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Frequent Contributor

Why do investors chose to hold individual stocks in their portfolio?

Many M* members hold mutual funds, both active and passive, as well as ETFs, CEFs and stocks. 

For me personally, I initially look for dividends, but also seek out stocks that are under valued.

Out

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Frequent Contributor

Re: Why do investors chose to hold individual stocks in their portfolio?


@outandabout wrote:

Many M* members hold mutual funds, both active and passive, as well as ETFs, CEFs and stocks. 

For me personally, I initially look for dividends, but also seek out stocks that are under valued.

Out


Whenever I invested in individual stocks, I only bought stocks that I considered undervalued, those that paid a dividend, those that paid a dividend at least twice the market cap weighted index (minimum of 5% or so), those that tended to increase their diveys over long time periods (the aristrocrats), those that, once an aristrocrat, cut their diveys (a good time to pick them up!).  I never bought a non-divey payer (a growth stock), anticipating that it would continue to grow (appreciate in value).  I tended to equally weigh those individual stocks in my portfolio (not market cap weighting.)

In terms of being undervalued, I used the Ben Graham criteria, who stated that he considered a P/E ratio of 15 and a P/B ratio of 1.5 to be a measure of a fairly valued company (the product of these two being 22.5).

By focusing on these kinds of stocks (divey growth stocks), my opinion was, and still is, that I was willing to take on the risk of holding an individual stock, rather than a fund, given that I expected each to throw off at least 2-3 times the cash thrown off by a fund.

Anyhow, these were/are my reasons.  Other than the historical divey payout of an individual stock, I could never figure out how anyone would figure out any kind of 'expected return' they were looking for in return for putting hard, cold cash to work.

ElLobo, de la casa de la toro caca grande
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Explorer ○

Re: Why do investors chose to hold individual stocks in their portfolio?

I personally look for undervalued dividend stocks. If I am able to purchase it at a low price I can get a higher yield on good companies. My goal is to build passive income which is a mix of indexes and individual companies. 

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Re: Why do investors chose to hold individual stocks in their portfolio?

        outandabout - I personally only invest in the top growth stocks held by the current top growth funds.. We can consistently beat an index where they are likely the top positions held there also. The index has to carry the losers along with the winners, individuals don’t. Same technique works with value stocks.
       
        I absolutely don’t invest in the “undervalued” company stock as judged by me a rank amateur and create dead money for an unknown period when I can consistently tip the odds of making money in my favor even under current conditions. Overthinking, ego, amateur decision making, investing in an unknown situation waiting for an unknown result is gambling not investing. I only invest in individual stocks smart money have researched enough to make them their top choices.

         As far as income all ours comes from CEF’s. Professionally run leveraged funds that provide excess income to needs. Thirty percent drops let us pick up 3-4k a year income this time. Do that on corrections also and your talking real income raises. I see no reason to nitpick, dither, angst, wait, allocate, market time or seize up to buy a “bargain” individual stock that raises their dividend 2-5% a year. With a few computer strokes I can pick up 1k a year from what I already own and more income starts flowing in next month. This pretty much makes me invest with facts only and eliminates what “I think” as much as possible. All I have to do is choose from a professionally vetted list of the most held that fits our risk parameters.

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Re: Why do investors chose to hold individual stocks in their portfolio?

Stocks so far has worked lot better than mutual funds for me. Mutual funds have huge manager risk specially the value funds.

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Re: Why do investors chose to hold individual stocks in their portfolio?

Thanks for all the responses.

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Re: Why do investors chose to hold individual stocks in their portfolio?

That's a great question. The answer is probably because they are being encouraged to do so by the industry, with slogans like "5 cheap stocks to buy now". Unless you are Warren Buffet, picking winners is spinning the roulette wheel. You would have to know those individual companies very well and would have to conduct very thorough research. That takes time few of us have. My guess is many investors simply aren't aware of this. Financial markets love them.

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Frequent Contributor

Re: Why do investors chose to hold individual stocks in their portfolio?


@waffle wrote:

Stocks so far has worked lot better than mutual funds for me. Mutual funds have huge manager risk specially the value funds.


