Why buy UK?

[MrFoolish]

The market says that Shell is worth 10X Tesco. It doesn't say that £5000 invested in Shell will do better, or be less risky, than £5000 invested in Tesco.

BoE

Correct. Take Nvidia. Massive market cap and potential upside.
But definitely risky. I'd recommend Tesco (or Shell) to widows and orphans before Nvidia.

Then again I'd probably recommend a tracker.

[NotSure]

Nobody knows which or the two shares will do better, or which will prove to be the less risky. When in a hole stop digging. If you do not know more than the market, buy a tracker.

This is nonsensical because I am the market whether I actively buy individual shares or passively buy a tracker.

The difference is that in one case I am using my abilities to price each share approximately correctly in my judgement

True

in the other I don't care what price I pay/receive for each share, I leave it to my counterparty to pick whatever price they choose.

I'd phrase this differently. In the other, I accept that due to hundreds (thousands?) of MBAs with huge data analysis resources and a pinch of inside information, I acknowledge that I cannot price stocks better than the market, so I accept market returns (which tend to be OK - much better than cash and bonds at least). This strategy, after costs, is often better than all those MBAs anyway.

[GeoffF100]

I'd phrase this differently. In the other, I accept that due to hundreds (thousands?) of MBAs with huge data analysis resources and a pinch of inside information, I acknowledge that I cannot price stocks better than the market, so I accept market returns (which tend to be OK - much better than cash and bonds at least). This strategy, after costs, is often better than all those MBAs anyway.

Before costs a tracker will do exactly as well as "all those MBAs" (plus all other active investors) do before costs, because the tracker is buying the same shares in the same proportions as they do collectively. After costs, the tracker will do better than they do collectively, because its costs are lower. Some active investors will do better than the average before costs, but every dollar of outperformance is exactly matched by another dollar of underperformance. You cannot pick the winners in advance.

[Lootman]

in the other I don't care what price I pay/receive for each share, I leave it to my counterparty to pick whatever price they choose.

I'd phrase this differently. In the other, I accept that due to hundreds (thousands?) of MBAs with huge data analysis resources and a pinch of inside information, I acknowledge that I cannot price stocks better than the market, so I accept market returns (which tend to be OK - much better than cash and bonds at least). This strategy, after costs, is often better than all those MBAs anyway.

The one place where an active approach can give you an edge is getting your high-level asset allocation right. So for example deciding that your focus is the US market already puts you way ahead for the last 30 years. If instead you had chosen the UK as your target market then you would have criminally under-performed almost no matter how good or lucky your individual picks were.

But once you have made that high-level allocation decision, trackers are the most efficient way to carry that exposure. Those MBAs working 60 hours a week will mostly cancel each other out, and they are well paid.

Before costs a tracker will do exactly as well as "all those MBAs" (plus all other active investors) do before costs, because the tracker is buying the same shares in the same proportions as they do collectively. After costs, the tracker will do better than they do collectively, because its costs are lower. Some active investors will do better than the average before costs, but every dollar of outperformance is exactly matched by another dollar of underperformance. You cannot pick the winners in advance.

As you say some active investors will out-perform. In fact that has to happen since a random distribution necessitates that some will be above the line. The problem is that it will be a largely different set of investors above the line each year.

If anyone here or elsewhere claims to consistently out-perform I would suggest that one or more of the following applies:

1) They don't really know how to measure returns, and/or
2) They chose a benchmark that was easy to beat, like the FTSE-100, and/or
3) They took on more risk, either by margin, leverage or speculation, and/or
4) They beat the market but cannot explain how or why they did it

[Mike4]

If anyone here or elsewhere claims to consistently out-perform I would suggest that one or more of the following applies:

1) They don't really know how to measure returns, and/or
2) They chose a benchmark that was easy to beat, like the FTSE-100, and/or
3) They took on more risk, either by margin, leverage or speculation, and/or
4) They beat the market but cannot explain how or why they did it

How about people who consistently under-perform?

Coincidentally I was just checking my (tiny) ISA portfolio and every single investment I hold has fallen in value since I bought it. You'd think one or two would have gone up at least by chance but nope, every one has fallen, including my ultra-conservative Vanguard funds. Even VRWL! (Mind you I've only held VRWL for a week )


Edit to add: Except property. Everything I do with property seems to work out well. My saving grace.

[GeoffF100]

How about people who consistently under-perform?

