3Mes
I don't think your thoughts are bad in principle.
A lot of things have already been mentioned. Since I invest quite heavily in individual stocks, perhaps a few words on this.
You did mention why you find the shares interesting. But not how you classify their pricing.
Example: you have a well-run craft business with which you make a profit of €100,000 every year (simplified, inflation and other external factors such as the interest rate environment are completely ignored here).
As the owner, you have your €100,000 every year. However, you are thinking about reorienting yourself and want to sell the business. Someone comes along and offers you €800,000 (8 times the annual profit). Is that attractive and do you agree? What if someone were to offer you only €350,000 or €1.4 million (not at the same time of course, but all offers have to be decided individually).
I think you understand what I'm getting at. How do you determine that the companies you have selected (20% of your portfolio!) are well (favorably) priced?
Perhaps take a look at the long-term charts (from 1995 to today) of big names such as Oracle, IBM, Nokia, Blackberry, Allianz, etc.
If you buy at the wrong time, you may not make a profit for decades (!).
Take Allianz, for example:
Share price 12/1996: 125€
Price 04/2000: 360€
Price 03/2003: 53€
Course 06/2007: 163€
Course 11/2008: 47€
Course 11/2025: 362€
If you had entered in 2008, you would have made a very good deal. If you had bought in at the all-time high in 2000, you would not have made any price gains to date (at least the dividend would still have been on top). And that's with a holding period of 25 years - and that doesn't even take inflation into account.
A lot of things have already been mentioned. Since I invest quite heavily in individual stocks, perhaps a few words on this.
You did mention why you find the shares interesting. But not how you classify their pricing.
Example: you have a well-run craft business with which you make a profit of €100,000 every year (simplified, inflation and other external factors such as the interest rate environment are completely ignored here).
As the owner, you have your €100,000 every year. However, you are thinking about reorienting yourself and want to sell the business. Someone comes along and offers you €800,000 (8 times the annual profit). Is that attractive and do you agree? What if someone were to offer you only €350,000 or €1.4 million (not at the same time of course, but all offers have to be decided individually).
I think you understand what I'm getting at. How do you determine that the companies you have selected (20% of your portfolio!) are well (favorably) priced?
Perhaps take a look at the long-term charts (from 1995 to today) of big names such as Oracle, IBM, Nokia, Blackberry, Allianz, etc.
If you buy at the wrong time, you may not make a profit for decades (!).
Take Allianz, for example:
Share price 12/1996: 125€
Price 04/2000: 360€
Price 03/2003: 53€
Course 06/2007: 163€
Course 11/2008: 47€
Course 11/2025: 362€
If you had entered in 2008, you would have made a very good deal. If you had bought in at the all-time high in 2000, you would not have made any price gains to date (at least the dividend would still have been on top). And that's with a holding period of 25 years - and that doesn't even take inflation into account.
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22
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@KevinE
A very illustrative example, of course I know what you mean.
You've also found a point that I find fascinating with well-invested people: how do you find the best possible entry point? A quick look at your portfolio with your returns showed me that you also seem to have a method that works in this area.
I don't do any fundamental analysis of the companies, if only because my savings rate in the individual shares is so low that it's not worth the effort. I look at how the company is doing, whether it has recently made sensible decisions, whether the share price is on a rollercoaster or is following a relatively stable trend. Then how high the value of the company is, how profits have developed over the last 5-10 years. Whether I believe in the company's product also plays a role.
After a while, it becomes clear whether I made a good investment or whether I bought at an overpriced price. In addition, the equity price smoothes out with continued saving.
These are my humble initial thoughts. I think you'll be able to tell me more about this, I'm curious!
That really is a sobering example with Allianz. I generally have the feeling that the market has become incredibly expensive compared to the past, or am I mistaken?
A very illustrative example, of course I know what you mean.
You've also found a point that I find fascinating with well-invested people: how do you find the best possible entry point? A quick look at your portfolio with your returns showed me that you also seem to have a method that works in this area.
I don't do any fundamental analysis of the companies, if only because my savings rate in the individual shares is so low that it's not worth the effort. I look at how the company is doing, whether it has recently made sensible decisions, whether the share price is on a rollercoaster or is following a relatively stable trend. Then how high the value of the company is, how profits have developed over the last 5-10 years. Whether I believe in the company's product also plays a role.
After a while, it becomes clear whether I made a good investment or whether I bought at an overpriced price. In addition, the equity price smoothes out with continued saving.
These are my humble initial thoughts. I think you'll be able to tell me more about this, I'm curious!
That really is a sobering example with Allianz. I generally have the feeling that the market has become incredibly expensive compared to the past, or am I mistaken?
