Felix Salmon carried on the discussion mostly taking the other side of the argument noting among other things that "active investors, in aggregate, never outperform the stock market" and noting the difficulty in adding trading ability (consistent with part of AR's point) on top of the analysis needed for stock selection which might make it a worse time to try stock picking not a better time.
I was reminded by a humorous quote from Taleb, or not so humorous maybe, where he essentially said that people would never invest in the stock market if they really understood the risk. The Taleb quote covers more ground, that is equity exposure regardless of the wrapper, as opposed to the discussion of stock picking versus some sort of fund strategy debated between AR and Salmon.
I think 'never invest' is a little over the top but the sentiment is very instructive in pointing out that many participants do not understand the risk. Over the last five and half years every time there has been an event of some sort that puts a little scare into people I say something about this having happened before and promising it will happen again.Rationally, people get this, I think, but many people seem to forget during the heat of the moment. Put another way, they don't understand the risks when they need to. The consequences of risk and volatility lose a lot of importance in the middle of a 75% rally which is of course a very bad way to look at it, foolish really.
If you've been reading this site for a while you know I am a fan of using the best tool available for each part of the portfolio; stock, fund, whatever. Felix' comment about needing to learn how to trade in addition to how to analyze is interesting. Over the years, in an effort to share process, I have talked about stocks that have worked out well and ones that have not. One type of trade I have mentioned several times before is having sold partial positions after a stock had skyrocketed far more than the market or the respective sector in some period of time.
If you have used individual stocks as part of your portfolio for any length of time you have had stocks that have done this. You can't go wrong selling a portion of a position in a stock that is up 80% in an up 20% world and I do not think it takes tremendous acumen to do something like this.
Likewise you have had stocks that have done poorly if you have been using equities for any length of time. A stock that is down 50% when the market is down 50% is not necessarily evidence of a bad stock. In a market that ends up dropping that much the more important thing is the top down decision to reduce exposure a little earlier on like after a breach of the 200 DMA.
A stock that drops 20% in an up 20% world could be a sell (re learn the story and make a decision) but if you are close to either side of mediocre then you have some winners, some losers and some index or sector huggers in your portfolio, in that context you won't go wrong selling the occasional name that you lose confidence in.
The above is not to imply that individual stocks, even just a smattering, are right for everyone because they are not but I do disagree with the idea that using some individual stocks is reckless, this is too broad of an indictment. It is very unlikely that someone putting 5% into Johnson & Johnson (JNJ), we target 3% in that one, is going to ruin themselves financially. It is a good bet that going forward that stock would be ahead of the market sometimes and lag it sometimes all the while inching up the dividend. Even 2% into something like that Intermune from last week that blew up doesn't have to be ruinous. The company didn't get the FDA approval which was unlucky for anyone holding the name, we've never owned this one, but with proper sizing which means understanding the risk and potential volatility it could have just been one that did not work out.
Another concept that I think was missed in both articles was the idea of risk adjusted returns. Not everyone needs to be up 25% in an up 20% world. There is plenty to be said for a strategy that delivers something that is anywhere close to John Serrapere's 75-50 target (75% of the upside and half of the downside). I devote a lot of time trying to explore this sort of thing and try to implement the concept (I refer to it as smoothing out the ride) into client portfolios as I believe it gives a legitimate chance of outperforming over longer periods of time which matter more than some random 90 day or 365 day period that will probably not have any bearing on your financial future.
12 comments:
These kinds of discussions seldom draw the distinction between traders and investors. Stockpickers don't have to be active traders. A wise man once said buy-and-hope-to-hold :)
IMHO, large cap dividend payers ought to form the core of an equity portfolio whose goal is 75-50. JNJ is an excellent example, and it doesn't take a forensic CPA to analyze the balance sheet. Why do so-called experts make this so hard when it doesn't have to be?
while US equities are leading the market on global basis this year -- the long-term opportunities will be in international markets (away from Europe).
Your average US advisor is not set-up for this --- they instead gravitate to the 'look for above average dividend paying US large caps.'
