How to do your own research?

Linton

seacaitch wrote: »

........

The "narrower" your investment strategy (ie. the further you depart from the market portfolio and towards one focused on a specific theme or element), the greater the opportunity for dramatic outperformance, but also the greater the opportunity for underperformance when conditions happen to no longer favour your specific focus.....

These considerations are precisely the main reason for my avoidance of simple index investing. The market's over-enthusiasm for different sectors at different times coupled with market capitalisation weighting can lead to a focus on a small number of very large companies in a limited range of sectors. This causes unnecessary volatility as economic factors and fashion change and to loss of performance whilst the allocations slowly adjust to a new norm.


In the absence of suitable funds with that objective I believe one can achieve a more balanced and stable allocation over the long term oneself than by investing in an index,

seacaitch

sebtomato wrote: »

Well, I have been investing for 15 years on the stock market, and have done well so far. You are entitled to your opinions and views, but no need to insult others'.

I didn't write it to insult, or to be contentious, more an observation of fact.

Up-thread Alexland wrote: "maybe their strategy happened by chance to be in a sweet spot for certain prolonged market conditions during an economic cycle? With so many active managers it is inevitable that some will have done well for 5 years."

And what he wrote is something that happens again and again.

Strategies find themselves performing well for periods of time, sometimes short periods, sometimes very lengthy periods, and then exactly the same strategy can perform poorly for very extended periods of time. Anyone who's observed the market over a decent period should know this. I've know idea why you suggest it is otherwise. I didn't bother listing examples ("trivial exercise") because it is so commonplace.

sebtomato wrote: »

As I said, it's all a gamble and bet anyway. If you think you can predict the future directions of stock markets beyond just looking at past data and extrapolating, then I can only assume you are the most successful fund manager around and/or a billionaire. Then it's to wonder why you can be bothered posting on this forum.

That looks like a reply to a different post to the one I wrote. I'm not predicting much of anything. Go and read again what I did actually write.

My view, as stated earlier, is that if people choose to invest actively then their focus should primarily be on the investment process being applied, not on the recent past results that the process happened to have produced, a recent period that the future will look differently to, and possibly look very differently to.

Whether you invest yourself, or outsource the task to a 3rd party, the only aspect you/they have any control over is the investment process - not the market conditions that arose - and that that, the process, should therefore be your focus.

People tend to use past performance as a shortcut or proxy for "soundness of process", but it's not reliable as such and can be extremely misleading, which is key. Afterall, returns are the result of process + market conditions, with the latter aspect often and easily swamping the former.

If you don't want the very difficult task of gauging the soundness of any given invest strategy (process) or to timing the suitability of a given strategy to present/coming market conditions then the clear solution is to avoid that and instead invest via a proxy for the market portfolio, tailored to your risk/volatility appetite.

masonic

sebtomato wrote: »

As I said, it's all a gamble and bet anyway. If you think you can predict the future directions of stock markets beyond just looking at past data and extrapolating, then I can only assume you are the most successful fund manager around and/or a billionaire. Then it's to wonder why you can be bothered posting on this forum.

If it were all just "a gamble and bet", then I, and I presume several others here, wouldn't do it. If you don't understand the clear difference between buying an investment and placing a bet, then perhaps some background reading is warranted. One key difference is the acquisition of assets which have intrinsic value and are productive (in most cases). Of course one can gamble on the short term performance of such assets (day trading, derivatives), but investing usually involves a much longer timeframe and that, along with diversification, serves to minimise risk compared with gambling to the extent that it no longer bears any resemblance to the latter. If you understand the drivers of markets, then that might disabuse you of the notion that their general direction over the long term cannot be predicted other than by extrapolation (which would be taking a gamble).

This forum is frequented by people at all stages of investing proficiency. Someone's willingness to post here should not be taken as evidence they are unsuccessful or don't know what they are talking about.

sebtomato

masonic wrote: »

If it were all just "a gamble and bet", then I, and I presume several others here, wouldn't do it. If you don't understand the clear difference between buying an investment and placing a bet, then perhaps some background reading is warranted.