There are regular claims that the average private investor greatly underperforms the market even before costs. Nonetheless, it is not clear who (if anyone) is gaining at their expense. However, it is certainly true that every time you trade, you risk losing money, so do not do it unless you really have to.

[SalvorHardin]

As you say some active investors will out-perform. In fact that has to happen since a random distribution necessitates that some will be above the line. The problem is that it will be a largely different set of investors above the line each year.

If anyone here or elsewhere claims to consistently out-perform I would suggest that one or more of the following applies:

1) They don't really know how to measure returns, and/or
2) They chose a benchmark that was easy to beat, like the FTSE-100, and/or
3) They took on more risk, either by margin, leverage or speculation, and/or
4) They beat the market but cannot explain how or why they did it

I've managed it reasonably often by having a portfolio that looks nothing like the S&P500, at times having a few big positions (small cap oils in the early 2000s, railroads since 2009), avoiding certain sectors like the plague (e.g. banks, newspapers) and a bit of luck (ViacomCBS short squeeze in early 2021 when a 6% holding rose by about 250% in three months and I sold the lot close to their peak because of a bad dream).

Railroads have consistently beaten the S&P for many years, with the occasional bad year. 19th century technology with a colossal moat.

The downside is that I have awful years (2008 was particularly awful, whilst 2011 and 2022 were merely bad). Thankfully I can afford to take big losses, both financially and psychologically.

An example is my current portfolio. Almost 50% in five companies. In order: top 3 are Canadian Pacific, Union Pacific, Berkshire Hathaway. All are long term holdings that I can't see myself selling.

4th is Burberry; having sold out last year at about £5 above the current price I've recently bought back in with a much larger holding. A mixture of buying something I think is heavily oversold, which has a strong brand plus bid prospects.

5th is SL Green, an opportunistic play on New York offices which is up by 150% in a bit less than a year.

[GoSeigen]

I'd phrase this differently. In the other, I accept that due to hundreds (thousands?) of MBAs with huge data analysis resources and a pinch of inside information, I acknowledge that I cannot price stocks better than the market, so I accept market returns (which tend to be OK - much better than cash and bonds at least). This strategy, after costs, is often better than all those MBAs anyway.

That's not how it works though. From my own experience: if I wish to buy a share and I'd be happy to pay, say 40p for it, but my counterparty is offering them at 16p then I don't pay 40p. I don't split the difference and pay 28p. I try to beat them down to 15p, then buy what I want at 16p. Then I sit for days wondering if I should go back for more, why the price asked is so cheap, what shall I sell to buy some more? Do I think I'm too exposed yet? Then I buy more, and more and more, always at the offered price, until that price reaches 40p. Why did the seller sell originally at 16p? I would have bought at 20, or 25 or more. Because he didn't care about the price, he just wanted to offload.

That is what I mean about having too many passive-investor muppets about. Other (active) market participants are able to buy at prices lower than they feel is the right value and sell at prices much higher.

I'm actively trading in trackers at the moment but in the options market, mostly selling vol. If I believe passive instruments like EFTs will consist of shares priced too high and shares prices too low then I may as well extract time value until that situation changes. Meanwhile I actively invest in/divest the constituents on a valuation basis.

GS

[dealtn]

Try an alternative thought experiment. On an Investment Forum there is a place called Passive Investing where this round of table tennis is off topic...

Hi dealtn, have I upset you in a previous post

Does this mean, according to you, no questioning or challenging of the passive investment approach is permitted on here? I would have thought that was absolutely central to the remit of any board (except perhaps HYP practical). Otherwise is there not the danger of group think?

BoE

No. And no.

However if you want to challenge Passive Investing why not start a new thread about that, rather than hijack an existing one. Personally I would think it better on Investment Strategies, but it would work here - unless a mod thinks otherwise.

There are rules and (for me) respecting them is important.

Where we likely agree is the danger here generally of group think. This place is already in my place stale and indeed often boring where the majority of "challenge" sits on Current Affairs & News.

[Lootman]

That's not how it works though. From my own experience: if I wish to buy a share and I'd be happy to pay, say 40p for it, but my counterparty is offering them at 16p then I don't pay 40p. I don't split the difference and pay 28p. I try to beat them down to 15p, then buy what I want at 16p. Then I sit for days wondering if I should go back for more, why the price asked is so cheap, what shall I sell to buy some more? Do I think I'm too exposed yet? Then I buy more, and more and more, always at the offered price, until that price reaches 40p. Why did the seller sell originally at 16p? I would have bought at 20, or 25 or more. Because he didn't care about the price, he just wanted to offload.

