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I disagree with the statement that you should not buy individual stocks because others know more than you. This is only true if you buy stocks for companies out

by marme 11y ago

I disagree with the statement that you should not buy individual stocks because others know more than you. This is only true if you buy stocks for companies outside of your area of expertise. If you work in tech you know more than the average wall street trader about tech companies especially the one you work at. If you work in medicine you know which medical insures are shit and which are great, etc. Now this does not mean you should buy multiple stocks all in one sector but it does mean if you know a company well and you know they are doing great and will be doing great in the next year you should buy their stock. You should never have more than 20% of your portfolio in a single sector but it is perfectly safe to have 80% of your portfolio in vanguard funds and 20% you invest in one or two companies you truly believe in.

orky56 11y ago
A stock's current price already reflects all public available information including its future value. You're assuming that "the average wall street trader" knows less thus causing the stock's price to not be accurate. Would love to hear a counter argument to that.
- sliverstorm 11y ago
  The assumption is that the average wall street trader has the information in hand but doesn't understand its significance.
- elihu 11y ago
  A stock may be priced accurately by the market according to a typical risk profile, but an individual investor may have a higher-than-average tolerance for risk.
pbreit 11y ago
99% of people should not buy individual stocks. If you're in the 1%, good for you. Having subject matter expertise can be dangerously misleading because company stock trades on financial performance, not product/technology/etc. This is a perfect example of fighting the urge to listen to folks like you and instead, just go with the index card.
- charlesdm 11y ago
  If you understand what the catalysts of a stock are (both long term and short term), buying individual stocks isn't a bad idea. And it's still possible to beat the market. But yes, most of your money should be invested in low fee index funds. As an example: a few years back, I owned some yelp stock. At the time, it was a growth stock driven by usage numbers. The quarter before, iOS6 (or 7? cant't remember) was launched, which included yelp support in every iPhone. A few days before yelp's quarterly earnings, Apple announced they sold 15% more iPhones than expected. Guess what? Yelp's numbers for the quarter were up significantly. I made 20% on my money the next day (and sold my shares). If I didn't have subject matter expertise, I might not have seen that.
  - pbreit 11y ago
    99.9% of people should not be doing that.
    - sokoloff 11y ago
      And that advice applies most fervently to the set of people who think they ought to be doing it...
ergothus 11y ago
You might know the tech better, but do you know what people will buy? That management will take care of the tech well? That they've hired the right accountants and lawyers to deal with financial and legal issues? I don't think people as a whole should avoid buying individual stocks...but I think it's probably a good rule of thumb for people. Sort of "don't buy individual stocks unless you actually know what you're doing. And 50% of you that think you do are wrong."
CyberDildonics 11y ago
This is very misguided. You might know that razer makes absolutely terrible products (and they do) but do you know their financials? Do you know their distribution and their profit margins? You can buy their shitty equipment all over the world.
superuser2 11y ago
>if you know a company well and you know they are doing great and will be doing great in the next year you should buy their stock This is a truthy-sounding and extremely common belief about the stock market, but false. Buying stock is not a bet that the company will do well, it's a bet that the company will do better than other market participants currently think it will.
egd 11y ago
> If you work in tech you know more than the average wall street trader about tech companies especially the one you work at. I have never met a group of people less able to correctly assess a firm's proper value or more capable of self-delusion than the engineers working for that firm.
- johnward 11y ago
  On top of that you have enough exposure to that company's risk by working for them.
mikestew 11y ago
If you work in tech you know more than the average wall street trader about tech companies especially the one you work at. If you work there, it means you're likely to have blind spots about what actually drives the stock price. Hint: it ain't necessarily the tech. Personal example: AAPL. I make most of my money these days working on Apple tech. The fact that I've made possibly a majority of my retirement money off AAPL has nothing to do with my knowledge of their tech. It has more to do with watching what makes it go up, what makes it go down, and a raft of other factors that have little to do with the technology. Let's take a look at some of their tech that drove the price up. iPod: no wireless, less space than a Nomad, lame. Oh, we laugh now, but Cmdr Taco had a solid point. iPad: just a big iPod touch. I said the same thing until FedEx dropped it off. New iPhone comes out, people stand in line for hours or days, Apple can't keep up with demand. Stock price goes down. Less on the technical side, Apple crushes earnings; stock goes down (whisper numbers and all that). A sibling comment said 99% of people shouldn't own individual stocks, a sentiment I agree with despite holding a majority of our money in individual stocks. Sometimes folks are too smart for their own good, and they even if they work at the company they ignore what really drives the price because of an intimate knowledge of irrelevant pieces, thinking knowledge of those irrelevant pieces gives them a leg up ("<I> know more than the average Wall Street trader." Not about trading stocks, you don't.) (So why do I own so many individual stocks? Because I'm a special snowflake? No, because I'm an idiot who thinks previous success means I know what I'm doing. I really should start diverting to index funds.)
