New investor question

[Mman]

See above. You made a claim clearly stating there is tons of academic research to show that "valuation will lead investors wrong nearly every time." This is the claim I've been asking for evidence about. You can see several place in the thread where I asked you to provide the studies that support that.

You keep repeating weird things that aren't in this thread. Where did I mention this "valuation will lead investors wrong nearly every time"? As far as I can tell you are the only person that has stated that phrase in this thread. Plastikos made a mention of a new investor not worrying about valuation. Is that what confused you? I think you aren't using quotation marks correctly. But in essence you'd like me to prove things I didn't say? Is that what you are going for? I can only hope you are doing better in medical school than you would in law school. On the other hand, what I actually did give as advice is here....

On a per time basis, the most efficient way to make money long term investing is passive and low cost and putting in money on a scheduled basis. There are possibly other ways to eke out a small edge here or there, but unless you are willing to invest substantial time into it, it is really not worth it.

I really don't understand your posts. I'm certainly not going to waste my time scanning in journals and textbooks for you that I can't link online and since you don't seem to be interested in what I actually have to say but instead want to create some weird strawman, well I guess I should ignore the trolling. I mean when you actually post this...

My main issue is that blanket statements can lead people astray, particularly when they don't have subject matter knowledge. For someone buying index funds, sure, disregard valuation can be a rule of thumb for many people. When these people take the "valuation doesn't matter" mindset and start buying individual securities, it starts to matter a lot more in the sense that you better have a well thought out and researched position for buying something instead of a "valuation doesn't matter" attitude. Purchasing individual securities is different from buying into a diversified fund.

It makes me think you literally don't get it. A thread with advice for investing regularly in low cost passive funds is not related in any way shape or form to advice on stock picking. But you want to argue essentially about stockpicking. I'm sure there are other websites you can go to for those discussions or maybe you can start your own thread.

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[dempty]

You keep repeating weird things that aren't in this thread. Where did I mention this "valuation will lead investors wrong nearly every time"? As far as I can tell you are the only person that has stated that phrase in this thread. Plastikos made a mention of a new investor not worrying about valuation. Is that what confused you? I think you aren't using quotation marks correctly. But in essence you'd like me to prove things I didn't say? Is that what you are going for? I can only hope you are doing better in medical school than you would in law school. On the other hand, what I actually did give as advice is here....

...see below, he made a comment, I disagreed, you stepped in and said it was a good comment...I mean, it's odd the selective memory here...you can just read back and see. I don't get why you would defend a statement you don't support...

I really don't understand your posts. I'm certainly not going to waste my time scanning in journals and textbooks for you that I can't link online and since you don't seem to be interested in what I actually have to say...

I told you I'm interested, but I have a feeling you know you can't find the research you claimed you had. I had a feeling you would look for an out with it. It's not hard to find these things online. If not for me, share it with us so those who are less informed can benefit.

...as mman said, all the time, never worry about valuation, etc...you will be wrong almost every time...

According to plastikos, this is your advice...pretty unqualified statement, if you ask me...

This is probably the worst advice you could give and I'm willing to bet most people who advocate not to worry about pricing and value ... but it can help you make very good decisions in the long run.

...

My advice to you, OP, is to learn what you can, and definitely question all the advice you get. I would also suggest looking at some investment forums, of course with a level of skepticism as you should here.

I quoted that advice and disagreed, then encouraged the OP to learn what he or she can, while looking to new forums focused on finance as well.

Warren Buffett disagrees with you. So does John Bogle. So do a host of other brilliant investors. I know all about price and value and the difference there of and I buy all kinds of individual securities with a value based approach so I am about the opposite of whatever stereotype you'd care to find. I read financial statements for quarters/years on end for companies.

My advice is not flippant or poorly thought out and contrary to what you believe, the academic evidence says it is the best advice possible.

I showed you that Warren Buffett does, in fact, see valuation as useful and has a role-- I posted a few articles about interviews with him.

You can look back in the thread...there are several places where I said valuation is relevant, and you said there's tons of research to suggest otherwise.

 

[Mman]

For anyone else that might care.

Warren Buffett: "Both large and small investors should stick with low-cost index funds." He reminded investors of something they probably know intuitively. "When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients."

Aswath Damodaran: "The performance of active money managers provides the best evidence yet that indexing may be the best strategy for many investors."

Active vs passive management, analyzing a decade of returns: "Put simply, the general investor should retreat from portfolio management and instead access the market portfolio using low-cost index replication structures via an execution-only approach"

WhiteCoatInvestor summarizing active vs passive

Aswath Damodaran: Market Timing, Does it Work? Includes nice graph of the best timing strategy identified in their group underperforming a simple 100% equity position.

