As much as he gets pilloried, I enjoy reading commentary from Ben Stein. He usually looks at things from a common sense perspective and while I don't necessarily agree with him all the time I do believe I can learn from him.
In yesterday's NY Times article he made one comment that I don't agree with that might be worth delving into.
He said, and he has said this repeatedly in the past, "unless you are a thorough genius like Warren Buffet, buying individual stocks is tricky."
The implication that I take from this sentiment is that he does not think individuals can or should pick stocks. I won't say stock picking is easy but it is not the sheer alchemy that some folks think it is either. I have long advocated a mix of stocks and products that is manageable and allows for sleeping at night (obviously the right mix will be in the eye of the beholder).
To make up an example where I don't think there is an ETF or other fund and that I am not an investor; stem cell stocks. If there was an ETF, you studied the segment and felt the fund owned companies that would not succeed thus dragging the fund you might think about an individual stock in that case, wouldn't you?
I also think the article makes the case for top down. In the article Stein talks about being wrong about the financial sector over the last few months. The mortgage mess, or whatever we are calling it, had a much bigger impact than he expected.
I have been prattling on about the financials for many months with the same simplistic concern; an inverted curve will be a problem and until the curve normalizes it makes sense to be underweight.
While I have repeated my logic for being underweight I never made any attempt to quantify how big the problem would be other than to say it won't be Armageddon, which I still believe.
The need to be precisely correct becomes less important if you can assess the big picture which is much easier to do than picking stocks. Another aspect of top down is that when you get the asset class right it almost becomes harder to find a stock that goes down.
While that statement is a tad hyperbolic it would not be easy to find a tech stock that was down in 1999 or an emerging market stock that was down in 2006. It would also be hard to find a tech stock that was up in 2001 or a financial stock that was up in the last six months. Obviously if you look hard enough you will find stocks that work against all four examples but you get the idea.
Not everyone can be comfortable buying individual stocks but it is far from Russian roulette. The worst thing a stock can do is go to zero and that does not happen very often. A 2-3% weighting in a stock that goes to zero might set a portfolio back a few weeks, if even. A 25% weighting in a biotech that cuts in half on bad FDA news can set a portfolio back for an entire year.
Moderation.
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11 comments:
You know how to read financial documents. I know how to read financial documents. But 99% of the rest of the educated classes don't have the first inkling of what they need. They may be wonderful doctors, dentists, lawyers, etc., but do not let them buy their own stocks.
I know how to read financial documents. I have access to Morningstar reports at the local library. I spent hours of research on both the individual stocks themselves AND learning more about them market.
And good LORD my portfolio does better now that I've adopted an index approach.
I still have 10% or so of my total portfolio set aside for individual stock investments. I lean toward high yield undervalued stocks.
62 yrs old, been actively buying and selling equities for ten years, self-educated in the game. About 30% of my portfolio is individual stocks which are Momentum picks AND Best of Breed. I have had much success buying high and selling higher. I select only those names that make money, have little debt, Peg ratio below 1.75, double-digit operating margin and return on equity, and current ratio of at least 1.5. The Stoch/RSI, Williams%ratio and On-balance volume must be rising. I don't vary from that. If it drops 7% right after I buy, I sell. Or I sell when "the run is clearly done" (no need to pick the top). I LOVE to pay taxes!
I agree, in principle, with Stein's comment. For the vast majority of people out there, choosing low-cost ETF products that track broad indexes is vastly superior to blindly following the stock-hawkers on television, or the internet. Maybe I'm a bit jaded, but I believe that if you are not truly into investing as a serious endeavor, internet message boards and television are probably your only sources of "information." These are the kinds of people I think Stein's comment is directed too.
Of course, for anyone who lives and breaths portfolio theory, this is not a black-and-white issue. Some themes are better-realized with single-stocks, while others with ETN/ETF's (i.e. currencies), CEF's (i.e. MLP's in an IRA account), or OEF's (i.e. market-neutral themes). I don't think that Stein would argue that point.
I am curious about your take on REIT etfs at this stage. It seems to me that as a group they have been overly beat down because of the sub-prime mess and perhaps the coming of the long awaited slow down in the economy. It avoid single stock risk, i have been thinking of putting a toe into this catagory of stocks. Any thoughts? Any best of breed insights? Thanks
Ben Graham put it well when he said, in effect, that there is no halfway point between being a defensive (passive) investor and being an enterprising (active) investor.
The difference here is not about how much risk you are willing to take, but rather in how much time and effort you are willing to put into learning about your investments.
For the VAST majority of investors (ie, upwards of 99%), it makes sense to be a passive investor, invested in globally diversified broad stock and bond indices, and to make use of dollar-cost-averaging and regular rebalancing to smooth out some of the market fluctuations. Beyond this, adding a little bit of active management is most likely to cause losses - there is nothing worse than the person who thinks that, by spending a few hours per week on their investments, they can time the market, or call a top or bottom, or pick the right stock, etc...
Graham argues that there is a role for active investors, but this role is only appropriate for those who, like Roger, are willing to do it pretty much full time - unless you're able to treat your portfolio like a full-time, serious business operation, there is no point in doing anything other than passive investments. Investing is not a game, and is a terrible thing to dabble in - either treat your investments as an automatic monthly contribution to your future, or approach it as a serious business operation that demands a great deal of hard work.
Of course, investing is different from speculation, and we should never confuse the two. Graham, of course, recognizes that there is a speculative instinct in many people, and so he doesn't mind if you set aside a little bit of money in a completely separate account for stock-picking and speculation... but don't expect to make any gains on this account beyond the thrill of the gamble.
Could be a stupid question....
Roger...when you see LP or MLP next to a company....do you have any thoughts that you generalize to these entities....currently, the tickers of interest on my screen are in the energy sector. LP...have any potential negative connotations? Same with MLP....and are there tax issues which are likely to favor or not favor a tax advantaged account? thx/japser
Jasper, something being a partnership is not a turnoff for me from buying a stock. The question really is whether a little more tax work is a reason to not buy a stock or not. From where I sit no but i can't say the other side is wrong.
I'll try to answer the REIT question in tomorrow post.
I had an e-mail exchange a few years ago with Mr. Stein. At that time he did not have any objections to individual stocks. He did have issues regarding the irrational egos of speculators trying to mask themselves as investors.
I cannot quarrel with his issues on that score.
That may have developed into his most recent thoughts regarding the avoidance of individual stocks for most individuals.
Choice and avoidance of asset classes, rather than choice or avoidance of particular stocks, is what makes or breaks long-term results.
Ben Stein underestimated the importance of the real estate downturn because he is a rabid political idealogue.
It's always tricky taking advice from someone so busy defending an untenable political position that he can't see straight.
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