Why not individual equities?

[SmallPotatoes]

Harry Brown advocated little seperation between one and one's assets.  Most here seem to agree that holding LTT's directly is the way to go for both cost and security (as well as duration control).  Cash is easy, and though gold gives many people trouble it really is easy to obtain and store leaving a little to trade using GTU/GLD, etc.  Enter stocks.  There's a lot of stock fear here IMO, and most here seem to think they could NEVER pick a decent set of stocks that would roughly produce the volaility that HB wanted in the PP.

However, can it be much more difficult than just doing what's already been done?  Of course, I'm young and foolish, but I can view the holdings in VFINX just as anyone else.  I recognize large Blue Chip companies like Apple, Johnson & Johnson, Exxon Mobile, and Coke will probably be around long after I'm dust.  Furthermore, hits and spikes are exactly what the PP looks for in stocks.  TSM is basically a barbell of the Big Boy Blue Chips vs. the small and medium cap Up-and-Comers.

I'm not against holding a core TSM index fund, or Small Cap, or International, but really, if you analzye many of those funds you find the top 25% is vested in a handful of well-known companies anyhow.  The rest will add or remove some risk/volitility, but how profoundly can that really be on the PP?

Look at what others are doing in the index and buy those securities.  Not only can you weed out companies you are morally or otherwise opposed to, but you control everything on the equity side.  Am I missing something?

[Pkg Man]

Harry Brown advocated little seperation between one and one's assets.  Most here seem to agree that holding LTT's directly is the way to go for both cost and security (as well as duration control).  Cash is easy, and though gold gives many people trouble it really is easy to obtain and store leaving a little to trade using GTU/GLD, etc.  Enter stocks.  There's a lot of stock fear here IMO, and most here seem to think they could NEVER pick a decent set of stocks that would roughly produce the volaility that HB wanted in the PP.

However, can it be much more difficult than just doing what's already been done?  Of course, I'm young and foolish, but I can view the holdings in VFINX just as anyone else.  I recognize large Blue Chip companies like Apple, Johnson & Johnson, Exxon Mobile, and Coke will probably be around long after I'm dust.  Furthermore, hits and spikes are exactly what the PP looks for in stocks.  TSM is basically a barbell of the Big Boy Blue Chips vs. the small and medium cap Up-and-Comers.

I'm not against holding a core TSM index fund, or Small Cap, or International, but really, if you analzye many of those funds you find the top 25% is vested in a handful of well-known companies anyhow.  The rest will add or remove some risk/volitility, but how profoundly can that really be on the PP?

Look at what others are doing in the index and buy those securities.  Not only can you weed out companies you are morally or otherwise opposed to, but you control everything on the equity side.  Am I missing something?

I think it might be possible to your own index that would in -- all likelihood -- behave in a similar fashion to the market with about 25 stocks.  But the costs to do so would likely be higher than if you just bought a low cost index.  And you probably would have to monitor it more just to make sure nothing blew up on you and periodically rebalance it.  I would just stick with an index.

[pershing83]

HB said (in 1999, Fail-Safe) one should invest in the broad mkt. He listed 8 mutual funds, suggesting one pick 3 of these.  No index funfs were listed. I would buy an S&P ETF and not worry. However, given the importance of overseas mkt's today, not 12-13 yrs ago, you might assume HB would have perhaps included those mkt's.

[AgAuMoney]

large Blue Chip companies like Apple, Johnson & Johnson, Exxon Mobile, and Coke will probably be around long after I'm dust. ...  TSM is basically a barbell of the Big Boy Blue Chips vs. the small and medium cap Up-and-Comers.

...
 Not only can you weed out companies you are morally or otherwise opposed to, but you control everything on the equity side.  Am I missing something?

The only thing you are missing is complexity, and you may not be considering cost.

For me, I am implementing what seems to be your exact idea.

I converted to dividend growth investing a few years before I converted to the HB PP.  I went down the same road you are describing.  Now I have about 35% of my portfolio in HBPP.

In my primary HBPP account (an IRA) the stock allocation is divided amongst:
  VBK
  VTI
  AVA
  CL
  CLX
  EMR
  INTC
  MCD
  PII
  PM
and my direction is away from VTI into more individual and more VBK.  Dividends reinvest, unless the stock is getting too far ahead (like PII did).

