FT opinion pieces - take profits or not?

[torata]

I thought about where to put this, like Scottish Mortgage on the IT board: https://www.lemonfool.co.uk/viewtopic.php?f=54&t=23391, but thought it may be of wider interest.

Interesting opinion piece in FT on Monday with rebuttal piece on Wednesday.

"Why it is usually a mistake for investors to take profits"
(Paywall but following a google search result gains access, I think)
A Baillie Gifford fund manager saying to hold for the long term.

This is based on research (by a Prof. Hendrik Bessembinder) that finds that over time most stocks return less than one-month treasury bills, and that real returns are made from only a limited number of stocks - just 1% of them (I remember reading somewhere it was 5%), and the remaining 99% are 'a distraction'

Hence BG tend not to sell.

Rebuttal piece "Baillie Gifford’s never-sell mantra is a song for fools" is by Andrew Dickson, the founder of Albert Bridge Capital (not heard of them, personally)

His points:
It's a misreading of the actual results by Bessembinder - in fact this 1% is in fact a total of more than 1,000 companies - so twice size of S&P.
And it's OK to hold on when it's a winner, but what about when it's not - like Cisco, Kodak, etc.

Enjoy.

Torata

(FWIW, personally, I tend to top slice, although I might take a long time about it, in my portfolios where I have decided % weights. In fact, SMT was about 2x over weight in my SIPP, and I'd intended bringing it back, to par until these recent wobbles made me hold.
But where I don't have weights, I try to let winners run as I flip between fear and greed.)

[EthicsGradient]

This is based on research (by a Prof. Hendrik Bessembinder) that finds that over time most stocks return less than one-month treasury bills, and that real returns are made from only a limited number of stocks - just 1% of them (I remember reading somewhere it was 5%), and the remaining 99% are 'a distraction'

Well, that does seem a misreading on the face of it, since here's Bessembinder's paper:

Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills.

Where the "1%" comes from, who knows. This is about looking at a stock for its entire lifetime; that to me seems a reason for not holding on. "Poorly-diversified active strategies most often underperform market averages". The research is saying that if you hold on to a stock as long as you can, it will probably have mediocre performance. Unless there's poor performance at the start of a typical stock, and that's the section to avoid, but the abstract doesn't say that, and I doubt that's true.

[simoan]

This is based on research (by a Prof. Hendrik Bessembinder) that finds that over time most stocks return less than one-month treasury bills, and that real returns are made from only a limited number of stocks - just 1% of them (I remember reading somewhere it was 5%), and the remaining 99% are 'a distraction'

Well, that does seem a misreading on the face of it, since here's Bessembinder's paper:

Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills.

Where the "1%" comes from, who knows. This is about looking at a stock for its entire lifetime; that to me seems a reason for not holding on. "Poorly-diversified active strategies most often underperform market averages". The research is saying that if you hold on to a stock as long as you can, it will probably have mediocre performance. Unless there's poor performance at the start of a typical stock, and that's the section to avoid, but the abstract doesn't say that, and I doubt that's true.

I think you have to be very careful with these kinds of research studies. If you're comparing long-term performance of stocks against Treasuries, 1926 doesn't strike me as a particularly good time to start i.e. just before the Great Depression. To get a statistically significant result you should try a number of different start points at the very least. Apologies if this was the case because as a long term investor who has kicked the proverbial butt of Treasuries, I can't be bothered to read it

All the best, Si

[EthicsGradient]

This is based on research (by a Prof. Hendrik Bessembinder) that finds that over time most stocks return less than one-month treasury bills, and that real returns are made from only a limited number of stocks - just 1% of them (I remember reading somewhere it was 5%), and the remaining 99% are 'a distraction'

Well, that does seem a misreading on the face of it, since here's Bessembinder's paper:

Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills.

Where the "1%" comes from, who knows. This is about looking at a stock for its entire lifetime; that to me seems a reason for not holding on. "Poorly-diversified active strategies most often underperform market averages". The research is saying that if you hold on to a stock as long as you can, it will probably have mediocre performance. Unless there's poor performance at the start of a typical stock, and that's the section to avoid, but the abstract doesn't say that, and I doubt that's true.

