By Dr. Jim Dahle, WCI FounderA white coat investor was recently scammed, and they wished for the story to serve as a cautionary tale. This is not a made-up story. It's a real-life story of a real doctor. So, be kind in the comments section or your comments will be deleted. I'll start with the verbatim statement (typos and misspellings are all original) of what happened and the lessons the doc learned. Then, I'll discuss some additional things that I think all investors should know. The scam the doc was involved in is simply a variation of the classic “pump-and-dump” scheme.
“I was involved in this scam starting November 2023. I came across a post in Facebook physicians group White coat investers when somebody was asking about investing questions. The post was about a WhatsApp group created for physicians to guide them in investing. It was posted by a lady named Cathy whose profile shows that she is a physician and a member of White coat investors physician group. After I clicked the link it took me to the WhatsApp chat group “US Stock Financial Report” where I see many people entering into the chat group. She stated that she will be directing me to a different chat group as she has a lot of bots in the group who are asking for cryptocurrency trading and she wanted to protect the physician group and directed me into another chat group “Stock Strategies for Billionaires.” I was enrolled into this stock trading investment group and it was headed by a person named Mike and his assistant Julie. They stated that they are well versed with stock market and has about 20 years experience. Mike also stated that he works for hedge fund and also guidance investors in trading. Every day I used to get latest stock market information and tips about trading stocks. Initially I was a little skeptical but they were never pushy or asked for any personal information. They also stated that Mike is a promoter of interactive brokers brokerage firm and requested all the team members to open brokerage account at interactive brokers as he will be getting commission from them. He also told about his investment Plan about investing in US and Hong Kong Stocks, stating that its the best strategy to balance risk.
Initially I invested about thousand dollars and that slowly increased to about $10,000. I was shown good results on 3 different Stocks 2 of them were Hong Kong and 1 is US stock. I was able to increase my returns to US$16,000. Then I started getting a little more confidence. He posted in the group stating that if people wants to be following his investment strategy he will be creating a separate group based on our investment threshold and closely guide us to invest. He promised that the investment should provide good returns and he has about 90% success rate in the Stocks. I was again skeptical at the second time looking at the returns he promissed and was willing to watch for few more trades.
As he stated before he continued to show good results on the trades in the coming days. Then at the end of 2023 he released his long-term cooperative group where he suggested that he divided people into different groups with amount of cash they are willing to invest. AA group is a Elite group with about $500,000-$1 million, A group with investment potential $300,000-$500,000, B-plus $100,000-$200,000, B $20,000-$100,000. I requested to join the lowest group with about $20,000. But he stated that to get at least a reasonable returns I need to join A group with at least $200,000. I stated that I cannot join that group but can put an extra to make up at least $75,000. So he allowed me to join the B-plus group and stated that I need to put extra $25,000 to meet the minimum requirement within few weeks.
I agreed for the same and moved $75,000 to my interactive broker's account. He stated that he will suggest a stock between January 15 to 20, 2024 which has very high success rate and he is 95% confident that he will make at least 50% returns on this trade. Some of the members in the group were a little skeptical and asked him the risk of losing the money since its a single stock investment. To calm them down he stated that he will also suggest to stop loss price so that our principal will be protected even though chance of it dropping is pretty low. On January 19 he suggested a Hong Kong stock 2439 and suggested a buy price of HK$2.61. He suggested that the price will rise up to HK$3.6 in 1 week time. He recommended to put a stop loss order at HK$1.85. I placed the order as suggested. The stock sale was executed at around 3 AM US Eastern time and within 1 hour the stock collapsed and my stop loss was not executed and the price my Stocks old was at HK$0.49. I lost about $60,000 in this transaction.