This is not a recommendation to buy, you don't know my overall weighting or diversification and I don't know yours, etc.  Over all my accounts I hold about 45 different tickers including some duplicates for heavier weighting to a particular company.

[AdamA]

However, given the importance of overseas mkt's today, not 12-13 yrs ago, you might assume HB would have perhaps included those mkt's.

Why are overseas markets important to the PP?

[pershing83]

Harry Browne said invest in the broad mkt. It seems today, years later, the broad mkt would be global by definition. I do not recall him mentioning overseas investments in Fail-Safe. A self directed pp could include only US stocks but those might include companies with a large overseas presence, ie CAT, KO, UTX and BA.

[Roy]

Harry Browne said invest in the broad mkt. It seems today, years later, the broad mkt would be global by definition. I do not recall him mentioning overseas investments in Fail-Safe. A self directed pp could include only US stocks but those might include companies with a large overseas presence, ie CAT, KO, UTX and BA.

Fair point about what the broad market is today.  Perhaps Harry would have today advised including some "total" international.  Or, like Bogle, he may still believe specific foreign holdings unnecessary, as many US companies have extensive foreign presence.  Not sure there is a right answer to this one, and some PP users do include a portion of international in their stock component.

My own opinion is that with the Gold, and the way the PP has worked for decades, TSM (essentially, the S&P) is all that is needed.  Then there is tracking error to the S&P to consider with a significant weighting to foreign, even though the calm of ex poste (backtesting), shows a diversification benefit. But the PP is going to have heavy tracking error anyway, so this seems more an individual decision—providing one is prepared to stick with their allocation and not be tempted to market-time the domestic/international allocation;  which is also a reason I don't like to slice/dice the PP equity portion in any manner, regardless of benefits shown in backtesting.

[SmallPotatoes]

I am using primarily dividend payers to generate investment income and modest growth, coupled with a few long growers like Apple, Inc. and a value pick or two (e.g. Ford Motors).  I just supplement my picks with a SC fund and it seems to give the best of both worlds.

My preference is having control over my investments, knowing where my money is going, and keeping costs low.  Researching a company requires a little time, but helps a person understand what they're buying--something HB would probably condone.  Frequent trading can raise costs, however, with dividend/growth companies my strategy is just hold tight, reinvest dividends, and rebalance anything that doubles in value.  Micro-managing my stocks also deters me from tinkering with the PP components, which provide the stability and security needed to focus on the equitiy side of things. 

Maybe my returns will be lower and my fees higher, but consider that investing doesn't happen in a vaccuum.  For me, I like owning a piece of the compaines that I patronize like Apple, Amazon, Procter & Gamble, Target, and Exxon Mobile. 

[KevinW]

Harry Browne said invest in the broad mkt. It seems today, years later, the broad mkt would be global by definition. I do not recall him mentioning overseas investments in Fail-Safe. A self directed pp could include only US stocks but those might include companies with a large overseas presence, ie CAT, KO, UTX and BA.

This has been discussed extensively, and while there is no consensus, there are many arguments for using domestic stocks only.

I am using primarily dividend payers to generate investment income and modest growth, coupled with a few long growers like Apple, Inc. and a value pick or two (e.g. Ford Motors).  I just supplement my picks with a SC fund and it seems to give the best of both worlds.

For the PP to work as intended you need the stock allocation to rally hard during domestic prosperity.  By definition the total market will, but stocks that are tilted away from the market may not.  In fact conventional wisdom is that dividend stocks are less volatile than the market in general, which is actually a bad thing in the PP context.

In principle I think it'd be OK to create your own index provided you try to track the total market through some mechanical process.  You might buy everything in the DJIA, or the top 20 stocks in the S&P 500, or something like that.  As Clive explained that would be more expensive than a mutual fund on small portfolios but could be less expensive on larger portfolios.

[Jan Van]

If you have enough stocks so that you almost replicate an index, then what's the point? Better go for the super cheap index funds then. I'd rather keep it targeted and simple and own no more than 10 stocks or so. That would keep trading costs quite low too.

[pershing83]

25 stocks? Is it not the received wisdom this will do no better than an index? So, why fret and spend the extra money? Heebner, the best of the best pickers , CGM Focus with 25 stocks, is down 14% YTD. H Browne clearly said buy the broad mkt.