 

[dynx]

"Well that escalated quickly"
"You killed a guy with a trident"

 

[The White Coat Investor]

Hi everyone,

I'm a pretty new investor, but I have been educating myself over the past few months. I have started contributing to my Roth since last fall, and investing in some ETFs through my online broker. My current tiny balance (a little more than $200) was mostly invested in a Financial sector fund form the beginning, and I have been diversifying into different funds as I continue saving. My question is, given the potential market changes coming soon, with the very likely prime interest rate hike by the fed, should I sell my financial ETF holdings before they dip?
I'm not risk-averse or anything, due to my small balance and my age (which allows me to experiment a little as I learn), but I feel like I can read the writing on the wall for some potential changes in the market.

Thanks for the help!

If I had it all to do over again, I'd probably just leave it all in a vanguard target retirement fund until it hit 6 figures. Your asset allocation/investment return just matters so little in the beginning that you can almost ignore it. It's all about your savings rate at this point. I think when I hit my first million something like 80% of it was just cold, brute savings and only 20% was investment gains.

It really doesn't matter to the final outcome how you invest $200 now. If you want to maximize the value of that account, what you need to do is figure how to come up with another $200 to add to the account.

As a general rule, I would not recommend a sector ETF, including financials, as a first investment, a sole investment, or really even an investment at all. You need to diversify more broadly than that.

 

[wanderingorion]

If I had it all to do over again, I'd probably just leave it all in a vanguard target retirement fund until it hit 6 figures. Your asset allocation/investment return just matters so little in the beginning that you can almost ignore it. It's all about your savings rate at this point. I think when I hit my first million something like 80% of it was just cold, brute savings and only 20% was investment gains.

It really doesn't matter to the final outcome how you invest $200 now. If you want to maximize the value of that account, what you need to do is figure how to come up with another $200 to add to the account.

As a general rule, I would not recommend a sector ETF, including financials, as a first investment, a sole investment, or really even an investment at all. You need to diversify more broadly than that.

I'm going to hit the minimum to invest in the Vanguard fund this week. I'm planning on leaving it in there for a long time. I just don't know how much I'll be able to contribute while I'm in med school. Maybe $50/month from my wife's pay.
Thanks for the advice


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[The White Coat Investor]

I'm going to hit the minimum to invest in the Vanguard fund this week. I'm planning on leaving it in there for a long time. I just don't know how much I'll be able to contribute while I'm in med school. Maybe $50/month from my wife's pay.
Thanks for the advice


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If your wife has earned income and wants to save it for retirement, it should go in a retirement account like a Roth IRA.

 

[PlutoBoy]

Following the trend is actually much more profitable in the long run than holding a stock and "forgetting about it". Why would you hold on to a failing company? That's pretty much an act of faith - That's basically you saying that it doesn't matter what happens to the company, you will keep your money on it no matter what. Stocks don't go up forever, companies fail, etc.

Do you remember what happened to the Enron stockholders? Yeah. I have plenty of other examples if you need them. Holding forever is not always the best strategy. There is money to be made with price movements. Let's say you buy at $12 and the stock is bouncing between $12 and $14 but all you do is hold. How is that better than taking advantage of the price action? Or simply moving on to a stock that has a greater ROI? Of course doing this takes time and effort. If all you want to do is put money away for retirement and focus on advancing your career then just buy index funds prn and call it a day. It requires little effort and likely to be profitable.

You know what's a poor investment strategy? Buying on emotion. That's where trend following and stock analysis helps. The only thing that is true in the stock market is price. Is the next iPhone awesome? Great. But I care about the price of the stock. I don't care if the phone is great if I am losing money or simply not making any money.

My advice is to familiarize yourself with the sector you are interested in. Learn how to evaluate a company. Learn fundamental and technical analysis and then make your own decisions.

PS: There is also a difference between investing and trading. Most of the people making a lot of money off the market are not simply investors. They are actively trading and managing their portfolios. Do you think that the Swiss National Bank buys a stock, forgets about it, and holds on to it no matter what?

 

[ThoracicGuy]

Following the trend is actually much more profitable in the long run than holding a stock and "forgetting about it". Why would you hold on to a failing company? That's pretty much an act of faith - That's basically you saying that it doesn't matter what happens to the company, you will keep your money on it no matter what. Stocks don't go up forever, companies fail, etc.

