Individual Investing Can Be Tough, Redux

I have many software robots that scan for responses to what I write.  Most come directly to me.  Some do not like this one at Seeking Alpha:

Merkel’s reasons are, to be blunt, stupid.

1: Its too crowded and there is too much competition: While his goals may be to outperform many of us just want to build wealth.
2: Too much information: Just ignore the stuff that is unimportant. More information the better it certainly beats how things were decades ago.
3: “We are in a macroeconomic environment where we are delevering. That is not the best environment for making money”
For someone claiming 20 years of experience that is incredible naive.

First, we build wealth in competition with others, and the competition has grown, not shrunk.  The anomalies the allowed smaller investors to prosper are for the most part well-known.  Whether they are over-fished is another matter.  I think that previously profitable strategies still have value to the degree that they are ignored as no longer valuable.

Second, yes there is way too much noise, and I even create some of it.  Yes, I try to filter the information I receive, but I receive a ton of it, and filters are not perfect.  Please tell me how to construct a perfect filter, because mine are imperfect.  If we could create perfect filters we would be very, very rich, unlike me and the commenter.

Third, I don’t get the last comment, except that the person does not understand that periods where lending is expanding usually offers the highest returns for risk assets.  Presently we are contracting.

If I am naive, it is that I am an idealist.  I want better economic policy, and see lousy governance at the Fed, Treasury, and State levels.  As a result, on average, I see low real returns for assets over the next 5-10 years, unless policy changes dramatically.



  • Shrivathsa says:

    Hi David,

    You have a clear view which is well expressed.

    Speaking for myself, your views are much appreciated.

    If I were you, i would just ignore that comment.

    Typical trash talk on Seeking Alpha.


  • miguelmartinez says:

    Wow, that person just gave you a lot of free advertising!

  • izimbra says:

    Hi David.

    I thought about replying to your original note, and now that you added a little bit more on your view, I’m doing that (I don’t agree with that SA comment and I’m ignoring that).

    Some big picture views that I agree with:

    1) The character of the equity market changes over time. What works well in any given period – in terms of either absolute or relative performance – changes.

    2) Equities should typically do better when credit is easing than when credit is tightening.

    3) There is more competition nowadays in terms of other entities looking for out performance, and it is harder for either individual or fund manager to identify overlooked fundamental factors – e.g. no point in checking out how crowded the local Walmart is when some hedge funds are using computers to track and analyze satellite images of Walmart parking lots all over the country. The relative change in level of competition is probably more pronounced in smaller stocks – i.e. the probability that a given seemingly under priced stock according to fundamental metrics is under priced for a fundamental reason has gone up substantially compared to 15 years ago.

    4) The equity market today seems more prone to highly correlated movements, on all time scales. That must, in some general sense, lower the relative significance of individual stock picking towards portfolio performance.

    I mostly disagree with the view that ETFs and the changes that have taken place in market dynamics work against individual investors as a group. I’d counter argue as follows.

    5) Lower trading costs and smaller spreads are unambiguously good for individual investors. An individual investor using a broker like Interactive Brokers can average a cost of about $0.80/100sh of U.S. stocks regardless of how frequently they trade. The lower costs by themselves must boost returns and make a wider range of strategies reasonable to consider.

    6) Existing ETFs allow individual investors to directly express a wider variety of investment philosophies in ways that were not readily available before – e.g. equal weighted (EWRS) or fundamental weighted (EES) small cap funds, or a small cap India fund (SCIF). There’s no reason to choose between a portfolio of only individual stocks vs. a portfolio of only ETFs/funds. They can be mixed and matched, for investing or for trading.

    7) The micro market dynamics of ETFs and the decline of “market makers” make it easier for the individual (trading small quantities) to routinely get filled on the market maker side of the bid/ask. Another factor improving performance.

    Finally, something you didn’t directly comment on that I think is highly relevant to stock picking as an individual investor.

    8) The biggest performance killer for someone selecting individual stocks with a value bias and without market captitalization constraints is fraud. Picking a stock that turns out to have fraudulent fundamentals, is, in my experience, the greatest risk in this type of investing. This happens a lot more often than one reads about with very small, publicly ignored stocks that can be found using stock screeners. I think this risk is about the same today as it was 15 years ago, though the nature of the frauds and which part of the market they are in changes over time. I’d expect you agree that the perspective “Don’t give up quickly on your investment ideas. Buy and hold for years, not months. Ignore the chatter” has to be understood against that context.

  • revelo says:

    The next 5 to 10 years will be tough, but no tougher for individuals than anyone else.

    Hedge funds, institutions, wall street proprietary traders and other professionals are all playing with one hand tied behind their back, because they can’t wait long for results. All the invididual has to beat the pros is pursue strategies that do require waiting. Right now, for example, the market is somewhat expensive. The pros can’t wait in cash for lower prices because that might take several years. So they are forced to play momentum games. A professional who tries hanging around in cash for several years isn’t going to be employed for long.

    You have clients. How do they react when you underperform in environments like the current one? Not too well, I suspect. Now imagine several years of underperformance. Doesn’t matter if that spell of underperformance is followed by a sudden burst of outperformance when the market crashes. Clients are long since gone.

    The only thing the individual has to worry about is other and smarter individuals. Buffett, for example, answers to no one and thus can play the same waiting game as the individuals. Luckily, many smart individuals quit playing once they have enough money to retire on. They put their money in muni bonds and index funds and retire. Only a very few, like Buffett, continue to play the game after they become rich. So the competition is mainly with other non-rich but smart individuals (young smart people, in other words), and the amount of wealth controlled by that group is fairly small.