\r\n\tIndividual stocks offer returns far beyond the approximately 10 percent provided by ETFs and the like. The question is, which stocks? It’s clear that not all stocks worldwide perform well. So, how do we select the stocks that can earn us more in the long run than popular world ETFs, the S&P 500, and the Nasdaq 100?\r\n<\/p>\r\n
\r\n\tNote 1:<\/strong> We do not guarantee that you will outperform index funds by following the tips in this article. However, we believe it to be “possible to very possible.”\r\n<\/p>\r\n \r\n\tNote 2:<\/strong> Due to their volatility, individual stocks are especially suitable for young people. As you get older, assets should increasingly shift from individual stocks to stock funds, bonds, and real estate.\r\n<\/p>\r\n\r\n \r\n\tAs the first step in our stock selection strategy, it\u2019s a good idea to examine the index funds mentioned above and consider whether we want to act similarly with our own small DIY ETF:\r\n<\/p>\r\n\r\n \r\n\t\tIndex funds use weighting, but we want to omit it.\r\n\t<\/p>\r\n\t \r\n\t\tThe composition of most index funds is weighted according to market capitalization, i.e., the total value of each company\u2019s stock.\r\n\t<\/p>\r\n\t \r\n\t\tAs of August 2024, Apple, Microsoft, and Nvidia each reach a market capitalization of 3 trillion EUR, while companies at the bottom of the S&P 500 list have less than 10 billion, or about 0.3 percent of that amount.\r\n\t<\/p>\r\n\t \r\n\t\tThis gives large companies a much greater influence on the price development of the respective index fund than smaller companies.\r\n\t<\/p>\r\n\t \r\n\t\tThis has theoretical pros and cons. Large companies tend to weather difficult phases better, as they have greater resources and are more likely to receive help from external actors (banks, government) (\u201ctoo big to fail\u201d).\r\n\t<\/p>\r\n\t \r\n\t\tOn the other hand, it\u2019s obvious that a very large company has less growth potential than a smaller company.\r\n\t<\/p>\r\n\t \r\n\t\tLarge companies in an index fund theoretically stabilize the fund’s price but also reduce returns.\r\n\t<\/p>\r\n\t \r\n\t\tThat\u2019s the theory. In practice, even giants like Apple seem to keep growing, and at a company value of 3.5 trillion EUR (as of August 2024), there seems to be no end in sight.\r\n\t<\/p>\r\n\t \r\n\t\tThis raises the question of how this is possible. Apple has tripled in a relatively short period without bringing groundbreaking new products to the market.\r\n\t<\/p>\r\n\t \r\n\t\tThis seemingly contradictory development is mainly due to the current hype around artificial intelligence and the fact that stock price development and actual economic development do not necessarily correlate.\r\n\t<\/p>\r\n\t \r\n\t\tRegardless of real economic development, there is a powerful, parallel, and quite linear phenomenon:\r\n\t<\/p>\r\n\t \r\n\t\tThe accumulation and concentration of wealth through inheritance. In Germany alone, an estimated 500 billion EUR is inherited annually. To our knowledge, there is no country worldwide where inheritances are taxed at standard rather than reduced rates.\r\n\t<\/p>\r\n\t \r\n\t\tIn Germany, only about 7 billion, or just 1.5% (!) of the total inheritance volume, ends up with the state \u2013 the rest goes to the recipients.\r\n\t<\/p>\r\n\r\n\t \r\n\t\tThis rapid accumulation of wealth compared to labor income happens worldwide. A slowly growing number of heirs accumulates more and more wealth, then seeks investment opportunities.\r\n\t<\/p>\r\n\t \r\n\t\t“Money in search of investment opportunities” is thus a strong driver of stock prices alongside economic development and is partly responsible for why even supposedly “mature” companies like Apple continue to grow like a startup.\r\n\t<\/p>\r\n\t \r\n\t\tHere, it\u2019s more about the money looking for a safe and profitable harbor, finding Apple among others, than Apple attracting the money through its economic activities.\r\n\t<\/p>\r\n\t \r\n\t\tAnother factor driving up stock prices is the increasingly popular stock buybacks by companies themselves.\r\n\t<\/p>\r\n\t \r\n\t\tThis method of price management is particularly popular among U.S. companies.