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3Mes
@_Barren_Wuffet_
Let me try to structure my thoughts on this.
I assume you are trying to outperform broad market ETFs with your individual stocks (serious question, other goals such as similar returns to the market with lower volatility would also be a valid goal)?
Let's now assume that you achieve this outperformance and are 1.5% p.a. better than an ACWI or a 70%World / 30%EM portfolio.
Example: with the broad ETF portfolio you achieve 8% p.a., with your individual share portfolio 9.5% p.a. Ultimately, however, you are probably not interested in the figure itself, but in how much purchasing power you still achieve with it.
The inflation-adjusted return is a good 2% p.a. lower than the nominal return --> ETF portfolio: 6% p.a., individual share portfolio: 7.5% p.a.
Let's compare this over the long term with a savings plan of €500 per month that you keep for 35 years.
ETF portfolio: €716,000 final value
Individual portfolio: €1,021,000 final value. In each case, today's purchasing power.
That's quite a difference. But the point is - you have to generate the better return from year 1 onwards, otherwise the difference to the ETF savings plan will not work out. So even if your portfolio isn't that big to begin with, it will have a big impact in the long term.
Before I go into how I screen and evaluate companies, my well-intentioned advice: for many people it is more efficient to invest their time in working hours, further education and career advancement rather than in stock market analysis.
It is still more efficient to invest €800 at 6% (adjusted for inflation) than €500 at 7.5% (at least in my example with an investment period of 35 years).
I have decided for myself that I like my specialist position, my working hours are very reasonable and I therefore have a lot of time in which I have (so far) managed to generate alpha.
For others, it is much more lucrative to take the market return with them and work 1-2 hierarchy levels higher and double the savings plan. That is the greater leverage in this case. Perhaps as a little food for thought.
Let me try to structure my thoughts on this.
I assume you are trying to outperform broad market ETFs with your individual stocks (serious question, other goals such as similar returns to the market with lower volatility would also be a valid goal)?
Let's now assume that you achieve this outperformance and are 1.5% p.a. better than an ACWI or a 70%World / 30%EM portfolio.
Example: with the broad ETF portfolio you achieve 8% p.a., with your individual share portfolio 9.5% p.a. Ultimately, however, you are probably not interested in the figure itself, but in how much purchasing power you still achieve with it.
The inflation-adjusted return is a good 2% p.a. lower than the nominal return --> ETF portfolio: 6% p.a., individual share portfolio: 7.5% p.a.
Let's compare this over the long term with a savings plan of €500 per month that you keep for 35 years.
ETF portfolio: €716,000 final value
Individual portfolio: €1,021,000 final value. In each case, today's purchasing power.
That's quite a difference. But the point is - you have to generate the better return from year 1 onwards, otherwise the difference to the ETF savings plan will not work out. So even if your portfolio isn't that big to begin with, it will have a big impact in the long term.
Before I go into how I screen and evaluate companies, my well-intentioned advice: for many people it is more efficient to invest their time in working hours, further education and career advancement rather than in stock market analysis.
It is still more efficient to invest €800 at 6% (adjusted for inflation) than €500 at 7.5% (at least in my example with an investment period of 35 years).
I have decided for myself that I like my specialist position, my working hours are very reasonable and I therefore have a lot of time in which I have (so far) managed to generate alpha.
For others, it is much more lucrative to take the market return with them and work 1-2 hierarchy levels higher and double the savings plan. That is the greater leverage in this case. Perhaps as a little food for thought.
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11
•@KevinE
First of all, thank you very much for taking the time to write this in such detail.
You are right in assuming that I am hoping for a "booster" in my portfolio with the individual shares.
The way you visualize it is of course even more tempting with the individual stocks, if the plan works out. I definitely understand your points and that also makes me think. However, I'm prepared to spend some time researching, as I also enjoy it somewhere.
I take your point and yes I am working on many things at the same time. I work full-time and take every shift that brings me extra money. I'm also doing my studies while working shifts and am in the process of climbing the career ladder.
So yes, investing more money is my plan. But investing more money and still outperforming the ETFs through individual stocks would be the best of both your suggestions, wouldn't it?
First of all, thank you very much for taking the time to write this in such detail.
You are right in assuming that I am hoping for a "booster" in my portfolio with the individual shares.
The way you visualize it is of course even more tempting with the individual stocks, if the plan works out. I definitely understand your points and that also makes me think. However, I'm prepared to spend some time researching, as I also enjoy it somewhere.
I take your point and yes I am working on many things at the same time. I work full-time and take every shift that brings me extra money. I'm also doing my studies while working shifts and am in the process of climbing the career ladder.
