Random Thoughts on index ETF & stock selections

I have been investing in stocks since I was 19 years old.  I am not the next Warren Buffet when it comes to stock returns, but over the span of 15 years I have learned a few things on mutual fund/index ETF/stock selections. Here are a few random thoughts I have on index ETF & stock selections.

 

1. Past performance does not guarantee future returns

When I used to buy mutual funds, I would always look at past performance to determine whether to purchase the fund or not. In reality, past performance has zero influence on whether the fund will continue to perform in the future. This is true for index ETFs and stocks too. Take Apple for example. Apple has done extremely well since the release of the iPhone. If you look at past performance only, you would believe that the future is looking extremely bright for Apple. But is this the case? Probably not. What happens if an “iPhone killer” gets announced tomorrow and 99% iPhone users switch to this said iPhone killer? What happens if growth dries up because Apple is no longer producing innovative products?

When selecting a mutual fund, an index ETF, or a stock, don’t base your decision on past performance. Past performance gives you an indication on how well the mutual fund/index ETF/stock did in the past. Whether the performance continues or not is dependent on future executions. Look at future profit growth potentials and if the company can continue be a leader in its sector.

 

2. There is no such thing as the best performing index ETF

Index ETFs are designed to track a specific index performance minus management fees. Index ETFs are not supposed to out perform the market. There are lots of index ETFs tracking different indexes. For example the S&P500, the TSX Composite Index, the Russel 3000, and etc.

If you look at S&P500 index ETFs, their performances should all be very similar. Why? Because they track the same index. A Vanguard S&P500 index ETF should have similar performance to an iShare S&P500 index ETF. If they don’t have similar performance, warning lights should come on in your head.

So how do you pick one index ETF over the other? Easy, pick an index ETF with the lowest fee.

3. Buying value will out perform hype

Buying a hyped stock may give you a decent return in the short run. But over the long run, buying value will usually provide a greater return.

I have learned ways to analyze technical charts and doing momentum investing. These techniques work and do not work. It really depends on the stock. When the techniques work, boy it is one hell of a ride. When they don’t, you start second guessing yourself. When it comes to momentum investing, it is all about the short-term and catching the wave. You can make big bucks but you can also lose big.

It is simply less complicated and less stressful to invest in a value stock with a large moat. Trust the management to grow profits over time and increasing values for the shareholders.

 

4. Go with your instinct

When I first came across Google back in the 1990’s, I thought the search engine was revolutionary. It was million times better than the likes of Yahoo, Excite, and AltaVista (do people use these search engines anymore?). I was convinced that Google would do great things and told my dad that Google stock would be a great buy when Google decided to go public.

When Google went public, I didn’t follow through with my conviction. I didn’t purchase Google much much later and lost out on multi-bagger returns.

Similarly, when Apple announced iPod I was very convinced it was a revolutionary product. Having used other MP3 players before, iPod was a million times better. Furthermore the music platform, iTune was also a game changer. I remembered my university friends showing me other people’s iTune libraries and play their music when you were on the same wifi network. I also recall feeling extremely envy of friends having iPod nano. Later when iPhone was announced, I thought this was yet another game changer. When a co-worker showed me his iPhone 2G, I was stunned how much better it was compared to other smart phones in the market. In the back of my mind I thought Apple stock would be a great buy.

Unfortunately for me, I didn’t purchase Apple stock until much later. Once again I didn’t go with my instinct and lost on multi-bagger gains.

Final thoughts

When it comes to investing, it is a lot simpler than many people thought. Investing in stocks is not the same as gambling in a casino if you do your homework beforehand. Learn to read financial results like the quarterly reports and annual report. Most importantly, understand the macro environment to evaluate the future profitability of the company.

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21 Comments

  • Reply
    Mrs. Adventure Rich
    July 19, 2017 at 8:14 am

    Thank you for the great reminders. It can be so easy to get caught up in the hype and thing you can “win the game”. Here’s to investing for the long haul!

    • Reply
      Tawcan
      July 19, 2017 at 1:11 pm

      Invest for the long haul and you’ll be OK.

    • Reply
      Lance @ My Strategic Dollar
      July 19, 2017 at 5:39 pm

      Attempting to “win the game” will put you behind. These tips are fantastic and great reminders to take it slow and invest in the right low-cost funds.

  • Reply
    MrSLM
    July 19, 2017 at 8:23 am

    Hindsight is always 20/20 😉

    Google/Apple, etc. were all great at the time, but there was no way to foresee just how much they’d change the game. For example. had Google just stayed a search engine sure they’d be a great investment, but it was branching out into building their own browser, acquiring or developing their own OS’s (Android/ChromeOS) that so deeply entrenched them into our lives.

