Why I'm Giving Up Individual Stock Picking

[Buffett Jr]

It was quite a difficult decision as lots of my spare time and energy has been invested into improving my knowledge of the share market and investing over the past 6 years of my life. However, my reasons are below.

- It takes up too much of my time
I'm spending on average 1-2 hours a day reading books, articles, company releases, annual reports, analyst reports, etc, banking dividends, filing and recording also. Compare this to our rental property which is managed by a property manager which we reply to perhaps one email a fortnight taking 5 minutes. Up until the beginning of this year, I enjoyed the process of learning about all these investment strategies, case studies, businesses, etc. But now I feel the books and articles I'm reading are just everything I've read before but repeating every week. Annual reports that I read are getting monotonous also. I'm beginning to pick up other hobbies outside of work including


- Even though I have good fundamental business knowledge, the "art of stock picking" still is hard to get my head around
I've self taught myself to understand accounting, economics and all the ratios. I can skim through a profit/loss statement and asset/liability statement very quickly and decide immediately whether I'm looking at a good, average or poor company. I understand which companies are good based on current and past performance. However, trying to predict the future of industries, economies and products is a complete minefield. I've been certain particular industries would do well year in year out but I've been suprised with poor results out of left field that have confused me constantly.


- I've read all the books (1 per fortnight on average for the past 6 years) and still feel like I know very little
I read on the subject of finance quite a lot over the past several years. Most of them are now getting very repetitive, even if they are a brand new book. I get new ones out of the library all the time but it is like a broken record saying the same things over and over. I've tried reading on different aspects like the emotional and mental side of investing, trading strategies to get their take on things, etc but I still can't seem to forecast a businesses future accurately. If I do find a business that ticks all the boxes, it is extremely expensive compared to earnings and not worth buying.

- The extra return I make on an hourly basis compares to well below minimum wage
The money I've been using over the past few years to invest has been excess cash building towards a house deposit or the small amount offsetting out revolving credit. The amount I've got to invest for this howevers around the $30k mark, as we pay off fixed mortgages along side this also. Therefore if I spend approx 500 hours a year studying, researching, etc to improve my returns 5-10% above and beyond the mortgage interest rate of 6.5% I'm making at most $2500 extra per year. This divided by 500 hours is $5 per hour I'm working for. I might as well spend the hour a day doing other hobbies I enjoy or working a bit extra at work which I get paid approx $24 per hour.

- I'm just not enjoying all the research anymore
This is the big one. I used to thrive and absolutely love researching on stocks, seeing my predictions come correct and pocketing a few thousand dollars extra at the end of the year. However, it is now becoming a bit of a chore, I've got lots of other things going on in life now, I've taken up other hobbies and researching the stock market is no longer a priority.

- Investment property is where the bulk of our net worth is and will be in the future also
Our strategy has always been to have a solid buy and hold real estate portfolio and then use investing in the stock market to enhance returns of the equity available. This therefore means that buying shares is a means to an end until we buy our next property. We therefore get taxed on any capital gains because our intention is to sell it when we buy additional properties. This could get muddled with IRD and we could end up paying capital gains on property also. We don't intend to sell but we don't want to muddy the waters either.

[Stranger_Danger]

Sounds like a rational decision backed by sound reasons.

Especially "- I'm just not enjoying all the research anymore"

I probably average 4 hours a day on investment activity, although it hard to know exactly as there some overlap with other business activity.

I regard it as a genuine joy, and not work. If that isn't how you feel, then you're making the right call.

The only comment I'd make is on "
- The extra return I make on an hourly basis compares to well below minimum wage"

Fair point - today - but it works the other way too!

There is no time spent difference between a 5 million dollar decision and a $5,000 decision. Once your investment activities reach a certain scale, I know of no other way to earn the same effective hourly rate.

But, if you don't love it, you won't stick at it that long. So I think you're making the right call.

[Lost in space]

Experiment was conducted years ago where they got apes to randomly pick stocks and the apes out did the market experts. Buy an admission to Auckland zoo and chance your arm - save you a lot of time and then you can blame them if all turns to custard. Or, alternatively, hire that match winning picking octopus :-)

[nextbigthing]

I personally like this bit

I'm beginning to pick up other hobbies outside of work including
(blank)

Best of luck.

