Saturday, November 23, 2013

RULE 9 The 10% Stock-Picking solution...If you really can't help yourself

Trying to beat the market is challenging and it's fun.  If you try, you will learn about yourself.  For most people, it will be an emotional roller coaster ride unlike any they have been on.  There will likely be times where you think it is easy, and you wonder why everyone doesn't get it that Wall Street is giving away money; and there will other times where that little voice in the back of your head constantly berates you for even entertaining the thought that you can beat the market.

When investors ask me if they should pick stocks, time the market, or use technical analysis to manage their investments, I tell them they need to have the time, the resources, and the expertise to do it.  The evidence that Andrew presents throughout his book, and which is widely available, shows that, even with these, the odds are they won't outperform the market over the long run.

In addition to the evidence cited by Andrew, it is also well known that we have built in biases in our thinking that push us to make costly investment mistakes.  I highly recommend the book by Jason Zweig, Your Money and Your Brain, that spells out these biases.

Still, as I said earlier, trying to beat the market is fun, challenging, and can be profitable.  Although I haven't seen any evidence, I suspect it may be the #1 activity of retirees.

This chapter presents a nice overview based on Warren Buffet's approach to stock picking.  I concur fully with the recommendation to limit stock picking (or active management in general, including positioning the portfolio on where you guess the market is headed) to 10% of assets.  So, if you have $1 million ,you can go off into the sandbox and play with $100,000 IF YOU HAVE THE CAPACITY TO TAKE THE RISK.

In other words, if you're 45 years old and have $1 million in your qualified accounts (IRA + 401(k)), you can go for it.  If you are 63 years old and looking to retire in 2 years with the same assets, you are probably not in position to take the same risk.

As an informational point, the research points Andrew mentioned, such as P/E ratio, debt levels, and return on capital, can be found at sites such as
Yahoo! Finance and Morningstar.  For those of you interested in stock screens, you may want to check out this discussion module at AAII.

It's hard to believe, but we are at the end of the book.  The time has gone by fast.  I hope that those of you who have stuck with the reading found it to be worthwhile and filled with principles that will help you as you build a nest egg.

I'll have an additional post shortly as a wrap up. For those of you in the area we'll have a face-to-face wrap up at the Miller Library on 12/10 at 7 pm.


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  5. I needed to thank you for this excellent read!!

  6. You’ve made some really good points there.

  7. I have 1.6 and in now way am I going to risk 160,000 in such a narrow speculative and misguided adventure. NEVER! I will stay with the first 8 rules regarding low costs, low expenses, and low capital gains taxes in my tax efficient index funds, earn average returns and save a bundle on taxes, costs and headaches. BTW, I saved enough on costs alone to afford a Tesla.

  8. It's your call. Some people can't resist the temptation to dabble in individual stocks. Others have the opportunity to pick up stock of the company they work for at below market price. The point is to limit this to only 10% of total assets.