Stock Picking

[Graemsay]

There's a piece at the Independent about a City analyst's pension planning today.

http://www.independent.co.uk/news/b...ts-top-tip--ignore-shares-advice-7936480.html

Stock picking, it's a mug's game.

 

[Macca]

Yep ! Been saying it for years, almost no funds beat the index over the years.

The only way that the dice is loaded in favour of the average mug is in the index, if a company fails they simply promote something else to replace it when they rebalance each quarter.

I have tried to explain it many times but people don't believe me or don't want to

 

[oracle]

Stock picking, it's a mug's game.

That's because the people who are good at stock picking and beat the index over the long term don't write newletters and sell their services coz they are busy making money.

A lot of money managers who claim to be good stock pickers if you look at their fees and commissions you will know they have a clear bias towards milking their clients irrespective of their performance. They get their huge $$ payouts due to their fee structures. Most of them follow the herd mentality whereby they all follow each others stock picks.

To make stock picking profitable requires independent thinking...going against the crowd if need be, doing the hard yards by researching companies yourself.

I have been stock picking for few years now and have beaten the All Ord Accumulation Index (which incl. re-invested dividends) each and every year. The most profitable was last financial year beating it by almost 17%.

But I still feel I have a lot to learn and it's probably going to be a journey where the learning is never going to end.

If you are not prepared to do the hard yards then Index funds are the second best choice. Keep regularly investing in a low cost Index fund and you should do well.

Cheers,
Oracle.

 

[redwing]

Here's Marcus Padleys recent take on the Index Funds

The Index Fudge

• Amazingly 50% of the market index in Australia is represented by the 20 biggest stocks and 80% by just 50 stocks. The index is hardly representative of all 1900 stocks. If you are not invested in BHP, the four banks, Telstra, Wesfarmers, Woolworths, RIO or Woodside then 50% of the index calculation is irrelevant to you.
  
• The Australian market is dominated by three almost entirely independent sectors; financials, resources and industrials. Mixing them all up together in one index quote doesn't tell you much. You have to look at them individually to know what's going on and to make decisions on stock trends. For instance, although everyone thinks the market peaked in November 2007 the truth is that the resources sector didn't peak for another six months. If you had made a decision on all your stocks based on your (or CNBC's) assessment of 'the market' you would have missed the fact that the resources were still going up whilst the financials were going into a sub-prime spiral.
  
• The index is a tool used by big institutions to generate average market returns which are then used in financial product marketing as a basis for quoting expected future returns. But the truth is that the average market returns in the past bear absolutely no relation to how the market is going to perform in the future. The average return from the All Ords over the last 75 years is 5.76% but laughably not one 12 month period has actually returned 5.76% and the dispersion of returns is enormous with the highest return at 86.1% and the lowest at -41.7%. In the next 1, 5, 10 or 20 years you are going to experience your own unique set of returns and they will bear no relation to 5.76%, to the past. Average returns are a marketing tool, a lie designed to make you feel comfortable so that you will buy something and anyone pedaling past returns as a justification for making future investments is either ignorant, lazy or selling you something. Past returns as a guide to the future, especially in the current turmoil, is the elephant in the room when it comes to stock market lies. They are irrelevant at best and a deception at worst. When a product says past performance is no guarantee of future returns, it's not a disclaimer, it's a fact.
  
• Even if the index returns did repeat in the future you are not going to make money out of 'the market'. 5.76% less inflation is not much. The government says inflation is 2-3% but the long term average is more like 4.7% and the truth is that we all have our own unique inflation rate depending on what we spend our money on. If you eat, drive, pay school fees or eat bananas it's higher than 4.7%. Headline inflation is politics not statistics. But even if you take off the current 3.6% it means you are dealing with an historic average real return from 'the market' of 2.16% and if you then take off dealing costs, tax, management fees if you are in a managed fund, financial planner fees if you used one to buy your managed fund, the associated product trails, and the index fudge you can see that the market is a lot of fuss about nothing. If it wasn't for dividends, which most people don't compound and retirees almost certainly spend, there wouldn't be much point investing for the average return. Basically you have to do better which means being in the right stocks at the right time, not all the time.