So I ask anyone how unless they have a global research operation -- how are they going to be able to even know where to start on analyzing Gazprom, Singapore Telecom or Petrochina? The earnings estimates? ha. no -- the new global model is to think in terms of MARKETS -- not stocks. but it will take many years for the laggards to catch up on this.
When I first started investing in the 80's brokerages were too expensive and, frankly, a bit mysterious: I didn't grok that stocks (and all other financial products) are inherently intermediated, a promise in lieu of, and required trust in a counterparty; e.g., you don't 'own' a share of a company, you only own a share in its successful operation.
But despite that investing directly with a company made sense to me and there were companies in those days, JNJ included, who not only had dividend reinvestment plans (DRiP's) but would sell you your first share to start one. So that's what I did.
These days I invest much more widely, brokerage costs are relatively cheap (and no longer mysterious) and almost all DRiP's are managed by a separate service agency instead of corporate shareholder relations in any case but the surviving DRiP's in my portfolio (some did not do well of course) remain including JNJ w/capital gains large enough to make it more likely I will donate the shares to charity than sell them.
One of the things I learned from Harry Brown was that investing is not different from life and neither is its logic, it's a matter of understanding the tools and the difference between investing and speculation (which is not the same as trading): You learn as you go, learning your own capacities along with the rest, and like any education it can be expensive but the job gets done if you're paying attention.
JNJ is a great example of a stock that works for buy-and-hold investors. They have hundreds of businesses with hundreds of brands in hundreds of markets. It is not that different from a health care mutual fund.
Berkshire is another diversified, global business.
If you buy-and-hold stocks like these, you might find that the expense ratio is 0.00%.
The market has been crazy the last 5 yrs or so (not that it wasn't that way prior). That being said, with hedge funds controlling the day-to-day activity, I would like to see our non-existant regulators develop rules specifically to help the small investor not get trampled. I cannot see how America can grow without the middle class masses to join in.
Roger
I read someshere that these large funds don't always pay taxes on these high-frequency trades. Do you know if this is true. If so, perhaps there should be a very high taxes for quick and large volume trades
not crystal clear on the question but the only tax thing i know of is the carried interest issue, beyond that i would only be guessing.
Can u say where the photo was taken?
RW,
good post. Can I ask you a question. In my study of many companies. I have noticed in this upmove. Some companies correct quite a bit, others almost none like Bidu and still others tank, and then resume and tank like ABK. After a cycle low how do you select companies like bidu, or gnw that have very little corrections if any.
Thanks,
Jeff from Milan, Italy
Hi Roger...do you forsee any
world etfs that would exclude
the PIIGS? They have etfs
that exclude USA and Japan... as
you know....thanks for all that
you do.
Jeff, I use momentum for growth stocks because these are not as sensitive to business cycle usually but my background is value investing so I tend to fall back on fundamental 'givens' such as a history of dividend growth, strong normalized earnings and free cash flow.
However, from my POV, the business cycle has been increasingly disrupted or chaotic since the late ninties with industrial sectors strenghtening earlier/later and/or stronger/weaker than expected so I no longer follow a strong sector rotation discipline. My investing has become much more bimodal, either very long-term strategic (usually hedged) or short-term/swing trading; not much intermediate any more which is what business cycle investing tends to be.
Even in better times I'm inclined to doubt a closed society like China could have a predictable business cycle but if I bought the macro and secular story about a stock like BIDU I might invest very long term on that basis. Alternatively I might swing trade a stock like that. But attempting to understand much less predict why or when it's price might prove stable or move would not be anything I would attempt.
FWIW BIDU developed a very nice P&F pattern yesterday; if it holds until next week I might swing trade it.
the picture is from Molokai (april 2007) right on highway (not really a highway) 450 somewhere past mile marker 17--we stayed at mile marker 17.
as for ETFs that exclude PIIGS that is tough to say. already there is the Nordic 30 (GXF) and single country funds but europe ex-piigs could be a bit of a gamble for a fund provider if the event only lasts another 2 or 3 years.
Post a Comment