Picking Stocks | Common Sense Investing
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- Опубліковано 14 гру 2018
- Today I want to talk to you about owning individual stocks, and no, I’m not going to tell you how to do it successfully. This is not that kind of channel.
Referenced in this video:
Do Stocks Outperform Treasury Bills? - papers.ssrn.com/sol3/papers.c...
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I hold 100% in Dunder Mifflin paper co. It's going places.
Hahahahahahahah. I'm in on Dunder Mifflin paper too!!! That's a company that I really believe.
Not sure where but places...
Deep, deep value
LOL! In Michael Scott we trust 😂
Active Fund Managers: Exist*
Fama and French: I'm going to end this man's whole career.
Fama & French: exists
Actively managed funds: (chuckles) I’m in danger
Active and Passive managers both complement each others strategies; the active managers provide better efficiency for the passive to exploit, and the passive managers provide more stability for active managers to exploit.
Unfortunately, it is more like the way a pearl diver and a jewelry conglomerate complement each other's businesses, especially in the long term. Except the pearl divers are usually well aware that they have the short end of the stick, while active management goes great until it doesn't.
@@carriermodulation While there isn't agreement about the exact figure, the consensus seems to be that about a 50/50 passive/active management ratio is ideal. This improves efficiency which helps index (passive) investors, while weeding out the active managers that perform poorly. Currently most US investments are actively managed, but hopefully that will change.
@@alankoslowski9473 I personally think we need very few active traders to keep the market relatively efficient, with the bulk being passive, and most people can remain totally passive.
Even the factor and CAPM weighting of index approaches might be enough to keep the market working efficiently without any bets.
@@carriermodulation That's probably true. Active managers still serve a purpose, but as you say they aren't nearly so important as most they market themselves. 50% active is probably too high; it's probably more like 20-30%.
This video literally convinced me (along with other videos of yours) to sell all my individual stocks and put them into my index funds. It was fun to dip my toe into it, but it’s not rational
Do you have any back ground in finance ?
A classic video that I come back to watch after UA-cam suggests some stock picking “genius’” video. I come to bask in the well researched rational arguments and that laugh at the end. 😂
Thanks MJ! I bet the stock picking genius gets more views than me. People don't want facts.
Just wanted to say I’m a US investor but I really enjoy your videos. Keep up the good work.
Thanks a lot for watching! I appreciate the kind words.
Just want to say I‘m an Austrian investor but still enjoy your videos. Not that my nationality changes global investment best practices 😅
Just want to say I’m a Swiss investor and also really enjoy your videos. 🙂
I just want to say I'm an Italian investor and I love your videos
@@BenFelixCSI Just wanted to say I'm a Torontonian (not by choice) investor but still really enjoy your videos :-).
I do irrationally hold individual stocks, but the more of your videos I watch, the less I am believing this is a good idea
same here
But it's fun and not as bad as the casino.
Actually I’m sure that holding the index is not the best idea. Avoiding travel, industrials and mining, and overweighting tech, healthcare and consumer defensive has been a good move relative to the index. Maybe when things are more normalised I will rebalance with some index positions but buying the whole market seems suboptimal when there are large sectors that continue to face such existential risks.
@@Citizen-of-theworld The S&P500 always rebalances the companies that make up the indice. If a stock isn't performing well, it will get replaced by one that is. That is why "all" the top 10 largest market-weighted stocks in the S&P500 10 years ago are no longer there.
@@Citizen-of-theworld just fyi as of the last couple weeks the vanguard total stock market etf (VTI) is beating vanguard growth (VUG, features the industries you mentioned) in post-covid gains. Like Ben’s said in other videos, the best companies/industries are not necessarily the best investments
Well worth watching this video multiple times. Thnx for great content!
Ben,
With the well-studied value you bring to people, I really am a fan. It is honest and to advantage of your viewers. Great job.
Thank you! I appreciate the kind words. Thanks for watching and commenting.
Should have watched this earlier. Thank you for sharing these valuable information free.
Thanks for watching for free!
Hahah best video ending of all of them so far, really liking these videos and The Plain Bagel for no-frills, non-sensationalist information, much needed on this topic
I just made myself watch this three times to make me change my allocation to more small cap, value, and Index ETFs like I want while my individually picked stocks are at 20-60% returns XD. It's a tough moment
Ben is always the voice of reason, always clear, always refreshing. I have etfs, and I also have some single stocks, and I do see the single stocks as glorified gambling, I'm just drawn to do it, despite myself! I do plan to get out of the single stocks when the time is right
Just curious, do you still own single stocks?
......When time is right. WWBD (what would Ben do?)
Best video ever - based on data and facts. I didn’t know that the odds are so bad actually. Since I read “Random walk down the Wall Street” I only hold some left over stocks (< 1%) waiting to sell them. I should have found this video earlier.
It is strangely compelling to listen to your videos. I have altered most of my investing strategy to fit all of the data presented in your content.
Another excellent video... subscribed to your podcast as well. Keep up the great work!
Thank you, Dan!
I’m new to buying stocks and hold both ETF and individual stocks. I’ve done ok in both but agree with your video.
Thanks for this, Ben...appreciated your references to investor psychology and bias in making (or not making) investing decisions.
Thanks for watching, Marcus!
You are right, I do hold my employer company stocks. And quite a lot of them. In my opinion the deferment of 25-28% local sell tax is important enough to take individual stock risk. But I never calculated it.
My rule is to sell when my RSU reach over 10% of my total portfolio. That way I do sell when the stock is up, or when I get too many RSU
Just a small point to add to one of yours:
Great point on the "if you would not buy more of the stock you own at the current price, you should not keep it".
