Why I invest in individual stocks, not Indexes

by Chris Parsons

Today I will be starting a series on Stock Investments. This is Part I of a four part series.

Everyone will tell you to invest in indexes, which track the overall stock market. They will tell you that you can’t beat the market and that index investing offers the lowest cost option.Personal Finance gurus spout this off endlessly, it’s even one of Ramit Sethi’s philosophies in his book.

The advice to invest in index funds is true for 90 – 95% of the population. I don’t believe it’s true for me. I pick and chose individual stocks to invest in.

NOTE: Index fund investing is still better than paying someone an annual fee to manage your money for you. That’s not what I am comparing here. I am comparing index funds vs picking individual stocks.

I’ve read perhaps THE book on index investing, Winning the Loser’s Game, Fifth Edition: Timeless Strategies for Successful Investing, which was written by Charles D. Ellis. Guess what Charles Ellis does for a living? He actively manages a stock portfolio – not exactly a ringing endorsement for index fund investing.

I invest in individual stocks, not indexes, because I believe I’m smarter than most people. I’ve got a fairly high IQ, but this isn’t what I’m referring to. I have a pretty good understanding of how the stock market works and how to analyze a company, but this isn’t what I’m referring to either.

The type of intelligence that I’m referring to when I say I’m smarter than most people is that of unbiased logic and strategy.I am not swayed by emotions. I analyze businesses logically and project growth potential strategically. I use similar criteria as Warren Buffett/Charlie Munger to review investments, which is quite simple – buy when others are fearful and sell when others are greedy.

In mid to late 2009, when the stock market was at its lowest point and everyone was trying to get out, I saw TONS of stocks that I wanted to invest in. Unfortunately, I was also getting engaged & buying a house at the same time, which meant that I didn’t have the money to invest. Unfortunate indeed, because had I made the investments I liked – I would’ve quickly made 75%+ gains. That’s life. We will be prepared next time.

I’m also primarily using the advice in the book Active Value Investing: Making Money in Range-Bound Markets (Wiley Finance) for my current stock selections – as I believe we will be in a range bound market for the next 15 years or so. The basic premise of the book is that most of the time we are neither in a bull or bear market, but rather a range bound market and the stocks that perform best in these markets are low P/E, high dividend yield stocks.

High dividend yield stocks also present the opportunity for passive income, as 20 years from now each dividend payment could be worth more than the original stock that I purchased.