I think you have to be very careful with these kinds of research studies. If you're comparing long-term performance of stocks against Treasuries, 1926 doesn't strike me as a particularly good time to start i.e. just before the Great Depression. To get a statistically significant result you should try a number of different start points at the very least. Apologies if this was the case because as a long term investor who has kicked the proverbial butt of Treasuries, I can't be bothered to read it

All the best, Si

It does take all stocks with any starting point, and also does things like group them in the decade they started. It also looks at them by decile of capitalization, and finds, for instance, that of the tenth with the greatest capitalization at the start of a decade, 70% of them beat treasury bills in the decade (as capitalization goes down, fewer beat T bills). So it's far from a "you've got to find that 4%" message. It's more "there are a lot of small companies out there that if you invest in at random, you'll probably do badly". Here's a commentary on it I found: https://www.garycarmell.com/skewed-bessembinder-study/

[LooseCannon101]

I thought about where to put this, like Scottish Mortgage on the IT board: https://www.lemonfool.co.uk/viewtopic.php?f=54&t=23391, but thought it may be of wider interest.

Interesting opinion piece in FT on Monday with rebuttal piece on Wednesday.

"Why it is usually a mistake for investors to take profits"
(Paywall but following a google search result gains access, I think)
A Baillie Gifford fund manager saying to hold for the long term.

This is based on research (by a Prof. Hendrik Bessembinder) that finds that over time most stocks return less than one-month treasury bills, and that real returns are made from only a limited number of stocks - just 1% of them (I remember reading somewhere it was 5%), and the remaining 99% are 'a distraction'

Hence BG tend not to sell.

Rebuttal piece "Baillie Gifford’s never-sell mantra is a song for fools" is by Andrew Dickson, the founder of Albert Bridge Capital (not heard of them, personally)

His points:
It's a misreading of the actual results by Bessembinder - in fact this 1% is in fact a total of more than 1,000 companies - so twice size of S&P.
And it's OK to hold on when it's a winner, but what about when it's not - like Cisco, Kodak, etc.

Enjoy.

Torata

(FWIW, personally, I tend to top slice, although I might take a long time about it, in my portfolios where I have decided % weights. In fact, SMT was about 2x over weight in my SIPP, and I'd intended bringing it back, to par until these recent wobbles made me hold.
But where I don't have weights, I try to let winners run as I flip between fear and greed.)

If most stocks return less than one-month treasury bills over time, then why does Warren Buffett advocate the average investor hold an S and P 500 index tracker or equivalent?

Individual companies can go bust, but the whole world-wide economy has usually delivered returns well above those of government bonds. I am a great believer in long-term buy and hold so long as there is adequate diversification.

[1nvest]

Stocks are leveraged, on average 1.5x (corporate bonds/debt).

Indexes are survivorship biased modified over time to pick up and run with more historically successful choices. Dow and Jones for instance devised three indexes but only the most successful survives as the 'indicator of historic rewards'. Index models are modified/changed over time again to align to the historic better models.

Longer dated bonds tend to be stock like, some stocks are more bond like than longer dated bonds. At 20 to 30 years there can be considerable similarities https://tinyurl.com/p62dn4cw

Bonds (and stocks) tend to do well during periods of progressively declining interest rates as we've seen since the 1980's. Also compare periods of rising interest rates and again long dated treasury bonds and stocks saw similar rewards. But there are differences, for one treasury bonds are more inclined to not be allowed to fail, states would rather print money or increase taxes rather than default on their treasury bonds. Bonds are fixed term, fixed rates, stocks are more undated variable coupon 'bonds'.

Compare a barbell of 20 year gilts/1 year and that tends to align with a central 10 year bond bullet. Hold a ladder of 10 year gilts where each is held to maturity and you don't have to mark to market, the reward simplifies to approximately the average of the current and past nine years 10 year gilt yields. Again broadly and over full cycles and the rewards from mid or longer dated treasuries compares to 1 year bills.

You might say that the average stock has the longer term reward expectancy comparable to 1 year bills, but where rewards are much more volatile and that are favourable when held over a period of progressively declining interest rates and by leveraging during such periods. Much of historic indicators is a function of distortions of index methodology/selectivity and choice of date range. And of course survivorship bias. There is however some element of lottery winners, the few individual stocks that do incredibly well. The 1% right tailers.

and that real returns are made from only a limited number of stocks - just 1% of them

Is rebalancing better or worse than not rebalancing. Broadly outcomes/rewards are the same either way but where not rebalancing will tend to see one or a small number of holdings becoming relatively heavily weighted (concentration risk) that can periodically backfire and that pulls portfolio rewards back down to comparable to if you'd periodically rebalanced to reduce such concentration risk.