An IFA who knows Monkey with a Pin

gadgetmind

mj62mj62 wrote: »

I think I have a bit of anxiety as so much of the news is about what not to do at the moment rather than what to do.

Do you think this makes now any different to any other time?

As it happens, I'm also dithering a little regards where my next cash inputs will go, but I'll probably just drip it and and keep everything balanced.

The only time I really, really know what to do is when everyone else is in full-on panic mode and is selling everything. Those times don't come too often, so make the best of them when they come, but don't sit on too much cash in anticipation, and don't underestimate the balls it takes to commit cash when everyone else is running for the exits.

Investing is simple, but it's not easy.

UsernameAlreadyExists

gadgetmind wrote: »

The only time I really, really know what to do is when everyone else is in full-on panic mode and is selling everything. Those times don't come too often, so make the best of them when they come, but don't sit on too much cash in anticipation, and don't underestimate the balls it takes to commit cash when everyone else is running for the exits.

... and then they go out of business and you lose your investment?

jamesd

mj62mj62 wrote: »

The book is fantastic :-) After doing so much research myself, it was a breath of fresh air amongst a sea of self-vested articles on there on the internet.

You should read the early pages of the book. Particularly this part:

"Peter is a private investor who has been trading shares for over a decade. he has a degree in psychology and he has worked for most of his career in market research."

That should be telling you that the author is far from unbiased but is clearly not hugely experienced, particularly given his apparent age. His own objective seem pretty clear: to make money and a name using a book with a catchy title and argument.

You'll probably find commentators who've done more research and perhaps have more experience or who've made more money investing posting here than the author of the book.

None of that means that what he writes is all wrong, just that it's worth doing things like reading the actual Equity Gilt Study data and presentation of that data.

When it comes to IFAs, you'll probably find it hard to find one who will do what it appears you want. Not impossible, though. One difficulty that IFAs have is that they need to be able provide data to prove their recommendations, to protect them from mis-selling claims later. That can make it harder for them to do things like making recommendations based on the presumption of a gilt bubble that might not burst for a long time. They should be aware of the issue, of course, because it means that gilts are currently higher risk than normal, just as would be the case for any investment with a higher than usual p/e ratio.

You're already way ahead of most investors because you're paying attention to things.

But don't let that prevent you from doing critical reading. Like considering the claim on page 95 of the book that "over the last 20 years - and even with paying the basic rate income tax - an investor in an instant access account would still have beaten inflation by 1.7% pa". The potential issues with that include things like looking at real returns then deducting tax, instead of deducting tax first then deducting inflation. Or picking a time of unusually low inflation, as the author did. Low inflation reduces the tax effect and it started at 7-8% in 91/92 then plunged to more like 2% for the rest of the period. 2.9% over 2% inflation is 4.9% which reduces to 3.92% after tax then to 1.92% after inflation. So ahead. But not do the same calculation with inflation at 6%: 2.9% over 6% inflation is 8.9%, reduce by 20% tax it's 7.12% then subtract inflation and it's down to 1.12% over inflation after tax. Using todays' 20% basic rate tax band, not the real, higher, basic rate bands over the period , which started at 25% (more old rates data). Then there were the times before that when the basic rate was 35% in parts of the 1970s.

You should also be extremely cautious about the author's portrayal of fund returns, which doesn't seem to make much allowance for the skill of managers. He seems to be falling into the trap that many fans of index funds get caught out by, believing the clearly false premise that you can't beat the market is a true statement rather than a theory that makes some analysis convenient. But whether you're one of the investors who uses the investment managers who do beat the market in some way (returns or volatility reduction are both legitimate objectives) or one of those who picks funds that systematically do badly, always, is up to you to some extent - underperformance has been shown to persist and you can greatly improve your results by avoiding the systematic under-performers as well as by using effective techniques like changing fund when its manager changes. But whatever you do there are never guarantees, so don't be a purist, use many approaches. Outperformance has also persisted, notably for the global growth sector in the 2000s when winners continued to be winners for many years, except where the manager changed. But don't take this as me arguing that index trackers are always bad either, I use both, for different reasons, depending on what I'm trying to achieve and where.

There shouldn't be anything in the book that a good IFA isn't aware of, but that doesn't mean that it would be good business to offer you investment advice based on it, just because of their regulatory constraints and focus on what's achievable in the real world.

There's one premise that's clearly broadly agreed, on, though: many investors do worse than a monkey with a pin could do by picking a broad range of shares. Not one share because that would have excessive risk of being away from the average result.