When I reached out to him he stated that he will provide more guidance the following day and will compensate for our losses. But since then all the phone numbers are closed and nobody ever contacted from them. I was in a shock for couple of days then I tried to understand how I lost the money. When I reviewed from the beginning what happened I came to realize that he bought the stocks in very small companies in Hong Kong and sold to different people on the WhatsApp group and once all the stock are sold he guided everybody to put a final buy order and he shorted the entire stock at that price dropping the stock price drastically and benefiting out of that. It is basically a pump-and-dump scheme. He benefitted twice by selling the stock to all the members and again by shorting the stock.
After I realized that I was scammed I tried to reach out to people in that group and most of them are fake numbers. I was able to contact 2 people in that group one of them has lost about $15,000 and other lost about $120,000 both of them stated their stop loss exicuted at 0.49 honkong dollars. And I also googled for similar activities on Reditt and realized that some of them has lost at list $400,000 to similar scam. And I also realize that there are multiple parallel scams running similarly recruiting multiple people in different WhatsApp groups. It seems to be a big syndicate running out of Hong Kong or other Asian countries involving multimillion dollars. I tried to reach out to my brokerage and they stated that they received multiple calls about the Hong Kong Stocks recently. If that is the case the brokerage should have alerted when they received buy order for this Hong Kong Stocks instead brokerage never alerted anybody and let stock execute and make multiple people loose. I think brokerage benefited out of commission from this international trades along with forex exchange. Brokerage sent an email few days later after everybody lost the money stating that there is a Hong Kong Stocks scam going on and wanted us to be alert about that.
I think people needs to be aware about this scam and protect themselves from future things like this happening. Unfortunateley during the whole process i was confident because he never asked any of my personal information or my bank account details and i was think i am just following his guidance. The whole process was a legal transaction executed by me in my own brokerage. I think it is illegal to do pump-and-dump in USA so he choose to use Honkong stocks and made all of us invest in them.
The lesson I learned is
- Never follow any online stock guidance
- Never invest without talking to a person face to face
- Never believe anyone posting that they will be give you more than 10-15% profit on any trades whether stock or realestate or anything else
- Never trust anyone blindly and always check back where to started trusting him.”
What Is a Pump-and Dump-Scheme?
OK, let's talk about all of this.
To execute a pump and dump, you first buy some thinly traded penny stock at a very low price. Then you “pump it up” in every way you can. You run articles about it on your blog. You talk about it in stock forums and on Reddit. Apparently, some people pretend to give stock advice about those stocks in newsletters or special online chat groups or forums. Once the stock price rises from all this demand for the thinly traded stock, you cash out. Maybe you even short the stock to benefit twice from your stock price manipulation.
Is Pump-and-Dump Illegal?
Pump-and-dump schemes (deliberate market manipulation) are illegal under both federal and state law. Involvement is fraud, and it can result in financial penalties and jail time. Here are some of the laws that are involved:
Securities Act of 1933 (Section 17(A): If you're involved in selling or offering securities, it is criminal to make material misstatements, omit material facts, or defraud security purchasers.
Securities Exchange Act of 1934 (Rule 10b-5): Similar to the Act of 1933, this Act also contains anti-fraud laws with various penalties.
18 U.S. Code (Section 1343): Deals with communications. Basically, if you use wire fraud, radio, television, or the internet for your scheme, you can be charged under this section of the code. Section 1341 of the same code adds postal fraud to the list.
Pump-and-dump schemes are also illegal in most other countries with regulated markets, including Hong Kong. In 2022, 13 people were charged there for a pump-and-dump scheme. Singapore has also put out warnings specific to the Hong Kong stock exchange. Obviously, it's harder for a US investor to catch and prosecute scammers in other countries, so it's best to prevent rather than treat this illness.
Lessons to Learn from This Pump-and-Dump Scheme
I'm not sure this investor learned the lessons that I think should have been learned and that would have prevented this from happening. Here are my tips—not just for avoiding pump-and-dump schemes, but for becoming a more intelligent, successful investor in general.
