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Harsh Reminder

Charles Schafer

DURING THE RECENT bull market, I fell off the wagon and bought some technology companies, once again trying my hand at stock picking. I’m talking about companies like Spotify Technology, MercadoLibre and Roblox. It was a small percentage of my portfolio, but I felt the pain.

I’d tried picking individual stocks when I was younger. I thought I had a better chance now. After all, I was more educated and knew more about researching companies. I convinced myself that if I put in more time—listening to all the earnings calls, reading all the research reports and slide decks, and looking at all the SEC filings—I’d get better results.

Wrong.

The reality: I was just as driven by market euphoria as everyone else. I put my hand in the fire and I got burned—again. If it were the first time, I wouldn’t have been so hard on myself. But the truth is, I knew better.

I knew the research says 90% of active fund managers fail to beat their benchmark index over the long haul, and yet I opted to be a more active investor. I knew that 90% of the long-term variation in a portfolio’s return is explained by asset allocation, and yet I decided to pick individual stocks. I knew that sticking to evidence-based investing, keeping costs low and diversifying are what I should focus on, rather than dabbling in whatever highflying stocks or sectors were in vogue at the time. I knew the history of bubbles and manias, including railroads in the 1800s, the Nifty Fifty stocks during the 1960s, Japan in the 1980s and the dot-com mania of the 1990s. I knew about all these, and yet I didn’t see the bubble right in front of me.

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I knew all this, and yet I did it anyway. This was my first mania, and I feel as though I failed the test.

I wasn’t the only one to get caught up in the recent bull market run and lose money. An estimated 10 million new brokerage accounts were opened in 2020 alone. According to S&P Global, retail trading was 47% higher in 2021 compared to pre-2020 levels. Much of that volume was in meme stocks. If you’d been invested in anything related to cryptocurrencies (symbol: BITW, -65% over the past 12 months), cloud computing (WCLD, -47%), e-commerce (IBUY, -65%), special purpose acquisition companies (SPAK, -46%) or any other highflier that crashed over the past year, you might be feeling the pain, too.

But my investment education has taught me something else: fleeing from investing altogether would be a mistake. I know about loss aversion, and the fact that we experience portfolio losses more than twice as acutely as we experience portfolio gains. I also know that, over the long term, my investments should fare well as long as I stick to my plan and always focus on my financial goals.

If I’m being honest with myself, picking individual stocks was not part of that plan, and it doesn’t align with my financial goals and with what makes me feel fulfilled. My losses may be painful now, but that’ll pass and I’ll always remember what this past year felt like. It will help me stay on the path to better investing. It will help me utilize the knowledge I’ve gained over time. It will help me stick to a boring and coldly efficient investing plan. And that’s the way it should be.

Charlie Schafer is an aerospace engineer with an interest in personal finance and investing. His other hobbies include reading widely and homebrewing beer. Charlie lives with his wife and two children in South Philadelphia. His previous article was A+ for Effort.

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Rob Jennings
Rob Jennings
3 months ago

Ill never forget 2008 when my 401k became less than a 201k, Even with continued contributions it did not fully recover for several years. I was fortunate that I did not retire until 2018 but did not do so until I worked “one more year” to add to the cushion and had retirement income plan what wasn’t based on market.

Andrew Forsythe
Andrew Forsythe
3 months ago

Charlie, I enjoyed your post and appreciate your honesty. I likewise once thought I could pick individual stocks and likewise learned the hard way that it was the wrong approach, for me at least.

Something I’ve read which has stuck with me is that any time you make a trade, there’s a person on the other end of it who’s likely a pro and knows 100 times more about the market than you ever will.

mytimetotravel
mytimetotravel
3 months ago

If you actually enjoy doing research on stocks (I find it extremely boring) I don’t see that it is a problem to devote, say, 2-5% of your portfolio to individual stocks, provided you recognize up front that it is a hobby, and not investing. But not more!

Ormode
Ormode
3 months ago

For long-term investing, you want to own companies that can make a substantial flow of profit relative to the amount you paid. That’s why Warren Buffett has spend his life reading 10K reports. If you enjoy analyzing corporate financials and evaluating business models, then building a portfolio of individual stocks is for you. Unlike a mutual fund, or an index, you can build a portfolio of stocks that is precisely suited to your financial situation, if you have the skills.

Now about those stocks. Let’s take Shopify. Given their price, by how many times would they have to increase their sales and profits to justify paying a high price? Last year, when they made $6.41 a share, they were trading between $1500 and $1700. In order to justify that price as a mature company, they would have to make at least $100 a share. How much business and revenue did your analysis show they would need to make that number? Was there any realistic prospect of their getting 15 times as many customers as they now have, while maintaining margins and managing their business efficiently? These are the questions you have to ask if you are analyzing a stock.

Charles Schafer
Charles Schafer
2 months ago
Reply to  Ormode

I enjoyed trying to evaluate business models, investigating the competitive landscape, and digging into the financials of companies, for a time at least.
But after awhile I found that it just takes too much time to track them all and keep up to date on the companies.
A well-diversified portfolio is around 20 stocks, and I found it was not only more risky, but also more time-consuming.

I’d rather keep it simple and go out and live my life instead.
I found I prefer to read books more than I like reading 10-K’s and 10-Q’s. Listening to podcasts and audiobooks more than I like listening to investor conferences and earnings calls all day.

macropundit
macropundit
3 months ago
Reply to  Ormode

>> That’s why Warren Buffett has spend his life reading 10K reports.

He spent the early part of his career doing this. When he met Munger he underwent a shift from a quantitative to a qualitative approach that he’s described many times. For the last 40ish years it’s competitive advantage and such that he looks for. BTW, when he was reading the whole book of reports there was no internet. His edge would have evaporated as people could have done what he did in a fraction of the time.

Jo Bo
Jo Bo
3 months ago

Thanks for your honesty, Charlie, and for driving home the basics. I do think there’s a place for stock picking — as there is for daydreaming — but only once one’s savings are on track and intact, and only if one is completely realistic about possible losses. I’d compare it to playing the lottery with some fun money.

The most satisfying part of my investing journey has been, without doubt, the feeling of building a nest egg. Yet the fun part? Buying a small amount of Apple in 1996 and holding the shares to this day. Not mentioning, however, that I also bought a comparable amount of Boston Chicken around the same time, that soon became worthless, would be irresponsible.

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