Buuuut I have to mention there is a perfectly good reason to keeping it if it would still grow and produce value, but there is simply a better place to invest "new money", and that reason is of course taxes. While uninvested money is not required to pay taxes, if you have made a gain in a position, selling it means losing at least 15% of it to taxes. In this case, it often can make more sense to keep your current position to avoid paying the tax (for now...} and instead have that 15% extra cash continue to work for you in the same company. Then invest your "new, yet to be invested money" in whatever you determine to be a better position at current prices.
Imagine you made an enormous profit on a stock such as buying Tesla a few years ago. You'd be up over 10x so the majority of the value of your position would be liable to be taxed. Imagine you had 100k worth of Tesla, then the moment you sell you now have 85k left to invest while Uncle Sam gets his cut. Don't forget state taxes...and this is assuming you held the stock for at least a year and a day.
In a tax privileged account like a ROTH IRA these days with no trading fees, I can finally cautiously agree with your statement.
Opening positions is easy. Knowing when to close is impossible.
I am holding quite a sizable "dividend stocks" in my country right now, but after watching your videos I realised how much risk I am taking, definitely selling them off slowly across these few months and switch to VWRA
You are doing an awesome job with your UA-cam channel! Thanks for all the info you are sharing with us. I have a question - would you be interested in doing a video about Joel Greenblatt investing strategy?
Yup, you caught me: I hold a good chunk of RSUs that were issued my employer. Normally I liquidate as soon as they vest and reinvest in my CCP portfolio, but this last round I've decided to defer selling because our stock is depressed, plus there's a good cohort of bullish analysts. We have a tendency to rally before each earnings call so I'm holding off to see what happens. I recognize I'm timing the market, but although I said it's a "good chunk" it's really only 3-4% of my total portfolio so I'm affording myself a bit of gambling.
The problem with referring to the price as depressed is that you are anchored at some higher reference price. There is no way to determine what the price _should_ be, so it's not rational to anchor at a higher historical price.
I didn't mention this one in the video, but anchoring and adjustment is one of the toughest biases to overcome. We get anchored at an arbitrary price and then don't want to sell until it gets back there, even though it may never get back there and possibly never should have hit that price in the first place. Also gotta remember that analysts are notoriously bad at getting their recommendations right.
I always tell people with company stock to do whatever they will be comfortable with in a worst case (goes to $0) and a best case (goes 10x or whatever). Minimizing feelings of regret is arguably more important than acting rationally.
Fair enough -- which goes back to the hard problem of assessing your actual risk tolerance. In my case, I don't even track my RSUs as part of my portfolio, so if it vanishes to zero, although I'll be annoyed, it will have no bearing in my overall financial plan and retirement outlook.
Can't argue with that approach.
Hi Ben, great video, thanks for all the information.
I was wondering if you had any thoughts on stock picking services, mainly The Motley Fool, that seem to have a good track record of beating the S&P 500. Would you consider stocks recommended by such a service as potentially worthy additions to one's portfolio?
Hey, Ben! I'm in the process of binge watching all you videos, great stuff :)
I totally agree with you that speculating with individual stocks is irrational. As well as being biased to holding stock granted by your employer. But what to you think about going long on individual stocks, after a thorough research and due diligence? Like reading through annual reports, performing a DCF calculation and buying with a consistent safety margin?
I realized Buffet's method of investing was bogus when I started working through DCF calculations and after finding that all the stocks I tried were trading at multiples of the intrinsic values I calculated - I realized that I could make intrinsic value be anything I wanted simply by tweaking expected growth rate and the discount rate. Now, who am I to think I know better than the market what reasonable input values should be?
That's what professional active managers do. Since 90% of them don't beat the market in the long-term, you probably won't either.
Just want to say this has helped me a lot. Because of this knowledge, I sold my individual Dividend Growth stocks (at a good profit), and made a portfolio of 80% XAW + 20% XIC, I'll eventually add 10% bonds via ZAG. I'm still holding a few stocks that are down a bit, but I want to wait until they come back up before I sell (WCN, MRU, T, ATD.B, ENB). Unfortunately, 2 other stocks I'm holding are weed stocks and they're down 50% and 20% respectively. I think I'll just hold those to profit or to $0, either way, lesson learned. No more individual stocks, only ETF's.
That's great! I'm glad it was helpful.
I do own individual stocks mostly in REITS, Financial and Telecom 60% in my portfolio. The rest is diversified everywhere else but ive been looking into the "power" of ETF/Index diversification and will rather put my money there with good returns and almost no risk. So im in a transition to load my portfolio up with ETF/index. My bank offered me a 1.17% of agressive investing portfolio consisting of 45%SNP500, 30% emerging markets, 25%TSX/SNP but its 1.2% MER... which is high. I will have this split with ETF indexfunds to start and probably as i get older ill add bonds. Im not going to sell any of my stocks but since i just started in DIY investing. In the end ill be using Questrade and Wealthsimple roboadvisor and ETF's with lower than 0.5MER. Thank you! great video.
Thank you so much Ben for all your resources. I'm so glad I discover your channel as well as Plain Bagel. You guys don't sensationalize the finance industry. I've learned ALOT from all your videos. I binge watch them and are on my second round of going through them again. It's not easy to digest all the material because I'm a new investor but I'm learning so much. Legitly, your channel is anything but COMMON SENSE. Your topic is jammed pack with rational layout of data and you do deep into your interpretation of the research. Definitely not common sense. Common sense would be to go to the moon with my friend by buying bitcoins (especially when everybody around me is buying). :)
ETF = Retirement savings
Individual stock = Gambling but with (hopefully) better odds than literal loto-tickets.
Thanks to you I've been moving away from stocks. When I wanna ''gamble'' I yolo on options for tendies.
Wow. So you're telling me that these videos have played a role in your transition from stocks to index ETFs for your retirement savings?? That makes it all worthwhile.
