An IFA who knows Monkey with a Pin

Linton

gadgetmind wrote: »

I can't see any issue as I'm using an evidence-based approach regards both selecting certain sectors and avoiding the decision of which high-fee fund to back.

Of course, it's worth noting that there are *much* more passive investors than myself. I'm an incurable INTJ and can't help but fiddle with things, but I try and ensure my fiddling is driven by a ratiocentric approach and I also restrict it to less than 5% of my main portfolios. Slight sector/cap tilting extends beyond this 5% but is still relatively mild and driven by value.

What low fee funds do you use for value and small cap investment?

If there is evidence based long term over-performance of such sectors, which has been my assertion all along challenged by your good self and others, why restrict them to 5%?

Linton

Linton wrote: »

How does this square with your previous comment that investors shouldnt even try to "beat the market" by buying the right funds?

gadgetmind wrote: »

I can't see any issue as I'm using an evidence-based approach regards both selecting certain sectors and avoiding the decision of which high-fee fund to back.

Why cant other investors do this? Why do you advise them not to try?

gadgetmind

Linton wrote: »

How do you indulge in "value" investing without the services of a manager who can distinguish between a value stock and an HMV?

Partly via "Vanguard's UK Equity Income" tracker, which I will accept is an experiment hence low exposure and my lack of long term commitment to it. I was already starting to see the thirst for yield and expected it to swing from bonds to high-yield equities, and this was a cheap way to get reasonably diverse exposure.

My other exposure is via 25 directly held high-yield equities, which are strictly speaking my wife's. Again, fees are kept low by almost zero trading and not paying any platform fees.

Both of these positions were taken back when everything was being indiscriminately sold. There are still pockets of value but nothing like we saw in late 2011, so come next rebalance, I'll probably add to everything else to reduce these a little.

And doesnt what you state has been shown, presumably in an academic paper, imply that "value" filtering on the FTSE would give better long term results than tracking the market?

The evidence for value investing is covered in "Smarter Investing", and yes, it's from academia. The advantage is very small so ...

The market which you assert cannot be beaten in the long term.

Doing this after paying high fees to a manager would be very difficult. After all, whether it's going to work at all is completely unproven. The advantage in the past has been positive but small, so moving negative is perfectly possible.

doughnutmachine

Linton wrote: »

Since these figures are averages, it could be that the majority of investors, whether in trackers or managed funds are naive in their investing buying when the going looks good and selling when its bad and so losing potential return. From the results there is nothing to say that there arent a minority of sophisticated investors gaining return with a different buy/sell approach.

Yes, it is possible that there is a “minority of sophisticated investors” making good returns on Unit Trusts by having an amazing grasp of macroeconomics. In the same way that it is possible Brad Pitt will chuck Angelina Jolie to go out with the fat girl that works at the local chippy. Ie possible but very unlikely.

Of course, I would be delighted to see any evidence that supports your personal opinion.

Anyway, is “sophisticated investors” investing in Unit Trusts not a bit of an oxymoron?

doughnutmachine

jamesd wrote: »

You have presented no data or studies that contradict it. That word "typical" is a waffle word just like "average" and tells nothing about how the more successful investors do, rather it masks the range of performances.

For the two studies you mentioned to matter you'd first have to determine whether my performance or that of gadgetmind or yourself is that of a typical investor. Or whether any specific investor we're considering is typical.

I don't assert that retail investors in general can beat the market or select the right funds. I think that most will not and do not, because I think that most just don't pay much attention to what they are doing and in this field as in all others, get rewarded appropriately for their lack of effort.

I'd also want to know whether the studies were using mean investor performance or performance weighted by money invested. That is, whether lots of poor-performance investors with little money were reducing the apparent performance and masking the performance of the better ones.

You were asking what “investors really do”. I provided evidence of what “investors really do”: that is the average investor was poor at timing investments. Now you imply that some private investors have the magic touch of finding the next winning unit trust. Do you actually have any evidence to back up this theory?