I am criticized for sarcasm etc but some of you people tend to wander off the reservation.

[MediumTex]

25 stocks? Is it not the received wisdom this will do no better than an index? So, why fret and spend the extra money? Heebner, the best of the best pickers , CGM Focus with 25 stocks, is down 14% YTD. H Browne clearly said buy the broad mkt.

I am criticized for sarcasm etc but some of you people tend to wander off the reservation.

I think what they are saying is to take an index and carve out the stocks that are going to go down and only buy the ones that are going to go up. 

[Pkg Man]

I stand corrected...it's 30 stocks

http://www.jstor.org/pss/2330969

[Lone Wolf]

Look at what others are doing in the index and buy those securities.  Not only can you weed out companies you are morally or otherwise opposed to, but you control everything on the equity side.  Am I missing something?

The issue is that it's just so darn cheap and effective to buy VTI, SCHB, etc.  The expense ratios (0.06%) are miniscule and for that get a constantly adjusting broad market index.  This index involves no work on your part and no notable tax consequences to fiddle with.  If you buy individual securities you'd need to keep an eye on things and put in the occasional purchase or sale (that may have a fee.)  Furthermore, sales come with tax consequences that you'd have to think about.

I think that if you really enjoyed trading individual equities this kind of thing might be fun but it's not very appealing to me personally.  I find that I get a lot more "bang for the buck" throwing a tiny bit of micromanagement into cash (because of savings bonds, the fact that Treasury Money Markets have high expense ratios, the availability of free Treasury trades, etc.)

[SmallPotatoes]

Look at what others are doing in the index and buy those securities.  Not only can you weed out companies you are morally or otherwise opposed to, but you control everything on the equity side.  Am I missing something?

The issue is that it's just so darn cheap and effective to buy VTI, SCHB, etc.  The expense ratios (0.06%) are miniscule and for that get a constantly adjusting broad market index.  This index involves no work on your part and no notable tax consequences to fiddle with.  If you buy individual securities you'd need to keep an eye on things and put in the occasional purchase or sale (that may have a fee.)  Furthermore, sales come with tax consequences that you'd have to think about.

I think that if you really enjoyed trading individual equities this kind of thing might be fun but it's not very appealing to me personally.  I find that I get a lot more "bang for the buck" throwing a tiny bit of micromanagement into cash (because of savings bonds, the fact that Treasury Money Markets have high expense ratios, the availability of free Treasury trades, etc.)

You're right, and there's a fine line between 'I'll choose some stocks' and 'I'm ruining my PP strategy'.  My core is VTSMX at about 20%.  From there I pick a few companies that I personally like or want to overweigh (e.g. AAPL, PG, XOM) and let it ride.  Most all my reinvestment cash goes into the MF, which is free, but if one of the stocks took off or dropped I might make a trade.

True, this sort of thing does break the PP Warranty sticker, but if anything I'm only off or ahead a few basis points. I'm not trying to tinker with the PP, but just make it so I feel comfortable with it.  Like buying a new Miata; most everything is ready to go, but you have to adjust the seat and mirrors, set the radio, then you're set to cruise.

[AdamA]

You're right, and there's a fine line between 'I'll choose some stocks' and 'I'm ruining my PP strategy'.  My core is VTSMX at about 20%.  From there I pick a few companies that I personally like or want to overweigh (e.g. AAPL, PG, XOM) and let it ride.  Most all my reinvestment cash goes into the MF, which is free, but if one of the stocks took off or dropped I might make a trade.

By how much do you think that this will improve your PP returns?

[AgAuMoney]

You're right, and there's a fine line between 'I'll choose some stocks' and 'I'm ruining my PP strategy'.  My core is VTSMX at about 20%.  From there I pick a few companies that I personally like or want to overweigh (e.g. AAPL, PG, XOM) and let it ride.  Most all my reinvestment cash goes into the MF, which is free, but if one of the stocks took off or dropped I might make a trade.

By how much do you think that this will improve your PP returns?

No one can honestly answer that question with anything but "I don't know."  Some will lie to themselves and act like they know, but they don't.