NBT

[bull....]

As stranger danger say if ya dont love it, its probably not for you.
its hard work thats for sure
charts are good for short term trading
I understand which companies are good based on current and past performance. However, trying to predict the future of industries, economies and products is a complete minefield
easy to see now but for long term investing it certainly helps if you can master your later comments

[Whipmoney]

Just out if curiosity, how many stocks were you actually holding? One strategy might be to re-weight to lower the overall number in your portfolio.

Aside from that I struggle to see how you are doing 1-2 hours research a day (500hrs/year)

If you classify being on the boards as research then I see what you're getting at as I too am admittedly on here a lot more than I need to be and to be honest I think there are only a few gem posts amongst scores of opinion, conjecture and repetition.

I think you could cut your research back to less than 50 hours a year simply by sticking to companies your excited about and just by setting and forgetting, and reading their annuals/quarterlies for calibration.

I'm certainly considering the same and I think at times I'm guilty of reading into too much and over-trading when I should just stick to my guns and wait my long-term value plays.

[percy]

Sounds like a rational decision backed by sound reasons.

Especially "- I'm just not enjoying all the research anymore"

I probably average 4 hours a day on investment activity, although it hard to know exactly as there some overlap with other business activity.

I regard it as a genuine joy, and not work. If that isn't how you feel, then you're making the right call.

The only comment I'd make is on "
- The extra return I make on an hourly basis compares to well below minimum wage"

Fair point - today - but it works the other way too!

There is no time spent difference between a 5 million dollar decision and a $5,000 decision. Once your investment activities reach a certain scale, I know of no other way to earn the same effective hourly rate.

But, if you don't love it, you won't stick at it that long. So I think you're making the right call.

I am with Stranger Danger;"I regard it as a genuine joy." It is my hobbie.
So I too think you are making the correct call.
I have always enjoyed the sharemarket,but what really set me thinking was when I was a young man,a retired friend of the family telling me he did quiet well as a builder,but made his real money on the sharemarket once he retired.

[Harvey Specter]

Does this mean you will just invest in more rentals, or are you going to stay in shares via a fund.

[Buffett Jr]

I personally like this bit

I'm beginning to pick up other hobbies outside of work including
(blank)

Best of luck.

NBT

Oops!

Triathlon and hiking mainly.

[Buffett Jr]

Just out if curiosity, how many stocks were you actually holding? One strategy might be to re-weight to lower the overall number in your portfolio.

Aside from that I struggle to see how you are doing 1-2 hours research a day (500hrs/year)

If you classify being on the boards as research then I see what you're getting at as I too am admittedly on here a lot more than I need to be and to be honest I think there are only a few gem posts amongst scores of opinion, conjecture and repetition.

I think you could cut your research back to less than 50 hours a year simply by sticking to companies your excited about and just by setting and forgetting, and reading their annuals/quarterlies for calibration.

I'm certainly considering the same and I think at times I'm guilty of reading into too much and over-trading when I should just stick to my guns and wait my long-term value plays.

We were holding 4 companies prior to buying the rental property. I sold 3 of them once we bought it and recently sold the other a couple of weeks ago.

Spending 1-2 hours a day isn't difficult. I'd generally check the company announcements and read the NZ Herald business section around 9-9.30am on my morning tea at work. Then I'd check again any announcements on the ASX on my lunchbreak at work. This would total perhaps 30mins a day.

Then after work I'd read any analysts reports or industry reports that I follow taking perhaps 30mins. If time allowed I'd read a few annual/half yearly reports for 30mins. Then once dinner was done, I'd read a book on investment, stocks, valuation, accounting, economics, etc for 30-60mins before bed to try and improve my stock picking skills.

So 1-2 hours a day is fairly easy to achieve. In the weekends I could read a book or reports or anything of the sort for 2+ hours at a time no issues.

[Buffett Jr]

Does this mean you will just invest in more rentals, or are you going to stay in shares via a fund.

We will just pay back the loans and buy additional rentals as equity and income allows.

