If you buy individual stocks - why?

[BWV]

Given that stockpicking is a zero sum game relative to index returns (before transaction costs - after costs it is negative sum), is it simply the cognitive bias of overconfidence the reason why you all buy individual stocks? Or is it for the entertainment value

Probably a mixture of both for me

 

[mgb_phys]

It's not necessarily a zero sum game.
Index funds only buy the index listed shares (FTSE 100 etc) not the whole market - this biases them toward the companies and industries with the largest market cap.
If you are interested in industries where companies are smaller then you are not necessarily playing against the index funds.

 

[BWV]

It's not necessarily a zero sum game.
Index funds only buy the index listed shares (FTSE 100 etc) not the whole market - this biases them toward the companies and industries with the largest market cap.
If you are interested in industries where companies are smaller then you are not necessarily playing against the index funds.

There are plenty of index funds that buy the entire market (Vanguard Total Stock Market for one). It is true that indexes are biased toward larger companies, but there are index funds that buy every stock in the bottom decile of market capitalization of the US market. So if you want to buy small stocks you can buy this or the Russell 2000 or any number of smaller cap products.

 

[russ_watters]

I would only pick individual stocks that I had some knowledge of. I used to be very up on computer technology and knew that AMD would win the 1ghz race before the markets recognized it. It was a big winner for me and I even got my parents to thow a bunch of their money at it (much more than I did, in fact).

But that was a pretty rare and special circumstance. Generally, individual stock picks are a toss-up. "Zero sum game" is a bad term to throw around in economics, but it is true that 100 relatively knowledgeable people picking stocks cannot generally do better than 100 monkeys picking stocks.

The Wall Street Journal once did an experiment where their editors threw darts - literally - at their stock page, then tracked their hypothetical mutual fund for a while. It did quite well.

 

[mheslep]

I would only pick individual stocks that I had some knowledge of...

I second that approach. Observation of companies I've had opportunity to deal with over time via visits from their sales staff, interaction with their engineers and middle management - whether they bumble along, are unresponsive, unmotivated, or the opposite - that all tells a story that often doesn't show up for the analysts until much later.

 

[LogicalTime]

Insider trading is rather lucrative...