Individual Shares vs the Index

[ENP]

In all the books I've read, it says generally, that it's better to have the index rather than try and compete against it for a better return by trading.

So then why would you hold individual stocks as compared to just the index?

I'm not trying to start an argument or anything, just wondering why you trade/own individual stocks instead? Do you do it for fun? For excitement? For a better return?

Thanks.

[beacon]

Here are some others to add to your list:
A. because it can be hard to buy an index you want?
B. because it can be hard to get a portfolio you want in the index you buy?
C. because indexes were diversification tools, yet you buy an index from a provider almost eliminating the diversification. Risk is bottlenecked at provider point?
D. because indexes have hidden/ non transparent costs besides management costs?
E. because indexes are brilliant for people wanting to ride this asset type without putting the effort to followup on anything except have a view on the big picture?

[Phaedrus]

"All the books I've read say it's better to have the Index than compete against it by trading."
Maybe you are reading the wrong books!

"Why would you hold individual stocks as compared to just the Index?" To beat the Index. Over the last few years this has been quite simple - all you had to do was NOT hold TEL. Because of its size and abysmal performance it dragged the Index down. Why hold underperforming stocks like that - even by proxy?

Be careful that you do not oversimplify your choices here. There are many other alternatives besides buying the Index or trading!

[peat]

Its hard to do in depth FA on an index so I would imagine a lot of people would prefer to be investing in something they can get an NTA , a PE, a cash flow analysis etc etc , and of course understand the underlying business model.

Indexes tend to attract TA style analysis. I believe most investors are more FA oriented, they're more inclined to be investing in something tangible, as Martin Hawes recently reminded us in a recent Herald article , you are actually investing in a business , whereas an index is an abstract derivative.

[CJ]

Over the last few years this has been quite simple - all you had to do was NOT hold TEL. Because of its size and abysmal performance it dragged the Index down. Why hold underperforming stocks like that - even by proxy? So why not hold the index but short telecom.

I use index as a base portfolio and then purchase specific shares I expect to outperform. If there was an easy way to short so I could under and overweight the index, that would be better.

[Snoopy]

In all the books I've read, it says generally, that it's better to have the index rather than try and compete against it for a better return by trading.

So then why would you hold individual stocks as compared to just the index?

I'm not trying to start an argument or anything, just wondering why you trade/own individual stocks instead? Do you do it for fun? For excitement? For a better return?


ENP, You have asked your question on a forum called 'sharetrader'. So you might expect the answers to be a little biased.

I would say if you asked the same question to the average person on the street their eyes would just glaze over. If you have no particular affinity with sharemarkets I would say you are dead right. 'Most people' would be better off buying an index fund. Index funds generally have low fees and are a 'no worry' kind of equity investment. If *any* equity investment causes you worry, then most financial planners would organize alternative bond and property investments to reduce overall portfolio volatility to 'acceptable' levels.

I invest directly in equities because I like the feeling of being plugged into my investments rather than being tossed around in some index fund soup. I also like to concentrate on some of the smaller companies that either don't make it into the index at all or make it in such a small way as to be a negligible part of an index investment. The holy grail here is the pursuit of the reported in the literature 'small company premium', where by small cap shares generally outperform larger ones. The problem with the 'small company premium' is that when as an investor you try to crystallize those assets into cash the liquidity works against you and you can't do it in the real world. However, as a contrarian investor, my feeling is that I will be able to get around this limitation.

SNOOPY

[lissica]

i do it for the intellectual challenge. Why buy everything when it's more fun to select specific stocks and make your own judgement call.

If you feel the need to diversify, then just buy a whole range (say 10-20) stocks that you like, instead of some default index, which is the equivalent of buying everything. Create your own index!

Good to see you make it over here from Propertytalk, if you're the same ENP

[ENP]

i do it for the intellectual challenge. Why buy everything when it's more fun to select specific stocks and make your own judgement call.

If you feel the need to diversify, then just buy a whole range (say 10-20) stocks that you like, instead of some default index, which is the equivalent of buying everything. Create your own index!

Good to see you make it over here from Propertytalk, if you're the same ENP

Yes, I'm the same person as the property talk one. Best to keep my options open. Got to invest some how for that illusive deposit. :p

[belgarion]

Following on from Phaedrus comments ... In every index there are companies in up trends and down trends. Using very basic TA skills like 50 day and 200 day moving average crosses you could simply buy shares from the index in uptrends and not those in down trends and back fill with those that pay good dividends but trade within a range. Viola - your own index that'll outperfiorm the base index and you'll only need to check for trend reversal once a month and sell / buy accordingly.

Met a fund manager in the UK who did this and had the whole thing being done by a PC program. The fund was one of the better performers and would have been better if the fund could move 100% to cash (bonds) but it couldn't so even when the PC program couldn't find any to buy and sells were flashing on every stock, the fund couldn't move out completely. The manager frequently like to say "Keep it simple - far too many people overthink long term investments".

[Paper Tiger]

Following on from Phaedrus comments ... In every index there are companies in up trends and down trends. Using very basic TA skills like 50 day and 200 day moving average crosses you could simply buy shares from the index in uptrends and not those in down trends and back fill with those that pay good dividends but trade within a range. Viola - your own index that'll outperfiorm the base index and you'll only need to check for trend reversal once a month and sell / buy accordingly....


You say viola and I say voilà.
Play on
Paper Tiger

[belgarion]

Française n'a jamais été ma langue la plus forte

[CJ]

Française n'a jamais été ma langue la plus fortehttp://translate.google.com/#fr|en|Fran%C3%A7aise%20n%27a%20jamais%20%C3%A9t%C 3%A9%20ma%20langue%20la%20plus%20forte