A lengthy comment came in that I suggest you read (click here) that covers a few points some of which are fair and some of which are off base.
The gist is that it takes decades to truly understand a company, he says individuals cannot do this, he questions whether I know the companies I own, he says no one person can possibly understand more than an handful of companies, thinking otherwise is hubris and that investing differently than what he says is irresponsible.
The first question of how well can someone know a company is the most reasonable question asked. No matter how well you think you know a company it is a guarantee that there are holders who know it better than you and holders who do not know it as well you, I am certainly no exception. I would think this would be obvious because when you buy someone else sells.
That it takes decades to understand a company makes no sense to me whatsoever. If it did only 60 year-olds who had been in the business since they were 20 could possibly do the job but then how could they be in the business in the first place?
The other obvious thing about decades is that many companies have not been around for decades or that the business has evolved in such a way that the companies are much different than they were ten years ago let alone decades ago.
Stock picking is not easy and not for everyone, I have repeated that countless times but it is no where near the rocket science that this reader will have you believe. If you pick stocks you will get some right and you will get some wrong, it's that simple. If your ratio of rights and wrongs (and magnitudes of each) allows you to sleep comfortably and stay on track for your goals great, if not then don't be a stock picker.
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20 comments:
Roger,
I think you are correct he makes it sound way to difficult. Unfortunately you are just as bad but in the opposite direction. You make it seem to easy.
Most individuals do not know what they are doing, do not research enough, and can not possibly keep track of the number of companies you recommend. So as incorrect as he maybe so are you.
Hmm, interesting.
GE is the oldest company in the Dow.
Is it? There is a company with the name GE in the Dow. It is nothing like the company with the name GE that was originally selected for the Dow. There is not one product or one person from that orignal company still a part of GE. So, studying the entire history of GE is to overstudy.
Moral of the story: Learn what you need to learn to do what you need to do.
Roger
I think your reader's comments were certainly a bit over the top. But at the core of his rant I do somewhat agree with his basic point.
The craft of investing is somewhat more complicated than it looks, and certainly requires more than learning how to click on a buy button. I know you preach research and balance, but my highly unscientific anecdotal observation is that few people have ever read a 10K, understand basic concepts like Modern Portfolio Theory (and it's limitations), or grasp the currency implications of a goods and services deficit. In other words, only a very small fraction of people out there have the capacity to invest competently.
It can be a lot of work, and few can/will do it. Unfortunately overconfidence will probably cause us to mostly over estimate how good we actually are, so caution against hubris is a fair consideration.
Michael
I believe that GE's whip and buggy division is still in tact (joke).
Nerdy factoid, at the turn of the last century there was a DJIA component called American Twine, I believe I have that name correct.
American Twine - yes, I believe they are called Charter Communications, now.
lol, nice
Picking stocks is NOT easy. One expert will recommend a purchase while another expert will recommend a sale on the same stock or the market. Even after doing all of your homework on the stock fundamentals and the market, that doesn't always mean the stock will go up in price. Roger, you have an excellent Method
Original poster here... I didnt mean to come off as harsh as I really do think that you disperse some great common sense information and that folks can take a lot from your thoughts and observations... and there is a lot to the idea that you can do well by making a lot of little judgements that add value here and there and at the end of the day you wind up doing better than the market... and its true that stock investing is not rocket science that laypeople can make reasonable guesses about entry and exit points... but it remains that most if not all of those judgements are guesses as most dont pour through balance sheets, company documents and the myriad of supporting data that the most notable investors spend their time studying... and if you dont know all of the publicly available data AND how to analyze and reconcile that data, you really dont know what a companies stock is truly worth... and I dont think that most people, even professionals, really know as much about the companies they invest in as they could or should... hence the need for diversification and putting 2% into every approach that is available...
Thats a totally different approach to a Buffett or Cumming or Berkowitz who spend years studying and understanding a company before and during the time in which they own them... that level of thoroughness allows those investors to hold a very limited number of companies and have portfolios which violate convention and appear to be dangerously un-diversified... but as they say, diversification is often really a compensation for a lack of deep knowledge about the businesses one owns... which is why I was noting that often individuals are better off investing in a few companies in which they have real direct knowledge than doing the slice/dice asset class mix... a glance at some of the largest fortunes in history seems to point towards knowing a lot about a little and investing in what you truly know
Some years ago I inherited a parents estate and had to go from knowing nothing about the markets to as much as I reasonbly could... I took control of a portfolio which consisted of three stocks which I promptly diversified upon taking over... since then I have done fine in comparison to various benchmarks... but if I had done nothing at all that portfolio would have been many times the size it is today... my parent knew those companies and held them for a lifetime... and likewise, in my own life and experience, had I invested in the three or four companies that I work directly with and have direct knowledge of, I would be retired and writing this from my easy chair...