@@BenFelixCSI I'm moving towards ZCN
(Canada) 25.5% VUN (USA) 28% ZDM (international)16% XEC (Emerging markets) 5% VSC (Can corp. bonds) 10% HYI (high yield bonds) 5% Other random stuff 10%.
I'm really not there yet, but I'm moving toward it. When I add money to my portfolio, I add it to the categorie I'm currently the most underweighted in.
@ZenoxDemin thanks. Very nice. May I ask why ZDM for International? I guess my question is really why hedged?
@@BenFelixCSI My portfolio is mostly plagiarized on "maximum growth portfolio lite" from the globe and mail. Fee is 0.23% it looks low enough. I like avoiding currency moving. But I don't own it yet and I am welcoming of other alternatives.
@@BenFelixCSI Same here
Isn't fundementals' validation (Q to Q) be enough to save you from a stock failing? If yes, wont that be aligned at least with the stock sector average?
Thanks Ben!
I laughed when you mentioned investor's unwillingness to sell a stock after the price has risen despite not wanting to buy more at the new price either. So true!
Personally if the company's fundamentals have also changed over time (e.g. no longer worth the high price by my metrics), I do sell. Past experience has taught me never to get attached to any stocks.
That's one of the reasons why I wouldn't buy Amazon or Tesla as individual stocks, only as part of a low-cost ETF. With PE ratios already running into 100s, they're already too expensive imo, no matter the expected future returns.
Hi Ben, I'm a great fan of your videos, been through a dozen already. Would you have commented on the legendary investors Peter Lynch before? Though I am a believer in passive management, but have found Lynch memos and books to be very insightful, more than what years of cfa classes have taught me. How would you view about his 13 years of outperformance? Also on his comments that even housewives can identify great stocks.
Secondly, according to AQR research, unlike other legends like buffet or gross. Lynchs alpha has been documented to be mostly unexplained by known factors, and that his style has been highly dynamic, ranging from size, and value.
Everything you say makes sense, and it's all things that I needed to hear! But, some people have to hold positions in individual stocks, right? Otherwise, what would be making up the index.
Well, index funds hold individual stocks. I think this video will answer your questions m.ua-cam.com/video/Wv0pJh8mFk0/v-deo.html
What do you think of sector investing? I have included health care ETF, FHLC in my portfolio. I'm religiously watching your videos. There is no UA-camr that backs up their arguments with academic research findings as you are doing. I'm shocked that there has been so much research done since 1975 when I studied the efficient market hypothesis. Many thanks.
Sector bets are uncompensated risk. Sector concentration is even a concern in things like value investing. We know that there's a premium for value stocks, but if you focus on valuation and ignore diversification you will likely end up with a sector portfolio. For example a deep value portfolio today might be mostly Canadian energy stocks. That uncompensated risk takes away from the expected value premium.
Ben Felix what do you mean with the uncompensated risk taking away the value premium?
@@arthurfeletti1870 Arthur, he means that this type of factor investing will result in higher risk but not higher return (or at least not enough higher return to justify the risk). In other words, there's a better way to get your returns. Yes, your car will still run fine on this gasoline that I will sell you for $500/gallon, but it's not going to go any faster or longer on my expensive gasoline. So, why pay the higher price for my fancy gasoline when the regular gas from the corner store will get you there for a much cheaper price? Or, what if I told you that my fancy gasoline was actually better than the regular gasoline? What if my fancy expensive gasoline increased your miles per gallon by 0.1 mpg? This would still be a bad deal for you. Indeed, we could say that my fancy expensive gasoline offered an "uncompensated" benefit (i.e. the high price doesn't justify the small benefits).
Can you do a video explaining what you think about investing or omitting certain business sectors from a portfolio? Do some have better intrinsic properties (eg defensive/cyclical) and are there any worth avoiding (I’ve heard airline stocks are particularly bad as their ROCE < WACC which lead to terrible results?
Excellent video, thank you. Really enjoying your channel
Thank you!
Tangentially related, but my take on owning the stock of your employer has always been that it is a bad idea, since your primary source of income is already dependent on the company, so tying your secondary income to the same company causes you to be doubly exposed. If you do hold an individual stock or a thematic basket of stocks, it should be something as far away from you as possible: different sectors, different region, possibly even different country.
Alright wise guy explain how my lifesavings is invested in Aerotyne international?
Good luck finding an index in australia that tracks consistently profitable high value small cap stocks. This is one reason for me to pick my stocks
Ben, excellent videos! You mentioned the underperformance of small cap stocks. In the working paper, Fact, Fiction and the Size effect, Ron Alqvist et al., show that although the size effect is statistically significant, when projected onto the CAPM, the effect does not generate a statistically significant alpha. Does this mean that it is not worth investing in globally diversified small cap etfs like iShares MSCI World small cap? You have a very nice video on factor investing where you do not recommend this for most people, but I'd be curious for those who insist, whether value would be a more meaningful tilt?
Gunnar, *great* question. I have already recorded a video on this exact topic which should be released early 2019.