Cont....

I like the idea of the addition of the US Index, Bonds as well as the Australian Index with a rebalancing strategy along the way though

 

[Graemsay]

I've two sets of odds for beating the market. The more optimistic is 20% over the long term, the more pessimistic is 20% in the short term, and 5% over the long.

Given that a lot of well connected fund managers with better information and tools than a retail investor fail to do so, I don't think that it's anywhere as easy as Oracle says.

Incidentally, there's a body of evidence that less frequent trading is a far more successful strategy. Part, but not all, of this is down to dealing costs eating into profits.

As for growth, we're in a world of relatively low inflation and interest rates, and growth is around 2% or 3% if you're lucky. A good rate of return is going to be on the order of 6% or 7%, and if you want more than that then you're going to have to take risks.

If I was wanting to take a punt as an Australian investor, then I'd be looking at buying into the FTSE 100 or 250 indices, or the DAX in Germany. None of these are looking expensive at present, and both the Pound and Euro are at lows against the Aussie Dollar. This would allow you to make profits on both the stock trade and the AUD slipping back on the FX markets.

 

[Edge7]

Stock picking, it's a mug's game.

I'd love to see someone have the courage to say that directly to Warren Buffett to see what response they get. And Benjamin Graham, Phil Fisher, Charlie Munger, Peter Lynch and Sir John Templeton - they must all be mugs too.

I firmly believe that individual retail investors who are prepared to do the research and think independently have a massive advantage over the big institutions and index funds.

Like any endeavour, hard work will reap rewards. People willing to do the work with their stock picking should beat the market each and every year.

 

[redwing]

I'd love to see someone have the courage to say that directly to Warren Buffett to see what response they get. And Benjamin Graham, Phil Fisher, Charlie Munger, Peter Lynch and Sir John Templeton - they must all be mugs too.

I firmly believe that individual retail investors who are prepared to do the research and think independently have a massive advantage over the big institutions and index funds.

Like any endeavour, hard work will reap rewards. People willing to do the work with their stock picking should beat the market each and every year.

It's not all Beer and Skittles though, Buffetts fortune is down by around $5 Billion on a year or so ago

Though at around $45B It's a hiccup rather than the flu

Plus he says he's an investor raher than a trader

 

[redwing]

For interests sake here's a piece called THE SUPERINVESTORS OF GRAHAM-AND-DODDSVILLE

Is the Graham and Dodd "look for values with a significant margin of safety relative to prices" approach to security analysis out of date? Many of the professors who write textbooks today say yes. They argue that the stock market is efficient; that is, that stock prices reflect everything that is known about a company's prospects and about the state of the economy. There are no undervalued stocks, these theorists argue, because there are smart security analysts who utilize all available information to ensure unfailingly appropriate prices. Investors who seem to beat the market year after year are just lucky. "If prices fully reflect available information, this sort of investment adeptness is ruled out," writes one of today's textbook authors.

Well, maybe. But I want to present to you a group of investors who have, year in and year out, beaten the Standard & Poor's 500 stock index. The hypothesis that they do this by pure chance is at least worth examining. Crucial to this examination is the fact that these winners were all well known to me and pre-identified as superior investors, the most recent identification occurring over fifteen years ago. Absent this condition - that is, if I had just recently searched among thousands of records to select a few names for you this morning -- I would advise you to stop reading right here. I should add that all of these records have been audited. And I should further add that I have known many of those who have invested with these managers, and the checks received by those participants over the years have matched the stated records.

Cont....

 

[Macca]

I'd love to see someone have the courage to say that directly to Warren Buffett to see what response they get. And Benjamin Graham, Phil Fisher, Charlie Munger, Peter Lynch and Sir John Templeton - they must all be mugs too.

