Investing 101 indexes vs stocks

This is an extract from a personal correspondence within my family on why I invest a lot more into indexes and less into stocks than my grandfather who was an adept stock picker early in his career.

Early on my grandfather was known for home-run stock picks.

But as he aged, he shifted to safer plays and the lesson was not lost on me.

So I share some decades old knowledge in hopes of helping others to attain their goals and dreams.

Compared to indexes: individual stocks are ALL higher risk gambles for me. Any individual stock can be taken down by a scandal or even something as stupid as Boeing focus on earnings not quality, safety, performance.  

Indexes are small risk, while individual stocks anything can go wrong.

Using Boeing as an example.  

2 years ago: Boeing was the dominant airplane manufacturer with a very good reputation.

There were minor rumblings of issues with the 787 subpar quality but it is a huge expensive plane that only sells a few per year, while the smaller 737 was the bread and butter mainline series aircraft.  

Boeing looked safe, but overvalued.  

But who knew that the quality issues were indicative of bean counting management for greed and profit across the entire company? 

It goes well beyond the 737-Max even the 787 Dreamliner is a serious problem child airplane with sub-par workmanship which only begs the question of what other Boeing planes are potential death-traps? This is why I remain short Boeing and wont buy BA until it drops considerably farther. I wont buy Airbus at their current valuations, but if I were an airline: I would ONLY buy Airbus planes right now.  

How did we get here with the 737-Max?  

The 737 was a workhorse up to the 737-900 which was the last workhorse 737 before the Max.  

The 737 was designed decades ago when plane engines were long cigar shapes which are far less efficient than a short wide open turbine. So the 737 series were designed lower to the ground which made them far easier to build and to service.  

Boeing made the 737 design when quality and reputation were everything and since have improved the design with new tech and innovations up to the 737-900. 737 has been a most-loved workhorse for decades and the MAX orders were from airlines that had nothing but success with 737 and trusted Boeing as Boeing had been worthy of trust in the 737 up to that point.

But the new LEAP engines are far more efficient and too large to fit under a 737 wing. Airbus saw the light and began designing taller planes decades ago while Boeing continued to rake in profits off of the 737 air frame which is now obsolete for these new engines.  

But as the LEAP engine efficiency is now too great to ignore, Boeing's solution was to move the engine forward on the wing which creates stability issues and throws the entire plane out of balance and requires software to keep the plane flying level.  

Now Boeing is a decade behind in having a stable LEAP compatible plane and falling farther behind by the day as they try to push the Max which in reality should not even be allowed/permitted to exist for passenger travel.  

Of course planes with aerodynamics issues have been successful in the past (most noticeable example is the F4 Phantom which had a known potentially fatal spin-stall tendency). but offset by the excessive engine power which made a very fast and strong/robust dual-role fighter-bomber plane that could carry a ton of armament and was successful despite the aerodynamic issues.  

But an F4 pilot can eject should the spin-stall occur and the PARED procedure fail to recover the plane.  

A passenger jet does not have anywhere near the maneuverability for successful PARED maneuvers; nor should it have or need passenger ejection seats (to begin with: the chutes would all get entangled). 

Stall-spins have 28% fatality rates and military planes are best designed for recovery, not large passenger jets where the fatality rates will be far higher.  

Pushing aerodynamic limits should be allowed on military jets, but not passenger ones.  

This is why I dont trust the 737-Max, nor Boeing any longer.  

When I first heard about the Max crash, I started looking into it to decide whether to buy on the dip and what I discovered was horrifying and absolutely made me short on Boeing and my buy-in target is in the low $200 range even for the duopoly.  

Airbus is going to have a near monopoly in the small to mid sized plane best selling sector for the next decade at least.  

Nothing that Boeing can do will make the 737-Max compete with Airbus A-320 and A-321 Boeing needs a new ground-up design just to get to parity and every day wasted on the 737-Max is a day wasted on closing the gap.

Boeing now needs to convince the world that their next small LEAP plane is not a flying coffin. I wont be the only skeptic. If the 737 is a LEAP engine model: I wont feel safe on it.  

I learn all of this stuff just to know which stocks to invest in and because it is fun to learn.  

Takata airbags anyone?

Again: lesson learned.  

Each stock and index is a potential learning opportunity. I am no expert on airplanes. But I apply what little that I know and can be found to decisions. Of course without inside information: it is still a guess and we can guess wrong. But knowledge and information are becoming EASIER to find, not more difficult, so it is becoming easier to make better decisions are time goes on. This is why ALL stocks are high risk. This is why I have more money invested in indexes with far lower risk. One company in a sector can go south, but it is unlikely that the entire sector will without significant warning. Okay, the coal (thermal coal for energy) sector: we all see that coming (except for metallurgical coal used in iron/steel coke production which is going to have a solid future...literally), but airplanes? Airplanes are a GROWING industry/sector. This is why indexes are low-risk and stocks are high risk. Any individual stock can have a scandal, a CEO groping assistants, a board of directors embezzling, or making sub-standard junk that kills people but the entire sector is highly unlikely to all be doing that; which is why diversity via indexes is safer: we can own all of the companies and dilute the bad players and own the winners at the same time.  

Wise people have noted, that if we are to buy individual stocks: that we really need to be constantly on top of them; ever vigilant. Indexes we can take measure a couple or few times per year. Last year I had some individual stocks and UNDERPERFORMED the SP500 index, but that was partially safety and partially due to not all individual stocks are up YET.

Although most of my money IS in indexes, I do have a few managed ETFs, and some individual stocks too. It is fun to have a little something to get engaged with and as you can see: these are learning opportunities to focus on studying something and learning about it to make better investment decisions. Without inside information: no stock pick is truly safe and even with inside information: we still wont see everything. Individual stocks are higher risk.

So suggest to take what you know and make your best guesses, but I suggest to put a substantial portion of your investment strategy into passive indexes with some allocations for managed ETFs and fixed income with whatever hedges and real estate that you choose to buy into and by all means make small investments into individual stocks that you believe in; but keep most of your big money into indexes and as many different indexes as possible. If Schwab, Vanguard, Fidelity, Morningstar, Oppenheimer, State Street, Blackrock, JP Morgan ALL have an index tracking fund: they wont all perform equally. Each has better or worse fund managers in each sector. Better to have less in each and more different index tracking funds than to put all eggs into one basket. So as your portfolio grows: add breadth of indexes tracking the sectors that you invest with as opposed to concentrating too much into one fund. Diversity works in indexes as well as stocks. Dont be all in one country, one sector, one industry or even one index. Get as wide as you can selectively. I look for low expense passive funds which outperform during boom years and fewer actively managed funds which may or may not outperform during recession years as expansion years consistently outnumber contraction years both in duration and depth. Look at the SP500 chart above and see that in the rear view: the recessions were only temporary setbacks.