I have to admit that I think the idea of “retail investors” being able to decide what unit trusts will be the next winners as slightly amusing. The academic evidence shows that fund management is a zero sum game (before fees). Does anyone really believe that “punters” armed with no more economic analysis than a copy of the Sun newspaper and Sky telly know the next economic trends? After all, if the “professionals” can’t get it right what chance does everyone else…

Linton

doughnutmachine wrote: »

You were asking what “investors really do”. I provided evidence of what “investors really do”: that is the average investor was poor at timing investments. Now you imply that some private investors have the magic touch of finding the next winning unit trust. Do you actually have any evidence to back up this theory?

My evidence is experience over the past 10+ years.

Solving the problem of poor timing is easy - dont try to time, buy with the intention of holding for ever and dont let downturns scare you into foolish reactions.

In my experience choosing the right funds is not difficult. Choose sectors that you believe are likely to outperform the global average and then choose funds that invest in those sectors and are likely to be good enough based on research into the fund and its managing company. You dont need to find "the winning fund". Choice of sector is much more important. 2 funds, one in the Far East and one in Small Companies, which I have held for just over 10 years are showing a 5-fold increase in value over that time and are continuing to show consistently high growth. My investments in my chosen sectors are showing an average 15% rate of return (4-fold increase in value). Of course one could have gone for a FTSE All Share tracker with 9.5% rate of return.

Other sectors which have provided me with pleasing growth over an extended time period are Raw Materials, and Emerging Markets. My Small Company investing has been mainly UK, but I am now moving into other regions.

What can you offer from your experience?

doughnutmachine

Linton wrote: »

My evidence is experience over the past 10+ years.

Solving the problem of poor timing is easy - dont try to time, buy with the intention of holding for ever and dont let downturns scare you into foolish reactions.

In my experience choosing the right funds is not difficult. Choose sectors that you believe are likely to outperform the global average and then choose funds that invest in those sectors and are likely to be good enough based on research into the fund and its managing company. You dont need to find "the winning fund". Choice of sector is much more important. 2 funds, one in the Far East and one in Small Companies, which I have held for just over 10 years are showing a 5-fold increase in value over that time and are continuing to show consistently high growth. My investments in my chosen sectors are showing an average 15% rate of return (4-fold increase in value). Of course one could have gone for a FTSE All Share tracker with 9.5% rate of return.

Other sectors which have provided me with pleasing growth over an extended time period are Raw Materials, and Emerging Markets. My Small Company investing has been mainly UK, but I am now moving into other regions.

What can you offer from your experience?

Tbh I agree that being in the right sector has to be one of the key things to get right to achieve good investment returns. But you seem to be implying that it’s easy to know which sectors will perform well over the next decade(s)? I honestly don’t see how even a highly intelligent investor can accurately predict what will be the economic themes over the next decade. For instance, I don’t remember anyone saying back in 2000 that most of the British banks will go effectively bust that decade. I don’t recall anyone saying that gold would have a stratospheric performance either…..

If you don’t mind me asking, what skill sets do you have that the millions of other investors don’t have? All those professional fund managers seem to struggle to forecast future winning/ losing sectors, it just seems strange that a retail investor is showing the way while all those double PhD rocket scientists are floundering by the wayside. Also why did you pick small companies in other regions ahead of the myriad of other investment sectors? I am genuinely interested why that investment class will offer better returns than every other.

My experience is that people that gamble on horses only talk about the times they won…My experience also tells me that sometimes people get lucky and think they have a unique skill.

Linton

doughnutmachine wrote: »

Tbh I agree that being in the right sector has to be one of the key things to get right to achieve good investment returns. But you seem to be implying that it’s easy to know which sectors will perform well over the next decade(s)? I honestly don’t see how even a highly intelligent investor can accurately predict what will be the economic themes over the next decade. For instance, I don’t remember anyone saying back in 2000 that most of the British banks will go effectively bust that decade. I don’t recall anyone saying that gold would have a stratospheric performance either…..