Investing into a managed fund/index fund outside of kiwisaver has no interest for me at all. Main reasons are lack of control and sub par returns.

[macduffy]

We will just pay back the loans and buy additional rentals as equity and income allows.

Investing into a managed fund/index fund outside of kiwisaver has no interest for me at all. Main reasons are lack of control and sub par returns.

I don't see Buffett Snr adopting that strategy but agree with others that if the interest has gone it's best to move on. Good luck with rental properties!

:)

[Snoopy]

It was quite a difficult decision as lots of my spare time and energy has been invested into improving my knowledge of the share market and investing over the past 6 years of my life. However, my reasons are below.

<snipped extensively>

[FONT=Arial][LEFT]
[FONT=Times New Roman][SIZE=3][COLOR=#000000]- Even though I have good fundamental business knowledge, the "art of stock picking" still is hard to get my head around
However, trying to predict the future of industries, economies and products is a complete minefield. I've been certain particular industries would do well year in year out but I've been suprised with poor results out of left field that have confused me constantly.


- I've read all the books (1 per fortnight on average for the past 6 years) and still feel like I know very little

I still can't seem to forecast a businesses future accurately. If I do find a business that ticks all the boxes, it is extremely expensive compared to earnings and not worth buying.

[SIZE=2][COLOR=#0000ff]



A couple of points you have highlighted are particularly interesting because Buffett Senior himself I am sure would agree. Buffet Sr. AFAIK does not attempt to find industries that he thinks will do well. Quite the opposite. He looks for industries that are not doing well, and bases decisions on whether he invests or not on recovery potential.

Of course the number of investments he makes each year are small. I think Buffet is on record as saying about one new investment per year is the way to go. Most things he evaluates he does not invest in. Contrary to what some think, truly good investment opportunities are rare and take patience to find.

Your point about 'good' investments being fully or overpriced is also well made. That is why Buffett always waits for some kind of negative event so that the market gives him the discount he requires. In fact I would go as far as to say unless a good company is in short term trouble, Buffett would not invest in it.

SNOOPY

[Schrodinger]

We were holding 4 companies prior to buying the rental property. I sold 3 of them once we bought it and recently sold the other a couple of weeks ago.

Spending 1-2 hours a day isn't difficult. I'd generally check the company announcements and read the NZ Herald business section around 9-9.30am on my morning tea at work. Then I'd check again any announcements on the ASX on my lunchbreak at work. This would total perhaps 30mins a day.

Then after work I'd read any analysts reports or industry reports that I follow taking perhaps 30mins. If time allowed I'd read a few annual/half yearly reports for 30mins. Then once dinner was done, I'd read a book on investment, stocks, valuation, accounting, economics, etc for 30-60mins before bed to try and improve my stock picking skills.

So 1-2 hours a day is fairly easy to achieve. In the weekends I could read a book or reports or anything of the sort for 2+ hours at a time no issues.

TBH I think you were doing the wrong research. The best business information I received by far was from the AFR (for ASX) and also from a business degree. I wouldn't read the herald for any business analysis, it is terrible. Herald has its uses, mainly for cross checking information but I would avoid their "insight". Brian Gaynor would be the only guy to provide thinking in that paper. Suggest avoiding the investment books unless you have a real gap in your analysis i.e. valuation etc.

[Snoopy]

It was quite a difficult decision as lots of my spare time and energy has been invested into improving my knowledge of the share market and investing over the past 6 years of my life. However, my reasons are below.

- It takes up too much of my time
I'm spending on average 1-2 hours a day reading books, articles, company releases, annual reports, analyst reports, etc, banking dividends, filing and recording also. Compare this to our rental property which is managed by a property manager which we reply to perhaps one email a fortnight taking 5 minutes.




I do appreciate there are macro-economic tailwinds in the Auckland property market. I had cousins in Auckland who bought a property close to the central city at what I thought was an ambitious price at the time. They sold the property after some six or seven years this year for about $400k more than they paid for it. Mind you it was a stress working those extra hours to close the gap between the rent income and the mortgage payments. So they didn't make $400k net profit on the property.