I am familiar with the paper. On page 42, they explain the following:
_Other premia being stronger among small caps may be a rationale to want to overweight small cap stocks even if there is no size premium. For example, the value premium in small stocks may be so large that it justifies being overweight small stocks even though there is no stand-alone size effect. Of course, simply being overweight small is not nearly as profitable as being overweight small value. Hence, absent a pure standalone size effect, an investor is always better off being overweight certain kinds of small stocks (e.g., those with high value, momentum and quality) rather than generic small stocks._
They also had a preliminary and incomplete paper in 2015 titled Size Matters, if You Control Your Junk, where they conclude:
_Size matters - and, in a much bigger way than previously thought - but only when controlling for junk. We examine seven empirical challenges that have been hurled at the size effect - that it is weak overall, has not worked out of sample and varies significantly through time, only works for extremes, only works in January, only works for market-price based measures of size, is subsumed by illiquidity, and is weak internationally - and systematically dismantle each one by controlling for a firm’s quality. The previous evidence on the variability of the size effect is largely due to the volatile performance of small, low quality “junky” firms. Controlling for junk, a much stronger and more stable size premium emerges that is robust across time, including those periods where the size effect seems to fail; monotonic in size and not concentrated in the extremes; robust across months of the year; robust across non-market price based measures of size; not subsumed by illiquidity premia; and robust internationally._
Put simply, small caps as a whole are not compelling in the data. Their performance is negatively affected by small cap growth stocks with low profitability (or junk as AQR writes it). Controlling for relative price and profitability (or quality) makes small caps far more compelling.
My view on this is that unless you can get small cap exposure without being bogged down by small growth low profitability, it might not be worth the additional risk and cost.
@@BenFelixCSI, thank you for a very informative reply. Looks like I have some more reading to do. Looking forward to your forthcoming episode.
What would you think of an home-made ETF ? This is what I do : I hold 40 microcap stocks both value and momentum in a rules-based manner. This counts for 40% of my portfolio, I have traditional ETFs alongside. Is it still irrational ? Thanks
I wholeheartedly agree with Ben and the research about holding individual stocks. At the same time, I hold a large position in American Battery Technology Company (ABML) and years ago sold a portion of this large position and made life changing money. I do realize that this windfall was largely (almost exclusively) due to luck. All of these statements can be true and they aren't mutually exclusive.
excellent video as usual Ben !! Thank you so much for all the effort .
I'm investing in 100% ccp but i was leaning toward adding couple of blue chip Canadian stocks to my portfolio like FTS or ENB and T or any of the 6 Banks or some Dividend Etfs like XEI or ZWB .
so do you think adding a portion of these stocks won't benefit my portfolio ?
Thanks in advance and Have a Merry Christmas !
Hi Gus, there is no rational reason to add in individual stocks or dividend-focused ETFs to a CCP portfolio. Individual stocks are too random to rely on for a positive long-term outcome, regardless of the company.
Dividends are not a way to find stocks that will produce a more reliable long-term outcome. There are a handful of established factors that explain differences in stock returns: company size, relative price, and profitability. Dividends are not one of these factors. If you sort the market by dividend paying vs. not dividend paying stocks you should not expect a better outcome for the dividend payers.
Other than following the CCP model portfolios, the only thing that you can do to increase the statistical reliability of your long-term outcome is adding in exposure to the factors that do explain returns. That might look like adding in some small cap and value exposure. Be careful adding in small cap though - I have a video coming up explaining why.
The issue that you want to avoid is adding complexity to the point that your portfolio becomes hard to manage.
I think investing in stocks like Fairfax and Berkshire Hathaway (B) is a better way to save on fees and reduce risk. Thanks for the video
In my country (Sweden) you are actually able to deduct 100% of the withholdning tax on individual foreign stocks that you own. Funds/ETF:s don't have that option and has to pay minimum 15% tax on the dividend of foreign stocks. This is why I hold individual stocks, higher expected returns after tax :)
You can avoid that by owning distributing ETFs domiciled in a country where ETFs are considered fiscally transparent. I think US treats Luxembourg SICAVs as fiscally transparent and withholds 30% tax on dividends which you can probably deduct from your Swedish taxes.
If you file US tax returns you can also claim a refund on the taxes withheld since Sweden has a lower treaty withholding rate.
Hi Ben, do you mind commenting on what impact the size of a portfolio has?. Is there a point at which stock picking becomes justifiable?
I agree that stock picking is almost akin to gambling, but if I accept the possibility of a huge loss in favour of a massive gain, would that still be rational?
Hi Ben, Not sure that this is the best place for this as it mostly grew out of your Globe and Mail article on dividend stocks (April 2019), but I thought this was more of an ongoing forum / project. Do you have any sense (better yet, data) on how sub-optimal a dividend focused approach is likely to be? Set aside the global market and revel in home bias, how much of a drag are you putting on your outcome by selecting 20 (or even 40) solid dividend payers, as opposed to buying the whole Canadian market? Lars Osberg, a great economics prof at Dal, used to say that mirco-economics will tell you that all sorts of triangles exist, only empirical work will tell you whether they're big enough to matter. Is it perhaps fair to say that a diversified dividend portfolio is probably pretty good, but sub-optimal?
Legitimately have been considering Cannabis companies over the past week and lo and behold in the first 60 seconds of the video you bring up the nature of it being irrational to do. I think I will inevitably just set aside a small nest of money to inevitably burn to scratch this irrational itch.
I think a lot of people end up doing this. As long as it's deliberate and controlled, and doesn't affect your ability to meet your goals, I see no problem.
tbh i only started investing in shares recently, but i feel like there are a few parts here,
i see the stock market as a couple of different things,
the first is to build up wealth/passive income for later in life / retirement, and with this as the only goal i would completely agree that individual stocks arent worth the risk
the second is as system to try and beat, and while expected returns might not be better than the index funds, they much are better than horses or the lottery, and likely comparable to poker
Great video as per! Have you ever released a video where you discuss a method of index fund investing that’s considered to be the best? There’s so many to choose from across the globe, it can be hard to settle on a selection.
And also it would be interesting to hear your thoughts on the ‘Magic Formula’ from ‘The Little Book That Beats The Market’ if you are familiar with that.
I touched on a lot of what you are asking about in my most recent video. The magic formula is really just factor investing.
ua-cam.com/video/jKWbW7Wgm0w/v-deo.html
@@BenFelixCSI thanks Ben!
Great vid!
