Source: How Many Stocks Beat the Indexes?
Recent posts about people losing their initial investments over the past 6-12 months made me think of this article that I heard the guys on the recent Animal Spirits podcast discuss. Over the past 10 years, 42% of the top 5,000 US stocks finished in the black, 36% finished in the red, and 22% are gone. Of that 22%, Morningstar does acknowledge they didn't check to see if a company went bankrupt or was acquired at a premium/loss but they did note, "Bessembinder’s research suggests that half the expired stocks were acquired, with decent results, while the other half were delisted, with dire consequences."
Basically what this research shows is stock picking isn't easy and probably shouldn't be done by most people, if any. There's a reason mutual funds and active money managers have been shown to trail benchmarks over short- and long-term timeframes. This IBD article from March shows only 25% of MFs beat their benchmark over varying timeframes. This 2019 article from CNBC shows nearly 65% of active fund managers trailed the S&P 500 for the 9th consecutive year. If people who devote their literal careers can't do it, most retail investors probably can't either. It's just as much luck as it is skill.
Note: if you don't give a shit about what my opinions are, do as my wife does and stop paying attention to me now. I only planned to post the above and then I just started jotting down thoughts that turned into more thoughts and the below was born.
If you want to pick stocks, probably the only hope you have is having a very long-term horizon and being diversified, but not diworsified. If you just want exposure to every industry for diversification purposes, just buy an ETF that tracks everything all sectors.
Irony time: Save for my wife's retirement and our savings for future kid(s) (both of which I manage and both of which are in QQQ, SPY, and/or VOO), I pick stocks and although I have overall exceeded my chosen benchmarks (SPY and QQQ) over the past 9 years, I have no expectation that will last, which is why I benchmark. I want need to know how I am doing because if I absolutely suck and perpetually trail the benchmarks, I would be leaving easy money on the table. I don't want to do that so I manically track my transactions.
For me, I actually match the Morningstar numbers pretty well.
Closed Positions
| Beat SPY & QQQ | Beat one but not the other | Trailed SPY & QQQ |
|---|---|---|
| 45% | 10% | 45% |
Open Positions
| Currently beating SPY & QQQ | Beating one but not the other | Currently trailing SPY & QQQ |
|---|---|---|
| 35% | 8% | 57% |
Quick tangent. Open positions are doing worse right now because I continue to buy. I don't care about the isolated market choppiness currently going on (some of which I'm invested in) and I'm not sitting on a mound of cash waiting for a massive dip. I buy when I have cash ready and a company I want shares of. People seem to think entry point matters but it doesn't with a long-term view. Sure, $45/sh is better than $50 but what if it goes to $60 before that 10% drop you were waiting for. Now you have to buy at a higher price or live with the feeling you missed the boat (spoiler: you didn't; just fucking buy). Sure, some stocks will pull back to your entry point but if the thesis is good and remains in place, just buy when you can and add more when you can.
So if the majority of my positions are trailing at least one benchmark, how am I beating SPY and QQQ overall? To keep the theme going, having a long-term approach is why. I wasn't beating the benchmarks right away. In fact, it took 3 years before I was intermittently ahead of them and another 3 years before I was consistently beating them every month. Six years may seem like a long time to allot myself but, at the time, my planned retirement was 40 years away. I had a long runway to work with so I knew my risk profile could be high and I could continue to learn as I went along. I bought companies I believed would win over 10+ years and then I let my winners win.
This is a divisive take but I rarely take gains on my winners. I don't need the cash now; this money was earmarked for decades down the road so I let it be invested. I even let some of my losers lose (looking at you Ford). I do everything I can to not micromanage my holdings. I monitor the news and quarterly filings but unless there's been a fundamental change in the business that renders my initial investment thesis moot, I hold.
By letting my winners win, I allowed the SHOP's and the SIVB's and the AMZN's and the SMG's to make up in gains far more than my losers lost. Currently, my three largest gaining positions have increased in value more than all my losing positions (open and closed) combined. And those 3 largest gaining positions are all still open. I have never in the 5+ years I've been invested sold a single share in any of them and I see no reason to even consider doing so. It's cliched to say but the max you can lose on a stock purchase is 100% while the max you can gain is infinite. Don't overreact. Follow your thesis. I bought AMZN in June 2014 for $327.39 and it then traded basically flat for 7 months. Imagine having had sold that for a miniscule gain because I didn't see an immediate 35% return?
All this being said, I absolutely understand why people would choose passive ETF investing. I enjoy reading about companies and perusing SEC filings. I view my investing as a hobby in addition to wealth building. Not everyone does. They may see the benefit of investing while viewing company research as work. Others may want to try to get rich quick. I would never recommend the latter but to each their own. I didn't hit it big on GME or AMC or become a Dogecoin millionaire but I also didn't FOMO buy only to lose 50% of my investment within a week and then panic sell. I'm not yucking anyone's yum. I just know the lane I'm comfortable in. Know your risk profile and how much you can lose without making your life uncomfortable, because any investment can drop 20% a day after you buy it and any investment can go to zero. You can't invest and also be undisciplined or prone to FOMO. You will almost always lose out.
I didn't mean for this post to turn into a soapbox speech but if it came off that way, my apologies. Just trying to convey some interesting research I heard/read with some lessons I have learned.
Happy investing!
Submitted May 06, 2021 at 07:17PM by interrobangbros https://ift.tt/33mEWuF
