In Investing, Money

Investing Series: Why I don’t hold huge market-cap stocks individually in my trading account

Liquid Independence recently blogged about how Google (GOOG) went up 13% and is now trading above the $1000 per share mark, and while I am thrilled it went up because he owns a few shares in GOOG, I’d like to discuss why I haven’t followed a similar strategy.

Liquid has admittedly like to hold individual stocks of big names in every area, like Google and Apple so that when one goes up and the other goes down, he wins, otherwise known as stock diversification.

I think this is a strategy better suited to index fund investing because it basically does the exact same thing, but for a lot cheaper, with less risk and a lot less hassle.

I’m more of a fan of buying cheaper, discounted stocks (although not so cheap that I enter Financial Uproar’s stock picking domain where he might end up taking more risks (and gain more) than most, but cheap enough where the fundamentals back up the story of the stock price being undervalued.

Back to Google’s most recent 13% increase:

It went from about $888 to $1011, or an increase of $122.21 per share or about 13.7%!!

Google-Stock-Price-Increase

This sounds pretty awesome right?

Of course, not as awesome as 9 years ago when they IPO’d at $85, and are now trading at $1011 (increase of $926 per share), but still.. pretty damn cool!

But even with all that..


I would never, ever buy individual shares of Google or any other similarly priced or sized company outside of index fund holdings!

Why?

Because it’s an inefficient use of capital especially if you’re using it to buy individual stocks and not index funds.

Here’s a real-life example of what I did with my money;I had $20,000 to invest and I did it about the start of August 2013 approximately 3 months ago.

Google at the time was $887.75 per share:


GOOG-Stock-August-2013-Comparison-to-ORAN

$20,000 / $887.75 = ~22 shares of GOOG

Orange (France Telecom) at the time was $9.85 per share:

ORAN-Orange-Stock-August-2013-Comparison-to-Google

$20,000 / $9.85 = ~2030 shares of ORAN

GAIN OVER THE PAST 3 MONTHS:

GOOGLE hit a share price of $1011.41 = $2688.62 profit

ORANGE hit a share price of $14.34 = $9114.70 profit

Yes, those numbers are right.

My stock pick returned about 3.39X more profit than if I had put my money into Google.

BUT WAIT, YOU PICKED A SPECIFIC STOCK THAT HAPPENED TO GO UP!

Umm.. isn’t that what stock picking is all about?

You picked Google, and I picked Orange….but who came out on top with the same $20,000 capital invested?

I picked Orange because I thought it would go up (the share price was too good at $9.85), and you could argue that that’s a slightly bigger risk that I took than if I had put it into Google to “set it and forget it”.

Yet I am not really sure this is always true because I can cite at least one other big share — Apple that didn’t deliver on its promise.

If you think about Apple (AAPL), when it hit its highs of $700 a share, people were on a buying frenzy. They were so sure it would hit $800, that they held on to all of their stock and refused to sell at $700.

Today, their stock price looks like this, a full $177.13 lower than at its peak in 2012.

AAPL-Stock-Price-Today

Google could have gone the same way. You just never know unless you do the numbers (which is what I did with Orange).

STOCK PICKING IS A HIT AND MISS

Of course, I have had failures as well, but those were mostly gambles, like the (rather small) one I took on Blackberry (BBRY). You can read about it here about how I should have trusted my instincts and sold at $18 a share.

Again, you should NEVER invest money you don’t have and aren’t willing to lose.

Stock picking is also a bit time-consuming, even though the rewards are greater. You have to read reports, do numbers, do your research, and then bite the bullet and watch in angst as it drops even a penny in price.

What’s the easiest of them all if you don’t want to deal with all that stuff?

Buy index funds or ETFs (which are like index funds but are traded on the stock market).

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Sherry of Save. Spend. Splurge.

I got out of $60,000 of debt in 18 months using TheBudgetingTool.com. Since then, I have worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K (savings rate = 85%). I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I also post daily on Instagram @saverspender.

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9 Comments

  1. Chris Grande

    well done. If you don’t see an edge in a position, why bother right? Index is better than wasting time buying a mash of large caps. Though there are so many ways to trade/invest. A 10% move is big for someone who bets big with good risk controls. And a 50% gain can be small for someone who bets small.

    Overall you explained yourself well and with an investing style you feel comfortable with you took a bigger individual position. The key is, this style works for you and when an opportunity pops up, you execute.

    Reply
  2. Nelson

    Obviously I agree with your anti mega cap stance. If you’re gonna buy Google or Apple you might as well buy the index, since they make up such a large percentage of it anyway.

    Where’s your cutoff? Is there a certain dollar amount you won’t go over? Or are you like me and will pick whatever as long as you think it’s undervalued?

    Reply
    1. save. spend. splurge.

      I prefer to stick around the $10 range for stocks, but will go up to $30 per stock, as long as at any price range, it is undervalued.

      Reply
  3. Tania

    Right, it’s all about growth potential and/or where the company and it’s holdings/product lines are in its lifecycle when you choose to invest. I actually don’t pick individual stocks at this time although I definitely have the background to do the research required. I do also read all your “investing” posts although I rarely comment.

    Reply
    1. save. spend. splurge.

      @Tania: I pick individual stocks because I’m bored. Otherwise, I leave them in ETFs.

      Oh good. At least I know my posts are being read even if they have no comments. Sometimes I wonder.. 🙂

      Reply
  4. Liquid

    Thanks for the mention. I remember you commented about this on my post. I’m glad you’ve elaborated on your interesting thought process 😀 Nice diagrams btw. If they were made in Photoshop I think we use similar line tools and shapes lol. I try to own lower priced stocks when I can and if I was invested in an index fund I would definitely not have bought individual shares of Google. I’m going to add Orange SA to my watch list now heh heh 🙂

    Reply
    1. save. spend. splurge.

      @Liquid: HAHA! I use Photoshop but really I have a Mac so I just screenshot it and modify it in Preview 🙂

      Reply
  5. moneystepper

    This is an interesting post. For instance, say you bought the top 10 individual stocks on the FTSE100. By holding a FTSE 100 tracker, 38% of your holding will be with these companies anyway.

    Therefore, I think I agree with this. Buy trackers or ETF if you want diversification in the highest market cap shares and if you are trying to “pick” a stock, then avoid these largest companies.

    Reply
    1. save. spend. splurge.

      @moneystepper: *nods*

      I am all for diversification in big stocks, but not individually because it just isn’t efficient use of capital. I prefer index funds / ETFs anyway.

      Reply

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