The Showdown: ETFs vs Individual Stocks

Why ETFs are better than individual stocks.

Author

Cade Invests
December 17, 2022

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Quote

"Risk comes from not knowing what you are doing." - Warren Buffett

The Showdown

Today's piece is going to touch on three reasons why I believe ETFs are better than individual stocks.

It's a common misconception that one has to adopt a complicated investing strategy to be successful, but that's far from the truth.

Armchair quarterbacks get criticized. Armchair investors make money.

Summary of topics:

  • Odds of picking the right stock

  • Value of saved time

  • History of returns

The Odds

If you haven't noticed yet, it is a little more difficult to make money on individual stocks than it was over the last three years. Previously, you could have laid out a billboard of stocks, blindfolded yourself, chunked a dart into the wind, and bought whatever company it landed on. Everything was going up.

Now, many of the "covid darlings" have been dumped by this market. This fall from grace highlights the importance of understanding valuations and being able to analyze the fundamentals of a company.

Reviewing a balance sheet, deciphering a cash flow statement, and understanding the meaning of EBITA, P/E, and EPS is much easier said than done (if this sounded like another language you should probably keep reading).

And what are your odds? Hendrik Bessembinder, a finance professor at Arizona State University put together a great study that explained just how rare it is for individual stocks to outperform the overall market.

Bessembinder examined the returns of the 26,000 stocks in the Center for Research in Security Prices database, which contains all common stocks listed on major U.S. exchanges. He found that the average stock traded for just seven years and lost money (including reinvested dividends).

In fact, the most common return for an individual stock over its lifetime was a loss of 100%. In other words, if you had invested in any one stock from 1926 through 2015, you would most likely have come away poorer. Only 48% of stocks delivered any gains. 

Of the 26,000 stocks, a mere 1,000 have accounted for all of the profits in stocks since 1926. And just 86 stocks ā€” one-third of 1% ā€” were responsible for half of those gains.

Time Value

Let's go light and say you spend 1 hour a night 4 days a week keeping up with your positions and analyzing potential investments.

That's 4 hours a week, or 208 hours a year, or 8.6 days you spend doing research.

This will differ for everyone, but for me, that time is better spent working on ways to raise my income. Let's say you spent 4 hours analyzing a stock, invested $1,000 into it, and watched it return 10% that year. You made $100 over 12 months.

Though, if you spent that 4 hours working on raising your income (social media sponsors, manual labor, etc) that 4 hours could earn you more than $100 in a much shorter period of time.

Lesson here, find where your time generates the most value.

Proven Returns

Iā€™m going to say proven return here because the majority of ETFs I talk about are attached to an index. For example, the classic VOO.

VOO tracks the S&P 500. Over the last 50 years, the S&P has averaged a 10.3% annual return with dividends reinvested.

It might not be as sexy as the 5,000% penny stock gain, but 10% is nothing to ignore. For example, $1,000 invested monthly over 20 years turns into $770,000. Keep in mind this is passive and can be done in the background while you pursue another side hustle, work your 9-5, or crack cold ones with the boys.

Disclaimer

Before you call me a hypocrite, yes, I own individual stocks. They are great investments if you keep up with them and make an effort to understand the business.

"Cade, why did you cut back on individual stocks?" Here are my 3 reasons.

  • Realized I was investing more from an I feel standpoint vs a fundamental standpoint.

  • Found I would rather spend that time working on other projects (like this email).

  • Wanted the ability to truly disconnect from my portfolio.

My recommendation, be honest with yourself regarding your track record of picking individual stocks. If you are struggling to beat the market, it might be time to reevaluate.

Thanks for reading, Cade.

Cade's Finds

From $542 to $1 million - Youtube video by Jarrad Morrow covering how likely you are to become a Roth IRA millionaire.

Inflation Breakdown - Single chart showing the breaking for November inflation.

Best Memes Of The Week

CPI came in lower than expected this week, but the market ended up rolling seven smh.

Que another inflation meme.

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Nothing in this email is intended to serve as financial advice. Do your own research. Thanks for reading, if you have any questions, comments, suggestions, etc. about the email send me a DM on twitter. See you soon!