If you just suggest index investing what do you actually do managing portfolios?
My guess is that they help with choosing an asset allocation that is appropriate for the client. Even if the client plans to hold one equity fund and one bond fund, there's still the question of how much to allocate to each fund. Also they can help with discipline, helping people stick to their plans in the middle of a crash or a bubble.
@@jimmyhirr5773 Yup makes sense.
Invest in company stock if your company matches, but only up to the match, then sell as soon as the waiting period is up (usually two years and then you can sell that stock and still keep the match).
I held $300k (after tax) in tech company RSUs from my time working there. I was planning to immediately sell after the IPO lockup expiration but was tempted by little increases in the price here and there, so I waited. (I had zero working knowledge of financial planning even a few months ago.)
Let’s just say that a few months and -40% total portfolio value later, I learned an expensive lesson about what I assumed would be epic stock growth by a concentration position in my former employer. Now, I’m in the process of fully diversifying my holdings in Vanguard ETFs and retirement accounts, with all my cash sitting in a 2.15% APY checking account.
2020 is looking like another big tech IPO will happen, and this time, I’m not going to make the same mistake with my RSUs...
Omg, ouch. Are you waiting for an ipo opportunity in 2020 or do you see a market crash coming like a lot of forecasters
Alright you win! I’ll just buy VTHR (Vanguard Russell 3000). I’m going to miss picking stocks though. Great videos.
Why buy Russell 3000 instead of VTI (total stock market index)? They both cover nearly the entire US stock market, while VTI provides slightly more coverage. VTI's cost is lower. I don't see the reason to invest in VTHR at all.
You can still gamble, just limit it to 5%
Hi Ben, thanks for all the great videos on your channel. Putting a few things together, I'm interested on your thoughts on allocating part (or all) of a portfolio to a basket of small cap value stocks from around the world, if you have the time/knowledge to set it up and manage, and you have the capital to make it worthwhile? The reasons I'm not ruling out you thinking it's a reasonable idea despite this video are as follows:
1) Small cap value has a great expected premium over the market.
2) You say that it's extremely difficult to find ETFs that give good exposure to small cap value, other than perhaps in the US (not sure that I can even manage that cost effectively from the UK).
3) While you take on some uncompensated risk by losing diversification in terms of the number of stocks you are exposed to, you gain diversification over a US small cap value ETF in terms of being able to diversify across different countries. I believe that you can also still get the bulk of the benefits of diversification with a portfolio of 30-50 stocks? Perhaps any overall loss of diversification is more than made up for by gaining access to the small cap value premium in a way that you can't through ETFs?
4) You have quoted a study saying that much of Buffett's returns can be put down to having exposure to factors. It would seem contradictory to claim that his returns can be explained by factor exposure from picking the right stocks while also claiming that you can't get good exposure to factors by buying stocks. I get that it's possible to claim that he might have been lucky with the extent of his excess returns and that he might have taken on higher risk to get those returns, but it sounds like it must be possible to increase expected returns (albeit with higher risk) by picking a portfolio of stocks based on factors?
I don't know whether it's just that you only hear from the lucky ones, but there appears to be plenty of value investors out there who consistently get market beating returns as a small private investor, with their focus being on small cap value stocks. Perhaps this is actually a solid approach to investing if you have the time and temperament, gaining good exposure to size and value factors while also potentially occasionally finding a market inefficiency in very small companies that aren't comprehensively studied? I know this approach wouldn't be suitable for most people but it's something I'm considering so I'll appreciate any honest thoughts you have :) thanks again for the great content!
Most corporate bankruptcies are small cap stocks. The 50 security rule of thumb for small cap stocks might not make sense. The reliability of the outcome decreases as you decrease diversification. Trading costs (commissions + spreads) to build a sufficiently diversified small cap portfolio might be prohibitive. There is no evidence that active managers are able to be more successful in small cap stocks. The conclusion of the paper on Buffett is that his success did not come from stock picking skill, but from gaining exposure to factors *which can be accessed systematically.* In other words a rules-based diversified portfolio could re-create his results. You could follow similar rules to build a small cap portfolio (small value stocks with robust profitability and low volatility, levered up 1.6x) but the implementation costs would still be an issue.
@@BenFelixCSI Thanks. Although if I understand you right, you're suggesting that costs likely mean that the factors that Buffett exposed himself to cannot be accessed systematically with a diversified portfolio. I'm not on the attack at all, I love your videos and am just trying to get a complete understanding of everything, but I guess the core question I'm getting at is "Do you think that you personally could get expected returns like Buffett's (in the real world after costs) by investing in a diversified portfolio with factor exposure and using the same amount of leverage as him?" From what you've said above it seems like the answer should be yes, but your videos tend to end up recommending just getting exposure to the market factor because it's too hard to get exposure to others with positive expectation after costs. Your model portfolio in your "Factor Investing with ETFs" paper also has relatively low exposure to factors and I assume you don't expect performance similar to Buffett's from it. Is this just a case of accepting lower expected returns to manage risk?
If the answer is indeed yes, may I suggest a video at some point explaining how to practically achieve Buffett like expected returns with the ETFs that are currently available? Personally I wouldn't be comfortable taking on that amount of leverage but I'd still find the video very interesting and I imagine many others would too. I expect you could take a lot from it, even if you're not planning to attempt to implement it. Thanks again.
Hi Ben - what are your thoughts on using Greenblatt's Magic Formula strategy to pick stocks? Appears to be a highly researched and successful strategy (essentially choosing Quality and Value - high ROIC, High Earnings Yield). Would love to hear your thoughts.