If you don’t mind me asking, what skill sets do you have that the millions of other investors don’t have? All those professional fund managers seem to struggle to forecast future winning/ losing sectors, it just seems strange that a retail investor is showing the way while all those double PhD rocket scientists are floundering by the wayside. Also why did you pick small companies in other regions ahead of the myriad of other investment sectors? I am genuinely interested why that investment class will offer better returns than every other.

My experience is that people that gamble on horses only talk about the times they won…My experience also tells me that sometimes people get lucky and think they have a unique skill.

Too many questions!! Lets try one: Small Companies

Why do I believe non-UK Small Companies a good bet? Looking at the UK first: perhaps the key factor is that the market is far from perfect:

1) Many small companies shares are rarely traded, and/or a significant % of the shares may be held by the directors and friends. Market prices dont necessarily reflect a company's value.
2) Data is difficult to find on individual companies, certainly for the private investor.
3) The companies are too small for the large funds to take an interest - they couldnt buy enough shares on the market to make it worth their while.
4) The absence of a meaningful market makes life difficult for the trackers, as does the illiquidity of some of the shares.

So there is an opportunity for small and medium sized funds to develop expertise in a range of small companies and personal contacts with senior management that other people would find difficult to match.

Then the clincher - if a small company does hit the big time enormous profits can be made. If it fails you can only lose your initial investment.

Next we have the evidence. Look at the trustnet data, its not too different when I looked at it 10 years ago. There arent many funds, a fairly high % have made very good 10 year returns easily beating the major indexes with only a few being complete dogs.

In choosing a fund I tend to focus on the top 10% over 10 years. Check that its performance is reasonably spread over time, check that it didnt perform unusually badly in the slumps, check its size. If the fund is very small, say a few £M then it might not have the resources to do the research. If its too large, say >£500M, then it could have difficulty finding good places in which to invest. Check whether the investments it currently holds look sensible and correspond with the size of company one is after - "small companies" are not necessarily small! I also look at the sectors a fund invests in. For example too much technology is a warning sign - my working experience suggests that skills in technology dont necessarily imply skills in business management.

Then one was to wait. Small companies funds are more volatile than say the FTSE100. So they outperform in the good times and under perform in the bad. It may take time for their advantages to win through significantly. But that's fine for me. I am deeply uninterested in timescales of less than say 5 years and like to invest with an eye on 20+ years. (Well I try).

Now why a move into other regions. I fear some of the highly lucrative markets of the past 10 years, particularly the major Far East and EM countries, are becoming too mainstream as evidenced by the appearance of trackers. I am sure they will continue to provide better than FTSE returns, but perhaps the best days are over. But I feel its too early to look too seriously at many of the the less developed EM opportunities. There simply arent yet the companies available in which to invest, though perhaps Malaysia, and Thailand could be considered.

So if one wants to continue investing in the more emergent emerging markets the next step could be to look at Small Companies and see if we can get the same benefits that are possible in the UK.

And of course there is Europe and the US. US could be well researched, but I would hazard a guess that Europe isnt.

jamesd

For another, look at say the PE of European stock markets in general compared to say the PE of the US market. That leads to some likely knowledge about which is most likely to have better performance over the next few years, but not an absolute guarantee.

Or look at gilts vs commercial property, one at high prices, the other currently unpopular, likely to move in opposite directions during an economic recovery. The speculation required is to believe that there will be an economic recovery, which isn't guaranteed but is very likely. Japan providing the counter-example.

Or skip those and look at the performance of an unleveraged ETF and a doubly leveraged ETF, both tracking the same market. It's knowable in advance that one will have roughly twice the volatility and long term gains of the other. But not guaranteed, there's always that chance that the market could not move or not move up or that the leveraged ETF might have high enough tracking errors to frustrate the expected results.

There are no guarantees about those things but the past behaviour of markets suggests that the outcomes are somewhat predictable. Just doesn't guarantee it and definitely doesn't guarantee timing.