Adventures in Stock Picking
Two Truths and a Lie is a popular “ice breaker” often used to facilitate camaraderie between a group of strangers. One at a time, everyone takes a turn providing three statements about themselves and it is up to the rest of the group to guess which one of them is false. Imagine it was my turn and I provided these responses:
- I have never eaten a bowl of cereal.
- I have never seen a Star Wars movie.
- I have never bought an individual stock in my life.
If you’re a regular reader of this blog, you are likely aware that my day job is Chief Investment Officer of a wealth management firm. Knowing that, you would probably be safe to assume that statement number three above is the falsehood.
The reality is that all three of the above statements are 100% true. That is, until last week.
Against my better judgment and in contrast to my firmly held beliefs that discretionary stock picking is ultimately an exercise in futility, I decided to finally take the plunge and buy some individual shares.
To the people that know me best this may be a bit of a shock – perhaps even hypocritical – given much of what I espouse in my writing and communication. To my readers, I assure you that I am not changing my stripes as an investor – I’m just adding a spot. With that said, this post is an opportunity to explain the who, what, when, where, why and how of this little experiment.
Friends and colleagues would often recoil with bewilderment when I shared the fact that I’ve never owned an individual stock.
How could that be? Isn’t that what you do for a living? Wait, you bought Bitcoin before you bought stocks?!
I almost wore it as a badge of honor, a symbol of purity as a card carrying member of the Evidence Based Investing community. Most other like-minded professionals I know that share a similar investment philosophy – broad diversification, asset class investing, factor tilts, systematic rebalancing – didn’t start out that way. Often they ended up there after years of doing the opposite – overpaying for active management, chasing the hottest asset class, reaching for yield, timing the market, dabbling in security selection.
I feel fortunate that while my thinking has evolved in a number of ways over the course of my decade plus in the industry, many of my core beliefs were instilled in me at a very young age. Part of it is nature – I’ve always had a healthy dose of humility when it comes to my ability to outsmart the market. An equal part is nurture – growing up the son of a financial advisor will do that to you!
I also naturally gravitated to the more quantitative aspects of of markets when I began to seriously study finance. Investing always has been and always will be a blend of art and science, but the scientific part of the spectrum always appealed more to the way my mind operates.
Before I get into what stocks I decided to dip my toe into, it goes without saying that nothing you read on this site is an endorsement of a particular security, a solicitation to buy or sell anything or advice of any kind. See my disclaimer here.
Since this was all new to me, I had no preconceived notion of what my stock selection methodology would be. Ultimately, I decided to borrow from the old Peter Lynch adage “buy what you know.” I purchased shares of three companies of which I consider myself a brand ambassador:
- World Wrestling Entertainment (Ticker: WWE)
- Starbucks (Ticker: SBUX)
- Twitter (Ticker: TWTR)
In each of these instances, I am a fiercely loyal customer who uses their products and/or services daily. In a way, these companies are an extension of my personality. I know this because I gave my wife five chances to guess my three stocks and she only needed four. (To be fair, she would have only needed three but she forgot that WWE was publicly traded)
My first trades were initiated last week. Over the next few months, I’ll likely add another handful of names into the mix, but I don’t yet know what. In keeping within my circle of (somewhat) competence, I could see myself adding a few financials to the portfolio since it’s the industry I pay the closet attention to.
The truth is I have no idea what the future holds for this endeavor. It would not surprise me one bit if a year from now I have abandoned it completely. Who knows, maybe one day I’ll be a walking anecdote that others reference as a signal the market had topped!
I knew from the get-go that if I was actually going to do this, it was going to be through the Robinhood platform. My reasoning? First and foremost, zero commision trading. Since I am starting off with a very modest amount of money, I didn’t want any unnecessary transaction costs eating away at my returns. Second, I believe Robinhood and other FinTech companies are redefining how future generations will invest and have the potential to disrupt the status quo much in the same way Charles Schwab disrupted the old guard brokerage houses in the 70s and 80s.