    • Reply
      Tawcan
      July 19, 2017 at 1:11 pm

      Very true, if Google didn’t go into the other ventures they wouldn’t be as big as what they are today. You can say the same thing with Amazon.

  • Reply
    Mr. Tako
    July 19, 2017 at 9:34 am

    Couldn’t agree more Tawcan! Investing is NOT gambling.

    Great list of lessons learned!

    • Reply
      Tawcan
      July 19, 2017 at 1:12 pm

      It is if you don’t do any homework. If you don’t, you might as well go to the casino and put everything on red. 🙂

  • Reply
    Oldster
    July 19, 2017 at 1:18 pm

    When it comes to investing, simple and consistent will almost always win. Your post gives us good reminders. I’m sure though that you could recall a few investments you didn’t make that turned out to be the right call. Negative Memory Bias is a powerful evolutionary tool and the primary reason we don’t randomly walk in to bear caves or lion dens!

    • Reply
      Tawcan
      July 20, 2017 at 2:32 pm

      Exactly, simple and consistent will usually win in the long run.

  • Reply
    John R
    July 19, 2017 at 1:35 pm

    Googl is still a good buy

    An indexed ETF, since there are so many that even those money managers don’t always get it right, neither does Mr. Buffett. Maybe he is a comparison to any ETF.

    On stock market investing, it is 100% gambling, folks are wagering their hard earned money investing on a wishful gain or yield. Why not simply go with a laddered GIC/CD?

    Now speaking of stock market & gambling, how many would invest in one of the publicly traded casino resorts in Las Vegas? There are at least three top winners that have positive EPS, growth as well as dividends.

    • Reply
      Tawcan
      July 20, 2017 at 2:33 pm

      Casino stocks are interesting, I was looking into a few a while ago but didn’t pull the trigger. I suppose Casinos are money making machine and worth doing more analysis.

  • Reply
    Norm
    July 19, 2017 at 4:11 pm

    I got a C in my college Investment Analysis class partly because my final presentation was about Apple and I recommended to buy it. Contrary to all the evidence, I thought it was a good buy. Probably I deserved the C going by the actual metrics you’re supposed to use, but I rationalized the “buy” because of their rabid fanbase, and the fact that they’re successful at everything a PC wasn’t good at. My presentation was the day before the iTunes store opened in 2003 and it’s gone up, what, 100x since then? I know it’s an outlier, but still, too bad I didn’t have any money to put where my mouth was. Knowing me, I probably would’ve sold it at a paltry 3x or something anyway!

    We put very little money into individual stocks, and the only great gains have been on companies that almost went bankrupt in 2009 and bounced back.

    • Reply
      Tawcan
      July 20, 2017 at 2:34 pm

      Interesting, only if you went through with your analysis right? There are too many could of, should of when we look back. Hindsight is always 20/20.

  • Reply
    Personal Alpha investments
    July 19, 2017 at 6:41 pm

    Agree with all you’ve said. In fact, I have written some articles on the very same should you want to check it out.
    The toughest thing I have found is the initial days – when the stock trades lower than your buying price, but you know it’s a good investment, except the market is telling you something else. If you get past that, you’d be in great shape as an investor.

    • Reply
      Tawcan
      July 20, 2017 at 2:34 pm

      Very true, once you pull the buy trigger and the price drops over the next few days. You start second guessing yourself.

  • Reply
    Divnomics
    July 20, 2017 at 4:19 am

    Very true reminders. The one thing I found to be a bit difficult with ‘Go with your instinct’, is that a lot of companies, like Google and Apple, are relatively small in the beginning and don’t give much return in the form of dividend. Real different type of stocks when your looking for cash flow 😉

    • Reply
      Tawcan
      July 20, 2017 at 2:36 pm

      Yes that’s very true hard to evaluate these so called “growth” stocks sometimes. Who know Google would get into things like Android.

  • Reply
    Turning Point Money
    July 20, 2017 at 11:38 am

    Great Points Tawcan. I really liked the comment of buying value over hype. Following the herd will never get you anywhere. Conduct your own due diligence and invest accordingly. Maybe the herd will come after you make your investment!

    • Reply
      Tawcan
      July 20, 2017 at 2:38 pm

      Thanks Turning Point Money. Conduct your due diligence is very important.

  • Reply
    Palmetto Millennial
    July 22, 2017 at 12:06 pm

    Good thoughts on buying based on past performance. It is nice to see how funds trended in the past, but it is now way a guarantee of the future. Nice write up.

    • Reply
      Tawcan
      July 24, 2017 at 2:46 pm

      Thanks, past performance only gives you indication how well the company did in the past. Future performance can be as good but can also be poor.

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