Why Some Investors Will Never Win With Individual Stocks
by Alexander Green, Investment U Chief Investment Strategist
Friday, November 2, 2012: Issue #1895
The other day I received an angry letter from a reader. He was upset about the performance of some of the stocks in The Oxford Club’s Trading Portfolio.
Any stock picker is used to hearing complaints. It goes with the territory. But this reader detailed each losing trade over the last few years and said he was “losing thousands more” on a current recommendation. He added that I needed to shape up or he would ship out.
Strong words. But I’m guessing this reader will never be happy or successful owning individual stocks. Let me explain why. Because if you fall into the trap of thinking the way he does, you’ll face the same potential problem.
I should begin by pointing out that our Oxford Club Communiqué is ranked among the top-performing investment letters in the nation over the last decade by the independent Hulbert Financial Digest. We have taken dozens of profits in recent years, but this reader mentioned none of them. He expected all winners. He didn’t expect any losers.
‘The Nature of the Game’
That was his first mistake: unrealistic thinking. Ted Williams was the best hitter in baseball. But even .400 hitters don’t get a hit more often than they do. That’s just the nature of the game.
If you buy individual stocks, you will have losing trades from time to time. Expect it. Even the greatest investors make missteps from time to time. Warren Buffett, for example, lost his shirt in U.S. Airways, causing him to ask, “What’s the quickest way to become a millionaire? Start as a billionaire and buy an airline.”
If my correspondent misremembered our past recommendations, his assessment of our current portfolio was just as wide of the mark. Our Oxford Trading Portfolio has 22 positions. Twenty-one of them are profitable, including four triple-digit gainers of as much as 185%. Our one losing position is down 8%.
But this single loser irritated the reader enough for him to write. And in some ways, I understand. Losses – even if temporary – can be frustrating.
But imagine if he owned all these recommendations in a single portfolio and only saw not the individual share-price fluctuations but just the change in the portfolio value at the end of each day. Then he would likely be happy, seeing his total value rise but not knowing which stocks were up and which were down.
Don’t Be ‘Consigned to Mediocrity’
This is exactly the experience of mutual fund shareholders, who only see the portfolio’s net asset value change when it is posted at the end of each session.
This passive approach is the way the majority of stock investors put their money to work. And, yes, equity funds offer convenience, diversification, and professional management. But the downside is high fees and mediocre performance. History shows that three out of four mutual fund managers cannot outperform an unmanaged benchmark each year. Over the long haul, more than 90% of them can’t.
In addition to high fees, these shareholders won’t enjoy the outsized winners that can cause a concentrated portfolio of stocks to generate superior performance, as The Oxford Club’s has for more than a decade now.
Big fees and lousy performance is the trade-off for equity investors unable to tolerate the occasional losing trade or to put their portfolio in perspective.
If you can overcome these mental hurdles, you can own individual stocks and enjoy much better-than-average returns. If you can’t, you may be consigned to mediocrity.
That’s a high price to pay for being unable to change your perspective.
Good Investing,
Alex
Any investment contains risk. Please see our disclaimer.
5 Responses to “Why Some Investors Will Never Win With Individual Stocks”
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The unanswered question is: Did he have his years of losers picking stocks on your recommended list and if so, how do I pick the ones he skipped and avoid the ones he picked? That should increase my return dramatically over even your brag rates! It sounds like he called every loser in your group but bought them instead of avoiding them. Since most people don’t buy(trade)22 stocks every month and therefore attempt to find a few best choices from multiple sources of recommendations, how can one refine the list down to four or five stocks without accidentally hitting the losers so often? Twenty two stocks per month just creates a high trading fee mini-mutual fund.
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In response to the angry subscriber I would have to say they they sound like the typical “investor” who simply throws money at ideas provided by others without ever performing any independant research of their own.
The only person in the world who is responsible for the return on my portfolio is me. I make the decisions when and in what to invest and if I lose money, it is because I made a bad decision. I find life to be much simpler and more peaceful when I accept responsibility for my own actions.
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All of this talk in defense of Oxford Club’s stock performance could easily be settled by publishing the complete performance history of portfolio performance and let the numbers speak for themselves.
Pick any time frame, pick any notional investment (ie $10K, $100K) and pick any weighting of equities in the portfolio. Record all buys and sells on the day AFTER the recommendation (to reflect realistic opportunity of the typical investor to act) and then report performance based on ALL closed transactions. Compare this result with that of the mutual fund community.
A second measure could be the above, plus ALL open positions in the portfolio, valuing them at their stop value, since this is how most positions are closed out.
This would be an honest representation of what the typical Oxford Club investor could expect to see.
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I’m in total agreement with you.
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How does Dollar Cost Averaging impact Oxford’s portfolios? It seems like it would provide slower wealth building for those of us who have the time but yet mitigate one stock which may have a bad run even with the trailing stop in place.
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