The Real Reason Your Stock Picks Are Wrong

July 13, 2017

It’s common knowledge that in the long run, stocks outperform treasury bills, which are short term loans to the federal government that can be considered a relatively risk-free form of cash. But according to a new study by Hendrik Bessembinder of Arizona State University, a majority of stocks in the CSRP database underperform treasury bills over both one-month and lifetime returns from 1926-2015. In fact, almost all the returns of the stock market come from just the top 4% of stocks! So what does this mean for you?

  1. Picking individual stocks is basically gambling. The odds are simply heavily stacked against you. If you want to “invest” a small amount of money in individual stocks in the hope of outsized returns, go for it. (I actually do this myself.) Just make sure it’s money you can afford to lose and not your retirement nest egg or college fund.
  2. Put your eggs in lots of baskets. It’s not just to avoid the big losers. It’s also to make sure you get the big winners too. For most people, this means investing in mutual funds or ETFs since it’s generally more difficult and expensive to buy enough individual stocks to be adequately diversified.
  3. Be careful of active management. Considering how slim the odds are of picking that 4% of stocks, it’s no wonder that the vast majority of active money managers underperform. They either have to take the risk of missing that 4% and drastically underperforming the market (hence putting their careers in jeopardy) or more likely, they create “closet index funds” that mostly buy the entire market but still end up underperforming (albeit less drastically) due to fees and transaction costs. You can avoid these problems by simply investing in a diversified portfolio of low cost index funds. This way, you know you’ll have that 4%.

None of this means you should abandon stocks for treasury bills. Let’s not lose sight of the big picture here. A dollar invested in US stocks in 1926 was worth $448 in real inflation-adjusted dollars at the end of last year while a dollar in treasury bills was only worth $1.53, barely staying ahead of inflation. If you want your money to grow (and you probably need some growth to hit your long term investing goals), stocks are still where the action is. We just don’t know which ones yet.

 

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What Tesla and United Can Teach Us About Investing

May 05, 2017

In another of my “grumpy old man” rants here, I’m absolutely mystified by investors and the car company Tesla. Sure, they make cool cars. Sure, they are selling directly to consumers and bypassing the traditional dealership model. Sure, every time I see one I give it a long look and think “that’s pretty awesome.” But in the midst of all of all of that, I just don’t understand how their stock price can be so high.

Tesla passed General Motors as the #1 US car company recently. Last year, Tesla sold about 76,000 cars. GM sold about 10,000,000. GM made over $9 BILLION in profits last year, while Tesla has had 2 profitable quarters…EVER! It is perhaps due to the “cool factor” that Tesla is now the #1 car company in the U.S. based on market capitalization. (Market capitalization is simply the number of shares outstanding times stock price.)

Clearly, the stock market is rewarding more than just financial results. As someone who has all but stopped using Facebook, never liked Twitter and is not a fan of social media in general, it seems that the stock market is moving away from rewarding the old school “logic and reason” of profitable companies seeing their stock price rise and companies who have yet to hit their stride from a profitability standpoint not getting much traction in the market. There are a lot of future expectations built into stock prices. This makes it hard to be an investor.

Heck, one video was able to move the stock price of United Airlines. This is a company with $9.1 billion in revenue in just the 4th quarter of 2016 and the stock price moved because of one cell phone video. This age of social media definitely has ripple effects in the investment markets. No one could have predicted in advance that United would have been hit by a wave of negativity after a cellphone video went viral or that an unprofitable car company would be worth more than General Motors.    

Picking individual stocks and outperforming the market is HARD! Most professional managers struggle to beat their respective index. If you bought Apple very early on, you’re probably a pretty happy investor. If you bought Enron or MCI WorldCom, probably not so much. All of those companies had spectacular performance at some point in their history, but only one is still in business.

That’s why it’s becoming increasingly more important to diversify your portfolio. Having a mix of stocks – small, mid-sized, large, international, emerging markets – and bonds and cash can help you avoid devastating losses like many investors experienced in 2008. Check out my blog from last week and get to know who you are as an investor and build a low cost, non-emotionally driven portfolio.

Since I started with a grumpy old man rant, I’ll end with an old phrase that we’ve all heard countless times in our lives. Don’t put all your eggs in one basket! In the investment world, it simply makes sense.

Some Of The Riskiest Investments May Surprise You

July 30, 2015

One of the biggest fears people have when it comes to investing is a year like 2008, when the US stock market fell almost 40%. But as long as you didn’t bail out of stocks, you would have recovered your losses in about 5 years and then gone on to make more money. The same is true of every other market downturn since the Great Depression. If you’re worried about the real risk of permanent loss, some of the riskiest investments actually seem much safer. Here are ones that may surprise you: Continue reading “Some Of The Riskiest Investments May Surprise You”

What A Lost Cell Phone Can Teach Us About Investing

February 25, 2015

Earlier this year, my boss shared with us her story of how she dropped her phone behind her bed. Her first thought since the bed was basically against the wall was to move the bed…in her words “bad idea.” After some time (and a little pain medicine), she took a second approach: use a hanger from the side to pull it out….again, “No dice.” (She thinks she actually made it worse by pushing it further out of reach.) Continue reading “What A Lost Cell Phone Can Teach Us About Investing”

When Should You Sell Your Mutual Fund?