Honest question: What about holding some stocks short term when there is a very high chance of the stock's value going up. Eg After Apple announced that they will make their own CPU, everyone expected TSMC's (their chip manufacturer) stock to go up and it did. Or after the announcement was made that Tesla will be added in the S&P 500. What would you say to someone who buys Tesla stock at the moment of the announcement and sold it as soon as it was actually added to S&P 500 ?
Hi, i really like your videos and the amount of analysis you put into them. Not sure if you have already done something like this but wanted to see your ideas on the following two topics:
1) How accurately technical analysis predict and are they really practical on their own.
2) How to prepare for CFA exam, which resources did you used and helpful tips from your personal experience
Benjamin Graham said that in the short-run, the market is a voting machine, and in the long-run, a weighing machine. So, value investing is trying to benefit from a situation, in which a company is wrongly voted out in the short-term, because, hopefully, sooner or later, the actions of that company should speak louder than words, and it will be voted in again. But this requires knowledge, research and, above all, a rational temperament.
But one thing to bear in mind is, most professional active investors are under tremendous pressure to show short-term results (quarterly, annually etc.). This pressure make them lose the power of patience, which I think is very important for a real value investor. That's why, in my opinion, most active managers underperform. They don't have the liberty to stay still, when opportunities don't present themselves.
So, perhaps the findings of the studies that you're referring to are not accurate at describing individual value investors, because quiet individual value investors are free from the pressure of having to outperform quarterly, annually etc.
I share this video with all my stock-picking friends. 👍🏻
Only thing that doesn't feel right is how to reconcile the fact that "the past is not a prediction of the future" with all the historical data based papers and scientific researches mentioned
It’s past RETURNS that are not a predictor of future RETURNS... Some factors (size, leverage...) are actually a good predictor of future returns.
@lalaurentiu375
lol good point - didn't think about that
"Schooled" aha; investing is impossible unless your doing it as a day job. Even buffett cant beat snp500. I think the answer is just all investing is good investing. And to not sell your stocks/ trade your stocks. ETF are the best option as well for very lowe risk and high return. :)
@@bakdjkafgs Buffet has, and frequently does beat the S&P 500 market return
The past returns of an *individual* stock are a poor predictor of the future returns of that *individual* stock. When we’re talking about the distribution of all stock returns as a whole, though, past data is the best available predictor of the future distribution of all stock returns.
It´s really tempting to make short term positions in these times as i see them go up and down 20% in just couple days, and it really does feel like i know which stocks have potential for this... Seem like some easy money by having a stop loss / and sell off if it jumps one day as it probably will, i had a position where i could have made a lot but i did not sell. I have two companies i follow that gives me an itch to invest short term but im fighting it by watching your videos ! It feel´s like you are reffering to long term holding here but im more interested in short term profit and then go back to index passive, And use this as an opportunity as it is so volatile.. But truth be told i probably just want to be able to make back the money i "lost" by not selling at 5k+ down to 300 usd+ It was a bad decision and irresponsible as i went all in i know that. The brain really looking for loopholes, FOMO, confirmation bias , anchoring etc... Powerful stuff. Thanks for your work it´s really important
The question that we all need the answer for is to what extent a stock price reflects the expected future performance (earnings) of a company and to what extent it is „too random“ due to the fact that not all market participants buy or sell based on the future expected earnings of a company. In an ideal world everyone would buy or sell rationally and thus stock prices would purely reflect or at least very close to purely reflect the future performance of the underlying company. I would love to hear someone’s opinion on this. And assuming we may never be able to quantify the stock price‘s composition of „irrational buying and selling“ and „a company‘s expected future cash flows“ does it even make sense to pick individual stocks based on the expected future cash flows of the underlying company and beta hedge at the same time (seeking purely alpha or company specific risk). Or…should one be better off investing in an index fund comprised of several companies so on the one hand price movements due to irrational buying and selling are dampened, while price movements due to expected future cash flows may weaken each other as well 🤷🏾♂️??
Hi Ben
I'm a firm believer in index fund investing, and totally agree with the comparison you made about not continuing to own a stock that you would not currently buy, but I currently have shares in an individual company which if sold would trigger huge capital gains and the associated tax. Though I would never buy this stock now, I can't bring myself to trigger the CGT.
What are your thoughts about this for those that discovered index investing after already owning a basket of individual stocks that now have embedded capital gains?
Even if 100% of your position is a capital gain, the most that you will pay is 27% in tax. Keep in mind that this is not a loss, it is tax that you would need to pay eventually. You are only losing on the deferral. The loss of deferral is 27% minus the present value of the future tax liability. Whatever that is, it will end up being less than 27%. Say it's 15% that you are giving up by paying the tax early. 15% relative to the potential volatility of an individual stock is pretty low. In reality 100% of the position is not going to be a capital gain, so your total loss from the loss of deferral relative to the whole position will be even smaller. Say you have a 100% capital gain (100 cost base and 200 price), then the 15% ends up being more like 7.5% on the total position, further strengthening the argument to sell. I think that it would be sensible to trigger the gain, maybe over a couple of years depending on your marginal tax rate and available loss carry forward.
Hi there love the show. I only invest into my employer stocks because they match my 6% income i invest by 2%. Still to risky what's your thoughts. I just starting dyi investing and had 50 dollers free trades so I bought 10 different stock all in different sectors in the tsx. Now I'm only investing in canadian etfs in my tfsa, and the VGRO in my rrsp. What's your thoughts on my strategy.!?!?!
What if you really like the stock though?
If you like the stock everything changes. Evidence goes out the window.
lmao
In the words of Peter Lynch, "A stock does not know you own it."
Thenks to you and your videos, I do not hold individual stocks any more
You should do a video about problems with ETFs. For example, the manufactured p/e ratio, the inclusion of certain stocks in an index just because they provide certain liquidity and so on. ETFs are not a gift sent from heaven.
Is it possible to overcome systematic risk with an all weather portfolio (i.e. with proper allocation)?
