Fool's Bet: Amateur Stock Investing

I completely concur with John's premise regarding the deck being stacked against amateur investors.

Frontline did a great piece on insider trading and hedge funds last year called To Catch a Trader which showed pretty clearly that trading/leaking of information is - or at least has been - a very common occurrence within the world of professional trading. I highly recommend viewing it.

One of the things Frontline talks about in the documentary above is the use of what they call 'expert networks' - just like GLG referenced above by John.

As UD1 points out above, it strains credulity that any investor would pay the kind of money they do to use these 'expert networks' if the information that they are able to glean from the $500 calls can't be converted to profitable stock plays. They are not paying to hear about office gossip and who parks in handicap spots, etc.

I've not dealt with GLG, although I have with AlphaSights, which sounds very similar. They coordinate fees/schedules for me to take phone calls with individuals/companies wanting knowledge about various industry segments, technology, and competition.

I have never been quite certain of their legitimacy after a number of rescheduled calls on the first go around and have turned them down for future calls ever since.

I disagree. I think you are over-emphasizing the research edge. I am a professional investor. I think that the deck is stacked against all sorts of investors:

• The careless
• The over-emotional
• The ill-prepared
• The gullible
• Fuzzy thinkers
• Excessive risk-takers

Investors like the above can be individuals or professionals. I have seen lots of both. Over the long-term, individual investors can do very well, I think, if they exhibit some or most of the following traits:

• Dispassionate
• Methodological
• Observant
• Curious
• Clear-thinking
• Brave
• Know themselves
• Understand risk

To be clear, yes investing takes some research. But more than this, it takes work and diligence and patience. You are better off to do no work and to buy the index than to pick stocks with insufficient work. I think Ben Graham, or perhaps another of the great investors, said you should allocate the same effort to selecting a stock as you would to selecting a car or a school for your kids.

The following books lay out very effective methods for stock picking by individuals.

1. The Intelligent Investor, by Ben Graham, 1949. The bible on value investing.
2. Common Stocks, Uncommon Profits, by Phil Fisher, 1960. The bible on growth investing.
3. One Up on Wall Street, by Peter Lynch, 1989. Makes the case that individual investors can outperform professionals.

Thank you for reading.

Research is part of it but it's only one part of it. Yes the large institution may spend lots of money to get that information edge, but they are equally free to draw the wrong conclusions, or to get mired in details or to lack courage to make a brave decision etc.

Also, the individual investor does not suffer through bureaucracy, investment committees, portfolio allocation definitions, the need for high-volume, the monthly returns game and other factors which create friction and lower returns for professionals.

Let's compare investing to golf. There are a lot of elements to a successful game, but ultimately nobody does it perfectly. It can be equally humbling for anyone. Your emphasis on research is a bit like emphasizing the putter or driver. All things being equal, will the person with the new titanium driver outperform someone who doesn't have that club? Maybe/maybe not.

BTW I taught my children investing when they were both under 12 years old. We used a simple methodology:

They picked companies they knew: They created a large list of consumer products and services they were familiar with. (Peter Lynch method.)

They screened the companies for financial parameters which show on Google finance: ROE, Cash from Ops, Dividend, PE. These were explained in simple terms they could understand, for example a dividend was described as an allowance you get for owning a stock etc. (Elements of the Ben Graham method.)

They screened the shorter list of companies by visiting the businesses, asking customers and employees about the business and using their own observations. This is research and it didn't cost anything except time. (Elements of Phil Fisher and Peter Lynch methods.)

They bought two stocks and made very high returns, cashing out over a 2-3 year period. Of course, luck and timing and my coaching were part of it, but the main point was to learn a method that they could repeat.

"This has been a very interesting and enjoyable discussion."

It certainly has!

John, I appreciate your allowing this discussion to play out, though not necessarily a Security topic.

U-4, love your careful approach to investing and that you shared it with your kids. I tried to get my son started as a child, but he had no interest. He's a science guy.