Howard Lindzon, an early investor in Robinhood, describes the company as follows:
Robinhood is fantastic. It is the fastest growing financial app of all time. I use it everyday. The company and product has reimagined stock trading and investing for the mobile era. It’s not just the free trades that matter, but it sure is genius. I believe the millennial generation will choose new brands when it comes to their finances. I expect Robinhood to be one of those brands.
The startup now has more accounts on its platform than E-Trade.
There are many factors that ultimately led me to embark on this adventure:
- Embracing the next generation: I’m barely a Millennial, but am a Millennial nonetheless. It seems pretty likely that 10-20 years from now the vast majority of people I advise will be Millennials and Gen-Z. Just as Gen-Xers invested differently than their Baby Boomer parents, so too will these future generations. And mobile-first apps will undoubtedly be a part of that shift.
- Empathy: Most of the clients my firm works with are completely content not owning any individual stocks. But there’s always been a small subset who feel the need to scratch their recreational itch. I used to always discourage this type of behavior – no dessert, just eat your vegetables! Now, I feel a little different. If someone eats a well-balanced diet 99% of the time – why should I care if they want to indulge in some sweets with the remaining 1%? As long as the proper guardrails are in place, it may even lead to better behavioral outcomes with their “real” money.
- Skin in the game: Though I’ve never fancied myself a stock jockey – and never will – I’ve always been fascinated by a number of great companies. Having some small stake in a handful of these stocks will force me to spend more time learning about what makes them tick. So much of what I have studied throughout my career has been focused on the stock market as a whole, that I have at times forgotten to view it through the lens of being a “market of stocks.” While there are efficiencies to be gained by investing in and across markets as a whole, it is important to remember that beneath the surface of this abstract, monolithic “thing” we refer to as the market lie actual businesses and people.
- Paying my tuition: The writer “Adam Smith” (the pen name of George J.W. Goodman) once wrote, “If you don’t know who you are, the stock market is an expensive place to find out.” It might seem crazy to voluntarily pay tuition to the stock market, when I’ve gotten along just fine coasting on a “scholarship.” Any maybe it is. My hope is that – similar to a college degree – the benefits of what I learn in the process outweigh the associated costs. And given some of the constraints I’ll be placing on myself, I think the bill will be pretty manageable.
- To “sin” a little: I’ve spent my entire career living a life largely devoid of any investing “sins.” I’ve resisted temptation from the twin seductresses known as market timing and stock picking. And for good reason. Over time, those activities have very little chance of adding any value. But to paraphrase one of my investing heroes, Cliff Asness, I’ve made peace with the fact that it’s OK to “sin a little.”
Now that you (hopefully) have an understanding of why I am doing this in the first place, here are the self-imposed ground rules I will be following:
- Rule #1: Never let it go above 5%. At no point should success or failure here have any material impact on my family’s financial well-being. That is why I am setting a ceiling of 5 % of my investable assets. If it ever hits the threshold – which I highly doubt it will – I will sell 1/2 of it and move the proceeds over to my strategic, long-term asset allocation. For the record, it currently sits at a fraction of 1%. Baby steps.
- Rule #2: Never own more than 20 names. If all I did was just collect stock after stock after stock, it would defeat the whole purpose and leave me with another index fund. This needs to be done in a concentrated manner, or not done at all.
- Rule #3: Don’t fight the trend. There is a little bit of exposure to momentum and trend-following strategies in my main portfolio, but in general my allocation is static in nature with a bias towards value, size and profitability. Might as well go the opposite direction with my “cowboy account.” Rather than explicitly targeting positive momentum, I’ll be focused more on avoiding stocks and industries in significant downtrends.
- Rule #4: Expect to underperform. I’m never going to know these companies better than the thousands of traders and analysts covering them on Wall Street. I have no discernible edge. The odds are stacked against me and that’s fine. Any success will be icing on the cake and almost entirely due to luck.
- Rule #5: Have fun! By design, the vast majority of my money is managed in a rules based, systematic way. While it improves my odds for long-term success, it can be a little, well, dull. If I’m going to have a release valve, some entertainment value should be a part of the equation.
So, that’s it. Feel free to chime in and tell me how stupid I am on Twitter. Or wish me luck! If history is any guide, I’m going to need it
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