Individual Stocks are Hard
By: Brian A. Magnan CFP®, AIF®, CEPA®
Director – Magnan Family Wealth Management
Still want to buy individual stocks? Let’s turn to Warren Buffett & Charlie Munger for some insight.
Charlie Munger gave a speech at USC Business School in 1994. The full title of the talk is “A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business”.
Charlie stated: 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.”
Mutual Funds are subject to risks of the underlying investments in the fund. Investment returns may fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
Director – Magnan Family Wealth Management
Well, hard but simple. All you need to do are three things:
- Get the purchase right.
- Get the sale right.
- Pay taxes.
For those of us with experience in individual stocks, we understand that this is easier said than done. For the record, we prefer mutual funds. (I’m using the term “mutual funds” broadly to include index funds, exchange-traded funds, separately managed accounts, or private equity. They all offer a diversified approach to owning companies.) Here are the key advantages mutual funds have over individual stocks, as we see them:
- Can’t go to zero - Permanent capital loss in a broadly diversified unlevered portfolio of companies with no leverage is historically impossible for the long term investor.
- Tax-efficient - Certain mutual funds have an embedded benefit of being able to sell existing investments and purchase new investments WITHOUT passing along the gains to the shareholders.
- Less stress - Monitoring a portfolio of individual stocks properly is a full-time job. The amount of information one needs to process on a daily basis is seemingly endless. Outsourcing this management to a mutual fund enhances your life by adding time back in your day and giving you less concerns to worry about.
I get it though. Investing in mutual funds doesn’t get you rich overnight. It’s not brag-worthy. You probably are not posting a screenshot of your mutual fund gains on a social media platform. You cannot make a killing this way. The trade-off is that you can’t get killed. By the way, that’s our definition of diversification - can’t make a killing; can’t get killed.
Still want to buy individual stocks? Let’s turn to Warren Buffett & Charlie Munger for some insight.
Charlie Munger gave a speech at USC Business School in 1994. The full title of the talk is “A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business”.
Charlie stated: 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.
Only 20 stock purchases in a lifetime, I’d say that qualifies as unconventional!
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Mutual Funds are subject to risks of the underlying investments in the fund. Investment returns may fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Magnan Family Wealth Management is a separate entity from WFAFN.