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I had to downvote this because of how smug it is. Your approach has validity, but it's valid for people who a) have no time or b) inclination to learn the mark

I had to downvote this because of how smug it is. Your approach has validity, but it's valid for people who a) have no time or b) inclination to learn the market. It's just ONE approach. You've presented it as "the" approach, full stop. It stems presumably from the idea that you can't "beat" the market. But that depends what you invest in. And as a human with a brain, and a human with 24/7 Internet, you can do a little research and invest in conservative, dividend-yielding mammoth blue-chip-type companies, or you can seek value. What I do is: Step 1. Move all my 401k holdings from previous employers into a Vanguard IRA brokerage account (there are brokerage and non-brokerage variants of the IRA, the latter allowing you to purchase individual domestic stocks and ETF's online). Step 1b. Create a Seeking Alpha account and add stocks, ETF's, etc. that I'm interested in to my portfolio. I'll watch these stocks for weeks/months as well as read some of the material / URL news links that appear (including analyses). Step 2. Allocate a certain percentage of the entire portfolio "Boglehead" type funds/companies of the exact type you've just described. Baby boomer nervous-can't-be-bothered investor mindsets. Step 3. Allocate a certain percentage to companies I know either because I may have worked there, I use their products, or as I work in technology I like the idea of the product or company. AAPL is an example. Step 4. Allocate a certain percentage to a 'gambling' value stocks. I find these by looking at the NYSE "Biggest losers" and "Biggest winners" lists. If I see something interesting, perhaps I feel I'll either ride a pump and dump trade cycle or simply I feel that the company was unfairly oversold, I'll add that to my Seeking Alpha portfolio, follow it for a few weeks/months, and purchase on a low. There are a lot of different trading strategies. If you were railing against day trading only, I perhaps would agree with you. But here you're suggesting that the only valid form of stock market investment is to follow a mediocre approach (which is high risk: what if it's time to retire and the market corrects right before?!)