#1 Don't Pick Stocks at All
If this investor had never engaged in stock-picking to start with, he or she would not have been caught up in a pump-and-dump scheme. I've been warning about individual stock investing for 13 years. Sometimes I think I spend too much time on the blog, newsletter, podcast, etc., talking about it. Then, something like this happens that reminds me of how important it is. A mutual fund—particularly a popular and liquid broadly diversified, low-cost index mutual fund with thousands of securities in it—is just too hard to manipulate in a way that would result in this sort of a loss. Sure, some conspiracy theorists will come up with some idea that the Fed and the political parties are in cahoots to manipulate the market, but it's certainly not going to happen by some chump on his mother's old computer in a Hong Kong basement sliding into your DMs in the WCI Facebook group.
Here's some more reading about that.
- Picking Individual Stocks Is a Loser's Game
- Why Talking About Individual Stocks Makes You Look Dumb
- Uncompensated Risk
- People Still Believe in Active Management?
#2 Know What Normal Investment Returns Are
Investment returns are generally single-digit affairs. If you're investing in cash, maybe you'll make 2%-5% depending on interest rates. Bond returns tend to be in the upper end of that range, perhaps 3%-6% long term, although there can be some variation year to year. Long-term US stock market returns are in the 10% range. Real estate returns are in a similar range, perhaps a bit higher with a reasonable amount of leverage—10%-15% is where they live. Maybe if you put a whole bunch of effort in yourself and are particularly talented (or lucky), you can get into the upper teens.
But if you expect long-term returns of 25%, 30%, 50%, or more, you're just ignorant about how these things work. I mean, imagine you could earn 50% returns reliably. Let's say you start with $1 million and earn 50% on it each year. How long would it take to own the entire $46 trillion US stock market? Answer: 26 years. Less than a full career. It's just not going to happen. Give me a break. It's not realistic.
#3 If It Seems Too Good to Be True . . .
Anyone promoting returns of 30%, 40%, or 50% is offering something too good to be true. High returns come with high risk. Extremely high returns not only come with extremely high risk, but the return/risk correlation ratio no longer exists. You just get risk. It doesn't make any sense that someone with a functional crystal ball who can earn 50% returns would share that information with you rather than simply borrowing all the money they can get and buying up all of those shares themselves. They'll own the entire stock market in just 26 years; why do they need your $75,000? There are no called strikes in investing. It's OK just to watch from the sidelines.
#4 Beware Your Own Greed
Sometimes it's not just ignorance that leads people to get involved in something promising super high returns. Sometimes it's greed. They want to shortcut the process. They want to get rich quick. Managing your own greed (and your own fear while we're at it) is a key part of being a successful investor. Unmanaged, it can lead you to be defrauded or make the classic investor mistake of buying high (when greed runs rampant) and selling low (when fear kicks in).
#5 Beware of Being Led Away from Safety
Somehow this fraudster snuck into the WCI Facebook Group. But they didn't run the scam out of there. Their invitation to join another “investment group” was likely deleted, and they were likely thrown out of the WCI group shortly after making it. However, before the moderators got to that, the fraudster successfully induced the investor to follow them down a “dark alley” into a secluded part of the internet. Another Facebook group. A chat room. A WhatsApp group. Whatever it takes until the group is easily controlled by the fraudster. The group itself may be a farce. It's just you and the fraudster impersonating a dozen other investors. Or maybe there are two or three marks in there reassuring each other.
Imagine if instead of hanging out in that fake group, this WCIer had posted what was going on in the main WCI Facebook group, on the WCI Forum, or on the WCI subreddit. The WCIer would have been immediately warned that something wasn't right, and 95% of the comments would have been something to the effect of “Run, don't walk, away!” Penny stocks? Hong Kong exchange? A stock-picker with a crystal ball giving advice for free? The promise of 50% returns? No, that's not going to fly by even moderately experienced investors without a serious warning.
Beware of anyone asking to take a conversation offline or “sliding into your DMs.” Unsolicited DMs should be reported immediately to moderators.
