Do not buy single name stocks
The first lesson I want to teach is that do not buy single name stocks. This is my experience so far with single name stocks.
A stock may not survive in ten or even five years’ time. I however know that the S&P or other world indices will still be around. Prominent names that have gone bust include Enron and Lehman Brothers. Even if a company did not go bust, it may drop off from its high and never recover. These include former big heavy weights like Xerox. Interestingly, only one Dow company from the original Dow 30 companies in 1896 still exists today.
You may advocate that certain investors like Warren Buffet have made their fortune buying their single name stocks. However what they own is a portfolio of such stocks so they diversify their risk. If that is the case, you might as well buy an index, which already comprises of such stocks. Even if you are bullish in a certain stock, say Apple, you might be better off buying an ETF that contains that stock like a technology or Nasdaq ETF.
You want to buy something that you can sleep soundly at night with. You will know the S&P will still exist 50 years from now when you retire, and you may even leave that to your grandchildren. Even when there is a financial crisis, you know that the index will always recover. It’s just a matter of how long you need to sit tight for that. It is one thing to buy a stock with $10,000 but when you have accumulated enough savings, the psychological stress of investing $200,000 in a single stock will be different.
You do not want to be up monitoring specific company news, looking at earnings and financial reports when buying single name stocks. What makes you think you are much better than that MBA analyst who looks at financial reports all day at work, while you only look at them on weekends? I personally have found it very hard to know when to exit when the price continues to drop despite fundamentals of the stock staying the same. You question whether you still want to hold the stock for long term. I however have no concerns over an index and will buy more if it continues to drop further.
On average very few fund managers have outperformed holding the S&P index. Warren Buffet made a very public bet with Protégé Partners on December 19, 2007, that over the following 10 years, an unmanaged S&P 500 index fund would outperform a collection of five high-profile fund-of-funds. In 2017, Buffett won the bet... and it wasn’t even close. The S&P 500 returned a cumulative 125.8% (or 8.5% per year). The hedge funds delivered cumulative returns ranging from just 2.8% to 87.7% (0.3% to 6.5% per year).