- icebraining 11y ago
  I always thought people misjudged CmdrTaco's comment, particularly here in HN, where everyone seems to think they're professional analysts. He was giving his personal opinion, not predicting the response of the market. And his comment aside, I have to say the general mood of that /. thread was actually pretty positive towards the iPod: http://slashdot.org/story/01/10/23/1816257/apple-releases-ipod http://slashdot.org/story/01/10/23/1816257/apple-releases-ip...
sliverstorm 11y ago
The big problem with investing in your sector is too much specialization. I realized one day that investing large sums of money in my employer's stock is essentially putting all my eggs in one basket- both my investments & my paycheck depend on the same company. I extend that to my market sector, too. I avoid investing in my market sector now.
Blackthorn 11y ago
> If you work in tech you know more than the average wall street trader about tech companies especially the one you work at. Whoa, be careful with the one you work at. There are often insider trading rules governing when and how you can buy/sell shares of your own company and derivatives involving them.
- KMag 11y ago
  In addition to the legal considerations, note that if your employer goes through layoffs, your investment is likely to tank right at the moment you need it most. You're already have natural long exposure to your employer's performance. Be aware that investing in your employer is a doubling-down on their performance. You also likely have some emotional investment in your career, which likely biases your judgement. On the other hand, you may have industry insight that the market simply doesn't have. While working for Google, shortly after Google announced Android, I wasn't sure if HTC, Apple, or some third manufacturer was going to become dominant in the smartphone market, but I was sure Intel was going to be playing catch-up in the mobile space for at least 5 years and smartphones were going to eat the world. I also knew the huge amounts of money per year that my employer was spending on datacenter electricity and saw that for many server workloads, watts/SPECINT and watts/flop aren't terribly important. The CPU largely (oversimplification) configures DMA between the disk controller and the network card, and there was a window of opportunity for ARM to get significant market share in the server space. This was before HP or Dell announced any of their ARM server projects or I had heard of Calxeda. The server thing didn't work out for ARM, but my investment in ARM Holdings still went up over 8x over 5 years or so. I no longer think I have any more insight than the market into ARM Holdings's share price, but I was able to profit from insight I had at the time that the average trader did not.
- edanm 11y ago
  Not sure, but I think those rules generally exempt (non-executive) employees, so generally speaking it's not a problem.
  - Blackthorn 11y ago
    Non-executive employees are absolutely not exempt.
Gnolfo 11y ago
You can't reliably beat the market. People who say they can are saying so out of some combination of: 1) lying (to others and/or themselves as well) 2) cheating (insider trading, boiler rooms, etc) 3) drawing conclusions from too small of a sample size Also I also disagree with the statement to not buy individual stocks because others know more than you. It might be true even, it doesn't matter, because it's not the reasons not to buy individual stocks for retirement. You don't buy individual stocks for retirement because your risk exposure is a lot higher compared to indexes and just riding the market (x10 for every dollar spent like this before taking maximum advantage of tax deferred retirement options). If you have enough money that you are able and willing to lose some % of it for the chance of better gains, then buy individual stocks with that money (or play in derivatives if you're into stronger risk-seeking behavior). If you are trying to avoid living off of cat food in your winter years, it is far smarter to surrender the marginal chance for larger gains for a very highly likely chance at modest gains. If you don't have a retirement planned out, then every dollar you get towards it needs to be spent with the retirement goal in mind, and for that goal, the risk profile of individual stocks, historically, is prohibitively high.
yellowstuff 11y ago
I work at a hedge fund. The people who evaluate companies aren't traders, they're called analysts. A lot of them have MBAs from highly ranked programs, but aside from that they have fairly diverse backgrounds. One of the guys who works with health care companies is an MD. One of the guys who works with tech companies was a VC. They have almost limitless resources for research, meaning that they read a lot of third party analysis. They meet with company management. They talk to people at other funds and exchange ideas. We also have a team that does proprietary quantitative analysis to supplement the fundamental process. And of course analyzing companies is a (more than) full time job for the analysts. Hedge funds struggle to outperform the market. The vast majority of amateur traders underperform it by a lot.
edanm 11y ago
This is very, very wrong. The technology is not what drives the stock price of a company. What does drive it? It takes years of studying finance to learn. Your statement is akin to a trader telling another trader that, since they specialize in studying Apple, they could probably be great at being iOS app developers. "[...] if you know a company well and you know they are doing great and will be doing great in the next year you should buy their stock" This is an example of a very common fallacy. Even if I tell you that e.g. Apple will be doing great as a company in the next 5 years, that's not a reason to buy their stock. The reason would be if I tell you that their stock is undervalued! This is one of the first rules you learn in finance - if I can guarantee a future payout stream (e.g. $1000 in 1 year, $2000 in 2, $1500 in 3, $4000 in 4...), I can calculate how much that payout stream is worth now. This is what a companies' stock essentially is - a promise of a future payout stream. So if the stock is trading higher than that stream is worth, then the stock is not a good investment.