#6 Beware Exclusivity
As the fraudster suckered the investor into investing larger and larger amounts, they used the promise of exclusivity. Making you feel like you're part of a special group is a classic sales technique. It's OK to pay more for a backstage pass or a premium ticket to a conference, to invest in something that requires accredited investor status, or to fly first class, but recognize that this sales technique is also used by fraudsters.
More information here:
Can You Spot the Unbelievably Bad Financial Advice on These TikToks and Tweets?
#7 You Don't Have to Give Up Personal Information to Get Swindled
Most people are smart enough to avoid some types of fraud, but just because you don't get suckered into wiring your money to someone else's bank account doesn't mean you can't get suckered into a pump-and-dump scheme or some other type of fraud. Being generally wary is good and knowing about many different types of fraud is better, but even then, there may be something out there sophisticated enough that even you might fall for it.
#8 Stop-Losses Don't Work in Volatile, Thinly Traded Markets
A stop-loss order does not always protect you from a falling stock price if there is no buyer at that price. It certainly won't protect you from whipsawing market movements. They're not a panacea.
#9 The Less Sophisticated You Are, the More Wary You Need to Be
I'm making a few assumptions about this doc based on the writing. English is probably not this doctor's native language. Therefore, the doctor probably didn't grow up in the US. Therefore, the doctor probably is not as familiar with how personal finance, investing, retirement accounts, and US securities laws as someone who did. This doc is starting in a different place, and they face a steeper learning curve. But they still have the same amount of income as the rest of us, and, thus, they are a prime target for a fraudster. If you are also an immigrant physician, it is even more imperative that you go out of your way to become financially literate than it is for someone who grew up here. There are people out there who are specifically trying to prey on you.
#10 Go Slow with Anything New
One of the things that this doctor did well was to move slowly. The doc started out only investing $1,000 and increased slowly to $10,000. That's less than a month's pay. While it sucks to lose $10,000, it's hardly a financial catastrophe for a doctor. The slower you move, the longer a fraudster has to keep the thing going without you getting suspicious. In the end, the doc lost $60,000. That blows, but it's hardly unrecoverable. Imagine if the doc had jumped in with both feet, a couple of IRAs, a 401(k), the entire taxable account, and a HELOC on the home. It could have been a lot worse.
More information here:
A Neurologist’s Road to Becoming a Bitcoin Maximalist: Why Bitcoin Is Not the Next AOL
#11 It Is Not the Broker's Job to Protect You from Yourself
This doc was disappointed that Interactive Brokers didn't stop them from buying that stock. Yet, when a brokerage takes steps to protect investors from their own foolish behavior (such as Vanguard refusing to let crypto ETFs trade on its platform), all it gets is criticism.
- “It's a free country!”
- “Censorship!”
- “This is ‘Merica!”
- “Who are you to tell me what I can and can't invest in?”
No, don't expect protection from your brokerage. It isn't so much that the brokerage wanted the $20 in commissions it made on these trades as that it just isn't the brokerage's job to ask you, “Are you sure you want to invest a huge chunk of your account into two Hong Kong penny stocks? You might want to read an investing book or two.” I was actually impressed it sent out a notice at all, even if it was too late for this investor.
#12 Know How Your Advisor Gets Paid
Whether they charge by the hour, use AUM fees, or use commissions, you need to know how everybody involved is being compensated. Here at WCI, for example, we make money when we sell ads and when you buy our products like online courses and books. That produces certain conflicts of interest. I don't think this WCIer understood how the “advisor” was making money until it was too late. In this case, the “advisor” (fraudster) was being paid by taking the other side of the investor's ill-advised trades. If you think this is prevalent in stocks, it's 10 times worse in the crypto space.
Pump-and-dump schemes have been around for a long time, and they aren't going anywhere any time soon. Know how they work and be careful out there.
What do you think? What scams or frauds have you run into? What do you do to avoid them?