However I have to ask with house deposits for not at all extravagant properties of $100k being required in Auckland, how long can this sort of property growth rate continue? I think it is important to realise that future performance is not derived from historical growth rates. I am not calling time on the Auckland property market, as markets can remain irrational longer than I can preach 'correction'. But I do think you will require more than five minutes a fortnight of research is needed to keep on top of the Auckland property market.

SNOOPY

[BIRMANBOY]

Its the age old conflict...expectations and reality. Human nature (for most people) says stop doing something when it isn't working to your expectations.....if you adjust your expectations to a more realistic level then the conflict goes away. For a lucky? few, disappointment can drive them to work harder. Up to the individual. Not that I am necessarily proud of this but I do SFA in the way of research but have been very pleased with my results Admittedly this is not trading but it is a somewhat associated endeavour..Investing. I have a diversified pool of dividend producers and these have been producing on average overall 8-10% return on my invested capital. Even including CNU and GFF. This requires very little research...just look at dividend history and pick a few that appeal and seem reliable and try and buy in dips. Probably oversimplifying but maybe you get the idea. The time you have spent has not been wasted but has been under rewarded is your basic gripe. If you had done better you wouldn't be feeling despondent about it all. Herein lies the essential problem with the share market. People call it "investing" in the share market but the reality is that its not an investment in the true meaning of the word but is really gambling ...gambling you have done the right research to accurately predict what is going to happen, gambling the other punters know less than you, gambling the annual results will actually result in the expected SP shift. Its not as big a gamble as the pokies or lotto or the gee gee's but it is a gamble and the problem is gambling is not investing. Several posters have said they treat it as a hobby. This makes perfect sense and could release you from the negative vibe that's developed.

[Harvey Specter]

I don't see Buffett Snr adopting that strategy but agree with others that if the interest has gone it's best to move on. Good luck with rental properties!
INdeed. He recommends his wife/family (ie. anyone not in the industry) invests in a Vangard EFT once he dies.

I think he even has a bet with a PE fund manager that an EFT will outperform the PE fund in the long run.

[dingoNZ]

We will just pay back the loans and buy additional rentals as equity and income allows.

You and the rest of New Zealand buddy, seems to have been very safe historically. If that's your interest then why not, whatever you are comfortable investing in is your call. I wish you well in it :)

[Penfold]

I built a model a few months ago that showed that until you have over 500k to invest you are better off investing your time increasing your earning potential and saving as hard as you can. I became interested in the benefits of individual stock picking after reading A Random Walk Down Wall Street. By investing in indexes your returns are generally about the same as when you pick individual stocks. Studying 2 hours a day and maybe increasing your return over the market 10% on a 100k portfolio is still only circa 10k extra income that year (and that wouldn't be easy). Those gains could easily be lost the next year... Putting 2 hours a day into your education can dramatically raise your earning potential.

I completely understand why smaller players are in the market. But don't fool yourself that its your path to riches. There will be a few winners, and hopefully you are one of them. But statistically most people will struggle to do any better than a passive index. And when they take fees and tax into account, they may find they are doing even worse.

I sold 20k of INTC recently that I picked up for $20. I worked out that in trade fees, fx fees and custody fees, ANZ made as much from the deal as me!

[Stranger_Danger]

I built a model a few months ago that showed that until you have over 500k to invest you are better off investing your time increasing your earning potential and saving as hard as you can.

I get that, but it is a bit like saying that playing rugby in the rain when you're 5 doesn't pay well, which is true, but, top All Blacks seem to do pretty well.

You can't say "I won't bother practicing and playing until I make the All Blacks - you have to get there first!

In the same way, you have to get the 500k first.

Also, if you can't manage 5k, you probably can't manage 500k or 5 million. If you could just start caring when the sums were large enough, lotto winners would do great post-win. They don't.

Finally, I didn't want to be negative and say this before, but sticking to residential property COULD be the safe, easy choice. Or it could be moving to the same side of the Titanic as everyone else.

[Bjauck]

I get that, but it is a bit like saying that playing rugby in the rain when you're 5 doesn't pay well, which is true, but, top All Blacks seem to do pretty well.