twtw 9y ago
So I have considered taking a more active approach to investing, but every time I think about I am dissuaded by the findings that actively managed funds get beat over the long run by index funds. For example, the Buffet bet of S&P500 beating mutual funds, the lack of correlation between fund performance from year to year, the darts thrown at NYTimes fund, etc. All these things suggest to me that actively managing can beat the indices in some years, but will be balanced out in others. I would be interested to hear more of your thoughts about this.
- mancerayder 9y ago
  Thanks. Well, I think there's "actively managed funds" and there's yourself. Funds are companies with infrastructures, eyes on them, politics in them. And so forth. I think it's a valid point that it's hard to time the markets and such. But as a simple person looking at companies you believe in, you can buy and hold. An example. If in 2001/2 when you saw an iPod for the first time, you thought to yourself that the company that made it has potential, maybe you bought some shares in it. That's just one of a lot of examples. Also it helps if you're in the industry that you're examining. We're in tech so maybe we've used some of the products that we believe in, and others we don't believe in. So that's one consideration. Also, hedge funds and asset managers do a bit more than buy and sell stocks. They do complex, sometimes crazy things that involve leverage, options/contracts, and very complicated instruments. There's nothing WRONG with buying a stock index fund, but if you see a company you think might have a winning product, and from some quick analysis seems like it's reasonably well managed, then that's something. Not everything has to be technical analysis of high risk biotech stocks, shorting strategies and so forth. And for the retail folks like us, we don't have to "trade" actively, as in buy and sell every day. That's my middle ground between "competing against high frequency traders or golf course CEO conversations" and "buy index fund and close my eyes for 15 years".
- andr3w321 9y ago
  Buffett structured his bet in a very specific manner to maximize management fees of the other side. His bet was the S&P 500 vs any five funds of funds hedge funds. This is like betting the S&P 500 vs the average return of 20 hedge funds. Of course Buffett is going to be a favorite when the investments are diluted so much and you take into account all the fees on top of fees. I think he would be a dog vs a single hedge fund or five hedge funds.
  - pedrocr 9y ago
    In aggregate the market is zero sum so if you think 1 or 5 hedge funds would beat the average easily who are the suckers taking the other side of those bets?
chillydawg 9y ago
Your profits on AAPL are nothing to do with you being smarter than the market. You've just presented a strategy of gambling as better than a long term tracker. I absolutely do not believe you can out perform a tracker long term.
- mancerayder 9y ago
  How is that gambling? A company has a product, which is sold to consumers. A company has a structure, which includes employee counts, capital expenses, and so forth. A company has a roadmap. And dividends. It's not "zero risk" but to suggest that it's no different than tossing chips on a roulette number or a blackjack dealer is completely absurd.
  - mattmanser 9y ago
    It's that it's stacked against you, like this article explains, just like a casino is stacked against you. Also, for you to have made money on AAPL you would have had to gamble on something. You had to have bought at a lower stock price. If you bought recently, it would be that Tim Cook doesn't suck and they don't botch the new iPhone. If you bought 6 years ago, it would be something else. If you bought 10 years ago it's that the iPhone would remain dominant, etc. etc.
  - chillydawg 9y ago
    The question isn't whether you like ipods 10 years ago or not. It's what information you had, that you incorporated into a model that you then traded on that gave you a real, statistically valid edge to the market price when making that trade. When you buy a stock, you pay two main fees: the basic broker fee and the market spread to the mid price. The moment you make a trade, you're down. When you toss chips on a roulette number, you pay one fee. You know there's 36-1 chance of your number being chosen but there's also the zeros that give the house the edge, which give you a 36-1 payout on a 38-1 event (depending how many zeros). The fee is 2-3% percent (on a european roulette table). Moreover, you actually KNOW the real probability in the casino and you KNOW the house edge. In the market, you have absolutely no idea what the real price is. Maybe Steve Jobs dies earlier in an alternate universe and the company implodes before the iPhone money press gets going. Maybe in another universe, he lives longer and tanks the company because he starts believing the hype about himself. Who knows? In this universe your AAPL bet paid off wonderfully. Liking a product and buying shares in the company is a completely reasonable thing to do, but unless you genuinely know something others don't it's gambling and convincing yourself otherwise is a really really dangerous thing to do.
overcast 9y ago
Here's the problem with this. Most people won't even change their own oil in the car, they aren't going to research and develop their own trading strategy. You do what works for you, but for everyone else, index funds are a great set it, and forget it strategy.
auxym 9y ago
I upvoted you because your post adds a valid discussion point, but I have to ask: 1. Are you actually getting any alpha using this method? Averaged over multiple years? 2. If you are, are you earning a decent hourly rate for researching companies and following the market?
- mancerayder 9y ago
  1 - So far so good, but it hasn't been many years. In a bull market, I'm also (in addition to some other winners) partly 'betting' (as per the conversations above) on some value stocks that underperformed during this time. One of them is based on geopolitical issues in one particular country that I'm expecting to be resolved based on the best knowledge I have while following the politics of this particular country and the industry of the company in question (and the company's legal disputes with the government). Another is a promising technology that was recently trialed successfully commercially. There are a few others like this. My educated guess is that even should the broader index go down when the bull market eventually subsides, these will picks still benefit and climb due to the underlying fundamentals. They're hedges along with a basket of other picks, some of which are very conservative (and include Vanguard funds). In the worst case, I don't think my picks will underperform a bear market. 2 - that's an extreme perspective, since there's value in learning that doesn't have an hourly cost. The TOC of my time may or may not be higher than what a fund manager would cost (or the index fund approach being discussed). Then again, monitoring the portfolio 3-4 times a day for a couple of minutes isn't that bad. Initially finding the stocks of interest and doing some basic research does take time. [edit: grammar]
lettergram 9y ago
You should checkout my startups blog post on causality in cryptomarkets: https://blog.projectpiglet.com/2018/01/causality-in-cryptomarkets/ https://blog.projectpiglet.com/2018/01/causality-in-cryptoma... Basically, we used it to generate pretty awesome returns, and we bias our "trade potential" advice towards reduced risk: https://projectpiglet.com/ https://projectpiglet.com/ It was easy for us to rack up some nice returns: https://blog.projectpiglet.com/2018/01/30-weekly-returns-using-piglet/ https://blog.projectpiglet.com/2018/01/30-weekly-returns-usi... All that being said, I personally limit my exposure to volatile assets - so I wont put more than I'm willing to lose in cryptocurrencies, and regularly pull out profits.

twtw 9y ago

So I have considered taking a more active approach to investing, but every time I think about I am dissuaded by the findings that actively managed funds get beat over the long run by index funds. For example, the Buffet bet of S&P500 beating mutual funds, the lack of correlation between fund performance from year to year, the darts thrown at NYTimes fund, etc. All these things suggest to me that actively managing can beat the indices in some years, but will be balanced out in others. I would be interested to hear more of your thoughts about this.

mancerayder 9y ago
Thanks. Well, I think there's "actively managed funds" and there's yourself. Funds are companies with infrastructures, eyes on them, politics in them. And so forth. I think it's a valid point that it's hard to time the markets and such. But as a simple person looking at companies you believe in, you can buy and hold. An example. If in 2001/2 when you saw an iPod for the first time, you thought to yourself that the company that made it has potential, maybe you bought some shares in it. That's just one of a lot of examples. Also it helps if you're in the industry that you're examining. We're in tech so maybe we've used some of the products that we believe in, and others we don't believe in. So that's one consideration. Also, hedge funds and asset managers do a bit more than buy and sell stocks. They do complex, sometimes crazy things that involve leverage, options/contracts, and very complicated instruments. There's nothing WRONG with buying a stock index fund, but if you see a company you think might have a winning product, and from some quick analysis seems like it's reasonably well managed, then that's something. Not everything has to be technical analysis of high risk biotech stocks, shorting strategies and so forth. And for the retail folks like us, we don't have to "trade" actively, as in buy and sell every day. That's my middle ground between "competing against high frequency traders or golf course CEO conversations" and "buy index fund and close my eyes for 15 years".
andr3w321 9y ago
Buffett structured his bet in a very specific manner to maximize management fees of the other side. His bet was the S&P 500 vs any five funds of funds hedge funds. This is like betting the S&P 500 vs the average return of 20 hedge funds. Of course Buffett is going to be a favorite when the investments are diluted so much and you take into account all the fees on top of fees. I think he would be a dog vs a single hedge fund or five hedge funds.
- pedrocr 9y ago
  In aggregate the market is zero sum so if you think 1 or 5 hedge funds would beat the average easily who are the suckers taking the other side of those bets?

