Update: FWIW, stock-picking does seem to work.

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Update: FWIW, stock-picking seems to work.

After three and a half months of the year, the three indexes that I’ve been comparing my portfolio to read like this for the year to date:

The S&P is up 4.0%
Russell 2000 is down 0.9%
IJS small cap value is down 4.2%

The average of the three is down 0.4%.

My un-average of 12 to 15 stocks is up 19.1% compared to that index average which is down 0.4%. There’s nothing fancy or unusual about my stocks. I’ve posted them every month. Now, you might think that my big gain is just because I was lucky enough to have picked Shopify (which had grown to 17.3% of my portfolio by Thursday’s close). However, guess what? Being up 19% is way bigger than that!

If you removed half my gain on Shopify I’d still be way, way, ahead of the indexes.

If you removed my entire gain on Shopify I’d still be way, way, ahead of the indexes.

If it was discovered tomorrow that the CFO was embezzling, and Shopify dropped by 20% in a day from $70.60 to $56.50, I’d still be way up from the average of the indexes.

If it was discovered that the CFO was embezzling and the company had been lying on its 10-K’s, and the stock price dropped by 50% from $70.60 to $35.30, I’d still be way ahead.

If it suddenly emerged that Shopify might be going bankrupt, causing the value of my largest investment to drop by 90% from $70.30 down to just $7, my entire portfolio would still be positive, up slightly for the year, in spite of that huge loss, and thus ahead of the average of the indexes. Think what that means: a 19.5% lead gives you an enormous cushion.

Intelligent stock picking can work, and can give you a huge leg-up on the indexes. It’s not dependent on just one stock. It does require paying attention, and work. You can’t be 19.5% ahead of the market in three and a half months with a portfolio of 100 stocks (simply because you are extremely unlikely to pick 100 stocks as good as your first 20 picks).

And you can have bad years. And I’m aware that with a couple of black swan events for a couple of my stocks this year could turn into a bad one. But in the long run you’ll win out if you work intelligently at it.

Just my opinion.

Saul

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“Intelligent stock picking”

Saul,

We, on this board, are uniquely blessed to be learning how to pick stocks…on our own.

Please KNOW how thankful we are for your patiently demonstrating the art of intelligent stock picking.

Jim

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Of course stock picking works. Look at the returns of the Motley Fool, of famous (the few) money managers, Warren Buffett… You can beat the market by holding lots of stocks (like a rare money manager, most don’t holding such large portfolios), or a few stocks, with Warren Buffett going 33% with Coke at one point in time.

This said, no one will beat the market every quarter, or even every year, or even every two years. Look at ISRG and AMZN for instance, two of the best growth stocks of this century. Both stocks have had lulls, collapses, panics, resurgences, and then steady market beating. If you look at these stocks year by year or quarter by quarter (which I have not, but assume it is true as I generally know how they performed) they probably beat the market during each time frame maybe 50% of the time or less.

However, if you count from when you bought, to when you sold (or to now), as one time period, they have smashed the market return to utter pieces.

My hat off to the few money managers, who can actively manage a huge portfolio and beat the market quarter after quarter. But for the rest of us, I think Warren Buffett shows the way - CAP, TAM, buying at opportune moments, holding long-term while others panic, and, if possible (not for most of us) use other people’s money to leverage your own returns (not talking margin - as that is your debt, so thus your money, but other people’s).

Tinker

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I’m finding this report about investor behavior fascinating [0].

They found the S&P returned 8.19% over the last 20 years while the average investor returned 4.67%. That’s a difference of 3.52%, and we know a difference of 3.52% compounded over 20 years can change your life.

So why only 4.67%?

Because most people are tweaking and fiddling and messing around with their portfolios. Indexing works really well for most people if you can do nothing, but most people can’t do nothing.

But let’s not talk about matching the index, let’s talk about the impossible: beating it. I’m doing okay against the S&P over the last 10 years (+20.38% vs +7.51%).

Admittedly, I’m not naive enough to think this is more skill than luck. It’s probably more “doing nothing” than anything else because I’m LTBH to the core.

I follow this board because there’s so many smart people with different perspectives. And that helps me see things differently and become a better investor. But my question today is:

How many people are actually beating the market? Like, not over the last month, but over 20 years and beyond? What percentage of average investors are doing this?

[0] http://www.northstarfinancial.com/files/6314/6523/9571/2016_…

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They found the S&P returned 8.19% over the last 20 years while the average investor returned 4.67%. That’s a difference of 3.52%, and we know a difference of 3.52% compounded over 20 years can change your life.

So why only 4.67%?

Because most people are tweaking and fiddling and messing around with their portfolios. Indexing works really well for most people if you can do nothing, but most people can’t do nothing.

The reason the average investor underperforms the market average is the asymmetric nature of wealth distribution as economist Vilfredo Pareto discovered in 1896

Vilfredo Pareto

Vilfredo Federico Damaso Pareto (born Wilfried Fritz Pareto; Italian: [vil’fre?do pa’re?to]; 15 July 1848 – 19 August 1923) was an Italian engineer, sociologist, economist, political scientist, and philosopher, now also known for the 80/20 rule, named after him as the Pareto principle. He made several important contributions to economics, particularly in the study of income distribution and in the analysis of individuals’ choices. He was also responsible for popularising the use of the term “elite” in social analysis.

He introduced the concept of Pareto efficiency and helped develop the field of microeconomics. He was also the first to discover that income follows a Pareto distribution, which is a power law probability distribution. The Pareto principle was named after him, and it was built on observations of his such as that 80% of the land in Italy was owned by about 20% of the population.

https://en.wikipedia.org/wiki/Vilfredo_Pareto

Stock picking has to work for some people because some people have to be above average. The real issue is learning how to pick stocks successfully and that is not easy.

If the Pareto Distribution is real and everyone were a great stock picker, three out of four investors would still underperform the market.

Denny Schlesinger

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Actually, 4 of 5 investors would underperform per Pareto, but now that is just picking at nits. Point taken Denny.

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4 or 5 investors who follow the Fool would not underperform. But if all investors followed the Fool, then 4 out of 5 would underperform.

To succeed is extraordinary, and thus you need to do extraordinary things, such as doing nothing. So often, doing nothing is the best thing you can do to succeed in investing, but it is a rare attribute.

So to succeed, do what you are suppose to do, but that so few actually can do. Invest each month in great companies. Hold, unless something really material has changed, ignore 90% of the news, and I wager you will destroy the stock market indexes.

This also makes sense as well, as with investors, so are companies. The best companies outperform the other 80% overtime, and thus so will their share prices plus dividends. Make the Pareto principle work for you, not against you. And actually, that is part of the Rule Breaker philosophy of buying top dogs and first movers…they are choosing the best of the best to begin with. That alone has a very high correlation, I would imagine, to better stock appreciation.

Tinker

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Whoever thinks he is standing securely should watch out so he doesn’t fall.

… just sayin’

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So to succeed, do what you are suppose to do, but that so few actually can do. Invest each month in great companies. Hold, unless something really material has changed, ignore 90% of the news, and I wager you will destroy the stock market indexes.

Okay, so 80% of investors won’t succeed because they can’t do things like “do nothing”. Which means the know-nothing investor investing in index funds won’t beat the market. And the know-something investor investing in stocks trying to beat the indexers won’t beat the market either.

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4 or 5 investors who follow the Fool would not underperform. But if all investors followed the Fool, then 4 out of 5 would underperform.

Exactly!

Denny Schlesinger

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My port is up 17.79% YTD and up 21.04% over the last 12 months

My 3 yr return is a disappointing ( to me ) 13.79%

Best to all, going forward,

Frank