For me, one issue is that I simply do not like some companies, and investing in the index means I invest in those companies at the weight the index assigns to them.  For example, my philosophy is dividend growth, yet I do not like Exxon-Mobile (XOM).  However if you look at any total market or S&P 500 index in the U.S. 3-5% goes to XOM.  OTOH, I do not smoke and prefer never to be around those who do as it really troubles my breathing and allergies.  Yet I have no problem investing in Altria (MO), Philip Morris (PM), and Reynolds American (RAI) while some people say they won't invest but they will buy an index where 5%-10% of their investment is in tobacco stocks?

But to be honest, I am convinced by the studies that over the entire market history and thru every 30 year segment, dividend growth stocks outperform the market average.  So I believe that by choosing solid dividend growth companies and monitoring my choices that I am separating the cream off the top and will do better than the entire market.  The past 15 years that has been true for me, and about 8 years ago I realized that and have transitioned more and more of my investments to dividend growth.  Other than the PP I'm nearly there...

For purposes of the PP I compromise my dividend growth position.  I have 1/3 to 1/2 of my stock allocation in a small cap index.  In theory, that is about the same percentage that would be in small caps if I were holding the entire market index.  So now I expect that I will meet or beat holding the entire market index.  But I don't know, and I'll have no one to blame but myself.

[AgAuMoney]

A PP with even just a few percentage points above the classic PP from self selecting individual stocks, and after perhaps 1% of PP value in additional trading costs (2% higher net benefit) might be deemed by some to be sufficient reward for the effort. More so if you enjoy the process.

And since I am doing the research already for my VP...

If the day comes when I decide "no VP for me!" and I decide to consolidate everything into the PP, at that point I'll be looking at my stock portion being solely invested in a whole-market index.  That day is not today.

[Jan Van]

As MT in that thread indicated however, Berkshire might be past is sell by date. But equally there are alternatives.

Decision Moose (http://decisionmoose.com)
Mycroft's P/FCF http://www.mycroftresearch.com/uploads/ ... ch_LLC.pdf
Greenblatt's Magic Formula http://formulainvesting.com/actualperformance_MFT.htm

as just three examples (or potential blends).

Clive, did you by chance read these two articles?
http://blog.empiricalfinancellc.com/201 ... c-formula/
http://blog.empiricalfinancellc.com/2011/06/909/

[dualstow]

I think that, like Clive said on page 1, costs are different between large portfolios and "small potatoes." 
I would add that if you have enough capital to deploy and enough time (decades) to let dividends grow, it can be tempting to plan for steady income growth, other strategies be damned. Sometimes slow and steady really does win the race.

Still, I only hold my individual equities, about sixty I guess, because I hadn't heard of the PP when I bought them. While they don't really cost anything to hold now that I have them, I wouldn't know what to sell if they were part of a PP and equities popped. Sell one company? If so, which one? Would I still have an index after several sales? Sell a bit of each company? That could get costly, real fast.

And, like others said, dividend champions don't make for the most volatile of stocks.
It's VP territory.

[AgAuMoney]

Still, I only hold my individual equities, about sixty I guess, because I hadn't heard of the PP when I bought them. While they don't really cost anything to hold now that I have them, I wouldn't know what to sell if they were part of a PP and equities popped.

Do you have an allocation to each company and/or a minimum current yield target?

Every few months I look and if a holding is significantly above its allocation I look to sell some and put it into something that is below.  I only do it if the transactions costs are a small fraction of the amount of imbalance.  Mostly I tend to hold equal allocations in an account but sometimes I'll do more complex allocations.  Makes it harder to tell at a glance tho.

I also note if something has grown in price faster than the dividend has grown.  If so, the current yield will have shrunk.  If it is below my threshold I might sell some if I need to rebalance into something or more typically I'll set a trailing stop to sell some -- tighter the more overvalued I feel it is.  That way if it drops I capture the gains, otherwise I let it ride for more.

[dualstow]

Still, I only hold my individual equities, about sixty I guess, because I hadn't heard of the PP when I bought them. While they don't really cost anything to hold now that I have them, I wouldn't know what to sell if they were part of a PP and equities popped.

Do you have an allocation to each company and/or a minimum current yield target?

Allocation: When I bought these, I put the same amount of money into each, almost to the dollar.
Every once in a great while (years), I trim. The way stocks have been behaving, I might not have to trim for the rest of the decade.
I had a maximum initial yield, but no specific minimum current yield target.