Are Individual Stocks Worth The Time And Effort?

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Thanks to everyone who shared why they do or do not trade individual stocks. Here’s what I think. I believe there are market inefficiencies that can be taken advantage of. I also think that unless you understand how to read a company’s financial statements and investor psychology, it is highly unlikely you can beat the market over time. Since I don’t know either of those things, I have no business trading stocks until I do.

But! I think a more important question is whether spending all that time looking at stocks is worth it. Not only do you have to build up your knowledge overall, you then have to constantly monitor the markets for new developments. After all that, by how much are you really going to beat a well-balanced mutual fund portfolio? I personally feel that unless you have a real passion for it, most people would get a better return on their time pursuing other things like career advancement or more entreprenurial activities. So I think I’m gonna do that instead.

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  1. I have to agree with you 100%. I don’t know how anyone not “investing’ thier time 100% into company research can outperform the hordes of professionals that are trying to do the exact same thing.

    I just posted on my blog not 5 minutes before I read your post about my effort to switch over to index investing exclusively. Its tempting to think that one can beat the market, but I’d rather get as close to a 100% match of the market performance as I can (through low fund expenses) than risk underperforming. The amount of data for efficient market theory is overwhelming.

  2. I think there is a lot to be said for just plunking your money into mutual funds, or if you’re going to buy individual stocks, trying to find something solid that will pay dividends and then just sitting on it for a long time rather than doing a lot of active trading. But then that is why I bought GM, so what do I know. On the other hand, it’s worked well for me with McDonalds.

    Caymans here we come!

  3. I don’t trade individual stocks for the same reasons. I don’t have the time nor inclination to know a particular company and sector inside and out to be able to recognize inefficiencies in the market. I’d be competing with professional money managers whose whole life (we hope) is to find these inefficiencies and exploit them for their clients.

    The one time I invested in individual companies — buying what I know, as the Motley Fool might say — I lost more money than if I had simply bought a S&P 500 index fund. I figure, find a money manager whose philosophy I’m comfortable with and who has a good track record, and let them manage my investment.

  4. I am in complete agreement. My problem is that I already own a few (9) stocks that were sold to me by a full service broker. Because it may be inappropriate to sell them at this point, I am forcing myself to take the time to evaluate them. However, it is time consuming and the quality of my work is questionable at best.

    Interestingly, the full service broker does not have a sell recommendation for any of the stocks.

  5. Investing in stocks is worth the time if you have a large portfolio. Excess returns on a small portfolio will not much of a difference. I invest in stocks because it’s challenging and fun. For people who do not like analyzing stocks, it’s better to stick with mutual funds and use their free time to do something they enjoy.

  6. Mutual funds are ok if you have limited assets.
    If you really like a mutual fund you can always find the stocks in that fund and buy them on your own and avoid paying hefty commission to fund manager.
    I know you didn’t like MBT but you can easily buy 10 or 15 stocks in units of 100 shares and just pay $1 each. Your performance would be same as that of the fund which invested in these very stocks without having to pay any middleman.

    100 share @ $20 would cost only $2001.

  7. I disagree. You don’t really need to know anything about investor psychology or everything about a companies financial report to buy a stock and hold onto it for thirty years. All you have to know is that you (or most of the people you know) can’t imagine life without their product (GAP jeans, Starbuck’s coffee, Sex in the City DVDs, Pella Windows, whatever turns you on). You should also know that their P/E is lower than competitors’ and you have to take a good look at their company leaders to determine a). their soundness of judgement b). their fiscal and personal investment in the company c). their openess to creativity and new ideas.

    However, if you are going to be a day trader, you better be ready to commit your life to exploritory data mining.

  8. Disappointed that you will not be actively trading. You seem to have a good mind for the details and homework needed.

  9. I almost completely agree with you. Beating the returns that a portfolio of index funds will give is a difficult, but not impossible task. However, not only does a person need to be well schooled in finance and business, but also be willing to dedicate significant time in due diligence, reseaching their portfolio picks. For most, it isn’t worth their time. Unlike others who have posted on this site, I argue that it takes more than understanding how to read financial statements or comparing P/E, EV/EBITDA, EV/Book Value ratios. You also should understand the industry, the competitive landscape, future drivers of growth, competency of management, etc. Only when you have a good understanding of the intangible aspects of a company, can you truly determine whether the market has incorrectly priced an equity or bond, thus creating a buying opportunity.

  10. I trade stocks precisely because most money managers don’t beat the market. Although these people have financial degrees and experience, what they don’t have is a crystal ball. They don’t know what is going to happen in the future so an individual has just as good a chance of making a better return than them. I agree with the comments made by “Sunrise” on 24 Feb. If people can’t live without certain products, buy those stocks. Even if the companies that make these essential items don’t outperform, they certainly won’t be underperforming either so there can only be upside. Worst case scenario is that your investment stays the same.

  11. There are several non- or semi-financial reasons to buy stocks. The first is to be able to gain access to shareholder meetings for political or social reasons. The second is if you invest in local companies to gain access to shareholder meetings for the free food and yes, in some cases, for the door prizes 🙂

  12. Steve Champa says:

    I fully agree with Jonathan. Certainly it’s a better deal to pursue bigger and fun things like entreprenurial ventures or LLC/LLP. For now, I’m thinking of maybe starting my very own cashflow online journal or blog and charge a minimum $40/month for any financial conglomerate to advertise or link their site from mine. The more I update, the bigger my archives get, which brings more pages within my site for 3rd party ads to be linked from…bringin me more money along the way. Yeah, I think I’ll do that!

  13. Greg Vande Corput says:

    For those of you deciding to trade individual stocks, please consider this advice…….before deciding to buy a stock know what price you are going to sell the stock, both directions from the price you bought it. This is more important on the downside than you can imagine. Pick some percentage of loss (6-9%) and if your stock drops this chosen percentage sell no matter what every time. Don’t hang on to it for any reason at all. I learned this back in 1999 at a cost of almost $14K. Let my pain be your gain!!!!!

  14. Jerry Maguire says:

    Jonathan – If you are only going for a million then you will be safer and sleep better at night with funds. On the other hand, each person has insight into stocks and companies that are unique to their experience. I personally feel that diversification is very conservative and will hinder your growth, but then again you have downside protection. For someone at your age, I think you should go for the gold and keep an open mind to individuals stocks. Good luck.

  15. Philip Choi says:

    Let’s not forget the pursuit of those things which are priceless! Family, friends, TV!!!

  16. Steve Champa says:

    I like to scam people through my Teach Me to Trade program. They always fall for my cancer ridden dead father trick.

  17. law group says:

    # Steve Champa Says:
    March 31st, 2007 at 1:02 pm

    I like to scam people through my Teach Me to Trade program. They always fall for my cancer ridden dead father trick.

    scamming people is against the law. teach me to trade, the learning annex and raymond aaron should drop you as a teacher/speaker

  18. osopardo says:

    LOL!! I just came back from a 3-day “seminar” with Steve Champa as the lead “teacher”. It was incredibly educational as far as seeing how a real pro snake oil salesman operates.

    I’m fascinated by the comments above; is that really Steve Champan or somebody using his name to discredit him? Is it just more of Steve’s sarcastic humor or an open disclosure of his true intentions? It’s like watching some rare exotic predator at work!

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