by marme 11y ago

orky56 11y ago

A stock's current price already reflects all public available information including its future value. You're assuming that "the average wall street trader" knows less thus causing the stock's price to not be accurate. Would love to hear a counter argument to that.

sliverstorm 11y ago
The assumption is that the average wall street trader has the information in hand but doesn't understand its significance.
elihu 11y ago
A stock may be priced accurately by the market according to a typical risk profile, but an individual investor may have a higher-than-average tolerance for risk.

pbreit 11y ago

99% of people should not buy individual stocks. If you're in the 1%, good for you. Having subject matter expertise can be dangerously misleading because company stock trades on financial performance, not product/technology/etc. This is a perfect example of fighting the urge to listen to folks like you and instead, just go with the index card.

charlesdm 11y ago
If you understand what the catalysts of a stock are (both long term and short term), buying individual stocks isn't a bad idea. And it's still possible to beat the market. But yes, most of your money should be invested in low fee index funds. As an example: a few years back, I owned some yelp stock. At the time, it was a growth stock driven by usage numbers. The quarter before, iOS6 (or 7? cant't remember) was launched, which included yelp support in every iPhone. A few days before yelp's quarterly earnings, Apple announced they sold 15% more iPhones than expected. Guess what? Yelp's numbers for the quarter were up significantly. I made 20% on my money the next day (and sold my shares). If I didn't have subject matter expertise, I might not have seen that.
- pbreit 11y ago
  99.9% of people should not be doing that.
  - sokoloff 11y ago
    And that advice applies most fervently to the set of people who think they ought to be doing it...

ergothus 11y ago

You might know the tech better, but do you know what people will buy? That management will take care of the tech well? That they've hired the right accountants and lawyers to deal with financial and legal issues? I don't think people as a whole should avoid buying individual stocks...but I think it's probably a good rule of thumb for people. Sort of "don't buy individual stocks unless you actually know what you're doing. And 50% of you that think you do are wrong."

CyberDildonics 11y ago

This is very misguided. You might know that razer makes absolutely terrible products (and they do) but do you know their financials? Do you know their distribution and their profit margins? You can buy their shitty equipment all over the world.

superuser2 11y ago

>if you know a company well and you know they are doing great and will be doing great in the next year you should buy their stock This is a truthy-sounding and extremely common belief about the stock market, but false. Buying stock is not a bet that the company will do well, it's a bet that the company will do better than other market participants currently think it will.

egd 11y ago

> If you work in tech you know more than the average wall street trader about tech companies especially the one you work at. I have never met a group of people less able to correctly assess a firm's proper value or more capable of self-delusion than the engineers working for that firm.

johnward 11y ago
On top of that you have enough exposure to that company's risk by working for them.

mikestew 11y ago

If you work in tech you know more than the average wall street trader about tech companies especially the one you work at. If you work there, it means you're likely to have blind spots about what actually drives the stock price. Hint: it ain't necessarily the tech. Personal example: AAPL. I make most of my money these days working on Apple tech. The fact that I've made possibly a majority of my retirement money off AAPL has nothing to do with my knowledge of their tech. It has more to do with watching what makes it go up, what makes it go down, and a raft of other factors that have little to do with the technology. Let's take a look at some of their tech that drove the price up. iPod: no wireless, less space than a Nomad, lame. Oh, we laugh now, but Cmdr Taco had a solid point. iPad: just a big iPod touch. I said the same thing until FedEx dropped it off. New iPhone comes out, people stand in line for hours or days, Apple can't keep up with demand. Stock price goes down. Less on the technical side, Apple crushes earnings; stock goes down (whisper numbers and all that). A sibling comment said 99% of people shouldn't own individual stocks, a sentiment I agree with despite holding a majority of our money in individual stocks. Sometimes folks are too smart for their own good, and they even if they work at the company they ignore what really drives the price because of an intimate knowledge of irrelevant pieces, thinking knowledge of those irrelevant pieces gives them a leg up ("<I> know more than the average Wall Street trader." Not about trading stocks, you don't.) (So why do I own so many individual stocks? Because I'm a special snowflake? No, because I'm an idiot who thinks previous success means I know what I'm doing. I really should start diverting to index funds.)

icebraining 11y ago
I always thought people misjudged CmdrTaco's comment, particularly here in HN, where everyone seems to think they're professional analysts. He was giving his personal opinion, not predicting the response of the market. And his comment aside, I have to say the general mood of that /. thread was actually pretty positive towards the iPod: http://slashdot.org/story/01/10/23/1816257/apple-releases-ipod http://slashdot.org/story/01/10/23/1816257/apple-releases-ip...

sliverstorm 11y ago

The big problem with investing in your sector is too much specialization. I realized one day that investing large sums of money in my employer's stock is essentially putting all my eggs in one basket- both my investments & my paycheck depend on the same company. I extend that to my market sector, too. I avoid investing in my market sector now.

