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Where to start with S&S?

Investment discussion for beginners. Why you should invest your money, get help getting started
GeoffF100
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Re: Where to start with S&S?

#116827

Postby GeoffF100 » February 9th, 2018, 10:17 am

So, if I choose to invest for dividend income and beat the FT350HY index, both in terms of capital performance and in terms of income received, and do that over 20 or 30 years, why might I have been better off following a passive route?

Cheap trackers were not available 30 years ago. As i understand it, your portfolio turnover was much less than the 100% plus typical of managed funds nowadays, so you would not have incurred their costs. You also invested in stocks which were, on average, riskier than the market as a whole, and earned higher returns as a result. You were also less diversified than a world tracker, but that was not available to you. Less diversified portfolios are riskier, but that can work in your favour as well as against you. Finally, of course, 30 years ago, you did not know whether you would be lucky or not. As it happens you have been lucky. The safe assumption is that we will not be lucky, and do not have any special investing skill.

SalvorHardin
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Re: Where to start with S&S?

#116845

Postby SalvorHardin » February 9th, 2018, 11:50 am

The idea that it is impossible to outperform the markets with skill comes from efficient market theory (EMH), specifically strong EMH where all information (public and insider) is immediately and correctly priced in by the market. EMH says that it is impossible to beat the market but since the universe of investors’ returns covers a wide range (the normal distribution) then those who outperform must do so by luck. Investors collectively must underperform the market because their returns are market returns minus costs and taxes. But it’s a big step to then claim that no-one can outperform the market through skill.

The rebuttal is that some people have consistently outperformed the market; Warren Buffett is the most public example. The academics responded to this by pointing out that statistically some investors must have consistently superior performance but who they are is random (if one billion people flip a coin twenty times in a row then approximately 953 people should get twenty heads). They called Buffett a “three sigma event“ (sigma is one standard deviation); with Buffett’s continual outperformance this soon became four sigma, then five, then six, then academics largely stopped writing about him.

But it wasn’t only Buffett who outperformed (if it was the coin-flipping argument would make a bit more sense). In Buffett’s 1984 article “The Superinvestors of Graham and Doddsville” he pointed out the outperformance achieved by a group of investors, all of whom followed the same investing strategy proposed by Graham and Dodds in the 1930s:

https://en.wikipedia.org/wiki/The_Super ... Doddsville

https://www8.gsb.columbia.edu/articles/ ... rinvestors

http://uk.businessinsider.com/warren-bu ... ure-2014-8

Where the supporters of EMH went wrong is that they went from the position that the market usually absorbs new information and reflects this in prices very quickly, to stating that financial markets are always totally efficient. Since Nobel Prizes were awarded for this theory then as often happens in academia all counter-arguments were treated as heresy. So the debate was mostly shut down until psychologists, notably Daniel Kahneman, torpedoed EMH with Behavioural Economics.

EMH fails because some of its assumptions are horribly flawed. Under EMH market participants are “homo economicus"; the perfectly rational utility maximisers who process new information immediately with 100% accuracy. Yet humans are often irrational (especially where money is concerned), we don’t always process new information quickly or accurately and we routinely “satisfice” (choosing suboptimal consumption packages which are “good enough”).

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

The thing is that most investors will underperform the market; they trade too much, they don’t have the patience to let favourable situations develop, they get scared (loss aversion; the asymmetrical way people react disproportionately badly to a loss compared to a gain of the same amount) and they don’t have the expertise to always process information correctly at high speed. And they don’t stick to what Buffett calls their “circle of competence”. But this doesn't mean that everyone underperforms the market or that when someone underperforms it is only due to luck. Correct decision making plays an important part, particularly when you realise that the crowd is wrong (it just becomes difficult to go against the crowd).

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

http://www.businessinsider.com/the-circ ... 13-12?IR=T

tjh290633
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Re: Where to start with S&S?

#116847

Postby tjh290633 » February 9th, 2018, 11:53 am

GeoffF100 wrote:Cheap trackers were not available 30 years ago. As i understand it, your portfolio turnover was much less than the 100% plus typical of managed funds nowadays, so you would not have incurred their costs. You also invested in stocks which were, on average, riskier than the market as a whole, and earned higher returns as a result. You were also less diversified than a world tracker, but that was not available to you. Less diversified portfolios are riskier, but that can work in your favour as well as against you. Finally, of course, 30 years ago, you did not know whether you would be lucky or not. As it happens you have been lucky. The safe assumption is that we will not be lucky, and do not have any special investing skill.