I am sorry, but anybody investing on the stock market needs to understand it's a gamble...otherwise, don't do it. I have understood a long time ago it's a bet, and I am doing it because there are not many alternatives to make money, and so far, I have been winning overall.

You are indeed investing in assets, but their valuation can be debated (for instance, all those companies with $$$ market caps but not profitable), and a lot of the markets are moving based on sentiments as opposed to real financial data. Anything can happen to any company anyway (e.g. BP in serious trouble by only one of its oil rigs).

Also, either past performance can be used to state that, over a long period, returns have been positive, or past experience/extrapolation can't be used. It's either one or the other, people can't have both arguments.

Anybody who doesn't think it's a gamble can advise on:
* US companies over valued or not? US markets due for some corrections?
* UK market likely to do well or not? Will Brexit have a negative impact? Will the pound go up or down against the EUR and USD? This will impact many FTSE100 companies
* Interest rates going up, down or staying the same?
* Would investing in bonds soften/balance a drop in shares, as traditionally the case?

If you don't know the answer to those questions for sure, then I am afraid...you are gambling. Stock markets could crash and not recover for 10 years, if past data cannot be used to predict future performance...

Linton

sebtomato wrote: »

I am sorry, but anybody investing on the stock market needs to understand it's a gamble...otherwise, don't do it. I have understood a long time ago it's a bet, and I am doing it because there are not many alternatives to make money, and so far, I have been winning overall.

You are indeed investing in assets, but their valuation can be debated (for instance, all those companies with $$$ market caps but not profitable), and a lot of the markets are moving based on sentiments as opposed to real financial data. Anything can happen to any company anyway (e.g. BP in serious trouble by only one of its oil rigs).

Also, either past performance can be used to state that, over a long period, returns have been positive, or past experience/extrapolation can't be used. It's either one or the other, people can't have both arguments.

Anybody who doesn't think it's a gamble can advise on:
* US companies over valued or not? US markets due for some corrections?
* UK market likely to do well or not? Will Brexit have a negative impact? Will the pound go up or down against the EUR and USD? This will impact many FTSE100 companies
* Interest rates going up, down or staying the same?
* Would investing in bonds soften/balance a drop in shares, as traditionally the case?

If you don't know the answer to those questions for sure, then I am afraid...you are gambling. Stock markets could crash and not recover for 10 years, if past data cannot be used to predict future performance...

In the short term, say up to 5-7 years,investing is a gamble as speculation leads to major price fluctuations. In the long term it is not, as long as it based on broad ownership of a % of the world's companies and the profits that come from them. If investing in the long term is a gamble that would imply that the world economy is at serious risk of a long term, perhaps terminal, decline. Under those circumstances, the value of your investments would probably be a secondary concern.


So long term investing makes sense - if it's successful you win, if it's not it doesn't matter anyway.



If someone seriously believed that long term investing is a pure 50/50 gamble they would be foolish to do it.

sebtomato

Linton wrote: »

In the long term it is not, as long as it based on broad ownership of a % of the world's companies and the profits that come from them. If investing in the long term is a gamble that would imply that the world economy is at serious risk of a long term, perhaps terminal, decline. Under those circumstances, the value of your investments would probably be a secondary concern.


So long term investing makes sense - if it's successful you win, if it's not it doesn't matter anyway.



If someone seriously believed that long term investing is a pure 50/50 gamble they would be foolish to do it.

But you are never going to invest in all listed companies in the world, so therefore you are going to take a gamble to invest in some areas, for instance having 30% of your portfolio in UK FTSE100 companies, 20% in large US market caps, bonds etc.

It's perfectly possible that some areas will be flat/depressed for very long periods of time (it happened in Japan) or that stock valuation may never reached the profits ratios they are at currently.

Based on past experience, long term investing has always been positive, but that could perfectly change. I am sorry for people who didn't realize it was all a gamble, with so many parameters/factors that can't be controlled/predicted...