\r\n\t<\/p>\r\n\r\n\t \r\n\t\tThe above title is an internet meme (a cultural phenomenon) that mocks central banks and their money-printing machines, which (allegedly carelessly and endlessly) print new money, with the machines making a rattling sound (\u201cBrrrrr\u2026\u201d).\r\n\t<\/p>\r\n\t \r\n\t\tThe seemingly humorous meme criticizes central banks, showing that the central banks’ process is trivial: “starting up the money machines,” while consumers face rising prices and can\u2019t simply push some buttons.\r\n\t<\/p>\r\n\t \r\n\t\tThe ongoing increase in the money supply through fresh money printed by central banks and the inflation that results from it is arguably the main reason for ever-rising prices.\r\n\t<\/p>\r\n\t \r\n\t\tAs money loses value, investors have no choice but to invest it as profitably as possible to at least offset the value loss due to inflation.\r\n\t<\/p>\r\n\r\n\r\n\t \r\n\t\tFor practicality and because we think we don\u2019t need it, we do without weighting.\r\n\t<\/p>\r\n\t \r\n\t\tWeighting is impractical for our needs because:\r\n\t<\/p>\r\n\t \r\n\t\tCreating dozens of packages (“positions”) of whole and differently priced stocks already requires somewhat larger investment sums. For example, if you want to buy a stock that costs 1,500 EUR, you would have to increase all other 20-40 packages to about 1,500 EUR to keep the packages roughly the same value.\r\n\t<\/p>\r\n\t \r\n\t\tIf you also wanted to weight as ETFs do, the required investment amount would be even greater. For Apple, with over 3 trillion EUR market cap, you would need 100 times as much as your smallest company with a 30 billion market cap.\r\n\t<\/p>\r\n\t \r\n\t\tIf the smallest company’s stock in your portfolio costs 200 EUR, you would need to hold Apple at 20,000 EUR with proper weighting and nearly as much in Microsoft and Nvidia.\r\n\t<\/p>\r\n\t \r\n\t\tBesides weighting by market cap, which most ETFs use, and our principle of keeping stock packages approximately the same value, there are other approaches:\r\n\t<\/p>\r\n\t \r\n\t\tWe don\u2019t need weighting for safety reasons, because:\r\n\t<\/p>\r\n\t \r\n\t\tWe thus consider each of our 20 to 40 stock packages (= companies) an equal ticket and assume that 30 billion in market capitalization, combined with a long history of returns and a location in the US\/EU, makes a company stable enough to be on par with Apple & Co. in our portfolio.\r\n\t<\/p>\r\n\r\n\t \r\n\t\tIf we invested billions like the large ETF providers, we would also weight to avoid influencing the price with our investment.\r\n\t<\/p>\r\n\t \r\n\t\tBut this risk of price influence doesn\u2019t exist with our comparatively small stock packages, each up to six figures. Example: 25 companies’ stocks at about 1,000 to 100,000 euros each.\r\n\t<\/p>\r\n\t \r\n\t\tInstead of weighting, we build – for diversification purposes – a sufficiently large number (20-40) of stock packages of different companies, each with approximately the same value.\r\n\t<\/p>\r\n\t \r\n\t\tWe distribute fresh investment funds across our 20-40 stock packages to keep them roughly equally valuable. Not every company is included each time, as with 2,000 EUR in fresh money, you can\u2019t buy 30 different stocks if some of them already cost 700 EUR or 1,500 EUR per share.\r\n\t<\/p>\r\n<\/section>\r\n\r\n \r\n\t\tProfessional ETFs contain 100 to more than 1,000 companies. For practical reasons, we limit ourselves to around 20-40, as we did with the omission of weighting.\r\n\t<\/p>\r\n\t \r\n\t\tWe don\u2019t believe that private investors should ever have a three-digit number of different companies in their stock portfolio. It becomes too confusing and seems unnecessary in terms of diversification.\r\n\t<\/p>\r\n\t \r\n\t\tAs diversification increases, returns decrease. The poorer-performing stocks in the portfolio drag down the overall return.\r\n\t<\/p>\r\n\t \r\n\t\tTherefore, to minimize risk, we want more than just a handful but not an excessive number of positions (companies) in the portfolio.\r\n\t<\/p>\r\n<\/section>\r\n\r\n \r\n\t\tIn the S&P 500, the smallest companies are worth about 7 billion EUR. In the Nasdaq 100, the smallest companies also have a single-digit billion value.