Stock picking vs ETF

UK investor using IB

Don’t have access to US domiciled ETF’s, so not able to use IB low commission for US stock exchanges

Portfolio exclusively NASDAQ or S&P500. Performance massively outweigh local FTSE. Did have some World ETF, but sold and exchanged for NASDAQ/S&P500. Happy with this allocation, but open to logical reasoning

However, main reason for thread, Stock Picking vs ETF

IB commission for Ireland Domiciled ETFs on LSE approx £6
IB commission for NASDAQ/NYSE around $0.35 or £0.27, plus ad hoc $2 (£1.52) FX

Due to

  • Difference in fees above
  • (deluded) belief in own stock picking ability

Have formed a portfolio of NASDAQ/S&P500 shares

Heavily weighted to FAANG

Started to look for dips in the market and buy

However, stock picking is taking a large amount of time

Performance wise, I am coming in slightly lower than a NASDAQ 100 ETF tracker. However the ride is a roller coaster and volatility is hugely greater between shares, I was caught with a large investment downturn in Netflix for instance, but equally an upturn in Apple and Microsoft compensated

Commission wise,

  • Although LSE ETF is higher one off cost, the ETF internally is doing the buying and selling of shares.
    -With stock picking, the commission is lower, but the number of transactions is larger, so commissions are working out similar to LSE ETF and becoming higher

I think I seem to be deluding myself that:

  • I have the ability to stock pick
  • costs are lower for stock picking

Any thoughts?

Let’s say your chance of outperforming the index is 50% in any given year (because the market cap weighted performance is basically the point where 50% of all investors made less gains and 50% made more gains). Your chance of beating the market for 10 years straight is 0.1%. You could also say that 1 in 1000 investors beat the market for 10 years straight. If you are lucky, you could be this guy. But almost everyone who isn’t investing on a market cap weighted basis is underperforming long-term. This won’t change that much if you think your chance of beating the index is even at 75%. Then your chance of beating the index for 10 years straight is at 6%. This is overly simplified, but should make the point. Do you really want to take that bet?

Nasdaq had a max. drawdown of -83%. It’s way riskier than the SP500. And why would you concentrate all your investments to one country? I’m not saying that the US could go through a Japan scenario, but it might underperform a globally diversified portfolio for decades. We just don’t know.

The US performance since 2009 was outstanding. ExUS performed poorly compared to the US, especially Emerging Markets. Basing your investment decision on only these 10 years is performance chasing and a harmful behaviour.

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At a time in history when Nasdaq went just cookoo. Tech sector is much healthier now. Ok, maybe discounting some money losing “enterprises” like uber & co

Apple going from 173$ to 300$ in the last 7 months, don’t really know what’s healthier about that. Is Apple really worth 1320 billion $ now? Hyundai at 29 billion $, BMW at 47 billion $, Daimler and GM at 52 billion $, VW at 88 billion $ and Tesla at 80 billion $. How many cars is Tesla selling compared to the others? Are they making any profit?

I’m not saying that I can forecast anything. But everything tech-related seems very high priced today.

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They were extremely undervalued before, like P/E of 15 or so, c’mon. Now they’re at 25, that’s more in line with the rest of big tech. Sure, they’re still a one trick pony but who isn’t? Google’s 99% an advertisement company. That’s why diversify over many companies.

Not a fan of Tesla myself too, unhealthy financials, I’d put it into same bucket as Uber. Car manufacturing is a tough business in general, very capital intensive and low margin, completely unlike tech. I’d short it but I’m not that crazy.

But back to the main topic

How big is your portfolio?

Frankly to me all these fees are almost negligibile, I wouldn’t sweat over it. But you seem very concerned with them and so it sounds like you don’t really have much money invested. In that case I’d suggest focusing on your job to get more money to invest to begin with. Stock market returns alone won’t make you rich if you start small, that’s simple math.

Stock picking is fun but, as you noted, time consuming, and it’s also questionable that as a small retail investor you have the ability to beat the index significantly. Thus the returns on your time spent on your career would likely outweigh the returns from stock picking. It’s also time better spent, unless you think you’re really learning a lot about finance and markets from all the time you’re spending on stock picking, otherwise it’s a waste.