I have found the same, waffle. When I cut back equities late last year I found a number of stocks that proved to be superior investment versus the funds I dropped. Many of those stocks positions were short term trades, others not.

 

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Re: Why do investors chose to hold individual stocks in their portfolio?

Most investors I know of are either fully in mutual funds or own a hybrid of mutual funds and stocks.  For the latter, usually a small portion (say 10% of the total portfolio) is in stocks.  

Main reasons: (1) takes much more time/expertise (and interest) to research/know any stocks, (2) the gyration (ups and downs) is much higher than typical (say index) mutual funds, (3) one seems to be the only novice in a gambling table - guess who is gonna lose, (4) painful experience from either family or self, and (5) a diversified portfolio of mutual funds does the job generally well.

One can select a few stocks for fun/thrill on the side; or else, one needs to dedicate full-time to own an entire portfolio in stocks.  

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Re: Why do investors chose to hold individual stocks in their portfolio?

@steelpony10     @What do you mean by "with a few computer strokes I can pick up 1K a year from what I already own and more income  starts flowing next month"

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Re: Why do investors chose to hold individual stocks in their portfolio?


@Mortmain wrote:

That's a great question. The answer is probably because they are being encouraged to do so by the industry, with slogans like "5 cheap stocks to buy now". Unless you are Warren Buffet, picking winners is spinning the roulette wheel. You would have to know those individual companies very well and would have to conduct very thorough research. That takes time few of us have. My guess is many investors simply aren't aware of this. Financial markets love them.


This thread was directed to why we chose to hold stocks, not why we don't. There are many sites, M* included, that provide valuable information on stocks.

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Re: Why do investors chose to hold individual stocks in their portfolio?

To answer that requires understanding the investor's goal. Mine is reliable income, quarter after quarter, year after year, that grows with inflation. Why individual stocks with this goal?

  • Expenses. What % of the fund's dividend + Interest income goes to the house? Whatever that amount is, that's what the investor is giving up (paying) by holding the income stocks in a mutual fund. With individual stocks, that income expense is $zero
  • Open end mutual funds operate in opposition to the income investors. No mutual fund wins praise for their reliable distributions....they win positive attention for risk adjusted rate of return. I'm not concerned about the latter....only about the former.
  • An index fund must hold all members of the index, including losers. Why would I hold a REIT index that must include names like CBL, GOV, MAC or BDN, to name a very few.
  • What a mutual fund does offer is income diversification. As we're finding today, diversification matters. So to meet this with a portfolio of individual stocks means making sure portfolio income is diversified across multiple industries and sectors. This amount of work and the fact that no 3rd party source, at least that I've ever found, provides assistance in doing this, means many will not be willing to spend that kind of time choosing individual stocks. Thus, this is a disincentive to individual stocks in favor of a fund.

BruceM

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Re: Why do investors chose to hold individual stocks in their portfolio?

a) I inherited stocks in a few companies. I've dumped most of them; not to my taste (e.g., XOM) but a few were reasonable (e.g., one in health-care -- UHS).

b) I may occasionally speculate on a start-up situation. I have just 1 such stock at this time.

These are a very small fraction of my investment holdings.

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Frequent Contributor

Re: Why do investors chose to hold individual stocks in their portfolio?

      Sheryldell - We invested in 8.5% CEF’s and “saved” the excess for over 10 years now. Since we have no real allocations but separated growth from income, when disaster strikes like now we take some of the excess income we saved and disperse it among our CEF’s or growth investments.
 
       At times like these CEF’s drop in value and now are at a 12% yield value for example. Thirty five thousand dollars invested at 12% yields new income of $4200/year. We don’t mess with stocks for income. Too much work, decisions or concern about markets. You can make CEF investments any time in 10 minutes on your computer probably near free and your done. The principle is at high risk and the dividend can be cut.  We decided to live on CEF income, not spend down and save capital gains from growth of principle in other positions for LTC if needed. Since our personal inflation rate is about 2.5% if a CEF cuts their payout plus with a ten year excess income in reserve it’s not a problem for us.

