Investors again show why they suck at investing

[micrographia]

Clearly you didn't comprehend that I indicated that when passed to the next direct generation that multiple layers of IHT end up having been paid. But if as you so indicate that you enjoy reading incomprehensible rants your mind isn't up to much

No that was obvious and I've made some discreet suggestions to GPs myself that since we have no need for their cash they might throw it at the GCs instead (some others in line for any inheritance have strongly differing views on this ), but your calculations make no sense given your too-short generational time, your views in the rest of the post are a little bit... fringe ... and the relevance of the whole thing to the thread it was posted in still escapes me .

Like I said, I enjoy seeing someone letting off steam but this is mostly nonsensical .

EEM

[1nvest]

Hi Adamski.

What do you think FCIT (closet) tracks?

Further, if indeed it does closet track some index, how has it been able to "outperform" over the last month?

Large global investment trusts will always exhibit a meaningful level of correlation with a global tracker, but they're not one and the same (closet or otherwise).

Regards, Newroad

I suspect any outperformance may be down to either leverage, can scale up/down stock exposure as deemed appropriate, but reasonably/sensibly restricted to not be excessive; Or, more likely price/nav change as recently its shifted from a near 10% price to nav discount to near 0%.

[1nvest]

Clearly you didn't comprehend that I indicated that when passed to the next direct generation that multiple layers of IHT end up having been paid. But if as you so indicate that you enjoy reading incomprehensible rants your mind isn't up to much

No that was obvious and I've made some discreet suggestions to GPs myself that since we have no need for their cash they might throw it at the GCs instead (some others in line for any inheritance have strongly differing views on this ), but your calculations make no sense given your too-short generational time, your views in the rest of the post are a little bit... fringe ... and the relevance of the whole thing to the thread it was posted in still escapes me .

Like I said, I enjoy seeing someone letting off steam but this is mostly nonsensical .

EEM

OP

It's an open secret that the average/median/typical investor in the stock market captures only a fraction of the the returns delivered by the stock market - while some may point the finger at active management, fees, and stock picking, there is also a far more important and simpler reasons - they cannot control their emotions and exhibit poor investor behaviour - they buy HIGH and sell LOW.

As I indicated I agree with the buy-high/sell-low opinion, and I added another factor. Maybe nonsensical to you, but is a reality in practice.

[Bubblesofearth]

I am not sure I agree with that. I think you need a more positive frame of mind. I avoided Carillion and warned at the time of the folly of holding it and I got out of banks in January 2008. I have missed out on a lot of good stuff, but I think avoiding disasters is more important.

How can it be with the asymmetry I pointed out, i.e. only losing up to your stake with disasters but gaining many times your stake with big winners? The importance of winners to a portfolio is critical given most of the rise in stock markets is accounted for by a small minority of such high performers. What is true for markets is almost certainly going to be true for a well diversified portfolio.

Re winners, running them is of course a well known strategy, but that I think is where luck comes in. When is the optimal time to sell? many years back I was very lucky with Tullow Oil which was a 14 bagger for me. That was down to luck but how often have we seen shares rise strongly and then fall back to earth? If we have 'run the winner' without taking a profit what was the point in that?

Dod

Yes, some shares will rise and then fall back, some will never rise, and a few will rise and hardly fall back at all. If you adopt a long-term buy and hold strategy you can sit back and watch it all play out without worrying about the dynamics along the way. Pick a big enough portfolio to start with, wait long enough, and you will almost inevitably end up with a few disasters, a majority of mediocre performers and a few big winners. None of which can be predicted beforehand by the majority of investors.

Trying to be clever and buy and sell along the journey might work a few times if you are lucky but more often than not you will end up at best incurring extra charges.

BoE

[Dod101]

I am not sure I agree with that. I think you need a more positive frame of mind. I avoided Carillion and warned at the time of the folly of holding it and I got out of banks in January 2008. I have missed out on a lot of good stuff, but I think avoiding disasters is more important.

How can it be with the asymmetry I pointed out, i.e. only losing up to your stake with disasters but gaining many times your stake with big winners? The importance of winners to a portfolio is critical given most of the rise in stock markets is accounted for by a small minority of such high performers. What is true for markets is almost certainly going to be true for a well diversified portfolio.

