Individual Investing Can Be Tough

I am glad I began investing 20+ years ago.  If I were considering starting now, I would likely not do it.  Why?

1) Too much data.  There are too many factors to consider in investing. That there is a wealth of data to consider is certain, but what are the right factors to look at?

2) Crowded.  More people and firms are investing.  The competition is higher.

3) There are more games in trading.  Makes it a lot harder to get good executions.  The low costs of transaction have created monsters.

4) ETFs affect the market as a whole.  They allow average people to speculate on broad trends, without telling most of them that they are noise traders, and are getting taken for a ride.  Dollar-weighted returns are far less than that for buy-and-holders in ETFs.  The traders are getting creamed.

5) Social media leads to groupthink, which lowers overall returns, at least for those that get there late.

6) ETFs allow investors to play well outside their circle of competence.  Beyond that, some ETFs don’t always do what they promise because of the derivatives that they use, roll, etc.

7) We are in a macroeconomic environment where we are delevering.  That is not the best environment for making money.

In general, I think most individual investors are cows for the institutions to milk.  But there are a few ways to immunize  yourself from this:

a) Hold very short or very long.  I lean toward the latter.  Don’t give up quickly on your investment ideas.  Buy and hold for years, not months.  Ignore the chatter, and read the data from the company and trusted third parties.

b) Use a value bias, and focus on companies where there is a margin of safety.  Buy the shares of companies with lesser growth prospects, that are selling cheaply.  Who cares if earnings aren’t growing if the earnings yield is over 15%.

 

4 Comments

  • tapertaper says:

    You say “ETFs”, but presumably a straight-up S&P 500 ETF held for decades is a good idea.

    I was taking the CFA and CAS exams and (of course) finished the CFA charter first. Took a hard look at investments, stuck to the CAS route and invested in the S&P 500 ETF. I’d rather spend my time studying than doing third-tier home-based research on companies.

    • My research so far on ETFs in general indicates that those who trade them, for the most part do badly. This is still a work in progress, so when I have a full result, I will publish it. Buy-and-hold is another matter, for what few that can plug their ears, and not listen to the tauntings of the Rabshakeh (Isaiah 36).

  • miguelmartinez says:

    One of my great weaknesses as an investor is that I am an emotional being. It is hard for me to be an innocent bystander as an investor. I get excited one way or the other, and it has cost me a lot over the years.

  • bbarberayr says:

    David,

    I actually think now is great time to be an individual investor. So much of the money in the market is chasing ETF’s and Quant strategies, that if you are willing to look outside of these areas (small caps for example), there are great values to be found.

    You are correct that there is too much information out there, so you need to come up with a good way of screening this, then dig deep into uncovered areas of the market, buy and wait for the value to be discovered.

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