Sure but that is really nothing more than the old adage "buy low; sell high", which I never found very useful. So we would all pay 16p for something worth 40p if we could. The hard part is knowing that it is worth 40p when nobody is currently willing to pay more than 16p for it.

My best recent trade was buying Nvidia in 2022 for about $125. It is now $875 so I am up seven times in 18 months. Does that make me an investment genius? No. Can I honestly claim that I knew it was worth $875? Again, no. In fact I challenge anyone to objectively value Nvidia at all.

The other current position with that kind of gain is Apple. It was the largest market-cap share on the planet when I bought it. But clearly it was not over-valued since, again, it is up abuot 7-fold.

I like to have fun with these bets, as we all do. But my biggest single position, at a half million or so, is a S&P 500 tracker. That is my bread-and-butter holding: Safety at the core; fun around the edges.

PS: I have almost nothing in the UK and not much in Europe. My active bet is high-level allocation: 90% in North America and Asia.

[NotSure]

That is what I mean about having too many passive-investor muppets about. Other (active) market participants are able to buy at prices lower than they feel is the right value and sell at prices much higher.

Surely us muppets are very helpful to geniuses like yourself? Imagine if we just stuck those funds under the mattress. Most active pros do no better than muppets like me. You are clearly a rare exception. You must be worth many many millions, compounding away at the rate you do. Good for you!

I am not trying say "passive good, active bad", just saying that if you are a muppet, but at least have the self-awareness to know you're a muppet, (quasi) passive investing via very low cost collectives is a real boon.

[GoSeigen]

That is what I mean about having too many passive-investor muppets about. Other (active) market participants are able to buy at prices lower than they feel is the right value and sell at prices much higher.

Surely us muppets are very helpful to geniuses like yourself? Imagine if we just stuck those funds under the mattress. Most active pros do no better than muppets like me. You are clearly a rare exception. You must be worth many many millions, compounding away at the rate you do. Good for you!

I am not trying say "passive good, active bad", just saying that if you are a muppet, but at least have the self-awareness to know you're a muppet, (quasi) passive investing via very low cost collectives is a real boon.

Ignoring the sarcasm, anyone who trades without a care about price is a muppet in my book, sorry. I'm not being personal about it.

As for never selling, that is only true for a small subset of investors and you know that.

It still doesn't stop the poor price problem every time a purchase is made. The fact is if you buy/sell a collective you have no control over the price of the constituents (or indeed the aggregate price if you're "just buying a tracker and never selling it".) If you are trading the components individually you have granular control of the price. If a large number of people participate in this sort of scheme then it is open to abuse profit harvesting by both the sell side and the rest of the market.

This sort of commentary is clearly being made way too early. It would obviously be better if I indulged in it after people start complaining about the poor performance of their capital.

If anyone hasn't realised it yet -- the whole thrust of my posts on the topic is that ETFs are NOT very low cost and not even low cost. Yes they have low headline fees but my point is that there are hidden costs that need to be taken account of.

Investing is not a simple thing solved by the magic of buying a tracker and then sitting back and watching the wealth roll in. It is an active process which requires revision of your ideas and continually applying basic principles like avoiding the latest fad.


GS

[Bubblesofearth]

Before costs a tracker will do exactly as well as "all those MBAs" (plus all other active investors) do before costs, because the tracker is buying the same shares in the same proportions as they do collectively. After costs, the tracker will do better than they do collectively, because its costs are lower. Some active investors will do better than the average before costs, but every dollar of outperformance is exactly matched by another dollar of underperformance. You cannot pick the winners in advance.

Any individual or fund, passive or active, that buys or sells shares will influence the price of those shares. The increasingly large amount going into passive funds will certainly influence the price they pay. You cannot assume that this is the same price active investors (on average) will pay.

Costs for passive funds are not necessarily lower than those for an individual adopting a LTBH strategy.

BoE

[GeoffF100]

Before costs a tracker will do exactly as well as "all those MBAs" (plus all other active investors) do before costs, because the tracker is buying the same shares in the same proportions as they do collectively. After costs, the tracker will do better than they do collectively, because its costs are lower. Some active investors will do better than the average before costs, but every dollar of outperformance is exactly matched by another dollar of underperformance. You cannot pick the winners in advance.

Any individual or fund, passive or active, that buys or sells shares will influence the price of those shares. The increasingly large amount going into passive funds will certainly influence the price they pay. You cannot assume that this is the same price active investors (on average) will pay.

