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For those familiar with Lars Kroijer and his views

edited 30 November -1 at 1:00AM in Savings & Investments
101 replies 6.2K views
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  • MalthusianMalthusian Forumite
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    If the vast majority of companies under perform shouldn't it be a doddle for everyone to beat the main stock markets? All you need to do is buy the index and pick one of the components to short. Sounds easy.

    He said underperform, not go down. On average short-selling loses money because most developed stockmarkets go up in the long term. It follows that if you pick any particular share in a developed stockmarket, the statistical expectation is that it will go up in the long term. And if you short any given share, the expectation is that you will lose money.

    (Bear in mind that this is "expect" in the statistical sense. In reality there is such a large variance from investing in a single share that it feels too much like gambling for most investors, even though the expected outcome is positive. The problem with "investing" in a single share is not that you expect to lose money but that you're taking huge amounts of risk for no expected reward.)

    Not only is the expected outcome of short-selling to lose money, but with short-selling you can lose more than your stake.

    If a share underperforms by going up less than the other shares, then by shorting it you lose money, compared to if you hadn't shorted it and had simply held the index.
  • LintonLinton Forumite
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    IanManc wrote: »
    I agree with your statement that it makes sense to spread one's net as broadly as possible, but you then make the assertion that the statement means "investing outside the market cap" which it does not. That is a conclusion which you have jumped to and a choice you have made, not the automatic sequitur to the statement you made.

    I would suggest that spreading one's net as broadly as possible means choosing the broadest possible global tracker in the particular asset class you have selected. :)


    Looking at company size: Small companies are less correlated than large ones. If you invest less in high market cap companies you can invest more in lower market cap companies. Therefore you have a wider spread. For practical reasons there are virtually no small company trackers, and in tracker world what constitutes a small company can be remarkably large.


    Looking at Geography: 60%+ US seems an unacceptable risk to me. Having a cap of say 35% for any country enables viable holdings in more markets.


    And now sectors: For that one must go back to the .com boom/bust. Much of the pain could have been avoided by having a maximum % sector allocation.
  • SailtheworldSailtheworld Forumite
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    Malthusian wrote: »
    He said underperform, not go down. On average short-selling loses money because most developed stockmarkets go up in the long term. It follows that if you pick any particular share in a developed stockmarket, the statistical expectation is that it will go up in the long term. And if you short any given share, the expectation is that you will lose money.

    Yes, that's correct. I need to change my strategy slightly.

    I buy all the constituent parts of the FTSE100 except for one and I'll outperform the FTSE100 Index? Given he also said the vast majority of companies in a stock market underperform the index I'd have to be pretty unlucky to go and pick the odd one that drives the index growth.

    That'll work won't it? This time next year...
  • PrismPrism Forumite
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    sendu wrote: »
    If you're able to buy in to companies with good fundamentals at good prices and never sell, and manage to remain diversified, then great.

    That seems to have been one of the most successful approaches over the last 20 years or so rather than trying to beat the market through purely buying undervalued stocks.
  • PrismPrism Forumite
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    Yes, that's correct. I need to change my strategy slightly.

    I buy all the constituent parts of the FTSE100 except for one and I'll outperform the FTSE100 Index? Given he also said the vast majority of companies in a stock market underperform the index I'd have to be pretty unlucky to go and pick the odd one that drives the index growth.

    That'll work won't it? This time next year...

    That might well work but the benefit would be almost negligible. Better results would likely occur over many years and if you got rid of the bad companies only keeping the good ones.
  • SailtheworldSailtheworld Forumite
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    Linton wrote: »
    Looking at Geography: 60%+ US seems an unacceptable risk to me. Having a cap of say 35% for any country enables viable holdings in more markets.

    Seems like quite a call to say the World has allocated more money to the US than you think appropriate. Don't forget that the idea of trackers tempered with government bonds is for people without an edge (like me). Kroijer's advice for people with an edge (like you) is to go make money.

    That's not to say I'm not bothered about the market cap employed in the US; most people have a home bias which will have the effect of sucking in tracker money. i.e. I could potentially be overweight USA because people in the richest and one of the most populous countries in the World prefer to invest at home.

    I think I'm more worried about currency risk - exposure to non-Sterling assets is quite small as a proportion of my net worth but about 65% of my retirement savings. It's been amazing as US stock markets rise and Sterling falls but clearly this could go the other way.
  • SailtheworldSailtheworld Forumite
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    Prism wrote: »
    That might well work but the benefit would be almost negligible. Better results would likely occur over many years and if you got rid of the bad companies only keeping the good ones.

    It wouldn't really. I don't buy the premise that the vast majority of components in an index underperform and that you can just pick one at random yet have a better than evens chance that you'll get it right. If the market was so inefficient and picking just one loser so easy then everyone would be outperforming the index which, of course, is an impossibility.

    Picking losers requires as much of an edge as picking winners.
  • PrismPrism Forumite
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    everyone would be outperforming the index which, of course, is an impossibility.

    Agreed. If 100 people invest in an index against each other at least one person must lose out.
    I am not making any claims that I am able to select the winning (or non losing) companies over the long term, although I have had decent success using fund managers that do.
  • ThrugelmirThrugelmir Forumite
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    sendu wrote: »
    If you're able to buy in to companies with good fundamentals at good prices and never sell, and manage to remain diversified, then great.

    Average life span of a listed company on the LSE has reduced to 15 years now. Number of listed companies has decreased over the past 20 years with an increasing number in private ownership.
    “An investor who has all the answers doesn’t even understand all the questions.” - John Templeton
  • SailtheworldSailtheworld Forumite
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    Thrugelmir wrote: »
    Average life span of a listed company on the LSE has reduced to 15 years now. Number of listed companies has decreased over the past 20 years with an increasing number in private ownership.

    You make it sound as if companies simply disappear without trace taking investors money with them. I would've thought this is a good reason to choose a tracker - it's hard enough choosing winners without having to take a view on longevity. Then there's the first world problem of 'losing' a company and deciding what to do with all the cash and having to make further decisions without an edge.
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