Do you remember what happened to the Enron stockholders? Yeah. I have plenty of other examples if you need them. Holding forever is not always the best strategy. There is money to be made with price movements. Let's say you buy at $12 and the stock is bouncing between $12 and $14 but all you do is hold. How is that better than taking advantage of the price action? Or simply moving on to a stock that has a greater ROI? Of course doing this takes time and effort. If all you want to do is put money away for retirement and focus on advancing your career then just buy index funds prn and call it a day. It requires little effort and likely to be profitable.

You know what's a poor investment strategy? Buying on emotion. That's where trend following and stock analysis helps. The only thing that is true in the stock market is price. Is the next iPhone awesome? Great. But I care about the price of the stock. I don't care if the phone is great if I am losing money or simply not making any money.

My advice is to familiarize yourself with the sector you are interested in. Learn how to evaluate a company. Learn fundamental and technical analysis and then make your own decisions.

PS: There is also a difference between investing and trading. Most of the people making a lot of money off the market are not simply investors. They are actively trading and managing their portfolios. Do you think that the Swiss National Bank buys a stock, forgets about it, and holds on to it no matter what?

That's why you buy an index fund so you own ALL the stocks. Buying individual stocks for long term investing is far riskier.

 

[PlutoBoy]

That's why you buy an index fund so you own ALL the stocks. Buying individual stocks for long term investing is far riskier.

I agree with you. If you are buying individual stocks you need to actively manage your account. You can't forget about it.

There's the question of age as well. I'm fortunate enough to be relatively young so my risk tolerance is higher.

I do have a regular 401k that I don't mess with. Everyone should set that up first.

I have a separate account for day to day transactions that I actively manage with relative success.

 

[cpants]

I agree with you. If you are buying individual stocks you need to actively manage your account. You can't forget about it.

There's the question of age as well. I'm fortunate enough to be relatively young so my risk tolerance is higher.

I do have a regular 401k that I don't mess with. Everyone should set that up first.

I have a separate account for day to day transactions that I actively manage with relative success.

Out of curiosity what percentage of stocks and bonds do you own in your actively managed account? What has it returned for you on a yearly basis over the past few years?

 

[PlutoBoy]

Out of curiosity what percentage of stocks and bonds do you own in your actively managed account? What has it returned for you on a yearly basis over the past few years?

100% stocks. My average return is around 15%.

 

[cpants]

100% stocks. My average return is around 15%.

Over what time frame? How closely does your portfolio track major indexes?

A 100% stock portfolio invested entirely in an S&P500 index fund or total market fund has returned around 15% too in recent history with minimal expense and much less volatility than a personally managed stock portfolio. Just food for thought.

 

[Another Second Opinion]

I agree with you. If you are buying individual stocks you need to actively manage your account. You can't forget about it.

There's the question of age as well. I'm fortunate enough to be relatively young so my risk tolerance is higher.

I do have a regular 401k that I don't mess with. Everyone should set that up first.

I have a separate account for day to day transactions that I actively manage with relative success.

How much are you paying for each transaction of individual stocks? Places like Vanguard allow you to buy/sell Vanguard ETFs at no expense so the more money you save there, the more money you have to invest in say a S&P index or Total Stock Market which are excellent choices.

Take a look at Warren Buffett, his advice on picking stocks isn't to mimic his portfolio, it's to buy a S&P 500 index fund which gives you exposure to some of the best businesses around!

 

[PlutoBoy]

Over what time frame? How closely does your portfolio track major indexes?

A 100% stock portfolio invested entirely in an S&P500 index fund or total market fund has returned around 15% too in recent history with minimal expense and much less volatility than a personally managed stock portfolio. Just food for thought.

That's probably true.

 

[PlutoBoy]

How much are you paying for each transaction of individual stocks? Places like Vanguard allow you to buy/sell Vanguard ETFs at no expense so the more money you save there, the more money you have to invest in say a S&P index or Total Stock Market which are excellent choices.

Take a look at Warren Buffett, his advice on picking stocks isn't to mimic his portfolio, it's to buy a S&P 500 index fund which gives you exposure to some of the best businesses around!

$7 for each transaction. How much does Vanguard charge for transactions that do not involve their ETFs?

 

[libertyyne]

$7 for each transaction. How much does Vanguard charge for transactions that do not involve their ETFs?

A better question is why risk it if you are not going to be able to outperform the market?

 

[Another Second Opinion]

$7 for each transaction. How much does Vanguard charge for transactions that do not involve their ETFs?

They charge $7 too, but goes up to $20 after 25 trades in the year. That's great if this system works for you, but for the amateur investor, it's definitely safer to pick diverse funds and avoid the trading fees, since again, it's more money they can put toward investing.