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Stock picking is lose, lose. Either you underperform and lose money, or you perform better and get overconfident and increase your stock picking share.

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That is a false assumption. What is true, is that the total expected return of active investing is equal to the market-weighted index. Some investors outperform, some underperform. How big your chance of outperforming is, depends also on your skill, not just your luck. It’s not a coin toss. I’m pretty sure if you have no idea about investing, your chance of beating the index is far lower than 50%. It’s like saying: the average time in London marathon was 3 hours. So let’s assume you have a 50% chance to beat that time. Makes no sense, right?

That’s a false conclusion made on the basis of a false assumption. When you actively invest, you don’t need to outperform the index EVERY YEAR. You just need one good year, and in other years you just need to trail the index.

In my opinion, in order to actively invest, you need to be smarter than the average investor. Average, not median. There are probably very few very smart investors, but they trade billions on behalf of huge funds and have a huge buying power. Conversely, some of these funds probably have more conservative strategies, which restrict the maximisation of their return. That’s where I would look for any possible market inefficiencies to exploit.

But I don’t. Whenever I get into any online games where you can see your place in the ranking, I can see just how many people are much much better than me. And even if I play for hours and master my play, I cannot match their skill. So how should I hope that I would do better in the game of investing?

There is no skill in stock picking, just luck. Otherwise actively managed funds would outpeform their index longterm, but they don’t.

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It is luck in the vast majority of cases. The medallion fund is probably the only example where we can be reasonably sure that the performance is due to skill and not luck or exposure to the right factors.

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If that was true, then there would be no examples of long-term market beaters, as you demonstrated in your thought experiment. But we have Warren Buffett and a few others, and probably thousands of other smaller guys, which we never heard of. There are constant inefficiencies in the market, which smart people try to leverage, and it’s like a gold mine: you can mine that idea only for so long, until everybody else knows about it and all that “gold” has been mined out.

There is one fund which appears to constantly deliver great returns every year. Google for Medallion Fund from Renaissance Technologies. They charge 5% management fee and 44% performance fee, and still have been delivering ~40% returns since 1988.

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Wrong. Most active managers don’t outperfom the index and probably have no idea what they’re doing, it’s true, but there are enough examples of funds who have an idea of what they are doing, have been doing it consistently and profitable for years such that the probability they got there by chance is astronomically small. Rentech is most famous, but there are others too.

There’s certainly a big element of luck and risks of getting overconfident in your own abilities. But there are viable trading strategies, “net nets” for one classical example. Not to forget that stuff is so correlated today that by just picking many random stocks you can end up being an index hugger.

But if you don’t have a strategy and risk management, picking stocks on emotions, I agree, you’d likely lose.

LOL! Never heard of it. 5% management fee? Crazy!

Still nothing compared to the performance they’ve been delivering,

But don’t worry about that, they are not taking your money. Most good funds aren’t open to public and trade their own capital. Strategies tend to have capacity constraints and taking on outside capital after some point just dilutes the returns for existing investors.

Warren buffet can’t “beat” the SP500 because it’s the wrong index to compare. He has a lot of small stocks. Small Value literally murdered the SP500 over a 30+ year period.

Stock picking is pure luck. The Medallion Fund is like the lottery winner. 1 of millions.

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Eh, no?

https://www.msci.com/documents/10199/25244741-85f5-4851-98f4-872d4fd82423

Ok, this data goes just 20 years back, but feel free to share your source.

Honey, they’ve been legendary for decades, already in the 90s. And still going strong. They have their system that works, noone on the street is doubting that.

Calculate p value that their returns are a statistical fluke and tell us how many zeroes after decimal point it has, It’s not even 1 in a million.

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Would be interesting to see a performance analysis of various funds before fees.

Portfolio Visualizer goes back to 1972. The actual research goes back to 1928 for value and size, for other factors back to 1963. Back to 1990 for ex US.

Your source goes back to 2002. 2009-2019 Growth stocks outperformed.

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Warren buffetts performance can mostly be explaind with known risk factors.

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