Costs for passive funds are not necessarily lower than those for an individual adopting a LTBH strategy.

All I have said is that the average asset allocation of the active investors is the same as that of a market weighted index fund. That follows from simple mathematics,

An index fund generally buys the same percentage of the available stock ("free float") every company in the index. That should not disrupt the relative prices. It is up to the index providers to ensure that it does not. If investors overall put more money into the market, that will tend to push the overall market up, of course.

The actual price that active investors paid is historical. They all bought their shares at different prices at different times in the past. The same is true for the index fund. The point is that the active investors are content to continue holding their shares at the current price, unless they do decide to trade them. The price that an active investor will pay in the market now, will be the same as that paid by an index fund, ignoring execution issues.

Individual LTBH investors can have much lower costs than those who buy index funds. I am paying out £thousands per year in OCF versus nothing. A big problem is that a small percentage of the shares account for most of the market's gains. If you did not hold the tech giants in at least their market weights, you will likely have underperformed. Of course, you could have gambled all on them and won big. I know someone who bought a big chunk of Facebook shortly after it first floated. Do you prefer market returns or a lottery ticket?

[NotSure]

Ignoring the sarcasm, anyone who trades without a care about price is a muppet in my book, sorry. I'm not being personal about it.

What sarcasm? When it comes to investing, I am a muppet.

As for never selling, that is only true for a small subset of investors and you know that.

I have absolutely no idea what you are referring to here?

It still doesn't stop the poor price problem every time a purchase is made. The fact is if you buy/sell a collective you have no control over the price of the constituents (or indeed the aggregate price if you're "just buying a tracker and never selling it".) If you are trading the components individually you have granular control of the price. If a large number of people participate in this sort of scheme then it is open to abuse profit harvesting by both the sell side and the rest of the market.

Ah - that explains why active funds are so much better than passive ones. (That was sarcasm )

If anyone hasn't realised it yet -- the whole thrust of my posts on the topic is that ETFs are NOT very low cost and not even low cost. Yes they have low headline fees but my point is that there are hidden costs that need to be taken account of.

Indeed. To my mind, the cost of a tracker is the gap between its performance and the index it tracks. OCF is just part of this, but it's still very small.

Investing is not a simple thing solved by the magic of buying a tracker and then sitting back and watching the wealth roll in. It is an active process which requires revision of your ideas and continually applying basic principles like avoiding the latest fad.

I used the term "quasi" passive. (e.g. I completely avoided the .com debacle, both up and down. "Truly" passive would be all in a global tracker, I guess, whereas I, and many others, prefer to at least tweak the weightings by using other collectives, added in because I like the price and sold off again when I don't.

I think you are being almost philosophical here whereas I am just concerned with the practicality of generating a pension fund. Would you tell a twenty/thirty/forty-something he (or she of course) should pull back from his family and career responsibilities to develop the knowledge necessary to beat the market with his SIPP, even though he likely won't anyway, or stuff the cash under a mattress, or buy some trackers? They are basically the options for many of us. I fully accept that global trackers may be in for a very extended period of poor performance and that active may come to the fore, but at my age, my response, as retirement looks, is simply to take some reasonably hefty profits (by my muppet standards) and allocate them to some (shortish) bonds, cash even, and accept the small but real gains currently on offer there.

If, however, you ever decide to launch an IT/fund though, I'm in with my "fun" money (that is not sarcasm).

[Lootman]

Surely us muppets are very helpful to geniuses like yourself? Imagine if we just stuck those funds under the mattress. Most active pros do no better than muppets like me. You are clearly a rare exception. You must be worth many many millions, compounding away at the rate you do. Good for you!

I am not trying say "passive good, active bad", just saying that if you are a muppet, but at least have the self-awareness to know you're a muppet, (quasi) passive investing via very low cost collectives is a real boon.

It still doesn't stop the poor price problem every time a purchase is made. The fact is if you buy/sell a collective you have no control over the price of the constituents (or indeed the aggregate price if you're "just buying a tracker and never selling it".) If you are trading the components individually you have granular control of the price. If a large number of people participate in this sort of scheme then it is open to abuse profit harvesting by both the sell side and the rest of the market.

This makes no sense. Even if you buy actively, you still have no "control" over the price you can get. The only choice you have is to not buy at all. But then you risk missing out on any subsequent returns.

You keep claiming that you have knowledge of this theoretical "real" or "good" price in addition to the public market price. But you cannot describe how you determine it. As an example, can you tell me the current "real" price of Nvidia or Apple? I don't think you can.

