The best stock tip that I can give
Posted by Frugal on September 6th, 2006
So what is the stock symbol? Actually, the best stock tip that I can give you is that there does NOT exist such thing as stock tip. There are small investors out there who come to my site, expecting to find a stock tip to get a fairly quick and sizable return. I’m sorry to inform you that investing is really about patience, not a get-rich-quick scheme. Return is ALWAYS proportional to the risk (of the stock).
If you have not read “The Four Pillars of Investing” (in my book list at my advices page above), you should definitely read it.
It will dispel many myths about stock pickings and stock timing. If you’re an ardent follower of the book, you will only be investing in indexes and investing in regular intervals. In fact, I think that is probably a very good passive strategy. FreeMoneyFinance in his 40s can attest to the power of index investing, which has been working for him for years. For disclosure, I’m not doing that, because of the following reasons:
- I think I’m young enough to try out active investing to see for myself whether it really does not work as the book would say.
- I believe that the moment index investing becomes popular, it is the moment that index investing loses its power. The next decade I believe will not be good for buy & hold investors. Buy & hold is for the last decade or two, not this coming one.
I will try to rebuff some points in that book on this site later, but I can tell you that some of my arguments are not as strong as I like them to be. Arguing against the time-tested Efficient Market Hypothesis is not an easy task. Even the existence of successful and consistent traders may be just mirages (although I can make a case against this later).
I just want to punch this line into your brain.
BE PATIENT
Don’t expect that you can get above average performance all the time. If you do get extra returns, be thankful. It just doesn’t happen all the time.
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September 7th, 2006 at 10:26 pm
Great post. I agree with you that the next decade will not be a good one for index investors. A weakness of index investing is that it does not prevent major drawdowns when the market itself does poorly. In fact, one of the things that kills people’s success in stock investing is that they leave themselves too exposed to poor investments, and so suffer PORTFOLIO losses of 30-50% when the market has a 1973 or a 2000. A 30% drop eliminates a 50% gain. A 50% drop eliminates a 100% gain. As an investor, I always want to minimize my downside risk.
Successful investing means concentrating your money in a few really good investments - which often violate the “risk-reward” rules of portfolio theory. As a part-time investor, I know that I am only likely to have a few good ideas in any given year. That’s ok, as long as those ideas earn me 20% or more on an annualized basis. Fortunately, by concentrating my money in those few investments, I don’t have to find very many. One or two picks a year is all I need.
It is focus that makes you rich, diversification just forces you to purchase some bad investments in the hope of finding a few good ones.
September 7th, 2006 at 11:04 pm
Doug,
Not sure if I agree with you completely on diversification. Unless every year, you can be smarter than most mutual fund managers who work full-time on managing money, otherwise, how can you generate 20% every year?
Concentration has its risk. And it doesn’t take too many times of you being wrong to wipe you out. If you have 30%, 30%, 30%, and then -55%, in year 1, 2, 3, and 4, repeating the same sequence over and over, your money will stay at 0% because 1.3 * 1.3 * 1.3 * 0.45 is about 1. How many times in a row do you think you can be right (in your bigger bets)? The answer is certainly a finite number. Once the string of luck runs out, are you diversified enough to prevent a wipe out?
September 11th, 2006 at 3:34 am
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