So, by managing my portfolio differently from the typical managed fund, I am able to get better results. As you are no doubt aware, diversification only helps to a certain level. 15 holdings is the smallest to get adequate diversity, and the benefits taper off as the number of holdings grows. By your argument, holding 350 shares, weighted by market capitalisation, is more effective than holding 30 or so, initially evenly weighted, slanted towards income, kept within certain limits and managed to preserve income. I do not buy your argument.

Nowadays the markets is manipulated by automated trading, institutional dealing, and rumour, not to mention shorting. Trackers can never, by definition, do better than the market, and they respond only to the amount of money invested in them or withdrawn from them and to changes in their benchmark. In effect they are subject to manipulation.

30 years ago I had already been investing for 30 years and had decided which route performed best for me. That was the route which I followed. It is not always a smooth path, sometimes you win, sometimes you lose, but over a long timespan it wins. In April 1987 the FTSE100 was 1949.4 and at the end of 2017 it was 7687.77, an increase of 294%. My income unit value rose from 100 to 669 over the same period, an increase of 569%. I trade infrequently and only to meet my own rules. My case rests.

TJH

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Re: Where to start with S&S?

#116861

Postby GeoffF100 » February 9th, 2018, 12:57 pm

15 holdings is the smallest to get adequate diversity, and the benefits taper off as the number of holdings grows. By your argument, holding 350 shares, weighted by market capitalisation, is more effective than holding 30 or so, initially evenly weighted, slanted towards income, kept within certain limits and managed to preserve income.

This chart will give the performance of the world market vs the UK market over the last 5 years:

https://markets.ft.com/data/indices/tea ... s=AW01:FSI

The UK market has clearly been rubbish compared with the world market over this period. You would have to have been very lucky to do as well as the world market with 15 UK stocks. Clearly 15 UK stocks would not have provided adequate diversification over this period.

tjh290633
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Re: Where to start with S&S?

#116881

Postby tjh290633 » February 9th, 2018, 1:49 pm

Now you are comparing onions and pineapples. With a multitude of indices, one will always be top and one bottom.

If I wanted more international exposure, then my choice would be a global IT. That, of course has diversity built in. I recall the days of the Johnson Fry Worst Performing Fund. It lived up its name and vanished without trace. The Japanese market led to its downfall.

TJH

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Re: Where to start with S&S?

#117053

Postby Quint » February 10th, 2018, 9:31 am

GeoffF100 wrote:
Lindsell Train Global Equity charges 0.54% sure more than a tracker legal and general international index is 0.08% (both with HL so include the HL discount) so the difference is 0.46% less than a quater of the 2% they like to quote.

Or am i missing something?

Yes. The transaction costs are very low for market weighted trackers. However, if you include market impact, the transaction costs for managed funds are typically over 1%. If the OCF is about 0.5%, the total costs for a manged fund are likely to be about 2%, plus any platform fee you pay.


I take your point, but surely a cap weghted tracker using physical replication must incur trading costs also.

The main reason i chose LIndsell train as an example is that i know they trade very infrequently which minimses trading costs.

I do not disagree that a global index tracker would be a good starting point for most new investors.

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Re: Where to start with S&S?

#117065

Postby GeoffF100 » February 10th, 2018, 10:50 am

I take your point, but surely a cap weighted tracker using physical replication must incur trading costs also.

The turnover will be very low. Usually, shares are just left to run. For example, if the price of a share doubles, its weighting in the index also doubles, so no action is needed. There are some exceptions. If a new share enters the index, the fund has to buy it, if it is implementing full replication. This has to be counterbalanced by a proportionate reduction in the holdings of all the other shares. This does not usually result in a cost to the fund, because there will usually be investors buying or selling the fund. In the case of Vanguard OEICs, all the costs of buying and selling units are born by the buyers and sellers, as a result of swing pricing. Similar action has to be taken for rights issues, IPOs take-overs etc. For a whole market market weighted tracker the transaction costs are very low.

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Re: Where to start with S&S?

#117066

Postby Degsy67 » February 10th, 2018, 10:59 am

Cookie wrote:I have had a H&L S&S ISA and SIPP and have dabbled with some funds with my gains cancelling out my losses and breaking even

I would like something that is quite passive and doesn't take much maintenance for a reasonable gain (capital preferred, but income would be ok)

Where do I start?


Getting back to the original “where do I start?” question, I’m surprised nobody so far has suggested that you invest a few hours in reading Tim Hale’s “Smarter Investing: Simpler Decisions for Better Result (3rd Edition)”.