You can't say "I won't bother practicing and playing until I make the All Blacks - you have to get there first!

In the same way, you have to get the 500k first.

Also, if you can't manage 5k, you probably can't manage 500k or 5 million. If you could just start caring when the sums were large enough, lotto winners would do great post-win. They don't.

Finally, I didn't want to be negative and say this before, but sticking to residential property COULD be the safe, easy choice. Or it could be moving to the same side of the Titanic as everyone else.

For the average individual it may be wistful thinking that they may be able to achieve returns exceeding those of actively managed funds.

If NZ is the "Titanic" then whether you are in property on the starboard side or the share market on the port side, when you hit the iceberg of a correction, you are going down into the depths off the Newfoundland Coast!

[Stranger_Danger]

Bjauck - Which is a very good reason for not making the bulk of your wealth denominated in a single currency backed by a tiny economy at the ends of the earth.

Investment in global businesses is one way to achieve this.

[Bjauck]

Bjauck - Which is a very good reason for not making the bulk of your wealth denominated in a single currency backed by a tiny economy at the ends of the earth.

Investment in global businesses is one way to achieve this.
I agree totally with that. With smaller starting values, it is certainly easier to diversify with shares and minimise single country risk, industry risk etc. Whereas with residential real estate, you may be limited to one suburb or area. Unfortunately many Kiwis have been put off diversification when it comes to share investments owing to (sometimes misunderstood) complex FIF rules and lack of mutual imputation recognition. For many it then boils down to rental property or NZ shares. To the detriment of NZ capital markets and ownership of productive assets, the decision, more often than not, is in favour of residential real estate investment

[Stranger_Danger]

Yup. Thus the Titanic comment.

I'm not saying bad things will happen, just that, as a nation, we are so hopelessly reliant and undiversified, we're really going to know about it.

I agree with you that NZ equities wouldn't be a place to hide in that scenario - but at least one tends not to be leveraged 20 to 1 in equities!

[Silverlight]

Our strategy has always been to have a solid buy and hold real estate portfolio and then use investing in the stock market to enhance returns of the equity available. This therefore means that buying shares is a means to an end until we buy our next property.

You have written your strategy down, now execute it.

The US market has added over 10% per annum since the 1970's with swings and roundabouts. Buy an S&P500 index fund, you know what is in it, they charge 10bps a year, and achieve your enhanced returns strategy.

Buffet senior says his entire fortunes mandate, after he passes on, will be 90% S&P500 index fund and 10% Govt treasuries, for smoothing purposes. There is no shame in buying index funds to achieve growth in your own capital.

[dingoNZ]

You have written your strategy down, now execute it.

The US market has added over 10% per annum since the 1970's with swings and roundabouts. Buy an S&P500 index fund, you know what is in it, they charge 10bps a year, and achieve your enhanced returns strategy.

Buffet senior says his entire fortunes mandate, after he passes on, will be 90% S&P500 index fund and 10% Govt treasuries, for smoothing purposes. There is no shame in buying index funds to achieve growth in your own capital.


Absolutely, I personally have a managed fund with Milford Asset Management and am very happy with it. Fee's are reasonable and it has had historic sound performance.

I also have my own holdings which I put significant time into researching, which I can say I thoroughly enjoy doing. Best of both worlds to be honest.

[ratkin]

First off , dont bother reading the books, like you say they just repeat stuff you have read elsewhere anyway.
Secondly , if your investing on a long term basis , the less you monitor the markets the better.
I have only sold one stock this year and have only bought two. Less is often more in this game.
If there a crash or something dramatic happens like 9/11 then wade in . Rest of time just go for your triathlon training runs/.
Paying attention to every little thing just leads to overtrading.
Thirdly accounts are overrated , most of them not worth the paper they written on

[Penfold]

I get that, but it is a bit like saying that playing rugby in the rain when you're 5 doesn't pay well, which is true, but, top All Blacks seem to do pretty well.

There are currently 31 All Blacks. Practice all you like when your 5. You are statistically extremely unlikely to be an All Black.