I am not saying that nobody can beat buying the index. In fact some have to either by luck, leverage or something else. But if you cannot explain your methodology for doing that in terms other than your magic price theory, then we are entitled to not see that as something we can usefully learn from.

To pick my preferred index, the S&P 500 has given me around 15% annually for the last 15 years. I'd like to see a describable and implementable real-life active strategy that has beaten that.

If, however, you ever decide to launch an IT/fund though, I'm in with my "fun" money (that is not sarcasm).

I might give GS a few grand as well, if only to see how the returns deviate from the claims.

But from what he has described, his strategy is too esoteric, individualistic and vague to be able to standardise as a fund. Rather like HYP

[spasmodicus]

To pick my preferred index, the S&P 500 has given me around 15% annually for the last 15 years. I'd like to see a describable and implementable real-life active strategy that has beaten that.

I'd like to see a describable and implementable real-life active strategy that will beat that in the next 15 years.

It worries me that the S&P500 has for some years beaten, say, the long term average Equity Premium by a handsome margin. Will it revert to that long term average in the longer term, given that some commentators assert that USA stocks are overvalued, e.g. by CAPE ratio? The problem is that when the US stock market is doing badly, so does everywhere else, which is the rationale for having gold in one's portfolio. Or will the USA just keep on truckin' (in a Tesla Cybertruck, perhaps)?

S

[SalvorHardin]

To pick my preferred index, the S&P 500 has given me around 15% annually for the last 15 years. I'd like to see a describable and implementable real-life active strategy that has beaten that.

I'd like to see a describable and implementable real-life active strategy that will beat that in the next 15 years.

It worries me that the S&P500 has for some years beaten, say, the long term average Equity Premium by a handsome margin. Will it revert to that long term average in the longer term, given that some commentators assert that USA stocks are overvalued, e.g. by CAPE ratio? The problem is that when the US stock market is doing badly, so does everywhere else, which is the rationale for having gold in one's portfolio. Or will the USA just keep on truckin' (in a Tesla Cybertruck, perhaps)?

S

The S&P 500 hasn't always been a superb performer; the 2000s were particularly bleak. From Forbes:

"For the period of December 31, 1999 through December 31, 2009, the S&P 500 index had an annualized simple price return of -2.72%"

https://www.forbes.com/sites/advisor/2010/09/13/its-not-really-a-lost-decade/amp/

Quite a few of us on TMF who focused on small cap oils generated annual returns of 30% or more over the same period. Now that's not going to be repeatable, but if I had to come up with a strategy to beat the S&P 500 I'd go with a core of three main holdings:

1) North American railroads (these have beaten the S&P 500 for many years and they are almost impossible to replace with new technology and/or competitors; they have a very wide moat).

2) Berkshire Hathaway (an investment Fortress which beats the S&P when it does badly).

3) India (via ETFs - the next big economy, with much better demographics than China and much more investor friendly).

I'm roughly 23% Railroads, 9% Berkshire Hathaway and 8% India at the moment.

I've been seeing signs that some of the dotcom mania has returned regarding AI. Whilst this time is a bit different in that the theme companies are highly profitable, people are paying a lot for a cheery consensus.

We're getting quite a few articles saying that old tech companies are past it and Warren Buffett should pile into Nvidia. In the latter days of the dotcom boom it was buy anything with .com

[monabri]

From Forbes:

"For the period of December 31, 1999 through December 31, 2009, the S&P 500 index had an annualized simple price return of -2.72%"

https://www.forbes.com/sites/advisor/2010/09/13/its-not-really-a-lost-decade/amp/

Hope for the UK market?

[SalvorHardin]

From Forbes:

"For the period of December 31, 1999 through December 31, 2009, the S&P 500 index had an annualized simple price return of -2.72%"

https://www.forbes.com/sites/advisor/2010/09/13/its-not-really-a-lost-decade/amp/

Hope for the UK market?

There is quite a bit of positive coverage for the FTSE100 in today's Sunday Times Business & Money, with quotes from several fund managers. Mostly driven by bids and bid prospects, but also because the FTSE100 is cheap by international standards.

Then on page 11 there's a quote from Barry Norris of Argonaut Capital:

"The real reason the FTSE is failing is that UK plc, along with the rest of Western Europe, has turned its back on capitalism. The basic fiduciary duty of company management to maximise profit for shareholders has been replaced by the need to appease all stakeholders"

I agree with Mr. Norris