\r\n\t<\/p>\r\n\t \r\n\t\tWe limit ourselves to companies with at least around 30 billion EUR in market capitalization. This is a figure we didn\u2019t just think of in advance; instead, we first looked at the current company values to decide where we could reasonably draw the line.\r\n\t<\/p>\r\n\t \r\n\t\tSo we set the rules after we got an overview of the situation, which is the right approach.\r\n\t<\/p>\r\n\t \r\n\t\tWe set the “minimum company size” requirement because large companies tend to be more viable and less prone to manipulation. Government aid, bank loans, or recovery on their own are more likely the larger the company.\r\n\t<\/p>\r\n\r\n\t \r\n\t\tIt’s also much harder for external actors (hedge funds, billionaires, banks) to manipulate the price of large companies to their advantage.\r\n\t<\/p>\r\n\t \r\n\t\tSince we ultimately want to select 20 to 40 companies and want the pre-selection to be slightly larger than that, we first had to check at what minimum size we still have enough options.\r\n\t<\/p>\r\n\t \r\n\t\tAt the NYSE (New York Stock Exchange), there are about 300 companies with a value of at least 30 billion, and on the Nasdaq, there are 90 companies.\r\n\t<\/p>\r\n\t \r\n\t\tWith the above guidelines (Min. 30 billion market cap, listed on NYSE or Nasdaq), we can now select our 20 to 40 from more than 300 companies<\/strong>.\r\n\t<\/p>\t\r\n<\/section>\r\n\r\n \r\n\t\tAccording to Google, the following company names and sectors or themes are most often searched in Germany in combination with the word “stocks,” sorted by frequency:\r\n\t<\/p>\r\n\t \r\n\t\tIt\u2019s clear that many private investors\u2019 stock choices begin with brainstorming company names and familiar brands rather than research. You might think of “Porsche” because of great cars, or “Cannabis” because it\u2019s newly legal, or “Rheinmetall” because of the Ukraine war.\r\n\t<\/p>\r\n\t \r\n\t\tThe criteria “good product,” “familiar brand,” and “positive environment” apply to most high-return stocks.\r\n\t<\/p>\r\n\t \r\n\t\tBut the reverse isn\u2019t true: Many companies meet the above positive criteria (product, brand, environment). Yet the stock prices of these companies rise relatively slowly.\r\n\t<\/p>\r\n\t \r\n\t\tWe will also look at what the company actually does, but only on a very superficial level and afterward. First, we make a pre-selection based on the stock prices of the past 10 to 30 years.\r\n\t<\/p>\r\n\t \r\n\t\tIt\u2019s often said that you can\u2019t deduce future performance from past performance.\r\n\t<\/p>\r\n\t \r\n\t\tBut looking at historical price development is the best tool available to us.\r\n\t<\/p>\r\n\t \r\n\t\tWe make our pre-selection based on stock prices from the last 10 to 30 years.\r\n\t<\/p>\r\n\t \r\n\t\tFrom this list of top stocks, we manually remove companies whose future we view critically.\r\n\t<\/p>\r\n\t \r\n\t\tSince we have a larger selection, we can afford to do without some stocks or entire sectors.\r\n\t<\/p>\r\n<\/section>\r\n\r\n \r\n\t\tLess is more: Trading stocks is time-consuming and frustrating. The stock market is highly professionalized and filled with terminology, virtual constructs, and complex regulations.\r\n\t<\/p>\r\n\t \r\n\t\tThe plan to capture more than the usual price movement as a private investor is very ambitious against this backdrop.\r\n\t<\/p>\r\n\t \r\n\t\tDay trading can make some profit, but the time commitment, emotional strain, and the fact that you hardly learn anything or have any skills to show years later make it overall very unattractive, and we strongly advise against it.\r\n\t<\/p>\r\n\t \r\n\t\tTherefore, we only buy and never sell. Aside from the fact that taking profits often doesn\u2019t pay off because the price rises further afterward, and you miss out on these gains:\r\n\t<\/p>\r\n\t \r\n\t\tSelling is a taxable event, and capital gains tax is deducted where applicable. The money you pay as capital gains tax could have continued to work and earn returns.\r\n\t<\/p>\r\n\t \r\n\t\tBuy and Hold performs very well in the long run and creates minimal stress or time commitment. We also want to delay any tax payments as much as possible, similar to the tax deferral effect of asset management GmbHs.