Why does anyone buy individual shares?

John_Smith_2019

TBC15 wrote: »

There are probably two types of amateur investor buying individual shares.

Those having a punt and those willing to put in the many.many.many.many hours of due diligence to make a go of it.

Being lazy I stick to funds.

It doesn't need to be one or the other.
You can always buy a tracker fund on a regular basis and also buy individual stocks if they look cheap etc.

Radiantsoul

I think people buy individual shares for reasons that are not dissimilar to why people gamble.

Some people enjoy share trading. Some people believe they can beat the house. My guess is the first motivation might be stronger overall, but there are worse hobbies.

John_Smith_2019

Radiantsoul wrote: »

I think people buy individual shares for reasons that are not dissimilar to why people gamble.

Some people enjoy share trading. Some people believe they can beat the house. My guess is the first motivation might be stronger overall, but there are worse hobbies.

You're assuming that everyone who buys individual shares is a trader.
I buy individual shares to hold forever.
The difference is that I am tending towards buying the shares when I think they are cheap, whereas with a fund you buy regardless of price or market cycle.

The other problem with an index tracker, is that if an individual stock (eg BP) loses value, then it drops down the index (down to 1%). So the tracker must sell the BP shares in proportion.
Then if it rises back up (eg to 10%), the tracker must buy more BP shares.

So the tracker (within itself) is selling low and buying high.

Whereas, if I saw BP dropping, I could buy more when it's down at 1% of FTSE, then leave it alone if it goes back up to 10%.

Plus now you have an even bigger problem with some funds deciding to leave out certain stocks for ESG reasons. But obviously, that is something most tracker buyers should know in advance.

[Deleted User]

I buy shares that outperform, so pretty much the opposite of John Smith. Luckily, we both invest in the stock market, as every transaction needs a buyer and a seller. But funds discriminate against either position: some cap the % of any individual share in the fund by selling the star performers.

bowlhead99

John_Smith_2019 wrote: »

The difference is that I am tending towards buying the shares when I think they are cheap, whereas with a fund you buy regardless of price or market cycle.

If you buy a fund that has a strategy of buying the shares when it's manager thinks they are cheap or offer relatively good prospects in relation to the market cycle, you would get the shares that the manager thinks that represent good value or prospects etc. You would also benefit from pooling resources with other fellow investors, diversifying risk across the collective investment scheme.

The other problem with an index tracker, is that if an individual stock (eg BP) loses value, then it drops down the index (down to 1%). So the tracker must sell the BP shares in proportion.
Then if it rises back up (eg to 10%), the tracker must buy more BP shares.

So the tracker (within itself) is selling low and buying high.

Perhaps you fundamentally misunderstand how an index (or a fund which tracks the index) works.

For example, if BP is 4% of the index today and drops in value by three quarters to only be worth 1% of the index by this time next month, the tracker fund will find that its holding of BP is had reduced in value from being worth 4% of its portfolio and now makes up only 1% of its portfolio.

As the BP holding is still the 'correct' proportion of the fund's portfolio with respect to the proportions of the index constituents, the fund has no requirement to 'sell the BP shares in proportion', to get its BP shares down to 1% of its portfolio. It already has the correct proportion.

Plus now you have an even bigger problem with some funds deciding to leave out certain stocks for ESG reasons. But obviously, that is something most tracker buyers should know in advance.

I don't see how it is a big or 'bigger problem' that some fund managers decide not to hold certain stocks due to environmental, social or governance reasons. They will have flagged such strategies to their investors in advance. If someone chooses to buy a fund with that strategy (either actively managed or an index with certain ESG filters) it will not be much of a surprise, or a big problem.

Thrugelmir

John_Smith_2019 wrote: »

If you have a direct debit and pay the same amount in blindly every month, on a regular basis over many, many years - then yes, Bogle was right. Passive tracker every time.

This a misinterpretation of Jack Bogle's ideas. The US is the mostly reearched market in the world. Passive investing works for the major indexes in the USA. Other markets are another matter. Where even Bogle considered the concept of passive investing a step too far.

Thrugelmir

capital0ne wrote: »

Even Warren Buffett, say's most people should just buy a tracker fund - you'll never beat the market by buying individual share. And I think Benjamin Graham said the same.

When did either say "you'll never beat the market"? Suggest you undertake some bedtime reading. Then you'll have a broader understanding of the two men. Buffett was both a student and employee of Graham.

Why are you picking on Woodford in particular? Hathaway has underperformed the S&P 500 over the past decade.

Thrugelmir

John_Smith_2019 wrote: »

The other problem with an index tracker, is that if an individual stock (eg BP) loses value, then it drops down the index (down to 1%). So the tracker must sell the BP shares in proportion.
Then if it rises back up (eg to 10%), the tracker must buy more BP shares.

Trackers have no need to buy or sell purely for index movements. As their holdings continue to mirror the index %'s.

Trackers will drive the markets higher if investors are depositing new funds. Likewise will need to liquidate holdings and drive markets lower if investors are redeeming units.

Trackers will need to reflect changes in the indexes they track. Such as when companies are relegated/promoted, or where a constituent goes bust and another stock is promoted to replace. Alternatively a Company splits itself, i.e. Prudential hived off M&G. Which initself is a sizable business.

fwor

ZingPowZing wrote: »

I buy shares that outperform

Damn - I knew there must be something wrong with my share buying strategy, but couldn't quite put my finger on it. I've been buying shares that underperform for years, and I had not realised the thing that I should be doing.

That being to only buy shares that outperform. Thanks for the tip - I will amend my buying strategy accordingly.

Radiantsoul

John_Smith_2019 wrote: »

You're assuming that everyone who buys individual shares is a trader.
I buy individual shares to hold forever.
The difference is that I am tending towards buying the shares when I think they are cheap, whereas with a fund you buy regardless of price or market cycle.

The other problem with an index tracker, is that if an individual stock (eg BP) loses value, then it drops down the index (down to 1%). So the tracker must sell the BP shares in proportion.
Then if it rises back up (eg to 10%), the tracker must buy more BP shares.

So the tracker (within itself) is selling low and buying high.

I guess it depends on the definition of trader, but most my guess is a relatively small number of individual shareholders have infinite holding periods. Equally few will be day traders.

Indexes don't buy and sell as you seem to believe. If the fund is close ended they would only buy or sell on entry or exit to the index(with open ended funds they need to balance flows of investor money in and out). The shift in value of holding is driven by the change in price rather than changes in the volume of shares held. So in effect tracker funds are quite similar to your approach, except they outsource the initial decision on what to hold to the market. Tracker funds are cheap as they don't really need to trade all that much.