That must be a very thinly traded stock. Amazing to think that only $75k could affect the price. Even if 100 investors were victims of that scam that’s only 7.5 million.
This was my thought as well. Is this multiple scammers working on hundreds of people at the same time or is it really that easy to manipulate a stock price? I’m shocked at it really. I’d heard of pump and dump but I sympathize with this victim. While I wouldn’t invest in an individual stock…other than that I can see it. Thinking you’re not giving any personal info out gave him false security I can understand. The gradual process would make me think nobody would put that kind of time into this scam. Meeting the person on WCI group… I get it. But for the grace of God there go I.
Before we judge too quickly, FOMO (and greed) runs deep in all of us in this circle if we are honest. Being “accredited” can be used against us since we think we are getting access to investments others don’t get.
Anyway I’m thankful I haven’t had this exact experience but as I read this I didn’t think wow what a fool. I thought holy cow I can see how that happened to him.
Thanks for the cautionary tale.
“Safety of principle, and an adequate return” -Benjamin Graham, The Intelligent Investor
I think this person fell for a dream we all are tempted by but, in the end, our goal should be to save what we need and protect the initial investment along the way. That being said, if you need your investments to return 10% or more the issue may be more about lifestyle/spending needs than investment strategy. If you want to meet and exceed your investment goals, then make your calculations based on a 4-5% return on investment and you will likely be pleasantly surprised.
Sorry to see someone victimized by one of these cruel schemes. This is the kind of scam behind those “stock group” invitations that litter social media. If you look at the price chart for HK 2439 (like Japan, Hong Kong uses numerical codes as stock tickers) it shows a pump-and-dump price peak on January 8 and may have been similarly manipulated back in June of 2023. The market cap, at 880 million HK dollars is tiny at roughly $100 million and the float may be much smaller, making it an easily manipulated stock. https://www.hkex.com.hk/market-data/securities-prices/equities/equities-quote?sym=2439&sc_lang=en
I have read on FB about ‘pig butchering’ schemes- fatten us up, then slaughter. I never considered the specifics of those. Is this the same thing or a version that warrants the same name? (Guess I was confusing ‘pig butchering’ with romance or secret escaping royalty scams- and thinking someone might as promised repay with high interest a short term loan of a few $1000s or $100s before asking for a larger loan or cashing a fraudulent check for them.)
Great Article, This sounds like something a pilot would do. Drive around all day to save $20 on a lawn mower, but give $100,000 to someone you never met over the phone for an investment.
“Nobody watches your money better than you”
Keep up the good work WCI,
From a Retired Pilot 🙂
Exactly. This is good for people as a heads up, but it suffers the same weirdness or selection problems that it paradoxically is useless. It’s like telling people to “be normal” in an interview. Yeah, that’s not controllable or the issue. They are what they are.
Never invest without talking to someone face to face is good advice, but it’s funny that it’s so obvious.
I give good advice all the time on here, and it will be for huge gains for many, but ironically they won’t listen to me (BTC) which is fine. But it’s good advice.
I think the people that get involved in this find something that is a different version of “gambling” which they think they don’t do, yet get involved in (just in a different way, as here) and that actually explains what happened.
There is a corrollary to the lessons learned: great scammers are also charmers in person, just like the wizard of oz or Bernie Maddoff. Some years ago, there was a scam preying/praying on old ladies in Chinatown. The scammer will simply invite the victim to stand, close their eyes, and pray with them HOLDING BOTH HANDS… while another accomplice go to town picking their pockets! Also years ago, my father’s employer’s garment factory had some financial trouble. Long story short, in the end the factory owner charmed, threatened, or cheated untold thousands of dollars of blood money from their immigrant employees, my father included. In summary, scammers come in all forms, in person or online, stranger or close acquaintance. And if they can’t scam you, they may just rob you. And as some old Chinese ladies would tell us, pray with your eyes open and your hands on your wallet.