If you're not already familiar with it you might take a look at value averaging, and contrast it with the more widely known Pound cost averaging. it's a technique that can help to counter some of the investor bias that harms returns.

jamesd

mj62mj62 wrote: »

Are you saying there is no one with whom I can discuss (using your example) the direction of the price of gold, perhaps given a caveat like "if the FTSE drops to 4000 where do you think gold will go?"

That's really more of a question for a stock broker than an IFA. IFAs would perhaps have a view but their regulatory mandate is different, generally being limited to packaged retail investor products, with narrow exceptions like investment trusts and ETFs that are effectively packaged.

mj62mj62 wrote: »

If I'm paying them by the hour talk about topics they love, why would they be adverse to that?

You might try mentioning that you're happy to pay by the hour for discussion, if you can find an interested IFA. But it's really outside the scope of what they are supposed to be doing, except perhaps some modest risk-based tweaks to allocations.

mj62mj62 wrote: »

1. People debate how low the FTSE is going to go based on historical trends, and therefore it's not a good time to by equities
2. People talk about the bond bubble and therefore it's not a good time to buy bonds.

The UK cyclical P/E is not unduly high. Gilt and high quality corporate bond P/Es are at exceptionally high levels. That makes now a time when someone practicing either buy low, sell high or rebalancing would be selling gilts and buying UK equities. But there might be better trades, Europe is on an even lower P/E and then there's natural resources that aren't particularly hot right now because thoughts of global growth haven't driven prices of those up yet. Ditto but to a lesser degree for commercial property, which is still somewhat depressed compared to say gilts. US isn't on exceptionally high P/E but it's higher than the average so less good to be buying than a while ago but still lots of scope. Also remember that the US is half of the global index, UK is about 8% and don't be over-concentrated in the UK.

For other commentary, watch when and where Warren Buffett is investing or increasing cash. If he's doing big spending it's probably a good time to be buying. He's entirely willing to stay in cash and wait for good times to buy. For a more broad view, look at P/E and cyclical P/E and try to invest more at low times and less at high. Since different types of investments can be high at different times there's usually opportunity somewhere. And if there isn't, there's nothing wrong with using cash for a while.

mj62mj62 wrote: »

They say stocks can outperform bonds but if 85% of managers underperform the market then how do you know which is a good one?

Start by rejecting the consistent losers. Then reject those who are investing in markets that are over-valued and whose mandate prohibits them from going somewhere else. Then look at style and see which style is right for what you think the current situation is. Neil Woodford is good but 2009 wasn't the right time to have a high weighting in his investments as it turned out, because he takes a more cautious value-driven approach and that was a time of general broad recovery when a tracker or recovery or leveraged approach did better - for those who go the call that there was a recovery going on right. Then don't expect perfection, it doesn't exist. If you don't want to try, accept the consistent below market returns offered by trackers in the areas where you don't want to try.

You might also observe that smaller companies funds tend to do better than large or mid cap at certain times and see if you can pick those times. But the small cap also tend to have higher volatility so not a good place to be during a market drop.

gadgetmind

jamesd wrote: »

He seems to be falling into the trap that many fans of index funds get caught out by, believing the clearly false premise that you can't beat the market is a true statement rather than a theory that makes some analysis convenient.

It's a testable hypothesis. It's been tested. Guess what?

Of course, some managers will always beat the market over certain timescales, but how do we know which these will be in advance?

Simple. We don't.

gadgetmind

jamesd wrote: »

That's really more of a question for a stock broker than an IFA.

I think it's more a question for Mystic Meg.

Or at least ask two stock brokers to make sure you get three opinions.

Start by rejecting the consistent losers.

Yes, and when doing the lottery, always avoid numbers that don't come up too often.

gadgetmind

UsernameAlreadyExists wrote: »

... and then they go out of business and you lose your investment?

In close to three decades of investing, I've had exactly one total loss.

If you diversify across territories, asset classes, and holdings within these classes, then such things don't cause any real impact.

Linton

gadgetmind wrote: »

It's a testable hypothesis. It's been tested. Guess what?

Of course, some managers will always beat the market over certain timescales, but how do we know which these will be in advance?

Simple. We don't.

Re: The theory "Managers cant beat the market"

It has been tested in the US on broadly based US funds. In the US there are specific peculiarities like the capital gains tax system and the nervousness of US investors about foreign investments and the US market is highly researched at least as far as large companies are concerned.

