Saturday, November 17, 2007

Index Investing vs Stock Picking

Our guru, Warren Buffett doesn't really like the idea of buying indices bcos it is not really investing per se. He thinks most pple stand a better chance if they follow simple investment rules like those governing Value Investing. But not everyone can be like him.

Another reason why some prefer stock picking is: index fund investing simply takes all the fun out of investing. It is like skipping the appetizer, the soup, the main course and going straight to the dessert. Investment is about pitting your wits against the market right? What's the point of just parking some money in some indices that move only 1% each day?

Well for most folks who really have no time to read up and study but yet want to say they are doing investments, it would be better for them to go buy index funds rather than spend the money on some structured pdts or unit trusts recommended by ignorant / totally unethical bankers that will probably give them poorer or even negative returns.

But for those reading this blog, well, we are different right? We are here to learn to pick stocks and beat the index. Sad to tell you the truth, chances of that happening is roughly 10%. This is a very well documented result and there is even a book that argues if you give darts to some monkeys and they simply throw the darts on some newspaper with all the stock quotes to "pick stocks", the resulting portfolio will do as well as the average fund manager's portfolio.

Nevertheless, the valiant shall not be discouraged. There is Value Investing and there are those Superinvestors fr Graham and Doddsville that made it right? Why not me? Well there are probably tens of millions of golfers around the world, why are we not like Tiger, Vijay or Phil? It takes years of hardwork to be good at anything. Value investing and/or stock picking is no exception.

But having said all that, stock picking is simply too fun to give up for many, including this blogger. Bcos even when you get just one stock right, it's more than enough satisfaction even though you may get another 10 stocks wrong hehe! It is like having kids, I guess. You lose sleep for 10 nights, there are the wailings, the worries when the baby is sick, worries when the baby is too fat, too thin etc. But in the end, that one smile is all it takes to make those sleepless nights and worries worthwhile. Emotional dividend yield 1000%, hehe!

So back to stock picking, although the chances of picking the 10 bagger is pretty slim, we can enhance our chances by sticking to the right investment philosophy. Well the tried and tested method that worked is of course *drumrolls* value investing lah. But it doesn't mean you studied all the literature about value investing then you will make money. Ah Beng knows the golf strokes and theory, but can he beat Tiger? Value investing just increase your chances. Of course, other investment philosophy may work too. After all it's a free market and there are pple who made millions out of day trading.

Maybe the trick is to have a certain % of your portfolio in indices and the rest in stock picking. That way you get to enjoy the best of both worlds. The index part of the portfolio will ensure you earn a good average return of 8-10% and the stock picking gives you the kick you want. So work hard, Tiger is not as high up as you think!
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