Re winners, running them is of course a well known strategy, but that I think is where luck comes in. When is the optimal time to sell? many years back I was very lucky with Tullow Oil which was a 14 bagger for me. That was down to luck but how often have we seen shares rise strongly and then fall back to earth? If we have 'run the winner' without taking a profit what was the point in that?

Dod

Yes, some shares will rise and then fall back, some will never rise, and a few will rise and hardly fall back at all. If you adopt a long-term buy and hold strategy you can sit back and watch it all play out without worrying about the dynamics along the way. Pick a big enough portfolio to start with, wait long enough, and you will almost inevitably end up with a few disasters, a majority of mediocre performers and a few big winners. None of which can be predicted beforehand by the majority of investors.

Trying to be clever and buy and sell along the journey might work a few times if you are lucky but more often than not you will end up at best incurring extra charges.

BoE

Your arguments and mine have been discussed many times on these Boards. I conclude that avoiding disasters and taking some profits are two positive things that I can do with some confidence (the latter with more confidence than the former) I for instance would have been more than a little annoyed with myself had I 'run my profits' with Scottish Mortgage only to see the share price halve and stay there had I not taken profits when I did. In a more recent example, I skimmed profit from Astrazeneca at the beginning of last month at £114 and in Shell last year at £24.50. I have come to the conclusion that that is quite a good strategy. I will never catch the peak but so what? I think my biggest disaster was holding on to Cable and Wireless for far too long hoping for a recovery back in 2000. That is a lesson I have never forgotten and have vowed not to repeat.

But I am basically a LTBH investor. Some shares I have held for well over 25 years, Legal & General, HSBC, Unilever, and Shell to name but four, and in ITs, Caledonia and Alliance.

Dod

[SalvorHardin]

I've long felt that the typical private investor treats shares as Veblen goods; things where the supply and demand curves work the other way. So as prices rise, the demand for a Veblen good actually rises. But when prices fall the demand for a Veblen good falls.

So when shares prices rise these investors buy more and when prices fall they sell more (or are more likely to sell). This "buy high, sell low" is commonly seen when fund managers report large amounts of buying funds close to market peaks and selling funds close to market troughs. Much of this is influenced by the manic-depressive nature of reporting about the stockmarket and the economy, with these investors unable to switch off.

I suspect that the phenomena known as "loss aversion" also kicks in as investors sell to avoid the pain of further losses (for most people the psychological effect of losses are known to be at least twice as painful as gains of the same amount).

There aren't many Veblen goods; most examples are what are commonly known as "luxury goods" (distinct from economic luxury goods) such as designer shoes and handbags, rare watches, yachts, expensive cars and other pricey items where owning them gives you additional status (positional goods).

https://en.wikipedia.org/wiki/Veblen_good

https://en.wikipedia.org/wiki/Loss_aversion

As Warren Buffett says, "You Pay A Very High Price In The Stock Market For A Cheery Consensus". Most people find it extremely difficult to invest when prices have fallen sharply, but they find it much easier to sell.

Strictly speaking Veblen goods must be luxury goods as defined in economics. A luxury good in economics is one where when your income increases you spend an even larger percentage of the increase in your income on luxury goods. There are things known as "Giffen goods" which behave as Veblen goods but are "inferior goods" (you spend more as a percentage of your income on inferior goods as your income falls). Examples of inferior goods are wheat, rice, low-quality cuts of meat and cigarettes.

https://en.wikipedia.org/wiki/Giffen_good

[Lootman]

when shares prices rise these investors buy more and when prices fall they sell more (or are more likely to sell).

Tax is a factor. A good number of my positions are in a taxable account and historically I have had an aversion to paying CGT. Realised losses, on the other hand, can be welcome.

Another factor is momentum. Once a share declines in value, you do not know how far it will go. I have been spared a few disasters by cutting my losses early. And missed some turnarounds as well of course.

Finally I do not like small positions as, even if they do well, it won't make a big difference. And my smaller positions are generally my losers.

[vand]

Not to reply to any post in particular, but I stand by assertion that in the stock market wealth concentrates upwards. In order for the market to delivery 7%, most players have to earn below 7% in order for a few to earn more -- and by extension it means that some will lose money in absolute terms.

Just because the pie grows larger, doesn't mean that everyone at the table can receive more cake. The only reason that the pie is able to grow larger in the first place is because some players lose - that's how capitalism works. The market's function is to efficiently allocate capital to businesses - like it or not, in a competitive system there have to be losers.