Example I was think of was the Ray Dalio All Weather approach?
30% VTI - Total Stock Market
40% TLT - iShares 20+ Year Treasury Long term Bond
15% IEI - iShares 3 - 7 Year Treasury Intermediate term Bond
7.5% GLD - SPDR Gold Trust (commodity Gold)
7.5% GSG - iShares S&P (Commodity Broad Diversified)
What's your recommendation for stocks allotted to you by your company?
So I assume the alternative is index funds and ETFs? Many thanks from the US! :)
Great video as always Ben, thanks for the great info.
Just for the record, I have been a huge believer of index investing ever since I encountered this idea years ago, but as I am now working in a healthcare company that is expecting huge quarterly earnings (potentially doubled from previous quarter), everyone around me in the office is buying its stocks with all their life savings and some are even on margin. Looking at their strong confidence to reap huge profits when financial results are released is making me start to doubt if my choice of not participating in this buying party is a good move. Any thoughts on this? FYI as of the point of writing, my company's stock is trading at P/E 100x.
so what was the outcome?
@@seeyditti As of to date, the company's share price fell close to 90% since the day I posted my comment...I'm so glad that I've listened to Ben's advice all the time ❤️
@@jasonpang3110 Great that you dodged a bullet. I will say that there are very few investors who would recommend buying any company at a valuation of 100 P/E.
In italy etfs gains cannot be used to compensate their minus. A small percentage of stocks helps for this.
Ben, I understand the academic literature points to low cost, diversified index funds as the most efficient way to structure a portfolio, but what do you say to people who want to achieve a net worth that requires more than the standard 7-10% of index funds? What are the best options beside investing/gambling (depending on how you look at it) in single stocks? Aren't the odds better than, say, a lottery ticket? Thanks.
You open a business, or move to a higher-paying career. If there was an investment that could _consistently_ give you better returns than the market, everybody would be on it.
I try to diversify by purchasing individual stocks in different industries and different categories of stock. My goal is not to beat the price index, but rather beat what the bank would give me and I've been fairly successful at it.
Pascal Moisan why not just buy index funds? They literally track the market and give roughly the same return as the index.
I told my friends many times that any Canadian buy any Canadian bank stock at any price at any time, hold it for long term and reinvest dividend, he or she will become a millionaire, this strategy worked for the past 100 years.
Just want to give a real example for people to think about.
That's terrible advice, in my opinion. Looking at a handful of stocks that we know ex post have had great returns and assuming that it will continue is not a sustainable investment strategy.
@@BenFelixCSI- Yes, it is terrible, but it worked for the past 100 years in Canada. This is just a real example for some people to think about.
“Most people would sooner die than think; in fact, they do so.”－Bertrand Russell，it is true that none of my friend can understand my advice.
@@valueinvestingcanada4259 a real guru!
Thanks Ben,
One point is still not clear to me. So why most of the institutional ,mutual fund.....picking individual stocks? clearly most of there money still goes to individual stocks and not indexing. if the odds of picking stock is so bad they should put large percent of the portfolio indexed and only with small sum try picking the best risk/return few stocks they find to try beat the market ,so they can justify there fees.
I don't think that argument makes sense rationally. Either you believe that picking stocks give you a net positive, or you believe it is net negative, or zero If you do think it is positive, your strategy should be to invest all your money in picking stocks. If you don't, all your money should be indexed. The reason to do a split is to 'pseudoindex', ie make your fund not deviate too far from the index so that you don't lose investors during bad times.
Ive had about 1/2 my portfolio in individual stocks. Im going to change that to less than 5 after watching this. I do wonder if this accounted for dividends?
I read the research paper you mentioned on lifetime holdings vs t-bills.
For this point to be a practically applicable (i.e. necessitating that investors should hold mutual funds, closed end funds or ETFs) wouldn't it require an investing strategy of buy & never sell?
If I don't hold my investment forever (I'm far from being a day trader), doesn't the argument become less relevant?
If you don’t hold forever and do better than the market then you’re right the data don’t apply. But the reality of security selection is that there is no way to consistently time trades. The main point of the paper in the massive skew. A few big winners drive the overall outcome.
I still irrationally own some individual stocks because it is more fun but got 80% of my money in index funds since you're pretty convincing
the laugh at 10:27 is the cherry on the top of the cake
Like other comments mentioned, holding individual stocks is not considered as the long-term investment. It's more treated as the money for gambling and entertainment purpose. But many people bet majority investment portfolio on individual stock which is definitely not a good idea.
I'm an Indian Investor. Sold all my shares. Moved to an Indian index.
Thanks...🙏
Several good ideas for put and bear spreads selling!
Haha
Are LICs okay?
Great content. Thanks
I feel like Ben Felix is missing an obvious point of owning company stocks--you typically get huge discounts, sometimes 25% or more, and sometimes the purchases are calculated with pre-tax income. In other words, its free money, which he has completely left out of the analysis when he dismisses larger allocation of company stock being more successful as merely past returns that cannot be extrapolated to the future. Free money is not some "unquantifiable past return" variable.
He does not. He is always speaking of probabilities, that is a different kind of thinking and it is not intuitive.
What about literal prospective investing? I bought BBM.CN which is essentially a penny stock using $4000 in a TFSA that I can afford to lose. I am not looking to win the lottery but thinking of them as a target of acquisition by a larger fish driving their stock value up at some point. The tide floats all boats must work in some industries?
Side question: Thoughts on silver...
Speculation in a TFSA can be extremely damning to your long term finacial goals. Losing big on that stock will mean you lose that TFSA contribution room.