I firmly believe that individual retail investors who are prepared to do the research and think independently have a massive advantage over the big institutions and index funds.

Like any endeavour, hard work will reap rewards. People willing to do the work with their stock picking should beat the market each and every year.

I am talking about the average Joe Punter who decides to "invest in shares" not someone like Warren Buffet, be fair

Joe Punter reads in the paper that XXX is up so they go and buy some, then they read the market has fallen so they sell some, rinse and repeat

Much better to put their money into a fund and when most funds struggle to beat the index why bother. Nothing worse than seeing the market down 10% for a year and your fund is down 20% plus fees for the year.

 

[willair]

Incidentally, there's a body of evidence that less frequent trading is a far more successful strategy. Part, but not all, of this is down to dealing costs eating into profits.
.

I would have to agree on that one,with Australian based ASX listed with div reinvest high end companies depending on the entry time the componding factor speaks for itself,or you can study the top 40 posters hottest thinkers in aussie share trading sites,if you were too track their trades and volume they say they buy,entrty exit times,plus brokers government ato ,i still can't understand how any make serious money..

 

[oracle]

I don't think that it's anywhere as easy as Oracle says.

To make stock picking profitable requires independent thinking...going against the crowd if need be, doing the hard yards by researching companies yourself.

If you are not prepared to do the hard yards then Index funds are the second best choice. Keep regularly investing in a low cost Index fund and you should do well.

Where did I say it was easy? On the contrary I think I said you have to do the hard yards researching companies and going against the crowd based on your independent thinking, none of which is easy.

Cheers,
Oracle.

 

[matto_]

Individual stock picking does take a lot of time and expertise.

I was heading down this path - until GFC hit me, and my fingers got a bit burnt. Since then I have been dollar cost averaging into low cost Index funds - hence as the ASX dips down - buy a bit, if it goes further - buy a bit more.

Has been working thus far.

 

[Edge7]

I am talking about the average Joe Punter who decides to "invest in shares" not someone like Warren Buffet, be fair

Joe Punter reads in the paper that XXX is up so they go and buy some, then they read the market has fallen so they sell some, rinse and repeat

I don't consider that investing. I reckon that is more like going to the casino and choosing red or black.

 

[austini]

A few quotes from Buffet are shown below. And I recall reading that Buffett's view of a person who migh have some chance of of beating the market (reasonably consistently over time) is someone like himself who devotes the vast majority of his/her time and life to understanding the companies that he/she invests in. Even then many professionals who fall into this category don't always beat the market over the "long term".

As for me personally I figured out long ago that I was not going to make serious money by actively trading. So nowadays I just buy Listed Investment Companies and a couple of Index Funds (for the dividends) whenever the market hits pessimistic lows (ie. Be greedy when others are fearful) and hold long term. Passive income is a wonderful thing.

But hey if you can beat the market consistently by actively trading then that's great. However if time spent enjoying life and family is important as well then don't forget that you really need to put a price on the time and research etc you spend on active trading and ask are you really getting rewarded for all this exra effort as opposed to taking the passive index investing path!

Warren Buffett Quotes:

1. Another situation requiring wide diversification occurs when an investor who does not understand the economics of specific business nevertheless believes it is in his interest to be a long-term owner of American industry. That investor should both own a large number of equities and space out his purchases. By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.

2. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

3. Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time. Be greedy when others are fearful and fearful when others are greedy, but don't think that you can outsmart the market. Very few people should be active investors."

 

[Macca]

I don't consider that investing. I reckon that is more like going to the casino and choosing red or black.

If you are an avid market trader I would agree with you to an extent but as we know the indices have an inbuilt upward bias by replacing anyone who drops out of the index with their replacement.

The average punter follows newspaper tips, I get asked by other members of the family often about shares and when I tell them to buy the index they get all disappointed, I think they like the excitement

Unfortunately one in particular copped a bit too much excitement when the GFC hit, back at work after being comfortably semi retired but had a margin call and was closed out with no funds to buy back in.