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LIKE MOST READERS of this site, I’m committed to index fund investing. Still, even though I know I’d have little chance of beating the market as a stock-picker, I’m periodically tempted to buy individual stocks. When a former mentor who’s a brilliant strategist joined Moderna in May 2020, I strongly considered buying shares. Given where the economy was at the time, I passed on buying the company’s shares (symbol: MRNA) and stuck to my standard S&P 500-index fund investing. In hindsight, this was a mistake.
As a daily viewer of CNBC, it’s been hard to ignore the performance of Moderna over the past 16 months. It has increased more than 300% in 2021 and yesterday it was up more than 17%.
As I watched CNBC yesterday, I said to myself, “It’s a bummer I didn’t buy shares last year, but at least I’m getting some upside now that Moderna is in the S&P 500.” I spent a little time analyzing this attempt at rationalization—and the results weren’t consoling.
My conclusions? First, you won’t get rich quickly through index fund investing. While you’re well-diversified against the risk of any one stock cratering, you’ll also see limited upside from a superstar like Moderna.
Second, Moderna has risen to have a market capitalization of close to $200 billion, but it still has a relatively small S&P 500 weighting. The top five companies in the index—Apple, Microsoft, Amazon, Facebook and Alphabet—comprise more than 20% of the index, so even moderate price swings by these stocks will impact the index much more than significant changes in a company of Moderna’s size.
Finally, if you periodically get well-informed gut feelings about individual stocks, it may be worth setting aside a small pool of funds to buy these stocks. Such a mini-portfolio won’t be well-diversified. But you’ll likely have fun with it and, at worst, some losses—and those losses will serve as a reminder to stick with your index funds.
You lament foregoing the purchase of Moderna shares, a stock which subsequently exhibited stellar performance. Just curious, but have you ever passed on a stock you felt was a good bet, but which subsequently went nowhere?
While its natural to feel sorry for missing “the one that got away,” shouldn’t we also acknowledge the ones that, it turns out, weren’t worth pursuing?
My point is that considering all the stocks we might have bet on over the years, it’s likely that few would have turned out to be home runs. A “fun money” account for exercising your animal spirits is fine as long as it doesn’t become an obsession.
It’s a very question regarding investments I’ve passed on. Fortunately, I am so locked in on index investing that I don’t get too serious about looking at individual stocks too often. Moderna was certainly one case. A case where I did buy and that I lamented greatly at the time was my first non-index investment which was in Webvan – fortunately for me, I didn’t have much money at the time, so the $500 I lost there (my entire investment) was well worth it in terms of how it shaped my future investing.
Just scanned the rest of the stocks I follow and can’t really see anything I’ve passed on that’s not up over the last few years. More a reflection of the market relative to my ability to spot good stocks 🙂
Why don’t I ever hear anything about equally weighted index funds? Seems to me that market weighted index funds defeats the purpose of diversification.
I have my share of index funds. But the real bang for my buck came from individual stocks like Apple, Microsoft, and ABBV.
It goes back to the old investing saw cut your losers short and let the winners run. When Google IPO’ed at about $85/share I was lucky to get 500 shares. I had a lot of confidence in them succeeding based on a book I read by the woman they hired as their chief operating officer, Shona Brown.
My dilemma was about a year later the stock had doubled and I was in long term cap gains tax territory. I sold all my Google shares and enjoyed a nice profit. The problem is had I held on for 10 years, then profit would have been 10 times greater.
Through out the many decades I have been investing this has repeated itself more than I like to think about. Moral of the story: think like a long term owner and keep your winners. You will hopefully wake up in 20 years with some great gains.
Agreed, and I didn’t pull the trigger on Moderna (or others) last year in the early days of the pandemic. But no regrets, I’m sure there were times I thought things were a “sure thing” that ultimately crashed and burned, it’s probably human nature to look at the winners like Camelot. But in that same timeframe, the hypothetical money I would have spent on Moderna was instead placed in a Nasdaq 100 ETF, so over the same timeframe an objectively positive outcome, with arguably much less risk.
Hindsight is 20/20 indeed. Hard to argue with the approach of just plowing $ into index funds. And I know that when I have deviated from this approach a few times in my life I’ve lost sleep, so I’ll keep on indexing with you.