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I understand that the math is very much against me if I pick stocks for myself... Don't sell yourself short! If you learn a few things about how to value compa

I understand that the math is very much against me if I pick stocks for myself... Don't sell yourself short! If you learn a few things about how to value companies and if you're really disciplined about waiting for great opportunities (with the proper margin of safety) and letting undervalued prices turn rational again, the math is on your side. Picking a good stock is very similar to buying into a good business.

tptacek 15y ago
This is more or less the opposite of the conventional wisdom on this topic; Malkiel, Bernstein, Swensen, Andrew Tobias all wrote whole books more or less dedicated to the premise that you should invest passively through indexing. Here's a great Derek Sivers comment: http://news.ycombinator.com/item?id=1157768 http://news.ycombinator.com/item?id=1157768 I'm sure a bit of stock picking isn't going to kill you, as long as your portfolio is mostly passive. (Every time this discussion comes up, someone points out Malkiel picks a few stocks for himself). On the other hand, there is a whole financial industry lined up more or less directly against your interests in picking stocks; they have better research, direct access to company principals, influence over the markets, a drastically lower cost of trading, and the ability to wait out irrational conditions far longer than you can stay liquid. I'm doing what Sivers suggested; it makes sense to me. On the other hand, I've been telling a friend of mine to stop investing Apple since, oh, 2006. So, grain of salt.
- chromatic 15y ago
  Passive investing through indexing is great. If your investment philosophy is "I want to make decent returns without researching companies or exploring financial statements" then indexing is the right approach. Note however that the choice between "smart investing" and "hyperactive investing" is a false dilemma. Timing the market and worrying about technical analysis is definitely a way to lose money to traders with quicker access to information and greater ability to profit from arbitrage. Solin's comments on the marketplace of financial experts is right, but indexing isn't the only way to avoid that mess. Sure, 80% of my portfolio is in a couple of indexes, but that other 20% I don't count as mad money. I don't make blind guesses; I'm very careful about where I put it. So far my strategy of five or six smart trades a year has paid off very well. That's hardly day trading. I suspect the ratio of 80/20 will get change in favor of active investments as I get more confident.
  - tptacek 15y ago
    Your 5 trades per year, just curious, how many of them are in any way related to tech?
    - chromatic 15y ago
      I only hold one tech-related stock directly. It's a semiconductor company where a good friend works, so I have a decent understanding of the business and its prospects. I've made about 400% on it in five years.
      - tptacek 15y ago
        Interesting. One reason I'm wary of picking stocks is that most of my expertise is in technology; if my field goes south, I don't want my investments tracking it. But you don't have that problem. I'm worried I would; my best picks have always ended up being tech companies.
        chromatic 15y ago
        Your concern is valid. You do want to invest in companies you understand, but you don't have to be an expert. (It helps, especially if you're looking for what Peter Lynch calls an edge.) I approach things from the other direction: I wrote my own stock screener that analyzes financial reports and suggests companies which might be dramatically undervalued at their current prices. If a few minutes of research on my own reveal that I don't understand the business or that the numbers are obviously skewed by something which jumps out (the company increased its free cash dramatically by taking out hundreds of millions of dollars of short term financing and that skews the return on invested cash numbers), then I look further. If I don't understand the company or the industry, or if it's a coinflip either way of being undervalued, I move on. As a concrete example, I have a pretty good idea of what Apple makes and where it can sell and where it might go in the future, but I don't believe it can keep up the 30% returns on invested cash rate for the next ten years. I don't buy it. Maybe I'm wrong in that case, but my backtests work even with eyeballing numbers.

tptacek 15y ago

This is more or less the opposite of the conventional wisdom on this topic; Malkiel, Bernstein, Swensen, Andrew Tobias all wrote whole books more or less dedicated to the premise that you should invest passively through indexing. Here's a great Derek Sivers comment: http://news.ycombinator.com/item?id=1157768 http://news.ycombinator.com/item?id=1157768 I'm sure a bit of stock picking isn't going to kill you, as long as your portfolio is mostly passive. (Every time this discussion comes up, someone points out Malkiel picks a few stocks for himself). On the other hand, there is a whole financial industry lined up more or less directly against your interests in picking stocks; they have better research, direct access to company principals, influence over the markets, a drastically lower cost of trading, and the ability to wait out irrational conditions far longer than you can stay liquid. I'm doing what Sivers suggested; it makes sense to me. On the other hand, I've been telling a friend of mine to stop investing Apple since, oh, 2006. So, grain of salt.

chromatic 15y ago
Passive investing through indexing is great. If your investment philosophy is "I want to make decent returns without researching companies or exploring financial statements" then indexing is the right approach. Note however that the choice between "smart investing" and "hyperactive investing" is a false dilemma. Timing the market and worrying about technical analysis is definitely a way to lose money to traders with quicker access to information and greater ability to profit from arbitrage. Solin's comments on the marketplace of financial experts is right, but indexing isn't the only way to avoid that mess. Sure, 80% of my portfolio is in a couple of indexes, but that other 20% I don't count as mad money. I don't make blind guesses; I'm very careful about where I put it. So far my strategy of five or six smart trades a year has paid off very well. That's hardly day trading. I suspect the ratio of 80/20 will get change in favor of active investments as I get more confident.
- tptacek 15y ago
  Your 5 trades per year, just curious, how many of them are in any way related to tech?
  - chromatic 15y ago
    I only hold one tech-related stock directly. It's a semiconductor company where a good friend works, so I have a decent understanding of the business and its prospects. I've made about 400% on it in five years.
    - tptacek 15y ago
      Interesting. One reason I'm wary of picking stocks is that most of my expertise is in technology; if my field goes south, I don't want my investments tracking it. But you don't have that problem. I'm worried I would; my best picks have always ended up being tech companies.
      - chromatic 15y ago
        Your concern is valid. You do want to invest in companies you understand, but you don't have to be an expert. (It helps, especially if you're looking for what Peter Lynch calls an edge.) I approach things from the other direction: I wrote my own stock screener that analyzes financial reports and suggests companies which might be dramatically undervalued at their current prices. If a few minutes of research on my own reveal that I don't understand the business or that the numbers are obviously skewed by something which jumps out (the company increased its free cash dramatically by taking out hundreds of millions of dollars of short term financing and that skews the return on invested cash numbers), then I look further. If I don't understand the company or the industry, or if it's a coinflip either way of being undervalued, I move on. As a concrete example, I have a pretty good idea of what Apple makes and where it can sell and where it might go in the future, but I don't believe it can keep up the 30% returns on invested cash rate for the next ten years. I don't buy it. Maybe I'm wrong in that case, but my backtests work even with eyeballing numbers.