My own investing education began around 12 years ago through dabbling in single stock purchases which lost me money. I then discovered the HYP approach to investing and built a 30+ holding portfolio which I was reasonably happy with for a while but when it came to considering switching my various underperforming pensions into a SIPP I realised that the HYP didn’t cut it for me in terms of effort, risk tolerance and global exposure. I then moved on to a variety of experimental portfolios of Investment Trusts and ETFs to gain experience in broad collective investments which lead me down the path of understanding asset allocation and multi-asset investing. It was only after reading Tim Hale’s book about 10 years into my investing career that I felt confident enough to open a SIPP and to transfer my DC pensions. Over the past year I’ve transferred my DB Pensions too. I’m now self managing a set of substantial 70/30 portfolios across SIPPs and ISAs for myself and my wife based on Smarter Investing principles. I’m around 5 years away from Financial Independence when I can access my SIPP at age 55. If I’d have started my investment journey in my 30s rather than my 40s then I’d already be sitting on a beach sipping mojitos.

My 12 years of investing self education has been an enjoyable ride but with lots of lumps and bumps along the way, including the Great Finanancial Crisis of 2007/08 when I learned some great lessons around holding your nerve and trusting in long term reversion to the mean. You could follow a similar self directed path to learning or jump straight to the answer at the end based upon the path travelled by many who have walked the various paths set out before you.

I wish you all the best whatever route you choose.

Degsy

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Re: Where to start with S&S?

#117383

Postby hiriskpaul » February 11th, 2018, 4:41 pm

SalvorHardin wrote:The rebuttal is that some people have consistently outperformed the market; Warren Buffett is the most public example. The academics responded to this by pointing out that statistically some investors must have consistently superior performance but who they are is random (if one billion people flip a coin twenty times in a row then approximately 953 people should get twenty heads). They called Buffett a “three sigma event“ (sigma is one standard deviation); with Buffett’s continual outperformance this soon became four sigma, then five, then six, then academics largely stopped writing about him.


My rebuttal is that this is not true. In particular Berkshire Hathaway has underperformed the S&P 500 by around 1.5% per year over the last 10 years.

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Re: Where to start with S&S?

#117384

Postby hiriskpaul » February 11th, 2018, 4:45 pm

tjh290633 wrote:Nowadays the markets is manipulated by automated trading, institutional dealing, and rumour, not to mention shorting. Trackers can never, by definition, do better than the market, and they respond only to the amount of money invested in them or withdrawn from them and to changes in their benchmark. In effect they are subject to manipulation.


Assuming this is true - the market is capable of being "manipulated", please explain how the performance of an index such as the S&P 500 is impacted more by manipulation than an actively managed fund comprising stocks from the S&P 500?
Last edited by tjh290633 on February 11th, 2018, 5:54 pm, edited 1 time in total.
Reason: Corrected attribution - TJH

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Re: Where to start with S&S?

#117400

Postby tjh290633 » February 11th, 2018, 5:55 pm

hiriskpaul wrote:
tjh290633 wrote:Nowadays the markets is manipulated by automated trading, institutional dealing, and rumour, not to mention shorting. Trackers can never, by definition, do better than the market, and they respond only to the amount of money invested in them or withdrawn from them and to changes in their benchmark. In effect they are subject to manipulation.


Assuming this is true - the market is capable of being "manipulated", please explain how the performance of an index such as the S&P 500 is impacted more by manipulation than an actively managed fund comprising stocks from the S&P 500?


Is it? Of course a managed fund is not a tracker, so you would expect to see some divergence, but it is said that ETFs and ETNs are a particular target of the automated trading.

TJH

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Re: Where to start with S&S?

#117410

Postby SalvorHardin » February 11th, 2018, 6:40 pm

hiriskpaul wrote:My rebuttal is that this is not true. In particular Berkshire Hathaway has underperformed the S&P 500 by around 1.5% per year over the last 10 years.

The thing is that in the last decade-ish the returns earned by Berkshire Hathaway have increasingly become dominated by the performance of its wholly-owned and 80%-owned subsidiaries. So Buffett's influence upon its investments has become much less of a factor and the recent underperformance of Berkshire's shares vs the S&P500 doesn't say anything statistically significant about his stock picking abilities.

The period where Buffett's returns have been statistically shown to be due to skill, not luck, runs from when he set up the Buffett investment partnerships in the mid 1950s to the early 2000s when Berkshire started to make some very large acquisitions.

For example, the equity portfolio as of 31st Dec 2016 (The 2017 report hasn't yet been published) was $122 billion; the current market capitalisation of Berkshire Hathaway is $483 billion

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Re: Where to start with S&S?

