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[G] Investing (part 3) - Page 2

Blogs > azndsh
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azndsh
Profile Blog Joined August 2006
United States4447 Posts
Last Edited: 2010-11-24 14:30:26
November 24 2010 14:29 GMT
#21
On November 24 2010 15:02 itzme_petey wrote:
So would a "best of breed" strategy work just as well? Best of breed meaning, selecting companies with the best balance sheets and best products poised to be successful in the next coming years. Buying an index funds means that not only am I buying AAPL but also RIMM and a slew of other companies on their way out the door. Can't I just accept that I will take on non-systematic risk and rid myself of "loser" stocks? What if I buy into 15-20 best of breed stocks? Won't that reduce my non-systematic risk significantly?

Do you mind covering "alpha" next? I been reviewing my portfolio and it seems that I out-perform the market everyday. If S&P goes down 1%, I'm only down .5% and vice versa. Is it realistic that this performance will last or is this a hot streak?

geometryb is pretty much correct. Personally I don't even like thinking about things in terms of alpha so I probably won't talk about it. Depending on how many data points you have, there's probably no real way to tell if you have positive alpha or if you're lucky. If you're +0.5% every day, then that means you're +125% in a year. If that's the case, then please start a hedge fund and I will invest.

As for good/bad companies, AAPL is currently 9x the market cap of RIMM, so if you were to buy a reasonable index fund, you'd be buying 9x more AAPL anyway. If you want to pick your 15-20 individually, you certainly can. The issue is you'd be paying more broker fees for something that will end up performing quite similarly to an index fund.
Michaelj
Profile Joined February 2008
United States186 Posts
November 24 2010 16:37 GMT
#22
Even respected finance professors agree:

http://www.amazon.com/Stocks-Long-Run-Jeremy-Siegel/dp/007058043X

"Poor investment strategy, whether it is for lack of diversification, pursuing hot stocks, or attempting to time the market, often stems from the investor's belief that it is necessary to beat the market to do well in the market. Nothing is further from the truth. The principle of this book is that through time the after-inflation returns on a well-diversified portfolio of common stocks have not only exceeded that of fixed income assets but have actually done so with less risk. Which stocks you own is secondary to whether you own stocks, especially if you maintain a balanced portfolio."

---
kzn
Profile Blog Joined June 2007
United States1218 Posts
November 24 2010 22:15 GMT
#23
On November 24 2010 15:02 itzme_petey wrote:
So would a "best of breed" strategy work just as well? Best of breed meaning, selecting companies with the best balance sheets and best products poised to be successful in the next coming years. Buying an index funds means that not only am I buying AAPL but also RIMM and a slew of other companies on their way out the door. Can't I just accept that I will take on non-systematic risk and rid myself of "loser" stocks? What if I buy into 15-20 best of breed stocks? Won't that reduce my non-systematic risk significantly?

Do you mind covering "alpha" next? I been reviewing my portfolio and it seems that I out-perform the market everyday. If S&P goes down 1%, I'm only down .5% and vice versa. Is it realistic that this performance will last or is this a hot streak?


Its actually been fairly convincingly shown that the reverse would work better.

If you look at a selection of stocks over any given time period, you can sort that selection into "winners" and "losers" according to stock price growth over the time period. Losers are consistently more likely to be winners over the next time period than winners are to be winners.
Like a G6
geometryb
Profile Blog Joined November 2005
United States1249 Posts
November 24 2010 22:42 GMT
#24

a very basic approach: use index funds, exchange-traded funds and other low-cost instruments, and stick to your long-term asset allocation — even when the markets are in tumult.

Don’t be distracted by market forecasts. You have to diversify against the collective ignorance. Nobody is in a position to react to these big macro-issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.

The people who should get involved are sophisticated individuals who have significant resources and a highly qualified investment staff. There is no way that an individual can go out there and compete with all these highly qualified and compensated professionals.
itzme_petey
Profile Blog Joined February 2004
United States1400 Posts
November 25 2010 03:45 GMT
#25
I started to invest in Feburary.
S&P 500 2/16/10 (1094.87), 11/24/10 (1198.35)
SPY 2/16/10 $109.74, 11/24/10 $120.2

I invested $10k, picking stocks I felt were successful. I now have $11,083, $126 in fees already removed.

Here is how I calculate my performance..

Portfolio
10.83% * (0.75) shorterm tax rate = 8.225%
vs
S&P Index
9.45% * (.85) longterm tax rate = 8.03%
vs
SPY ETF
9.53% * (.85) longterm tax rate = 8.1%

Now that I written and calculated everything on paper, I completely agree with OP. In this tax environment and transaction fees, picking stocks and taking on additional risk is not worth the small percentage of out-performance vs the market.

However, without transaction fees (just qualified for 10 free trades a month!) and without the short-term tax bracket. I can totally rape the shit out of the market. :D

1083 + 126 = 12.09% vs 9.45%
"Last night, I played a game.. as I recall it was a strategy game.. Peeked around and what did I see, a girl playing starcraft better than me.. and I jizzed in my pants.."
azndsh
Profile Blog Joined August 2006
United States4447 Posts
November 25 2010 16:03 GMT
#26
unfortunately, 5% is the cutoff required for beating the market as a hedge fund
under a 2/20 structure, 2% annual fees + 20% of profits means 15% gets reduced to 10%
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