of one’s investment dollars in an index fund, e.g.- VFIAX- and the remainder in individual stocks? Or would that be counter-productive?

(I am not yet 60 years old, but am retired and, while I’ve done pretty well with my investments, I wouldn’t mind spending a bit less time on managing them).

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The point is that the recommended path depends on the individual, which requires a person to be honest in their self-assessment. If one doesn’t have the skills or the time, then one should admit that and use indexes. Some in indexes and some in stocks is a way to hedge the bet.

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It’s also a question of whether you like it. For me it’s like a hobby. I enjoy it. I’ve always been a game player (card games like bridge, also chess, backgammon etc) and to me it’s another game.

It also doesn’t have to be so time consuming if you limit yourself to a reasonable number of stocks. And don’t over-obsess about each decision. They are usually binary decisions after all (buy/not buy). Sometimes chasing more figures is just more static in the system if you’re just dealing with a two choice decision.

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As tamhas points out, there is a fly in the ointment, three out of four investors underperform the indexes. This is the natural distribution of wealth discovered by Wilfredo Pareto also called the 20-80 rule.

One has be pretty good, specially at not making mistakes that lose a lot of money – capital preservation.

I would chose one or the other, self directed or indexing, except when starting out where you might play it safe with most of your capital while you play real investing with a smaller but significant amount. Paper trading just does not have the gut-wrenching experience needed to learn the trade.

Denny Schlesinger

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Thanks to all who responded to my inquiry.

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" At the same time, one should remember that most people can’t and don’t beat the indexes and would be better off just investing in the indexes. It is not as if beating the indexes is trivial or easy."

I wonder why? There are obviously investors that obtain better results than others in one period or another.

Obviously weighting on the ‘better’ businesses in the ensemble should have something to do with it. But there are always different views on what are the ‘better’ ones. On what are these views based? they are different viewpoints for sure but being right eventually is not the reason why some would do better than others. You are right sometimes and you are wrong sometimes. You may have an edge if you know the business better than other and you understand what it is trying to do. But that has always been iffy. Knowing a business well does not harm for sure.

But more importantly, it helps to have a good sense of the general trend. The rest is to be lucky enough to be ‘more right’ than expected.

I agree you don’t need to be right all the time to make money in the stock market. You go with the upward trend in the longview and you hope that your specific pick does much better in this trend, and you hope there will not be too big of a fiasco along the way.

You don’t need much skill for that but you need a certain temperament and you need patience.
I don’t see much more to it than that. Is there more to it?

tj

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