#117415

Postby hiriskpaul » February 11th, 2018, 6:49 pm

tjh290633 wrote:
hiriskpaul wrote:
tjh290633 wrote:Nowadays the markets is manipulated by automated trading, institutional dealing, and rumour, not to mention shorting. Trackers can never, by definition, do better than the market, and they respond only to the amount of money invested in them or withdrawn from them and to changes in their benchmark. In effect they are subject to manipulation.


Assuming this is true - the market is capable of being "manipulated", please explain how the performance of an index such as the S&P 500 is impacted more by manipulation than an actively managed fund comprising stocks from the S&P 500?


Is it? Of course a managed fund is not a tracker, so you would expect to see some divergence, but it is said that ETFs and ETNs are a particular target of the automated trading.

TJH

People say all sorts of things that are not true. In particular the active fund management industry goes out of its way to sling mud at index tracking funds for the obvious reason that tracker funds are diverting substantial revenue away from fund managers and towards end investors. All sorts of unsubstantiated rubbish is spewed out regarding index funds and ETFs.

I accept that individual stocks can be manipulated through false rumors, etc., but anyone caught doing that will face a lengthy prison sentence. Manipulating the whole market, or a large part such as the S&P 500, would take some doing and even if possible, such manipulation would be bound to hurt actively managed US large cap funds as well as trackers. They all hold the same stocks, just different weights.

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Re: Where to start with S&S?

#117418

Postby hiriskpaul » February 11th, 2018, 7:00 pm

SalvorHardin wrote:
hiriskpaul wrote:My rebuttal is that this is not true. In particular Berkshire Hathaway has underperformed the S&P 500 by around 1.5% per year over the last 10 years.

The thing is that in the last decade-ish the returns earned by Berkshire Hathaway have increasingly become dominated by the performance of its wholly-owned and 80%-owned subsidiaries. So Buffett's influence upon its investments has become much less of a factor and the recent underperformance of Berkshire's shares vs the S&P500 doesn't say anything statistically significant about his stock picking abilities.

The period where Buffett's returns have been statistically shown to be due to skill, not luck, runs from when he set up the Buffett investment partnerships in the mid 1950s to the early 2000s when Berkshire started to make some very large acquisitions.

For example, the equity portfolio as of 31st Dec 2016 (The 2017 report hasn't yet been published) was $122 billion; the current market capitalisation of Berkshire Hathaway is $483 billion

I would really like to see the analysis that Buffett's returns have been statistically shown to be due to skill. I strongly suspect such analysis is lacking in much rigour. That is not to say Buffett is not a brilliant and eloquent businessman. In fact I rather like the advice he gives to private investors ;)

https://www.youtube.com/watch?v=y4tITwhEfFE

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Re: Where to start with S&S?

#117421

Postby hiriskpaul » February 11th, 2018, 7:10 pm

monabri wrote:
Degsy67 wrote:Getting back to the original “where do I start?” question, I’m surprised nobody so far has suggested that you invest a few hours in reading Tim Hale’s “Smarter Investing: Simpler Decisions for Better Result (3rd Edition)”.

Degsy



Amaazing what you can find in Google.

https://docslide.us/download/link/smart ... er-results

All 392 pages.

Thanks for that. 2 versions out of date, but I doubt it matters very much as the analysis, message and approach will be largely the same.

Edit - it is interesting what he says in section 17.5 International equities. A point of view I strongly disagree with and one that would have meant considerable underperformance since this version of the book was published if the advice had been followed. Anyone know if his position has been changed in later versions of the book?

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Re: Where to start with S&S?

#117436

Postby hiriskpaul » February 11th, 2018, 7:40 pm

hiriskpaul wrote:I would really like to see the analysis that Buffett's returns have been statistically shown to be due to skill. I strongly suspect such analysis is lacking in much rigour. That is not to say Buffett is not a brilliant and eloquent businessman. In fact I rather like the advice he gives to private investors ;)

https://www.youtube.com/watch?v=y4tITwhEfFE

p.s. Buffett's advice is the one I would offer to the OP, assuming the investment is for the long term (10+ years), but go for a global tracker rather than a S&P 500 tracker.

Depending on the size of the investment and how often you want to invest, Vanguard's VWRL ETF would be good start at Hargreaves Lansdown as the platform fees on ETFs are capped at much lower levels than funds. HL do not charge dealing fees on funds though, so it may work out cheaper in the short term to buy a global tracker fund and switch later to an ETF. Once the investment becomes more substantial, say £50-100k? It can work out cheaper to hold separate regional tracker ETFs (US, Europe, UK, Japan, etc.) rather than one global tracker as the net management fees are lower for regional trackers.