I accept what you are saying... practice with small amounts and one day you may be a better investor. But don't fool yourself that by investing in shares you will make it to the top. It will work for a few. But most are better off with the safer option of working and saving hard. And perhaps owning a rental as you say. But the leverage in that path could see it all end in tears.

My partner and I have raised our income 130% in the last 7 years... and we save 30% of our income. It makes the 100k I have made from shares look pretty average over the same period. I realise this all sounds a bit bleak.

[Earthling]

Some us like to read a broker’s report. However there are a lot of brokers. And there are funds that do research, and companies and individuals that do research. Wouldn’t it be good if there was one place where we could get an average of what they all believe?

Well you can get such an average. Even better it is an average weighted by how much of their money they are willing to put where their mouths are. And even better it is available on the internet.

It’s called the share price.

So if you think you can outperform the market that’s who you have to beat, except with a few dummies like me thrown in.

So if the share price is a reasonable first approximation to what a share is worth and if diversification is as close as you are going to get to safety then perhaps a good strategy would be to buy a bit of everything for whatever the market thinks it’s worth.

However there would be large transaction costs and time costs if you did that. This is where index funds come in. They hold a little of all the shares on the market, often in proportion to a company’s size as measured by market capitalization. Such funds usually have lower fees because they don’t do research into companies.

The idea is that you are unlikely to beat the market anyway so minimize risk by maximizing diversification as cheaply as possible.

There is a brief video at http://www.morningstar.co.uk/uk/news/114859/fund-fees-equate-to-7-porsches.aspx in which an ex-hedge-fund manager argues that "the vast majority of investors have no real prospect of having an edge to beat the markets. So, what does that mean? It means that you will as an investor in all likelihood not be able to make a security selection or pick stocks or the active funds, better than the market as a whole and that you shouldn't even try...
you should buy the world equity index ..
The difference at retirement ... between having picked a passive fund that's called the world equity index and an active fund that tracks the same thing, the difference in fees will amount to almost £300,000 in today's money. So, provocatively, I'd say that's the equivalent of seven Porsches."

The Vanguard World Index fund, VT, trades on the NYSE Arca market.

[Tomtom]

Like many here I invest because it’s intrinsically interesting to me and has been for most of my life, when the financial crisis came I couldn’t resist the chance to go...nearly all-in. I really only follow a few NZX companies closely because this isn’t my job (and, having a few old school friends who went into banking and finance, I’m glad it isn’t). Since my initial post-financial crisis splurge I’ve been very happy to carefully invest my spare savings using a DCA approach and over the time I’ve been investing I’ve managed a much better return than a savings account…or almost any Index Tracker (paying only a couple of a tenths of a percent to invest the funds without ongoing fees!).

People are irrationally pessimistic about investing but if you can accept that you will likely never find the next big thing and your investment timeline is sufficiently protracted beating an index fund in the long term should be quite easy (if not go and put your money in an index fund, investing probably isn’t for you).

[Lease]

Like many here I invest because it’s intrinsically interesting to me and has been for most of my life, when the financial crisis came I couldn’t resist the chance to go...nearly all-in. I really only follow a few NZX companies closely because this isn’t my job (and, having a few old school friends who went into banking and finance, I’m glad it isn’t). Since my initial post-financial crisis splurge I’ve been very happy to carefully invest my spare savings using a DCA approach and over the time I’ve been investing I’ve managed a much better return than a savings account…or almost any Index Tracker (paying only a couple of a tenths of a percent to invest the funds without ongoing fees!).

People are irrationally pessimistic about investing but if you can accept that you will likely never find the next big thing and your investment timeline is sufficiently protracted beating an index fund in the long term should be quite easy (if not go and put your money in an index fund, investing probably isn’t for you).

What is "DCA approach"?

[winner69]

What is "DCA approach"?

Dollar Cost Averaging

Investing set $ amounts on a regular basis irrespective prices .... lessens the risk of 'timing the market' incorrectly

[Lease]

Dollar Cost Averaging

Investing set $ amounts on a regular basis irrespective prices .... lessens the risk of 'timing the market' incorrectly

Oh，thanks. I actually have been using the approach for a while but never know the abbreviation.