Even in the, admittedly very limited, US data I have read fund managers do beat the market at least sufficiently to pay their extra costs. If this were not so there would be good evidence that over time passive funds rise to the top of the rankings. Looking at UK data the standard trackers are always mid market.

The theory clearly doesnt work in some other markets at all. UK small companies being my favourite. It also self-evidently doesnt work for some managers for extended periods where their investing style is appropriate for the market conditions - long enough for an investor to gain advantage. Take Fidelity Special Situations for 25 years or whatever and Neil Woodfords income funds.

Even well known investors like gadgetmind dont really believe that the market cannot be beaten, at least that is what the investment choices suggest!

Many people across the history of investing have been convinced that they know the only right investing approach. All such approaches when tried by others seem to work some of the time but not well enough to convince. The lesson I think is that an investor does need a strategy to help avoid emotional choices, but not one that is too prescriptive.

gadgetmind

Linton wrote: »

It has been tested in the US on broadly based US funds.

Mainly in the US but also elsewhere, and quite extensively.

Even in the, admittedly very limited, US data I have read fund managers do beat the market at least sufficiently to pay their extra costs.

Some do, most don't.

If this were not so there would be good evidence that over time passive funds rise to the top of the rankings. Looking at UK data the standard trackers are always mid market.

Yes, of course they are, because active funds that underperform tend to be quietly sidelined so survivorship bias eliminates them.

The theory clearly doesnt work in some other markets at all. UK small companies being my favourite. It also self-evidently doesnt work for some managers for extended periods where their investing style is appropriate for the market conditions - long enough for an investor to gain advantage. Take Fidelity Special Situations for 25 years or whatever and Neil Woodfords income funds.

Fidelity and its star manager is certainly the exception that proves the rule, but his golden hands didn't work elsewhere, and it was also very difficult (impossible?) for anyone to have predicted his continued success based on early/mid performance.

Even well known investors like gadgetmind dont really believe that the market cannot be beaten, at least that is what the investment choices suggest!

I guess that all depends. If were to take 2% of the pot that I actively manage (which is less than 10% of my total investments) out in cash each year, and set light to it, then I'd be very surprised if I could show anything other than long term under-performance.

By the way, here is a bit of fun. Without looking up the data, which looks best, portfolio A or portfolio B?

A
Blackrock UK Dynamic
Marlborough UK Income and Growth
Close Special Situations
CIS European Growth
Templeton Global Emerging Markets
Jupiter China
Legg Mason US Equity
Invesco Perpetual Japanese Smaller Companies
Kames Global Equity

B
Blackrock UK Special Situations
Fidelity MoneyBuilder Dividend
Marlborough Special Situations
Blackrock European Dynamic
JPM Emerging Markets
Schroder Asian Alpha Plus
JPM US
CF Morant Wright Japan
Aberdeen Ethical World

jamesd

gadgetmind wrote: »

It's a testable hypothesis. It's been tested. Guess what?

No need to guess, the answer is well enough known: it's false and markets are not in general efficient. But it's still convenient for lots of analysis, just like the inaccurate but still useful billiard ball model of atoms.

As Linton has mentioned, in the US, active managers on average do beat the market before tax. They then suffer due to the way taxation in the US works, which penalises active management. The net result is some underperformance on average. But those are just averages.

gadgetmind wrote: »

Of course, some managers will always beat the market over certain timescales, but how do we know which these will be in advance?

Simple. We don't.

You might try reading my past posts here years ago observing the consistent performance of the funds in the global growth sector, something also noted in a book you've recommended here in the past, or the ability of tracker fund buyers to correctly predict which tracker funds will have the best future performance. In general picking the under-performers is easier than picking the performers, so start out by eliminating the consistently bad ones. In trackers, that'd be the ones with higher than usual fees. You still might not get the absolute best performer but at least you won't be buying a consistent underperformer.

gadgetmind wrote: »

I think it's more a question for Mystic Meg. Or at least ask two stock brokers to make sure you get three opinions.

I expect stock brokers to know something about P/E values and to be able to discuss whether they are high or low and what that implies for likely future returns. If they can't tell you that buying in at lower P/E is likely to give better results than buying at higher P/E then they may not be so good at working out whether a market is or isn't a good buy. But surely you know this already, so why imply that stock brokers can't do such things?

gadgetmind wrote: »

Yes, and when doing the lottery, always avoid numbers that don't come up too often.

You do that if you like, I'll pick the ones that are selected least often by participants, generally those above 31, unless I'm allowed to not participate at all, an even better strategy for improving expected returns in this market.