I know you said to be kind in the comments but it’s hard to do anything but shake one’s head at falling for this scam, it seems maybe one level more sophisticated than an email from a Nigerian prince asking for money.
The first point of contact was a credible facebook group. And the reason to be kind in the comments is to encourage an open dialogue without fear of getting blasted by the group. Everyone makes mistakes and a “thank you” is in order to those willing to share their stories so that others can avoid the mistakes.
Exactly. Let he who is without sin cast the first stone. Part of the reason WCI exists is because I was “taken” with the inappropriate sale of a whole life policy and mistook an advisor who charged me fees and commissions but I thought was fee-only. From where I stand now, those mistakes are about as dumb as a pump and dump. Another WCIer a few years ago had her email hacked and ended up wiring the entirety of what was supposed to be a private real estate investment into a scammer’s bank account, never to be recovered. Making fun of her misfortune and keeping it from being shared keeps others from learning how important it is to verify wiring instructions by phone or in person before wiring money.
Two interesting emails in my inbox today after running this post:
The first:
Any chance I can connect with the person that contacted you?cI fell victim to the same thing at around the same time. (Slightly different names mentioned but almost exact same scenarios and brokerage) Thank you!
The second:
Thank you so much for sharing this story. I was almost scammed as well via the White Coat Investor Facebook group a year and a half ago and was too ashamed to bring it up anywhere. Someone sent me a direct message saying she was a physician in the midwest and wanted to connect with like-minded women interested in finance. I googled her name and there was indeed a pediatrician with that name. She and I chatted on and off. She talked about how her husband and she were planning to buy a rental property etc. I also shared info about my financial situation etc. Thankfully I started smelling a rat when she would talk about crypto and and how she found it super interesting. I said I was not interested, as I’m a buy and hold vanguard funds investor. She would keep pinging me every few days. Then one day, she changed her name. I looked her up, and found she was using the name of a California based physician. That’s when I knew I had been talking to a scammer. I blocked her immediately. I saw that she removed herself from the white coat investor group as well. I pride myself in being in the tech world and was ashamed that I had been gullible. Luckily I didn’t lose any money but I felt like a fool.
This reminds me of the time my wife made me buy “cheaper concert tickets” off of Craigslist. I will never get that $300 back. In hindsight it made me trust people a whole heckuva lot less with my money and probably saved me from one of these bigger scams later in life.
Can’t fall for these scams if you have a boring portfolio of index funds.
Different scam issue, but I am glad that brokerages and banks are fairly proactive in communicating that they’ll never ask for a login code sent to your phone (the “we found suspicious charges on your account, could you confirm your info with us?” scam).
ahh man I feel so sorry for the victim here. to the victim: sorry man, I’ve made mistakes too and lost $50,000 to whole life insurance. thanks for sharing!
Wow, a mention from JD and now Rikki here about losing big sums to life insurance. What’s the deal there? A lot of tricksters in the field? Fine print? Legal cases? Man.
https://www.whitecoatinvestor.com/what-you-need-to-know-about-whole-life-insurance/
Just a product that is sold inappropriately the vast majority of the time. Pretty significant minority of docs have purchased a policy and regretted doing so. Huge majority of docs have heard the sales pitch.
I can see how it happens. I’m getting older and when I check my e-mail, I see all these “notifications” about payments and accounts that I don’t have. Some of them are so good, I almost click on them. Its annoying that I have to constantly check myself and go to the webpage versus clicking on the email.
I feel sorry for my fellow physicians who got scammed.
I am 55 years old.
I am immuned from falling into these kinds of scams not because I am a sophisticated investor!
Exactly the opposite, I have not nor I will ever use social media, EVER!.
It is saver to be a social media troglodyte!
I fell victim to my first online scam when I was 8 years old in an online game called Runescape. A member of a very good/exclusive clan I wanted to join had me do trust exercises where we traded our armor and weapons in increasing value over several days to see if “I could be trusted to join the clan.” Eventually when I traded him all my best armor and weapons, which took me dozens of hours to accumulate for nothing, he logged out and blocked me and was never to be heard from again and my stuff was permanently gone.