So yes, investing more money is my plan. But investing more money and still outperforming the ETFs through individual stocks would be the best of both your suggestions, wouldn't it?
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2Mes
@_Barren_Wuffet_ Sorry for the late reply, only just rediscovered the thread.
Ultimately, there are three levers for wealth:
1. time (start as early as possible)
2. return (anything above the market return is not a sure-fire success and requires a certain - time - investment. It simply takes time to familiarize yourself with it. Bluntly buying whatever is in vogue will almost certainly not lead to outperformance in the long term.
3. high investments. If you invest a lot, you will of course get a lot more out of it in the end.
The leverage of time is easiest to realize if you come to the knowledge early on. But then, of course, you also need an income that is high enough to allow you to live well and still put a decent savings rate into your portfolio - that's where it gets more difficult. Long-term outperformance is the icing on the cake.
You could also simply do the math with your personal data. Let me give you a fictitious example:
Variant 1:
You earn €3,000 net with your contractual working hours. Your expenses amount to €2,000. This means you can invest €1,000. You use your free time to familiarize yourself with the topic of individual shares. You spend 8 hours a week to stay on the ball --> your outperformance over the next 30 years is 100 basis points (e.g. 8% instead of 7) higher than the MSCI World. Inflation is 2%. We calculate your wealth adjusted for purchasing power (!) after 30 years of investing:
MSCI World with 5% p.a. at €1,000 savings rate: €835,000
Your custody account at 6% p.a. with a savings rate of €1,000: €1,009,000
Variant 2:
Your job has not changed, but you invest exclusively passively in the MSCI World. Instead of working 8 hours a week to optimize your portfolio, you work an extra shift at the weekend. You receive €250 net for the extra shift due to tax-free bonuses. 100% of your additional salary goes into the savings rate.
1,250€ savings rate at 5% p.a. through the MSCI World = 1,044,000€.
In this case, your work performance would therefore be worth slightly more than the excess return you would have achieved in variant 1.
Ultimately, there are three levers for wealth:
1. time (start as early as possible)
2. return (anything above the market return is not a sure-fire success and requires a certain - time - investment. It simply takes time to familiarize yourself with it. Bluntly buying whatever is in vogue will almost certainly not lead to outperformance in the long term.
3. high investments. If you invest a lot, you will of course get a lot more out of it in the end.
The leverage of time is easiest to realize if you come to the knowledge early on. But then, of course, you also need an income that is high enough to allow you to live well and still put a decent savings rate into your portfolio - that's where it gets more difficult. Long-term outperformance is the icing on the cake.
You could also simply do the math with your personal data. Let me give you a fictitious example:
Variant 1:
You earn €3,000 net with your contractual working hours. Your expenses amount to €2,000. This means you can invest €1,000. You use your free time to familiarize yourself with the topic of individual shares. You spend 8 hours a week to stay on the ball --> your outperformance over the next 30 years is 100 basis points (e.g. 8% instead of 7) higher than the MSCI World. Inflation is 2%. We calculate your wealth adjusted for purchasing power (!) after 30 years of investing:
MSCI World with 5% p.a. at €1,000 savings rate: €835,000
Your custody account at 6% p.a. with a savings rate of €1,000: €1,009,000
Variant 2:
Your job has not changed, but you invest exclusively passively in the MSCI World. Instead of working 8 hours a week to optimize your portfolio, you work an extra shift at the weekend. You receive €250 net for the extra shift due to tax-free bonuses. 100% of your additional salary goes into the savings rate.
1,250€ savings rate at 5% p.a. through the MSCI World = 1,044,000€.
In this case, your work performance would therefore be worth slightly more than the excess return you would have achieved in variant 1.
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2Mes
@KevinE In this respect, the following factors naturally play a role: Can you achieve the long-term outperformance? If so, is this possibly even significantly higher than 100 basis points? Then the whole thing will pay off much faster.
How long is your investment horizon? The longer you invest, the more relevant the level of return becomes. Because your deposits become smaller and smaller over time in relation to the value of the portfolio.
I put a lot of money (probably too much) into my portfolio at the beginning. As a result, the leverage is of course greater than if I had invested small sums at the beginning and only put the large sums into the portfolio at 50. For me, the outperformance is therefore worthwhile, as my deposits are already relatively small in relation to the portfolio.
How long is your investment horizon? The longer you invest, the more relevant the level of return becomes. Because your deposits become smaller and smaller over time in relation to the value of the portfolio.
I put a lot of money (probably too much) into my portfolio at the beginning. As a result, the leverage is of course greater than if I had invested small sums at the beginning and only put the large sums into the portfolio at 50. For me, the outperformance is therefore worthwhile, as my deposits are already relatively small in relation to the portfolio.
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