chillydawg 9y ago

Your profits on AAPL are nothing to do with you being smarter than the market. You've just presented a strategy of gambling as better than a long term tracker. I absolutely do not believe you can out perform a tracker long term.

mancerayder 9y ago
How is that gambling? A company has a product, which is sold to consumers. A company has a structure, which includes employee counts, capital expenses, and so forth. A company has a roadmap. And dividends. It's not "zero risk" but to suggest that it's no different than tossing chips on a roulette number or a blackjack dealer is completely absurd.
- mattmanser 9y ago
  It's that it's stacked against you, like this article explains, just like a casino is stacked against you. Also, for you to have made money on AAPL you would have had to gamble on something. You had to have bought at a lower stock price. If you bought recently, it would be that Tim Cook doesn't suck and they don't botch the new iPhone. If you bought 6 years ago, it would be something else. If you bought 10 years ago it's that the iPhone would remain dominant, etc. etc.
- chillydawg 9y ago
  The question isn't whether you like ipods 10 years ago or not. It's what information you had, that you incorporated into a model that you then traded on that gave you a real, statistically valid edge to the market price when making that trade. When you buy a stock, you pay two main fees: the basic broker fee and the market spread to the mid price. The moment you make a trade, you're down. When you toss chips on a roulette number, you pay one fee. You know there's 36-1 chance of your number being chosen but there's also the zeros that give the house the edge, which give you a 36-1 payout on a 38-1 event (depending how many zeros). The fee is 2-3% percent (on a european roulette table). Moreover, you actually KNOW the real probability in the casino and you KNOW the house edge. In the market, you have absolutely no idea what the real price is. Maybe Steve Jobs dies earlier in an alternate universe and the company implodes before the iPhone money press gets going. Maybe in another universe, he lives longer and tanks the company because he starts believing the hype about himself. Who knows? In this universe your AAPL bet paid off wonderfully. Liking a product and buying shares in the company is a completely reasonable thing to do, but unless you genuinely know something others don't it's gambling and convincing yourself otherwise is a really really dangerous thing to do.

overcast 9y ago

Here's the problem with this. Most people won't even change their own oil in the car, they aren't going to research and develop their own trading strategy. You do what works for you, but for everyone else, index funds are a great set it, and forget it strategy.

auxym 9y ago

I upvoted you because your post adds a valid discussion point, but I have to ask: 1. Are you actually getting any alpha using this method? Averaged over multiple years? 2. If you are, are you earning a decent hourly rate for researching companies and following the market?

mancerayder 9y ago
1 - So far so good, but it hasn't been many years. In a bull market, I'm also (in addition to some other winners) partly 'betting' (as per the conversations above) on some value stocks that underperformed during this time. One of them is based on geopolitical issues in one particular country that I'm expecting to be resolved based on the best knowledge I have while following the politics of this particular country and the industry of the company in question (and the company's legal disputes with the government). Another is a promising technology that was recently trialed successfully commercially. There are a few others like this. My educated guess is that even should the broader index go down when the bull market eventually subsides, these will picks still benefit and climb due to the underlying fundamentals. They're hedges along with a basket of other picks, some of which are very conservative (and include Vanguard funds). In the worst case, I don't think my picks will underperform a bear market. 2 - that's an extreme perspective, since there's value in learning that doesn't have an hourly cost. The TOC of my time may or may not be higher than what a fund manager would cost (or the index fund approach being discussed). Then again, monitoring the portfolio 3-4 times a day for a couple of minutes isn't that bad. Initially finding the stocks of interest and doing some basic research does take time. [edit: grammar]

lettergram 9y ago

You should checkout my startups blog post on causality in cryptomarkets: https://blog.projectpiglet.com/2018/01/causality-in-cryptomarkets/ https://blog.projectpiglet.com/2018/01/causality-in-cryptoma... Basically, we used it to generate pretty awesome returns, and we bias our "trade potential" advice towards reduced risk: https://projectpiglet.com/ https://projectpiglet.com/ It was easy for us to rack up some nice returns: https://blog.projectpiglet.com/2018/01/30-weekly-returns-using-piglet/ https://blog.projectpiglet.com/2018/01/30-weekly-returns-usi... All that being said, I personally limit my exposure to volatile assets - so I wont put more than I'm willing to lose in cryptocurrencies, and regularly pull out profits.