Please watch Ben's video on the subject
Ben, I'm not sure what to think since I trust you but I made a killing for over a year now by picking stocks. I look at what the companies are doing, the stock price is secondary. So, if a company is doing better than the market seems to be pricing it at, specially comparing to others in the sector, I buy it. By now I'm right 17 out of 17 times... Most notably 3 gave me 3 digits returns in a few months and I tripled my whole portfolio in about 8 months...
That with the fundamentals to go against market panic seems to be a safe longterm bet for me. I would like to know what you think about it since I'm your fan. The last few weeks I've put my toe in the water for currency exchanges because I saw an oportunity (some currencies falling too fast due to panic) and I already made significant returns...
I'm either a natural or extremely lucky to be so consistent with it until now.
The elephant in the room might be that coronavirus was a big contributor to my success, since emergent markets fell WAAAAAY too much when it hit, it was ridiculous, the market moved as if the world was ending and I just bought at a big discount.
To summarize my strategy is to evaluate companies real prospects and growth capacity and buy them if they're undervalued compared to the sector. I consider the market to be constantly too pessimistic or too optimistic, so I usually go against it. Finally, I diversify when the opportunity presents itself, I don't try to predict when sector A will fall by 40%, but when it does (and there seems to always be something like this happening somewhere) I do some research and go into it.
That can happen. It’s unlikely to keep happening. Try this video ua-cam.com/video/I8gH5bR3clg/v-deo.html
I'm all indexed, except for one stock - BRK. It's currently 4% of my portfolio and I plan to never let it get above 5%, so is really my play money. I bought a few shares originally because I wanted to go to the BRK shareholders meeting, but then kept on buying every quarter. I tend to think of it as a way of tricking myself into having a higher equity allocation as it is separate from my portfolio. I view BRK as a zero cost private equity and large cap value/profitability/low vol actively managed fund run by the world's best investor who has succession well thought out. Is that still irrational?😀
I think that you're thinking about that as rationally as possible. I agree with the type of exposure that BRK results in. It was the way to access factors before factors were a thing.
I realise this is an old video. I'm planning on taking a small position on ramsdens holdings. It's a pawn brokers, loan shop and currency business. If it ranks I can absorbed it. I studied these stocks and they seem to move with the price of gold. I have a entry price and exit price in mind. If I make a profit I will put it into index funds. Its pe ratio is 11 all research indicates it's a buy. I calculated all my costs and have a time frame. I will let you know how it works out. The reality vs my prediction. I noticed how powerful curiosity, impulse, fomo. Can really skew rational clear headed steps forward.
I think there is one important point t I wont hold the stock long this is just a short term opportunity. Index fund are what I would.hold onto.
Thanks for the video! To confirm my understanding - so the main point here - once you have individual stocks and the stock price is that you rather not buy more - it is probably a time to sell yours?
I’d say the main point is not to pick stocks and instead invest in broadly diversified low fee index funds.
@@739jep Exactly.
Endowment Effect. If I bought a stock that I would not buy at its current price, I should sell it. Then why ever hold any stock unless you are constantly buying it? For example, Buffet owns Am Express stock and hasn't bought any in years. Shouldn't he sell? The dividend yield is miniscule (1.2% at current pricing) What about the endowment effect in index funds? I own S&P 500 index thru Schwab but I won't buy now because I believe it's overvalued. Shouldn't I sell it if I wouldn't buy it at its current price, i.e choose the cash instead? OMG this video gave me a headache.
Good content.
Hi Ben - I enjoyed this video. I know you are clearly against investing in individual stocks. What is your opinion of purchasing stock of all the companies in an index. For example, if you own the DOW 30 stocks or the DOW transports or utilities, have you still not diversified non-systematic risk away?
I wouldn’t call the DOW 30 a diversified index, so replicating it would not be any different. If you replicate the CRSP 1-10 you’re good to go, but that would take a bit of coin to accomplish.
Thanks for your thoughts on that. The data I have shows the DOW 30 actually outperformed the S&P 500 on an annualized basis (including dividend reinvestment) from December 1896 to September 2019. I know that doesn't prove it's a diversified index, but does it say something about the quality of the companies in the index? Could a viable strategy be imitating the DOW 30 - when it changes you sell the stock and buy the new stock. Also, with the advent of no brokerage fee investing, it seems like it would be possible to replicate the CRSP 1-10 without excessive cost. I know there are OTC fees too but still seems more feasible today. Where can I find a full list of the businesses that make up the CRSP 1-10?
Patrick, why would you want to replicate an index yourself if you can buy index funds or etf’s with expense ratios of just a few basis points?
@@Pieter2360 There are some tax advantages to holding the individual stocks of an index, since you have more control over when you buy and sell. Also there is risk you take with individual brokerages when you buy ETFs. I'm not advocating this to save on the expense ratios, it's more a tax advantage and a comfort level.
Awesome content !
Thanks!
yes i started by teaching my daughter how to buy individual stocks but now its different
I understand that index funds reduce risk but shouldn’t at least a partial allocation to individual stocks have an overall positive effect on your portfolio? My thinking is that much of the market is short term focused (money managers and hedge funds etc.) and therefore can’t afford to properly value growth stocks, especially during market downturns. So, if there are specific companies that I have high conviction in then it is certainly possible and sometimes likely that I am buying the stock at an undervalued price. Obviously, that conviction cannot apply across an entire index. So, by this logic, if one identifies specific undervalued/growth companies with long term potential then those companies can help one’s portfolio consistently beat the market.
Thanks for the amazing videos! Would love to hear your thoughts.
Using small cap value funds to tilt your portfolio is a more systematic approach to target potentially under-valued companies.
Haha awesome! I own one single individual stock: one share in Tesla. And it’s just because of the collector’s value of it to me, not because I think it’s a good share to own. People have a hard time understanding the nature of randomness. Just look at all the people in casinos who think they can get an edge.