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Yes and no. I read in Brealey-Myers [1] that you can get 80-90% of the way to pure beta (market risk) by picking 15-20 stocks. You just have to pick ones that aren't super correlated, e.g. 10 pharmaceutical companies.

Whether it's worth your time messing about with this is a separate matter entirely.

[1] https://www.amazon.com/Principles-Corporate-Finance-Richard-...




>Whether it's worth your time messing about with this is a separate matter entirely.

Yeah, transaction fees can really eat into your gains unless you're a very good picked or are interesting millions.


Eh these are trending to zero pretty quickly, and with buy and hold plus yearly rebalancing, you're not really doing that many transactions anyway.


I wouldn't use brokers that have zero fees but yes, the transaction fees are not that high.


>Yeah, transaction fees can really eat into your gains unless you're a very good picked or are interesting millions.

Buying 20 stocks would only cost you ~$120 (at $6/trade). For a $100k portfolio, that's an expense ratio of only 0.12% if you did it once per year.


Buying some amount of each stock once a year is probably not how you're going to be doing things if, for example, you want to keep your portfolio balanced to match your desired asset allocation. You'll probably need to make more trades than this.

You're also more vulnerable to losing a bit of money to the bid-ask spread than Vanguard or Fidelity are.


Much easier to just buy an index.


Yes & no.

Buying individual stocks lets you exercise some level of moral control over which companies you tacitly back. Don't want to support diabetes-inducing sugar water? Then avoid soda companies. Don't want to support environmentally-unsound logging, mining, or petro companies that exploit unregulated externalities? Great, you can select the ones that don't. Don't want to back companies that exploit 3rd-world sweathshops -- there again, you can.

Investment dollars are like voting... and generally speaking, picking individual stocks is akin to evaluating a politician based on their policies rather than voting strictly along party lines.

(Edit: as an aside, you can find "Socially Conscious" ETFs to help offset this concern.)


> Don't want to support diabetes-inducing sugar water? Then avoid soda companies.

So thought experiment on this. Say 49.5% of the world buys pure index fund. 49.5% of the world what you said... and say, all avoided Pepsi stock. Wouldn't that mean that Pepsi stock is undervalued from a PE standpoint, and the 1% of investors left would go 100% in Pepsi, and make a crapload of money?

I totally get voting with your money. If you think some company is absurd for some reason, avoid buying their product. But to avoid buying stock? I think all you do is create an investment opportunity for someone savvy with numbers to make big money, and the company feels no different.

Please correct me if I am wrong though, I might be missing something in this argument.


I feel like this is a perfect example of "put your money where you mouth is."

If you are outraged over soft drinks, then you should own soft drink stock so that, A) you have some influence over their operations, B) you're shouldering some of the risks associated with moving to a safer product.

If you avoid a company completely (purchasing neither their stock nor poduct), then they have absolutely no reason to listen to you, so you're only remaining option is regulation.


My comment was strictly on ease. Calculating the market (to the extent that you believe it exists) is tough, especially in a multi-factor (added betas for size, value, etc) world where risk preferences change over time.

There are other reasons to buy individual stocks but they generally aren’t easy. Deciding what stocks are considered socially acceptable frequently devolves into the same “lesser of evils” decisions as picking politicians.


> Investment dollars are like voting

No, not really. If the market is efficient, the price of a given security isn't dependent on whether or not you've invested in it. Your conscience is clear in that you haven't profited from <whatever> but you haven't affected anything.

Investment can be like voting in the sense that you can vote your shares, or even take legal action, as an investor and perhaps cause change that way. Sadly there's no way right now to do this if you own shares in an index fund.


Even an efficient market will still have capital be more expensive for goods people disapprove of and aren't willing to support. An efficient market just means the price is discovered, not that the price solely reflects monetary outcomes.

Plus there's probably no such thing as an efficient market; determining future outcomes of a market is an NP-complete problem and there are finite traders, so unless P equals NP you are definitely on the moral hook for the impact of your investment decisions. https://arxiv.org/pdf/1002.2284.pdf


Brianwawok in the comment above mine illustrated the problem with this line of thought.

> Plus there's probably no such thing as an efficient market

It's a lot more accurate to say that the market doesn't always behave in an efficient manner, there are plenty of examples of that. But what we're talking about, some investors avoiding the "sin" stocks out of principle and everyone else piling in, has been going on for a very long time and it's instructive to look at the stock performance over time. Not to mention which investors have done better.

Literally the only ones who have ever made the "Investment dollars are like voting" statement I was objecting to true are activist investors who have sued or voted their shares. That's it. Fighting the market doesn't work so well.


Especially if you are trying to capture market beta. It's literally what index funds were designed to do.




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