My Investment Plantation: Why I Still Prefer Picking My Own Stocks

There is something wonderfully simple about investing in an ETF.  Buy it, hold it, collect the dividends, reinvest them and let the market do the rest.  There is no need to spend hours reading annual reports.  No need to decide whether CapitaLand Integrated Commercial Trust (CICT) is more attractive than ParkwayLife REIT (PWLR).  No need to wonder whether Keppel DC REIT (KDCR) is worth buying today or whether another company might be better.  An ETF does much of the work for investors.

So why do I continue buying individual stocks even when I know perfectly well that my portfolio could underperform an index ETF?  I continue picking individual stocks because I value something that an ETF cannot give me in quite the same way.

Choice.

I want to decide what companies I own, how much of each company I own and, especially as a dividend investor, what kind of income my portfolio produces.  However there is a trade-off involved.  The more control I want, the more responsibility I have to accept.

Why ETFs Are So Attractive

The strongest argument for ETFs is diversification.  Instead of trying to identify the handful of companies that will perform well, I can simply own a basket of them.  Some companies will do exceptionally well, some will perform reasonably, some will disappoint and some may eventually fail.  But because my money is spread across many businesses, one company's problems should have a much smaller impact on the overall portfolio.

There is also much less work involved.  If I buy a broad ETF, I do not need to continuously monitor dozens of individual companies, ask whether a particular company's competitive advantage is weakening, analyse every earnings announcement, or decide whether a dividend cut is temporary or a sign of a permanently deteriorating business.  The ETF does not require me to be right about every individual company.  That is a huge advantage.  If my only objective were to own a diversified portfolio while spending as little time as possible managing it, I would have a very difficult time arguing against ETFs.

But I Want to Choose My Own Companies

My problem with ETFs is not that they are bad.  It is that they do not give me enough control over what I own.  Take REIT ETFs such as CFA and CLR as illustration.  With one purchase, I gain exposure to a diversified basket of REITs and a reasonably attractive dividend yield of slightly above 5%.  That sounds great, but I do not necessarily want every REIT in the same proportion.  I particularly like REITs such as CICT, PWLR and Aims Apac REIT (AAR).  Thus if I stock pick, I can choose to buy more CICT.  If I want more PWLR because I like the quality and defensive characteristics of its portfolio, I can buy more.  If I want to add KDCR because I want greater exposure to digital infrastructure, I can do so deliberately.  I do not need to accept an ETF's predetermined allocation.

The same applies outside the REIT sector.  Companies such as Riverstone (RVS), Kimly and HRnetGroup (HRNG) are not part of the Straits Times Index (STI) in the way the large blue-chip companies are.  Nonetheless, I can gain exposure to smaller them through iShares MSCI Singapore Small-Cap ETF.  But doing so means accepting the entire basket.  I may end up owning many companies whose businesses I barely understand.  Some may eventually become excellent investments, others may not, and some may have very low dividend yields.  For a dividend investor like myself, that matters.

I Care About the Dividends Too

My investment objective is not simply to maximise the number of companies I own.  I also want my portfolio to generate a meaningful stream of dividends.  An ETF may contain businesses with excellent long-term growth prospects that pay very little dividend today.  Such companies that reinvest its profits instead of paying them out may eventually grow much faster.  But it does not complement what I am trying to achieve with my own portfolio.

I want companies that can generate cash and return some of that cash to shareholders.  When I select individual stocks, I can deliberately construct that income stream.  I can decide how much exposure I want to banks, how much to REITs, how much to industrial companies, etc.  That difference in flexibility matters to me.

But There Is a Price for Choice

Of course, there is a price for having that control.  I have to accept concentration risk.  I have to spend time researching companies.  I have to monitor my holdings.  And when something goes wrong, I cannot simply tell myself that my portfolio will eventually rebalance the problem away.  I have to make the decision myself.  

More importantly, I have to accept that all this effort does not guarantee better returns.  I could spend years analysing companies and still underperform an index ETF.  In fact, the ETF investor may end up with better returns while doing far less work.  I am completely comfortable acknowledging that.

So Why Do I Still Do It?

I do not pick individual stocks because I believe I can predict the future.  I do not believe I am smarter than the market.  I simply enjoy the process, reading about businesses, comparing companies, deciding where my next dollar should go and most importantly, watching the dividends arrive and deciding where to reinvest them.

Perhaps an ETF would ultimately give me a better return.  Perhaps it would not.  But investing is not purely about finding the theoretically perfect strategy.  It is also about finding an approach that I understand, enjoy and can stick with for decades.  For me, individual stocks give me something ETFs cannot quite provide: the freedom to decide what I own and why I own it.

That freedom comes with additional work and additional risk, and I am simply willing to accept the trade-off.  In fact, the risk can also be minimized if I am careful with my own allocation of the stocks and sectors in my portfolio, as if I am constructing a mini-ETF of my own.  I think as long as I am not overly concentrated in any individual stock, any failure in my stock picking will still be manageable, and not destructive for my overall portfolio.  For now, I still want to pick my own stocks.  After all, it is my money, my call.  Barista FIRE, here I come...!

Comic Version: https://www.instagram.com/p/DdINj6CkldA/?stkn=dG9heTUzOGcyZGRi