\r\n\t<\/p>\r\n<\/section>\r\n\r\n \r\n\t\tThis stock market wisdom suggests that you end up better off if you let stocks sit long-term (“time in the market”) rather than trying to predict prices (“timing the market”).\r\n\t<\/p>\r\n\t \r\n\t\t“Timing the market” is the modern version of the alchemist\u2019s quest for the “philosopher\u2019s stone,” which could turn base metals into gold and silver.\r\n\t<\/p>\r\n\t \r\n\t\tExample: You observe that your – very individual – stock portfolio as a whole climbs about 2% above the initial value during the day and falls up to 2% below the initial value by the evening for several days.\r\n\t<\/p>\r\n\t \r\n\t\tThis makes it tempting to sell everything at noon or in the afternoon to buy it back cheaply in the evening. You would then have earned 2 or 3 percent in one day.\r\n\t<\/p>\r\n\t \r\n\t\tThat works with some of your stocks, and you make 10 EUR here, 50 EUR there, or correspondingly more if your positions are larger. Some of the stocks barely move that day, so you don\u2019t sell them. So far, so good.\r\n\t<\/p>\r\n\t \r\n\t\tBut with one stock, you don\u2019t get back in. After selling it at noon, it keeps rising. You hope it might drop the next day, but it keeps going up.\r\n\t<\/p>\r\n\t \r\n\t\tNow you have opportunity costs: You aren\u2019t benefiting from these stock price increases. If you hadn\u2019t traded but just held on, you would have earned more<\/em> with less time and stress.\r\n\t<\/p>\r\n\t \r\n\t\tFinally, you repurchase this stock, which you sold for profit-taking and intended to buy back cheaper, at a significantly higher price a few days later.\r\n\t<\/p>\r\n\t \r\n\t\tYou want to hold this stock long-term, and since it\u2019s unlikely to fall below your selling price from a few days ago, you have no choice but to accept the higher price.\r\n\t<\/p>\r\n<\/section>\r\n\r\n\r\n","protected":false},"excerpt":{"rendered":" Individual stocks offer returns far beyond the approximately 10 percent provided by ETFs and the like. The question is, which […]<\/p>\n","protected":false},"author":17,"featured_media":5747,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_locale":"en_US","_original_post":"https:\/\/meine-renditeimmobilie.de\/?p=8645","footnotes":""},"categories":[189],"tags":[],"post_folder":[235],"class_list":["post-9554","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-stocks","en-US"],"_links":{"self":[{"href":"https:\/\/meine-renditeimmobilie.de\/wp-json\/wp\/v2\/posts\/9554","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/meine-renditeimmobilie.de\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/meine-renditeimmobilie.de\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/meine-renditeimmobilie.de\/wp-json\/wp\/v2\/users\/17"}],"replies":[{"embeddable":true,"href":"https:\/\/meine-renditeimmobilie.de\/wp-json\/wp\/v2\/comments?post=9554"}],"version-history":[{"count":2,"href":"https:\/\/meine-renditeimmobilie.de\/wp-json\/wp\/v2\/posts\/9554\/revisions"}],"predecessor-version":[{"id":11331,"href":"https:\/\/meine-renditeimmobilie.de\/wp-json\/wp\/v2\/posts\/9554\/revisions\/11331"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/meine-renditeimmobilie.de\/wp-json\/wp\/v2\/media\/5747"}],"wp:attachment":[{"href":"https:\/\/meine-renditeimmobilie.de\/wp-json\/wp\/v2\/media?parent=9554"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/meine-renditeimmobilie.de\/wp-json\/wp\/v2\/categories?post=9554"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/meine-renditeimmobilie.de\/wp-json\/wp\/v2\/tags?post=9554"},{"taxonomy":"post_folder","embeddable":true,"href":"https:\/\/meine-renditeimmobilie.de\/wp-json\/wp\/v2\/post_folder?post=9554"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Omitting Stock Weighting in the Portfolio<\/h2> \r\n\t
Weighted Composition<\/h3>\r\n\t
Stock Buybacks as an Additional Price Driver<\/h3>\r\n\t
“Money Printer Go BRRRRR”<\/h3>\r\n\t
No Weighting in Our DIY ETF<\/h3>\r\n\t
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\r\n\r\n\t\t
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Number of Companies in ETFs<\/h2>\r\n\t
Company Size in ETFs<\/h2>\r\n\t
NYSE & Nasdaq instead of DAX<\/h2>\r\n\t
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Always Buy, Never Sell: Buy and Hold<\/h2>\r\n\t
Time in the market beats timing the market<\/h2>\r\n\t