the dollar journal

[thedollar]

It seems as if you are still caught between two different mindsets. If you already have an investable net worth of ~4m USD, wouldn't it make sense just to get the market returns at this point? IMO, the true beauty of index funds is that they take a lot of the decision-making away from you. When selecting individual securities or otherwise actively betting on certain parts of the market to outperform, you are literally faced with the decision to buy/hold/sell every holding you own every single second during every market day.

In addition, the outperformance of the stock market over T-bills seems to be carried by very few stocks, see e.g. this paper https://papers.ssrn.com/sol3/papers.cfm ... id=2900447 Identifying these stocks in advance is no trivial matter. Who would ever have bet big on Domino's Pizza ($NYSE:DPZ) for example? A household name, sure, but not exactly the textbook definition of a groundbreaking business.

Yes!! Exactly. Index funds are great because they will capture the growth of stocks we can't predict to be the true winners / those few stocks delivering a huge part of the returns of the stock market. Domino's, Monster, Novo Nordisk, Tesla, Amazon, Apple, Adobe, NVIDIA, Netflix. How would we know that exactly those stocks from 1000s of other stocks would deliver insane growth... It's so easy looking back now and saying of course those companies would dominate - but in 2000 or 2010 we likely wouldn't be able to distinguish them from other companies.

Picking stocks is only for the very, very few vs. just owning an index fund.

So why am I still conflicted? Well... Let's consider how some of the greatest investors in the world looks at owning few vs. a lot of stocks vs. owning an index.

Peter Lynch: One of the greatest investors of all time. He would own more than 100 stocks at any given time and he'd pick stocks. Well, the point is if you own this many stocks you don't have to be right all of the time at all and you can thus "afford" to own risky and early-stage stocks. Granted that your research must still be great. Now consider having a $1 mill. portfolio and allocating 2% to Apple in 2007 when they launched the iPhone. You'd now have $1.4 mill. just in Apple stocks not counting the possible return from the 98% of the rest of the portfolio.

Bill Ackman: He only owns 7 stocks in his portfolio and argues against diversification. I guess the point is, that if you're not certain that you are right, why own it? And that it's extremely powerful to own this few stocks if you are right.

Warren Buffett: I guess he has 30+ stocks in his portfolio but with some position having a major concentration. From what I've read, his wisdom is that you don't have to catch all the greatest investments oppurtunities. You have to find your edge, and when you finally do find the right investment, you need to back it heavily (=high allocation and thus low number of stocks). You don't need to have found Adobe or NVIDIA as long as you found Monster Bev. and allocated 10 or 20% of your portfolio towards it.

Top 10 people net worth in the US: They all had an extreme concentration of just 1 investment. Steve Ballmer, now one of the richest people in the world, only owned Microsoft stock. When Bill Gates diversified away from Microsoft he lost out on over a trillion USD. Of course there's a looot of survivorship bias since top 10 only reveals the times where it went more than well, but it shows the power of concentrating your portfolio (i.e. whether to own 10 or 100 stocks).

So bottom line, index funds are great. Stock-picking is a hell of a lot better, if you're good at it, because the returns can be much much higher. There are different strategies regarding whether to own a lot of stocks vs. concentrating on a few.

[Henry]

For the average investor, limited to the deployment of their own earnings, I'm not sure it makes a difference what path they take. The ultimate accumulation numbers will not appear in different demographic categories, as the spread will most likely be some iteration of thousands, not millions. For me it could be in multiple six figures, but if I'm ahead or behind, I'd still be living in some proximate manner to how I am living now. Monetary distinction without significant lifestyle difference.

[7Wannabe5]

My friend who was worth over 100 million when he died at 80 from being totally broke/fired/eating-from-dumpster at age 28 definitely was in favor of picking stocks within industries. To the extent he shared his reasoning with me, it seemed like to him diversifying within an industry would be like going to the grocery store and buying 1 bag of each of 3 different brands of potato chips. Like maybe you can't figure out whether your guests will prefer potato chips over pretzels, but you should be able to figure out which brand of potato chips and which brand of pretzels to buy. And his answer to how you figure that out was just that you buy the "best one." For example, he thought Apple and Costco were both 'best one"s.

[thedollar]

My friend who was worth over 100 million when he died at 80 from being totally broke/fired/eating-from-dumpster at age 28 definitely was in favor of picking stocks within industries. To the extent he shared his reasoning with me, it seemed like to him diversifying within an industry would be like going to the grocery store and buying 1 bag of each of 3 different brands of potato chips. Like maybe you can't figure out whether your guests will prefer potato chips over pretzels, but you should be able to figure out which brand of potato chips and which brand of pretzels to buy. And his answer to how you figure that out was just that you buy the "best one." For example, he thought Apple and Costco were both 'best one"s.

That worked out pretty well for him, wow. I'd love to hear more details if you're willing to share. How long did he invest? Did he make the majority of his money from investing?

[thedollar]

When Warren lectures at business schools, he says, "I could improve your ultimate financial welfare by giving you a
ticket with only 20 slots in it so that you had 20 punches ‑ representing all the investments that you got to make in a
lifetime. And once you'd punched through the card, you couldn't make any more investments at all."

He says, "Under those rules, you'd really think carefully about what you did and you'd be forced to load up on what you'd
really thought about. So you'd do so much better."

Again, this is a concept that seems perfectly obvious to me. And to Warren, it seems perfectly obvious. But this is one of
the very few business classes in the U.S. where anybody will be saying so. It just isn't the conventional wisdom.
To me, it's obvious that the winner has to bet very selectively. It's been obvious to me since very early in life. I don't
know why it's not obvious to very many other people.

I'm doing more research, reading what some of the best investors in the world thinks/thought. I thought I'd share this quote from Charlie Munger, since it's heavily in favor of stock-picking, only picking few (selective) stocks and backing them heavily.

[Henry]

I would read Morgan Housel on this topic. The dumpster diver to riches anecdote has made a lot of people a lot of money, but not necessarily the people who intended to be the next dumpster diver. You can read Charlie Munger books to help you become a better investor. You can also read Ted Williams' book on how to hit a 100 mile per hour fastball if you want to improve that aspect of your life. Doesn't mean you're going to hit a home run off of Sandy Koufax once you put the book down.