Apprenticed Investor: There Are No Shortcuts

Tscm_1The latest "Apprenticed Investor" column is up:  There Are No Shortcuts.

Sorry to be the one to deliver the sad news, but despite some claims to the contrary, there is no magic bullet.  Investing takes some smarts, lots of hard work and a little bit of luck.

Here’s an excerpt: 

"To be fair, some investing books are worth exploring and considering on their own merits. Take, for example, The Little Book That Beats the Market, which has gotten some favorable press of late.

I have no problem with the book’s main plan: "Invest in good companies when they are cheap." That’s certainly one way to pick stocks, and it sure has worked for Warren Buffett. Of course, you also can use a technical method of stock selection. Or you can screen with quantitative data. Or you can rely on fundamentals to make your stock

It really doesn’t matter how stocks enter your portfolio. As we have shown time and again, stock selection is not where investors run into trouble. Managing the positions after they become part of the portfolio is where people typically discover their investing shortcomings. And that’s before we get to a wealth of other important issues, including how and when to make purchases, how much of a given stock to buy (position-sizing), when to add to existing holdings, how to handle bad markets, when to use leverage, how to use options, how to hedge, when to use stop-losses, etc.

Regular readers no know I think stock selection is way over enmphasized. So much so, that in the column, I lay down this challenge to both readers and the author of the book The Little Book That Beats the Market:

"You pick your best stocks, the
ones you have done all the research on and know inside and out. Then
give me a portfolio of randomly selected names. I bet that over the course of a year, I can outperform most people’s
favorites by 20% by using only techniques discussed in the Apprenticed
Investor series, such as stop-losses, money management,
position-sizing, etc.

The point of this exercise is to demonstrate that stock selection is
far less important to performance than a host of other factors. The
overemphasis on stock-picking permeates the financial media. It’s easy
to see why. It has a good story line, an inherent dramatic conflict. It
lends itself to the horse-race-type coverage that’s so easily done.
Plus, it’s easy for readers to comprehend: Buy this, don’t buy that.
You can understand why the media and investors overemphasize it."

I’m curious if any one wants to take me up on this . . .

Apprenticed Investor: There Are No Shortcuts, 11/16/2005 7:30 AM EST


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What's been said:

Discussions found on the web:
  1. joe commented on Nov 17

    Do it over a 3 year period and include your transaction costs and I’ll bet that a stock picker like the guys at Southeast Asset Management, FPA Advisors and Tweedy, Browne will beat you.

  2. hey now commented on Nov 17

    Shouldn’t “Regular readers no I think …”
    “Regular readers know I think …”

    BR: Ooops! Corrected — (I blame it on the editors)

  3. wcw commented on Nov 17

    I’ll play over one year. Plus, to make it on-topic, I’ll throw down the biggest short-cut I can imagine: a five-minutes-work ETF portfolio.

    In five minutes, all you do is replicate and try to get decent fees. Shoot for rough GDP weight, so 20% US. Throw up your hands and do 50/50 equity/bonds. US ETFs are pretty easy; I don’t know too many cheap non-US fixed index funds, so I’ll go with a couple old-fashioned CEFs there.

    Your six names:
    100 VTI — US equity, 10%
    70 IEF — US 10-year, 5%
    50 TIP — US TIPS, 5%
    600 EFA — non-US equity, 30%
    140 EEM — non-US emerging, 10%
    4500 GIM — non-US fixed, 30%
    900 TEI — non-US em fix, 10%

    At around $120k, that’s a real portfolio, enough to trade I hope. Let’s invest it at December 31 closing prices. If any of these moves a ton, adjust the share amounts to be roundish lots approximating those weights. There — that took me five minutes.

    Your twenty tradeable names via random draw from the S&P 1200 global (I used randnorm in gnumeric):

    2914 (Japan Tobacco)
    9205 aka JALSF or JALSY
    9531 aka TKGSF
    4689 (Yahoo Japan Corp.)

    Since there aren’t even OTCs I can find for Japan Tobacco or Yahoo Japan, you can add the next two in the draw if you don’t want to trade ordinaries:

    Shall we?

  4. wcw commented on Nov 17

    PS — oops, seven names. And it took fifteen minutes, but that was partly downloading and randomizing the S&P Global.

  5. Chad K commented on Nov 17

    I’d love to play as well :)

  6. PC commented on Nov 17

    Focusing on stock selection is focusing on entry. The general public and most of the investment books all focuses on entry.

    IMO, entry accounts for no more than 30% of trading or investment success. Like the author said, it’s the exits (both stop loss and profit taking) and position sizing that are the crucial factors.

    An interesting experiment would be to enter a market via a coin flip. Heads you go long and tails you go short. After you enter you set a stop loss (e.g. based on market volatility to filter out the noise). If you get stopped out, you flip the coin again. When you get a profitable position, you trail your profitable position with a trailing stop and may even add to your position size. You will be surprised will the results you can get with such “random” entry.

  7. Jack commented on Nov 18

    Here is a very simple method of beating the market:

    Buy when you are too scared to buy.
    Sell when you are too greedy to sell.

  8. wcw commented on Nov 18

    PC, trendfollowing works, except when it doesn’t. You have twenty names on which to try it. I’m going to trade once, at 12/31 close. You can post the results of your system on those twenty names on this thread.

    Jack, some people don’t get emotional about investing. What do they do?

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