It was a hard life lesson at age 8, but I’ve never trusted anyone online since which has saved me a lot of money and heartache in the long run. I also have learned to be very suspicious of scammers that try to build trust starting in low non-significant amounts until they can scam you out of the whole enchilida. The doctor behind this email fell for one of the most classic scammer moves in the book which was thinking 10k -> 16k meant he could trust the scammer — ultimately that is what set him up for losing 60k. Be wary of people who try to earn your trust by giving you great returns on small amounts of money.
Feel bad for this person and good to publish to help others. I agree with much here; however there are a few things to consider. First even many index funds have some active picking of stocks involved as there is a committee etc and rules to picking stocks for S&P 500 for instance. Then there is deciding which index to use (S&P 500, total world, total US, value, etc). Anyone saying simply use S&P 500 and forget it is making an implicit assumption that US large companies will do well over period they invest. Then there is allocation to fixed income etc. which I never did when rates were below 3% (not a good bet at those nominal rates yet people kept saying you need it for “stability”). The interesting thing is in your post “why talking about individual stocks makes you look dumb”, the stocks discussed would have decimated the S&P 500 since then…. Just a small allocation to NVDA alone would have been pretty sweet so those folks don’t sound so dumb in hindsight. My point is I think personal finance is personal and dogmatic advice fails to keep in mind that everyone is different. I see no reason why a portfolio with majority of say passive index funds can’t be supplemented with a small portfolio of individual stocks as long as one is aware of the time commitment and work involved. I happen to think there are some companies that are inherently better businesses than others and over the long run those superior businesses will do better. For instance, does one really need old school retailers like Target, levered financials like banks such as Wells Fargo, airlines which have been a terrible business since the Wright Brothers started flying, etc… these are all in the S&P 500. And I would add financial “experts” are constrained by need to track index over time or be fired…. They are not necessarily free to make good long term decisions.
Don’t confuse process/strategy with outcome. It’s easy to see in hindsight that NVIDIA would have been an awesome bet (at least if the bet ended today). That’s not so easy a priori.
While I’m not a big fan of 500 index funds (I prefer TSM indexes that are not only less active, but more tax efficient and harder t front run), your idea that there are better companies than others needs to be modified a bit. Yes, some companies are better than others, but that doesn’t necessarily make them better investments. You also have to consider the price you pay. At a certain price, Target is a far better investment than Amazon.
At any rate, if you want to pick stocks with a small percentage of your portfolio because you think you can beat the market, feel free. It’s your money. But you probably ought to ask yourself why, if # 1 you’re going to put the time in to do so and # 2 can actually accomplish the feat, why in the world would you only want to do it with a small portion? In fact, why would you only do it your money? If you can reliably beat the market, you should get as much leverage as you can. In fact, you ought to be managing money for others and charging 2 and 20 on it. If you can beat the market reliably long term, I would gladly pay those sorts of fees to hitch a ride.
Let me answer for you. The reason why is because you’re really not very sure at all that you can beat the market and you’re not willing to bet the farm on it. You’re certainly not sure enough to take on the additional risks of leverage much less the risk that you’ll have to face a bunch of investors and explain why you lost their hard earned savings. I would submit that you ought to treat yourself and your own family as well as you do those hypothetical investors in your non existent hedge fund.