Blackthorn 11y ago

> If you work in tech you know more than the average wall street trader about tech companies especially the one you work at. Whoa, be careful with the one you work at. There are often insider trading rules governing when and how you can buy/sell shares of your own company and derivatives involving them.

KMag 11y ago
In addition to the legal considerations, note that if your employer goes through layoffs, your investment is likely to tank right at the moment you need it most. You're already have natural long exposure to your employer's performance. Be aware that investing in your employer is a doubling-down on their performance. You also likely have some emotional investment in your career, which likely biases your judgement. On the other hand, you may have industry insight that the market simply doesn't have. While working for Google, shortly after Google announced Android, I wasn't sure if HTC, Apple, or some third manufacturer was going to become dominant in the smartphone market, but I was sure Intel was going to be playing catch-up in the mobile space for at least 5 years and smartphones were going to eat the world. I also knew the huge amounts of money per year that my employer was spending on datacenter electricity and saw that for many server workloads, watts/SPECINT and watts/flop aren't terribly important. The CPU largely (oversimplification) configures DMA between the disk controller and the network card, and there was a window of opportunity for ARM to get significant market share in the server space. This was before HP or Dell announced any of their ARM server projects or I had heard of Calxeda. The server thing didn't work out for ARM, but my investment in ARM Holdings still went up over 8x over 5 years or so. I no longer think I have any more insight than the market into ARM Holdings's share price, but I was able to profit from insight I had at the time that the average trader did not.
edanm 11y ago
Not sure, but I think those rules generally exempt (non-executive) employees, so generally speaking it's not a problem.
- Blackthorn 11y ago
  Non-executive employees are absolutely not exempt.

Gnolfo 11y ago

You can't reliably beat the market. People who say they can are saying so out of some combination of: 1) lying (to others and/or themselves as well) 2) cheating (insider trading, boiler rooms, etc) 3) drawing conclusions from too small of a sample size Also I also disagree with the statement to not buy individual stocks because others know more than you. It might be true even, it doesn't matter, because it's not the reasons not to buy individual stocks for retirement. You don't buy individual stocks for retirement because your risk exposure is a lot higher compared to indexes and just riding the market (x10 for every dollar spent like this before taking maximum advantage of tax deferred retirement options). If you have enough money that you are able and willing to lose some % of it for the chance of better gains, then buy individual stocks with that money (or play in derivatives if you're into stronger risk-seeking behavior). If you are trying to avoid living off of cat food in your winter years, it is far smarter to surrender the marginal chance for larger gains for a very highly likely chance at modest gains. If you don't have a retirement planned out, then every dollar you get towards it needs to be spent with the retirement goal in mind, and for that goal, the risk profile of individual stocks, historically, is prohibitively high.

yellowstuff 11y ago

I work at a hedge fund. The people who evaluate companies aren't traders, they're called analysts. A lot of them have MBAs from highly ranked programs, but aside from that they have fairly diverse backgrounds. One of the guys who works with health care companies is an MD. One of the guys who works with tech companies was a VC. They have almost limitless resources for research, meaning that they read a lot of third party analysis. They meet with company management. They talk to people at other funds and exchange ideas. We also have a team that does proprietary quantitative analysis to supplement the fundamental process. And of course analyzing companies is a (more than) full time job for the analysts. Hedge funds struggle to outperform the market. The vast majority of amateur traders underperform it by a lot.

edanm 11y ago

This is very, very wrong. The technology is not what drives the stock price of a company. What does drive it? It takes years of studying finance to learn. Your statement is akin to a trader telling another trader that, since they specialize in studying Apple, they could probably be great at being iOS app developers. "[...] if you know a company well and you know they are doing great and will be doing great in the next year you should buy their stock" This is an example of a very common fallacy. Even if I tell you that e.g. Apple will be doing great as a company in the next 5 years, that's not a reason to buy their stock. The reason would be if I tell you that their stock is undervalued! This is one of the first rules you learn in finance - if I can guarantee a future payout stream (e.g. $1000 in 1 year, $2000 in 2, $1500 in 3, $4000 in 4...), I can calculate how much that payout stream is worth now. This is what a companies' stock essentially is - a promise of a future payout stream. So if the stock is trading higher than that stream is worth, then the stock is not a good investment.