        The principle and dividends of individual stocks are at risk but less so. Our individual stocks are mostly for growth of principle which is somewhat unpredictable. That’s why we chose the most held by the best growth funds.. Didn’t take much time at all or involve much follow up. Just cash capital gains when you want to. In ten minutes once you have a list you like you can invest in AMZN, MSFT, AAPL,MA,V etc. which has served us well so far. After this current dilemma I’am sure they will again.

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Re: Why do investors chose to hold individual stocks in their portfolio?


@outandabout wrote:

@Mortmain wrote:

That's a great question. The answer is probably because they are being encouraged to do so by the industry, with slogans like "5 cheap stocks to buy now". Unless you are Warren Buffet, picking winners is spinning the roulette wheel. You would have to know those individual companies very well and would have to conduct very thorough research. That takes time few of us have. My guess is many investors simply aren't aware of this. Financial markets love them.


This thread was directed to why we chose to hold stocks, not why we don't. There are many sites, M* included, that provide valuable information on stocks.


If you read my second sentence you'd see that I answer that question. My answer is based on empirical research and is widely accepted within the investment community. However, I concede it may be completely wrong and that you are a successful investor able to deliver returns in excess of the market. However, before I accept that you would need to provide evidence that is what you are doing, and doing it consistently. If you are unable or unwilling to provide that, then you will have to concede my opinion remains valid. Fair?

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Explorer ○○○

Re: Why do investors chose to hold individual stocks in their portfolio?

I've always bought individual stocks since day one in my taxable account (early 90's) and when I rolled my 401 to an IRA I did the same. I just recently bought some ETF's to try. My dad was invested in individual stocks as mutual funds weren't very popular when he started and maybe it's because his broker made more or a lot of the funds back then had a high load. 

I like stocks for another reason too. Not paying taxable gains unexpectedly when a fund company decides to "rebalance". I'll decide when to rebalance (buy or sell) on my terms. Most of the stocks I hold have multiple cost bases and if I decide to sell I can pick which tax lot to my advantage tax wise. This played out recently when I sold half my position in UTX at $130ish in March before the big drop. I sold the shares with the higher cost which lessened my tax. 

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Re: Why do investors chose to hold individual stocks in their portfolio?

Outandabout,

I continue to hold a significant number of individual stocks primarily because they are strong wide moat dividend payers, and I have huge (unrealized) capital gains in the vast majority of them.

Over the last ten years or so, I’ve been putting new money in well diversified index funds, but back in the 70’s, 80’s, and 90’s, I was mainly investing in individual stocks. Now, I limit any new individual stocks and require them to “replace” an old holding. Main reason I hold the individual stocks is they have appreciated a LOT, and I want to avoid paying capital gains. Plus, they are strong stocks- JNJ, MSFT, ABT/ ABBV, APPL, BRK.B, CL, INTC, KO, LOW, MRK, MMM, PG, QCOM, T, UL, VZ, XOM, etc.

Win
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Re: Why do investors chose to hold individual stocks in their portfolio?

The two main reasons I would hold individual stocks.

1. Attempt to beat an equity market index (VTI or VT)

2. Make investing more personal and exciting

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Re: Why do investors chose to hold individual stocks in their portfolio?

I buy individual stocks that are under-valued (as opposed to growth stocks) and are also good dividend payers when I have personal conviction in their future prospects...

If I am correct, I get the dividend and the capital appreciation.

If I am wrong, I at least get the dividend.... and as Galeno said it keeps my investing exciting..

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Explorer ○○○

Re: Why do investors chose to hold individual stocks in their portfolio?

Some of us dedicate up to 20% of our portfolios to trading.  So we are perhaps only 80% investors.  Just look at Cos like LNN , CWT and DIS.  For those of us who trade parts of our portfolios we use individual stocks because they have strong LT fundamentals but also respond /over respond to market technicals.  So you can still be a LT investor in these kinds of great companies selling their peaks and buying their volatile bottom feeding frenzies.   So what is the amplitude of the change from peak to trough in an LNN over the last 3 weeks?   $84ish to $98...?  So if you are in an IRA or ROTH you have no capital gains consequences on ST trading.  You can sell shares into the market peaks LT OR ST, these days you do not even have to guess where the peak will be because you can sell one share and one share multiple times intraday, in some smaller lot than you last purchased.  There is no trading cost. This becomes "accumulation" "Channel Trading". It is trading.  Trading stocks.  At some point usually with small and midcaps, one of these stocks you accumulate Channel trading may get a take over offer.  