Hmmm – you brought up price for Target which would seem to imply market timing which seems to be a dirty word for index investors, and it also implies Target doesn’t become Kmart. In that dead money scenario, any price for amazon could be better than Target. Even Munger moved Buffett away from cigar butts to great companies as over long term earnings is typically most important. Why is your assumption that folks should always do what gives them the most money? Would you treat patients that don’t need treatment for money? No. Just as I wouldn’t rip people off like many hedge funds do. And I wouldn’t want responsibility of investing other people’s money when I have enough now to live a modest life and no one can predict future. I get your point about newsletters, risks of individual stocks, etc but I see reasonable paths to doing so: 1) buy at least 20 or so stocks to diversify or 2) buy a lot of small stakes and hold long term if going venture capital type route. I think you are for 100% optimization – and you think juice is not worth any potential squeeze on investing in individual stocks. I respect
that. I prefer to have a small portion in individual stocks and I enjoy doing so. I know a good number of people who have done well doing this. My old dentist invested in edward lifesciences years ago based on his knowledge of the area and did massively well, another friend writes for Motley Fool and did very well in tesla, googl and other tech stocks (again he researched extensively, spread small bets, and lets winners ride), and I worked with someone who also did well in Tesla and NVDA. I am in finance so maybe my experience is different but I don’t see major harm in having a small amount in stocks. Before index funds that is how my grandfather did it and saved enough to start his own business.
If it were easy to work hard and pick 20 stocks and beat the market, why do so many active fund managers have so much trouble doing so. And even those who beat the market typically only do so by like 1% a year. Before tax.
Data is not the plural of anecdote.
I agree there isn’t “major harm” in picking stocks with 5-10% of your portfolio. It just doesn’t seem particularly logical to me. Even if it was fun, how much return are you willing to give up for fun?
Dr. Dahle- I agree with 99% of what you said. And I will note one of the biggest drawbacks to individual stocks is the bookkeeping and mess you could leave a spouse. For this reason, I now only have 4 stocks right now – berkshire that I bought yrs ago and has no annual tax implications as no dividends and would have huge capital gains if sold. I also have 3 small investments in oil/gas stocks chosen more as bond alternative/inflation hedge. I could have done an oil ETF but chose those 3 companies with low cost per barrel, low debt and large enough to be fairly safe. My best individual stock is my ESPP that I own about 2-3 weeks every 6 months but get at 10% or more discount and sell as soon as available – easily gets 30% plus per year for time money is as risk. I also think that those in tech world that know their company’s industry well have an edge over institutional and retail investors and can make a small investment if they are confident of their
company’s competitive advantage (and I emphasize small as you don’t want your work $, investments etc all tied into all one company). My biggest concern with the advice to just do an index fund is that yes 95% of time you can just forget it but even the late Jack Bogle moved out of equities into bonds before 2000 when bonds offered better value. So passive investments in equities are great, but I don’t believe in completely passive investment management (as allocation matters when stock or bond valuations hit extremes). And unless someone has utmost confidence in market or great emotional control, I think some knowledge of individual stocks / businesses / markets provides a psychological edge to hold when the market inevitably has a dip/plunge. Knowing what’s in the index fund you own helps one stay the course. This is where your total stock market
is also helpful – owning everything means it will never go to zero without the end of the world or USA.
You don’t have to justify your portfolio decisions to me or anyone else. It’s your money. Do what you want. Many roads to Dublin. Just about any reasonable investment strategy, funded adequately, will allow you to reach your goals. But you certainly haven’t convinced me that adding a few stocks to a portfolio of index funds is somehow essential to optimizing a portfolio.
I also think you’re overstating Bogle’s tactical asset allocation moves, but it’s not like I look at Bogle as some sort of infallible messiah. Bogle did lots of things and believed lots of things about investing that I don’t.
At any rate, in 2000 Bogle says he went from 70-80% stocks to 25-30% stocks. At other times when talking about tactical asset allocation he suggests one should limit it to a change of no more than 10-15%.
I’m not a big believer in tactical asset allocation. It’s a strategy that requires at least a somewhat functional crystal ball, which I’ve discovered I don’t have. I think most other people don’t have it either, and thinking you do or should have is likely to lead to behavioral finance errors that are highly likely to have a larger detrimental effect on portfolio performance than any benefit the portfolio might see from successful tactical asset allocation.
And know better than to rely on Facebook (social media) for anything other than marketing and advertising.