Picking Stocks? Get a New Hobby

Is picking stocks nothing more than a hobby for bored upper-class men? Felix Salmon, the Reuters blogger, recently wrote an interesting post making this argument.

The piece quickly turns into an exploration of online financial journalism (Salmon’s own job). It also launches into a bit of media criticism about stock tickers scattered through stories.

There’s a reason for all those tickers, having to do with how news stories get automatically distributed across sites. Salmon should know this perfectly well and seems to have forgotten.

The diversion into media, however, means Salmon gives the hobby argument short picking stocks shrift, in our view. Time to dig back in.

The case against picking stocks can be summed up like this:  Men do it because they can. They have disposable incomes and time, the two things you really need for any serious hobby.

He goes on to break down the cost of picking stocks. Salmon’s argument is that picking stocks is a cheap hobby, at least compared to typical rich-guy pastimes such as collecting cars, flying planes or riding fancy racing bikes.

That may be true, but only considering the cost of stock-picking newsletters and services, which Salmon estimates at $5,000 a year. A pittance compared to adventure travel or wine collecting.

If only the losses from picking stocks stopped at $5,000 dropped on worthless stock ideas. The real cost is much, much higher.

As the market researcher Dalbar noted in its most recent breakdown of individual investor behavior, active stock investors underperformed the S&P 500 by 4.32% annually over the past two decades. Bond investors trailed by 5.56% annually.

Just owning the  S&P 500 over those years brought investors 7.81% a year, on average, while market timers posted 3.49%. The Barclays Aggregate Bond Index gained 6.5% a year while individual bond buyers got stuck with a paltry 0.94% a year in gains.

If you’re a retirement investor, here’s what happens: Imagine you have $10,000 to start and $10,000 a year to save. Over 20 years at 7.81% you end up with $529,595. The “active” stock investor has $310,126.

On the fixed-income side, the passive bond investor has $447,682 while the active bond buyer comes up with $232,335. Compounding being what it is, this trend just gets worse when you take it out to 40 years or more.

Here come the tickers, Felix: You could get into a passive, long-term plan easily enough with Vanguard Total Bond Market ETF (BND) and Vanguard Total Stock Market ETF (VTI).

Add to that a collection of correctly allocated holdings in commodities, such as SPDR Gold Shares (GLD), emerging markets with Vanguard Emerging Markets Stock ETF (VWO) and real estate through SPDR Dow Jones REIT ETF (RWR), among other inexpensive exchange-traded funds. (See how that works? Now this story is all over the web.)

Nassim N. Taleb, author of The Black Swan: The Impact of the Highly Improbable, recently took the investment industry to task, arguing in a paper that active trading returns amounted to nothing more than luck. He called those short-term outperformances the “spurious tail,” the result of chance wins in a field of losers that creates the impression that winning is possible.

“An operator starting today, no matter his skill level, and ability to predict prices, will be outcompeted by the spurious tail,” Taleb maintains.

Are you picking stocks or investing?

And that’s the important point about picking stocks as a hobby. If you are disposed to trade, treat it like a real hobby, with limits. Create a “play account,” stick $10,000 in it and make sure your real retirement money is properly invested in a serious, long-term plan.

When you blow through that picking stocks hobby budget, take your next $10,000 and buy some really nice golf clubs, or maybe take a cruise around Europe. You’ll be more fulfilled.

There are plenty of generally pointless hobbies in life. Market watching is not that harmful, if you can keep it in perspective as a hobby — not a lifelong retirement plan.