If you bought stocks during the Covid crash, or during the depths of 2022 and are sitting on a nice profit, you have to realise that someone else sold them to you and are now missing out on the gains that you are now enjoying. You never "see" the other side of the trade because its anonymously hidden behind the workings of the market makers and clearing process, but rest assured someone else sold those shares that you now hold. You won, they lost - congratulations.

[Newroad]

Hi Vand.

I'm not sure your thoughts above re "cake" and "losers" are necessarily accurate. If you take into account mutliplier effects, (increased) velocity of money and similar, there can be multiple winners and (theoretically at least, though unlikely in practise) no losers.

Regards, Newroad

[Dod101]

Not to reply to any post in particular, but I stand by assertion that in the stock market wealth concentrates upwards. In order for the market to delivery 7%, most players have to earn below 7% in order for a few to earn more -- and by extension it means that some will lose money in absolute terms.

Just because the pie grows larger, doesn't mean that everyone at the table can receive more cake. The only reason that the pie is able to grow larger in the first place is because some players lose - that's how capitalism works. The market's function is to efficiently allocate capital to businesses - like it or not, in a competitive system there have to be losers.

If you bought stocks during the Covid crash, or during the depths of 2022 and are sitting on a nice profit, you have to realise that someone else sold them to you and are now missing out on the gains that you are now enjoying. You never "see" the other side of the trade because its anonymously hidden behind the workings of the market makers and clearing process, but rest assured someone else sold those shares that you now hold. You won, they lost - congratulations.

Indeed. I do not think anyone would argue with that. A market return is an average of all the trades, no one I think is suggesting that the return is spread evenly across all investors, unless of course you buy an index linked fund.

Taking up Newroad's comments, I guess we could all be winners, but some are likely to win more than others. But as he/she says, in practice some are likely to lose and some to win. I am not sure any of this is getting us very far.

Dod

[1nvest]

Sort a number of stocks worst to best, left to right tails, and typically the rightmost will outweigh the leftmost. One stock might double, another half (next month/year/whatever and those individual outcomes might have totally flipped such that they both compounded to zero gain/loss). The arithmetic mean is positive, -50 on the left, +100 on the right.

Some suggest you have to hold the entire haystack (market) in order to capture the few great winners, but that's wrong. Its fractal. Hold fewer stocks and the left/right tails wont be as tall as if you hold many more stocks, but in having distributed capital across fewer stocks you have more invested in the best/worst cases. 100 stocks, best gains +100% but with only 1% exposure to that, or 10 stocks, best gains +10% and where you have 10% exposure to that.

So within limits, holding say 16 stocks can compare in total return to holding 100 stocks.

What about rebalancing? Again it washes. Measure 30 year outcomes for rebalanced and non-rebalanced and they tend to end with similar outcomes. The non-rebalanced tending to end with a higher weighting in the asset(s) that were the more rewarding, the rebalanced holding less, having sold some to add to other assets.

Pick a individual asset, or a individual investor, and they're more inclined to lag the 'average'. As most stocks out of a bunch of stocks lags the average. In a sense captures the geometric, rather that the arithmetic.

All-stock is suggested as being more rewarding that stock/bond blends, however again that isn't accurate. In around 20% of cases all-stock will lag stock/bond. For a large chunk of cases they achieve similar outcomes. Its only few great cases where all-stock considerably outshines, more often from a start date after deep stock prices declines. Pick a random start date and with all-stock you're inclined to do no better/worse than a stock/bond blend. A potential benefit however of stock/bond is that as/when deep declines in stocks occur, you might migrate bonds over to stocks, at least have loaded some capital in at lows and that can go on to yield great gains. In contrast the all-stock'er just rides through that volatility, are restricted to their particular choice of start date outcome.

Pyad's HYP advice was that 16 stocks was enough diversity (spread across sectors), and not to bother with rebalancing, just let that ride. Which mathematically might compare to rebalanced, but involves less trading and hence less costs (and maybe avoids taxable events also such as capital gains taxation on the shares sold as part of rebalancing).

Dividends matter? No. Generally a broad portfolio of a mixture of stocks compares to a portfolio of high yield stocks. Tally total returns, take the same amount of DIY dividends out of those total returns, and broadly the outcomes are no different.

[Dod101]

Sort a number of stocks worst to best, left to right tails, and typically the rightmost will outweigh the leftmost. One stock might double, another half (next month/year/whatever and those individual outcomes might have totally flipped such that they both compounded to zero gain/loss). The arithmetic mean is positive, -50 on the left, +100 on the right.