Beyond Channel trading their is trading the trend.  But not all trends are against the market averages moving up and down.  I did not own any shares of Washington Gas Light. But I have owned shares of Empire District Electric,  Vectren, and Valener, and AGAAF Alta Gas Canada, now since it's takeover by a pension fund and private capital group known as TriSummit Utilities.  So there are no known O/E mutual funds or ETFs that put the rest of the usual suspects for the next acquisition in their top ten holdings.  Buy you can own individually and again accumulate in small NTF tranches that same list of usual suspects.  NJR, AEE, NI, LNT,PNW, POR, SO, VST, and EVRG.  A couple of those may be too big to get targeted but after the Anadarko deal we can not rule out madness.  Besides those the trend of significantly increasing the grid sourcing from alt energy.  So you have the Canadian players in that which under the tax treaty with Canada are ideal for IRAs and Roths.  AQN,FTS,EMRAF,and NPIFF, as well as US Utes like the nuke operator EXC and New Era.  In machinery stocks like CMI with a whole line heavy duty truck engines that run-on NAT GAS, LPG or even LNG.  New Flyer industries which. has dominated the alt fuel alt energy shuttle and full size bus markets for over a decade.  

Mutual funds will always have issues as to being all in all the time, not so beneficial when a once in a lifetime melt down in the markets occurs twice now in 12 years, ST trading fees if you want to exit some of what you dollar cost averaged into before a decline, and typically instead of owning a focused portfolio end up with +100 to+300 stocks so you get lots of the chaff dragging down the top ten PERFORMING stocks in the portfolio.  ETFs not that much of an improvement except for their liquidity.  Mutal funds are further hampered by the flight of capital and especially from the under performers which makes it unlikely they will survive over the LT.  Mutual funds continue on with the same old sing songs about LT investing , market timing of sales and purchases, hurting the fund and it's investors and all that mumbo jumbo, even as they have continuously amended their trading rules and minimums to be able to compete with ETFs.  

In the Mutual funds I own I HAVE BECOME a shameless trader of performance.  So every year the two three or even four dogs get fired and the assets move to a more adept asset manager.  

We have Been in an era of indexing and other computer bot trading in milliseconds for years now.  Big surprise that the "indexes" have gotten clobbered with the majority having gone mindless and all investing in the same 30, 500, 2000 5000 stocks depending on the index.  No heed given to the cautionary flag that hit bonds in the fourth qtr of 2018.  Yes Virgina interest rates and rates of inflation can and sometimes will go up.  Carnival thanks to the Fed backing the bond markets in general, was just able to get $7 billion at 11.75%, which then went to 12% in the secondary market.  Risk free income now comes with out any income at all.  

So again why buy these bank financial FUNDS when you can just own JPM, MS,GS, BAC and WFC along with some of their preferreds, many now selling below par.  If this socio-economic fiasco blows over in the next 24 months then there can be little doubt that inflation and rate risk is going to assert.   The TBTF banks will be making big gains out of those conditions asserting.  And there will be the smaller banks as well.  One of which in the Northeast will be targets of WFC for an expansion into that region.  Which regional bank mutual fund or ETF will be holding the top ten of those usual suspects in the top ten of their portfolios?  

DIS was recently trading a panic with an $85 handle.  Most have it with a near $150 handle over the next 18 to 24 months.  In a couple days CWT drops from a $50 handle to a $44.  But water is the most precious commodity on the West coast.  The Sierras just got a rare in the last decade huge, snow dump/pack season.   In the long term the AGs industries will have to pay more for water resources. 

You can still be an investor in O/E mutual funds for allocating to a theme like the "FAANG"s, where the cost of individual shares is cost prohibitive. But with some FDN, PNQI, CTCAX, and JAMFX you can get a nice over weighted participation in those names.  

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