I'll disclose that I do own a few individual stocks that have done quite well, but I'm not actively trading these, just bought them a long time ago and enjoy watching them grow.

 

[PlutoBoy]

A better question is why risk it if you are not going to be able to outperform the market?

I think it is a skill worth learning. Everybody is making money in the market this year. Once the market pulls back and estabilizes the returns of index funds may be lower.

I concede that this may apply to actively trading individual stocks as well (ie, I am making money because everyone is making money) but in a down market it may pay off, I hope.

 

[PlutoBoy]

They charge $7 too, but goes up to $20 after 25 trades in the year. That's great if this system works for you, but for the amateur investor, it's definitely safer to pick diverse funds and avoid the trading fees, since again, it's more money they can put toward investing.

I'll disclose that I do own a few individual stocks that have done quite well, but I'm not actively trading these, just bought them a long time ago and enjoy watching them grow.

$20 each way?!

 

[Another Second Opinion]

$20 each way?!

Yeah, after you make 25 trades in the year it goes up that high. Obviously if you're actively trading individual stocks, Vanguard is not the place for you. I think TradeKing offers $5 trades each way.

 

[cpants]

I think it is a skill worth learning. Everybody is making money in the market this year. Once the market pulls back and estabilizes the returns of index funds may be lower.

I concede that this may apply to actively trading individual stocks as well (ie, I am making money because everyone is making money) but in a down market it may pay off, I hope.

Statistically, it is very unlikely to pay off. Professional stock pickers can't beat the market return reliably. 87% of actively managed mutual funds underperform their indexes. What makes your strategy different? I'm not trying to be hard on you....I just think the belief that you will somehow outperform the pros is magical thinking. I used to think the same way, and I made some mistakes.

 

[PlutoBoy]

Statistically, it is very unlikely to pay off. Professional stock pickers can't beat the market return reliably. 87% of actively managed mutual funds underperform their indexes. What makes your strategy different? I'm not trying to be hard on you....I just think the belief that you will somehow outperform the pros is magical thinking. I used to think the same way, and I made some mistakes.

I'm not taking offense but thanks for the disclosure

Statistically speaking you are right. There is no denying that actively managing stocks is not worth it to the average guy.

Ultimately it comes down to this: I have fun doing it. As far as I am doing a little better than the market I feel like it is worth my time.

Everyone needs to find out what works for them and how much risk they can tolerate.

 

[NewRPh2006]

Good that you are asking questions and getting educated. There is a book I would strongly suggest for you: The Little Book of Common Sense Investing by John C. Bogle. Don't let the humble title fool you. The author is one of the greatest stock market experts of all time (founder of Vanguard). Imagine having a one-on-one tutoring session with him for $15. That's essentially what you get when you buy and read this book. Very likely to re-shape your investing strategy for the better.

 

[Mman]

Holding forever is not always the best strategy. There is money to be made with price movements. Let's say you buy at $12 and the stock is bouncing between $12 and $14 but all you do is hold. How is that better than taking advantage of the price action? Or simply moving on to a stock that has a greater ROI?

If anybody knew that a stock was going to spend the next few months and years bouncing up and down between $12 and $14 they would obviously profit by buying every time it hit $12 and selling every time it hit $14. Unfortunately it's only in hindsight that you know that. When it's sitting at $14, you don't know if it will go back to $12 or if it will go up to $100. Selling it and then watching it skyrocket is a real thing that happens.

I believe it was Ben Graham (or might have been Warren B) that suggested you shouldn't buy a stock if you wouldn't be happy holding it for 5+ years even if you couldn't have a quoted price for during those years (in other words not knowing if the price was going up or down). It was certainly Buffett that said his favorite holding period for a stock is forever.


Now is holding every stock forever always the best idea? Of course not. But the investors that have done the best over decades are generally the ones that have held their best holdings the longest. Even stocks that show a 15-20% return for decades will have massive decreases in share price over the years as their business cycles through good times and bad. AAPL has killed it the last 20 years, increasing by 26,000%, but even they have had many downturns over that time including 2 near 50% drops in the last 9 years and another 30+% drop. AMZN is the current poster child for stock returns, but if you've been a long time holder you have had several big drops, including a nearly 95% drop from 1999-2001.

With individual stocks, or entire markets, people like to think they can accurately call tops and bottoms of price movements, but evidence suggests they can't with any actionable degree of accuracy. Better off to just buy something when you feel the risk is acceptable and then hold on for a long time unless something fundamentally changes (and that something not being the price).

 

[goodoldalky]

Time in the market > timing the market

 

[PistolPete]

Time in the market > timing the market

Exactly this