Some suggest you have to hold the entire haystack (market) in order to capture the few great winners, but that's wrong. Its fractal. Hold fewer stocks and the left/right tails wont be as tall as if you hold many more stocks, but in having distributed capital across fewer stocks you have more invested in the best/worst cases. 100 stocks, best gains +100% but with only 1% exposure to that, or 10 stocks, best gains +10% and where you have 10% exposure to that.

So within limits, holding say 16 stocks can compare in total return to holding 100 stocks.

What about rebalancing? Again it washes. Measure 30 year outcomes for rebalanced and non-rebalanced and they tend to end with similar outcomes. The non-rebalanced tending to end with a higher weighting in the asset(s) that were the more rewarding, the rebalanced holding less, having sold some to add to other assets.

Pick a individual asset, or a individual investor, and they're more inclined to lag the 'average'. As most stocks out of a bunch of stocks lags the average. In a sense captures the geometric, rather that the arithmetic.

All-stock is suggested as being more rewarding that stock/bond blends, however again that isn't accurate. In around 20% of cases all-stock will lag stock/bond. For a large chunk of cases they achieve similar outcomes. Its only few great cases where all-stock considerably outshines, more often from a start date after deep stock prices declines. Pick a random start date and with all-stock you're inclined to do no better/worse than a stock/bond blend. A potential benefit however of stock/bond is that as/when deep declines in stocks occur, you might migrate bonds over to stocks, at least have loaded some capital in at lows and that can go on to yield great gains. In contrast the all-stock'er just rides through that volatility, are restricted to their particular choice of start date outcome.

Pyad's HYP advice was that 16 stocks was enough diversity (spread across sectors), and not to bother with rebalancing, just let that ride. Which mathematically might compare to rebalanced, but involves less trading and hence less costs (and maybe avoids taxable events also such as capital gains taxation on the shares sold as part of rebalancing).

Dividends matter? No. Generally a broad portfolio of a mixture of stocks compares to a portfolio of high yield stocks. Tally total returns, take the same amount of DIY dividends out of those total returns, and broadly the outcomes are no different.

So there you have it. No need for any further discussion. Except of course that 1nvest is just like any other commentator, sometimes right and sometimes not so right.

Dod

[Bubblesofearth]

Indeed. I do not think anyone would argue with that. A market return is an average of all the trades, no one I think is suggesting that the return is spread evenly across all investors, unless of course you buy an index linked fund.

Taking up Newroad's comments, I guess we could all be winners, but some are likely to win more than others. But as he/she says, in practice some are likely to lose and some to win. I am not sure any of this is getting us very far.

Dod

Market asymmetry, where a minority of big winners drive gains, has implications for portfolio construction, specifically the level of diversification required. Once you understand that it is more important to capture winners than to avoid losers (multi baggers trump failures from an investment performance pov) you need to ensure sufficient diversification of this. So, for example, 15 shares might be sufficient to minimise the pain of failures but insufficient to be confident of capturing at least one big winner. You can run the maths on this starting with different assumptions regarding winner/failure probabilities but as long as there is overall market asymmetry you will always find higher diversification is required once your mind-set is about capturing winners.

This learning is IMO important and not something that comes out of simple risk analysis of diversification - the most common method of presenting the level of diversification required. In other words the graphs of risk vs portfolio size underestimate the level of diversification necessary.

I realise I'm repeating myself here but this has been an important learning for me since joining TLF, and TMF before it.

BoE

[1nvest]

Again I'll say its fractal. Fewer stock, more capital invested in each, and left/right tails are inclined to be smaller in magnitude than having smaller amounts invested in each of many more holdings but where the left/right tails are larger in magnitude. Such that the likes of 30 (Dow) stocks can broadly compare in total return to 500 (S&P) stocks.

https://seekingalpha.com/article/401039 ... index-fund

[vand]

It surprises me not in the least that investors threw in the towel on unloved UK funds just as they started to outperform in 2022. This is not the sign of a market that is in danger of exhibiting irrational exuberance and why I am still very happy to be concentrated in UK stocks.

UK asset managers suffer record outflows in 2022
Retail investors withdraw more than £25bn

https://www.ft.com/content/9674ab3a-f1f ... 5ffdf2dac8