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Re: Where to start with S&S?

#117441

Postby SalvorHardin » February 11th, 2018, 7:43 pm

hiriskpaul wrote:I would really like to see the analysis that Buffett's returns have been statistically shown to be due to skill. I strongly suspect such analysis is lacking in much rigour. That is not to say Buffett is not a brilliant and eloquent businessman. In fact I rather like the advice he gives to private investors ;)

https://www.youtube.com/watch?v=y4tITwhEfFE

My statistics ability has atrophied due to a lack of use in the past decade, so I'm unable to do a t-test!

Here are a few starters. If you've got access to academic databases you might be able to find some of the papers in the 1980s which looked into Buffett. I know from conversations with people over the years that academics started to ignore Buffett after a while because his performance contradicted efficient market theory.

https://www.statslife.org.uk/economics- ... orang-utan

http://brooklyninvestor.blogspot.co.uk/ ... s-etc.html

https://www.theglobeandmail.com/globe-i ... cle624079/

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Re: Where to start with S&S?

#117543

Postby GeoffF100 » February 12th, 2018, 10:45 am

Mr Shark says that people buy trackers because of XYZ, and goes on to show that XYZ is nonsense. Mr Investor says "I am glad you told me that. These people who buy trackers are clearly daft. I am glad I did not buy one. "Of course," says Mr Shark, that does not mean that beating the market is easy. You cannot do it yourself. In fact most fund managers cannot do it. It requires a special skill, but the good news is that I have that skill." I am glad to hear that," says Mr Investor. "I am afraid that skill is expensive though. You will have to pay me more than you pay yourself, but it will be worth it because I can beat the market." "You seem to be very confident that you can beat the market," says Mr Investor, "What happens if you fail?" "You still pay my fee," says Mr Shark. "Do you compensate me for your failure to beat the market," asks Mr Investor. "No," says Mr Shark.

Of course nobody believes XYZ, and XYZ certainly is not why people buy trackers.

Nobody believes the strong form of the EMH. However, departures from that hypothesis do not necessarily make the market easier to beat. Yes, dot coms were overvalued in the bubble. Nonetheless, if a fund manager under-weighted them, he would under-perform in that sector, and perhaps lose his job. If he wanted to out-perform in that sector, he had to over-weight them, and get out quickly when the bubble burst. The problem is that most of the other fund managers will be doing the same. Buying the over-valued dot com stocks was not irrational. Momentum investing beats the market, but is risky. In its weakest form, the EMH just says that the market is very hard to beat in risk adjusted terms, except by chance.

Perhaps there were long odds that Buffet's performance was not due to chance, after the event. However, that does not help us to identify the next Buffet. By the time the odds become long enough for us to be confident that the results are not just due to chance, his skill may have faded, or the market anomalies that he was exploiting may have disappeared. Indeed, that is exactly what appears to have happened to Buffet over the last ten years, but, of course, ten years is not long enough to judge.

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Re: Where to start with S&S?

#117563

Postby Alaric » February 12th, 2018, 11:57 am

GeoffF100 wrote:Nobody believes the strong form of the EMH. However, departures from that hypothesis do not necessarily make the market easier to beat.


You can replicate an index by buying all the stocks it contains. Suppose you then went through each company with a fine accounting tooth comb and discarded all those where the balance sheet or business proposition didn't make for a long term profitable and dividend paying business. If you managed to dodge the likes of Carillion or even short sell them, I suspect you can beat the portfolio index. But is the extra cost in research worth the extra performance from not having the dogs? Perhaps it's different for institutional investors paying for research as compared to private ones who would do their own legwork.

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Re: Where to start with S&S?

#117572

Postby GeoffF100 » February 12th, 2018, 12:15 pm

Suppose you then went through each company with a fine accounting tooth comb and discarded all those where the balance sheet or business proposition didn't make for a long term profitable and dividend paying business. If you managed to dodge the likes of Carillion or even short sell them, I suspect you can beat the portfolio index.

That is the sort of thing that Mr Market is proficient. He employs lots of highly paid analysts. Nonetheless, market irrationality does not always help here. Suppose that you do succeed in identifying a stock that is undervalued. In a completely rational world, the market will soon realise this, and revalue the stock so that you can sell at a profit. However, if the market still irrationally shuns that stock, you make nothing, and may even lose money. Come the next set of financial results, the stock may no longer cheap, so you may not be rewarded for hanging on either.


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