September 18, 2014

As the stock market reaches new highs, have you been wondering if you should sell and take profits before the next eventual dip? If the stock market does take a dip, should you sell and cut your losses? With the launch of our “Ask a Planner Week” on Monday, here was the first question we received: “I have absolute percentage rules for taking profits and losses on individual stocks. When should one consider taking profits or losses on index funds?” Continue reading “When Should You Sell Your Mutual Fund?”

Stock Investing Made Easy

May 08, 2014

Last week, I wrote about some of the benefits of investing directly in individual stocks. However, it can be challenging to decide which stocks to invest in. Here are some tools that can help simplify that process.      Continue reading “Stock Investing Made Easy”

The Risk of Not Taking Risk

April 17, 2014

Back in college in the late 90’s, I learned a valuable lesson about managing risk when I got caught up investing in the dot com bubble. It was so easy to put up two thousand dollars and see it double or triple overnight. But the bubble burst a few years later and I was left with less money in my account than when I started. I cashed out of day trading, fortunately realizing before I had lost too much that this was not a viable long term strategy. Continue reading “The Risk of Not Taking Risk”

My Embarassing Confession

April 04, 2014

Yes, I’ll admit it.  It’s embarrassing and I’m not proud of it but I will confess  that I have spent hours playing Candy Crush Saga on my phone.  Mostly at airports or on rental car shuttle busses, but I have played the game for more hours than I am proud to admit. Continue reading “My Embarassing Confession”

Should You Invest in a “Motif?”

September 12, 2013

A friend of mine recently asked me what I thought of a site called Motif Investing. The idea of the site is that it allows you to buy a basket of up to 30 stocks or ETFs based on an idea or “motif.” Some popular examples are stocks benefiting from things like the rise of 3D printing or biotechnology, stocks  that have recently suffered a sharp decline, or stocks with good dividend payouts. The weighting of each motif can be customized and individual stocks or ETFs can even be removed. It costs $9.95 to purchase, sell, or re-balance each motif. So is this a good way to invest in stocks? Let’s take a look at the pros and cons: Continue reading “Should You Invest in a “Motif?””

What is Risk?

August 08, 2013

For many people, reducing their risk is their top investment priority. Yet, in I’ve noticed that the word “risk” means very different things to different people. The standard definition in the financial world is the variance of returns. In other words, a risky investment is one in which the returns fluctuate a lot from year to year. But when most people use the word “risk,” I think they’re referring to the probability of their investment losing value. Continue reading “What is Risk?”

Bubbles Come in All Shapes and Sizes

July 11, 2013

After reading my colleagues’ blog posts this week about their best and worst investment decisions ever, I’m glad that I was in college until 2000 and missed the dot com bubble of the late 90’s. As a college student, I didn’t have money to invest in the likes of pets.com even if I wanted to. Instead, I got to watch the rise and fall of the “New Economy” stocks from a distance. The only thing better than learning from your mistakes is learning from other people’s mistakes. Continue reading “Bubbles Come in All Shapes and Sizes”

Have You Outgrown Your Mutual Funds?

September 27, 2012

When it comes to investing, many of us stick to mutual funds. After all, they’re generally the only option in employer retirement plans (except perhaps for company stock) and financial advisers like to sell funds because they’re relatively easy for them to manage. They also make a lot of sense when you’re just starting out with investing and don’t have enough to purchase in individual securities. However, as your portfolio grows, you may want to consider purchasing individual securities, especially if your portfolio is taxable. Here are some reasons why: Continue reading “Have You Outgrown Your Mutual Funds?”

The “Secret Sauce” Behind Successful Investing

August 24, 2012

Much to the chagrin of dentists everywhere, Tootsie Roll has been a staple of the candy business for a very long time.  This article talks about the Tootsie Roll Company being a very secretive organization. (And we thought it was just the CIA that operates in relative secrecy)!  Tootsie Roll doesn’t give tours, they don’t give interviews to analysts and they don’t operate with much transparency. It’s as if they have some magical mystery formulas that they don’t want the rest of us to know. Continue reading “The “Secret Sauce” Behind Successful Investing”

When Enough is Enough

March 07, 2012

After my stepfather passed away, my mom started working with a local bank to manage her investments.  At the time, I was living in California and it was difficult for me to help her with investment decisions.  Plus, I had always warned my clients that allowing family members to get involved in your investments was a bad idea because you could always fire a stranger but you can never fire a member of the family.  It was with this in mind that I allowed her to continue this relationship despite my occupation as a financial planner. Continue reading “When Enough is Enough”

Back to Basics: What Exactly is a Stock?

January 05, 2012

With the start of a new year, it might be a good time to take a step back. As financial planners and educators, we can get so caught up in the complexities of things like employee benefits, various investment strategies, and tax laws that sometimes we forget that sometimes people just really need to understand the basics. I recently asked a group of workshop participants what exactly a stock was and one person said it was just a piece of paper. I thought about it later and realized that his answer reflected many of the misconceptions people have about investing (aside from the fact that we don’t even really use paper stock certificates anymore). In fact, there’s a surprising amount of insight you can gain just from examining some of the basic investment vehicles. Continue reading “Back to Basics: What Exactly is a Stock?”