I just think its worth thinking about what you really know and what you dont know... and trying to leverage that knowlege as intelligently and profitably as possible
Cheers!
Anon
"Buffett or Cumming or Berkowitz" offers no guarantee either. They do not get all of them right. No knock on them by any means. Trying to copy them actually makes the job more difficult for the simple reason that we are not them and never will be.
Isn't the sector or country more important than the individual stock? I recently read the worst performing stock/etf in the best sector will usually do better than the best stock/etf in many other sectors. Obviously, you can bet on a turkey in the best sector but if you diversify then you should reduce the risk. It would, surely, be hard to pick a wrong'un in the mining sector or an oil producer that doesn't produce good returns. Drip feeding into that stock would negate the problems of timing.
Regarding Buffett's recent buys, using three year revenue growth, three year earnings per share growth, three year equity per share growth and R&D/revenue (five year average percent) and using seventeen well known companies to compare to GSK and thirty five companies to compare to KFT, GSK received the highest number (65) among the Drug & Biotech companies while KFT received the highest number (108) among the Food & Beverage Manufacturers.
I must admit I don't really understand the above paragraph, I read it somewhere else. I've also read somewhere that Buffett's purchases seem expensive in the short term. I could buy them now and, if I hold them forever, I'm doing better than he is. Woohoo.
Maybe all this means that a financial advisor who consisently outperforms the indices is worth his or her fee.
Wow. At least he signs off with "Cheers!". I'm the guy who referred to you as 'Dude' awhile back and thinks you could use some TA to fine-tune entry/exit points; but other than that, you seem to know what you're talking about (feel free to use that when soliciting new clients - lol). I'm surprised no one pointed out the one about the monkey who threw some darts at the stock pages and did better than a very large percentage of fund managers.
"I took control of a portfolio which consisted of three stocks. . . "but if I had done nothing at all that portfolio would have been many times the size it is today."
Let's see...we are taking a sample size of 3 and making some retro-fitted cognition that those 3 stocks would have been just fine?
A sample size of three means that you don't have a meaningful sample size. Those three stocks could have just as easily been dogs, and then you could have just as easily said, "I diversified it and boy am I glad that I did." Spend decades understanding and knowing a company? It doesn't take decades--though I'd be the first to admit that it takes 10 years to be an expert in one's field of study. The company that you know a decade ago is NOT the company that you know today. The rate of change is just too darned quick.
Original poster again...
Of course the idea behind diversifying out of the three stock portfolio was to avoid "stock-specific risk" which we all know and dislike... but I didnt give enough consideration to how much this parent knew these companies and how that knowledge actually made this portfolio less risky and potentially more rewarding...
What we are really debating is bottom up versus top down... both can work; my main point is that I think that modern tools make it easy for people think they understand a company and its value when perhaps there is more to the picture than a cursory glance... companies are groups of people, and there is no substitute for meeting and knowing the people who form the companies that we invest in and seeing the company culture first-hand... in general very smart people in the right culture can produce very good results... which is why the direct knowledge aspect seems to be so important in my experience...
Roger,
Your comments and advice is fantastic. But, you just do not get what is easy for you a trained professional who works on this 70 hours a week is not the same for joe better than average at home.
Please continue your advice, but if you thin the better than average joe can easily pick stocks you are severely underestimating your true worth to an investor.
So those of us who strongly disagree with you on picking stocks at home still greatly appreciate all of your comments.
The stock picking example I ALWAYS remember when I talk about why I'm an indexer now (with 5% or a little more in individual stocks).....
Money Magazine, late 90s. I'd had a subcription for years. "2 stocks you should own for the rest of your life: Enron and Worldcom."
At the time, I was thinking "get this crap with the p/e of 60 or whatever out of here."
Roger,
In your comment about "knowing" a company, you alluded to the fact that, after all, if you're buying, the other guy is selling, and both can't be correct. On the face of it, that's true, but it disregards investing time horizons. Maybe the guy I'm buying from is a trader who's bailing after a fast "pop". and I'm buying with the intent of hanging on for a few years. In that case, we can both be "right".
jan
I would add that most stocks are highly correlated, and trade together in industry groups, if not overall as "equities". Even the commodity complex is witnessing this currently. Yes, there are differences from company to company, but market and industry direction are far more important, not to mention, easier to grasp. Too often, traders and investors complicate the process, when psychology is the most important aspect. If you can't admit you're wrong and take a loss, you'll lose in the long run. Risk control has many aspects, with the specific company risk being only a very small part. Keep it simple!
Jan, actually I cut out a paragraph about that very point. The example I was going to use was a stock goes up 100%, a holder sells to a new buyer and it goes up another 100% for the new buyer.
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