Linton

sebtomato wrote: »

But you are never going to invest in all listed companies in the world, so therefore you are going to take a gamble to invest in some areas, for instance having 30% of your portfolio in UK FTSE100 companies, 20% in large US market caps, bonds etc.

It's perfectly possible that some areas will be flat/depressed for very long periods of time (it happened in Japan) or that stock valuation may never reached the profits ratios they are at currently.

So invest in all areas.

Based on past experience, long term investing has always been positive, but that could perfectly change. I am sorry for people who didn't realize it was all a gamble, with so many parameters/factors that can't be controlled/predicted...

It is uncertain, which is different to a gamble. A true gamble implies a low chance of a very high reward and a high chance that you will lose your stake with a near certainty that you will lose out in the long term - eg a lottery.

Investing is not like that - there is a very low chance you will make a short term life changing gain, a moderately high probability that you will make a short term loss, but a high probability that you will make a long term worthwhile gain. The only eventuality that you would cause you to lose your stake is total world economic collapse.
There are activities with a far higher risk of catastrophic failure that you do every day.

masonic

sebtomato wrote: »

I am sorry, but anybody investing on the stock market needs to understand it's a gamble...otherwise, don't do it. I have understood a long time ago it's a bet, and I am doing it because there are not many alternatives to make money, and so far, I have been winning overall.

You may be gambling on shares for all I know. As alluded to by Linton above and me in my previous post, if you understood a little more about what drives markets you'd be able to invest without taking risks akin to gambling.

You are indeed investing in assets, but their valuation can be debated (for instance, all those companies with $$$ market caps but not profitable), and a lot of the markets are moving based on sentiments as opposed to real financial data. Anything can happen to any company anyway (e.g. BP in serious trouble by only one of its oil rigs).

The market price is what the asset can be acquired or sold for and is the best price a buyer and seller can both achieve. Opinions about whether something is overvalued or undervalued at any snapshot in time is largely irrelevant. You seem to be suggesting that it is necessary to correctly value companies and successfully time the market to be successful in investing. No wonder you think it is a gamble. There is a breed of investors who set their strategy based on their own objectives, remain invested through thick and thin, only making changes when their objectives change or an investment no longer meets their needs, and pay little attention to sentiment and timing, yet very reliably do well out of investing.

Also, either past performance can be used to state that, over a long period, returns have been positive, or past experience/extrapolation can't be used. It's either one or the other, people can't have both arguments.

I said "If you understand the drivers of markets, then that might disabuse you of the notion that their general direction over the long term cannot be predicted other than by extrapolation (which would be taking a gamble)"

You have now introduced the statement: "past performance can be used to state that, over a long period, returns have been positive", it wasn't something I stated. It is clearly true that past performance can be used to state returns have been positive in the past. It would be dangerous to extrapolate that out into the future and state future performance will mirror past performance without any understanding of why.

The understanding of why is what I would encourage you to research. That's what I meant by "the drivers of markets" and Linton has given you a big clue. I'm not going to attempt to go into that any further as the information is readily available and better presented than I'd achieve here.

Anybody who doesn't think it's a gamble can advise on:
* US companies over valued or not? US markets due for some corrections?
* UK market likely to do well or not? Will Brexit have a negative impact? Will the pound go up or down against the EUR and USD? This will impact many FTSE100 companies
* Interest rates going up, down or staying the same?
* Would investing in bonds soften/balance a drop in shares, as traditionally the case?

If you don't know the answer to those questions for sure, then I am afraid...you are gambling. Stock markets could crash and not recover for 10 years, if past data cannot be used to predict future performance...

You seem to be advocating gambling if you think you should be picking investments or whether to invest or not based on your opinions about those questions. What I'm saying is there is another way.

Whether or not past data can be used to predict future performance, stock markets could crash and not recover for 10 years. Stock markets are guaranteed to crash, they do it with regularity. There is precedent for them not recovering for 10 years. That's an example of how past performance can be used to evaluate the possibility of a future event. Looking at the statistical distribution of returns over historic 20 year periods and using that data to forecast the likelihood of achieving such returns in the future can be a valid analysis provided you have some understanding of how those returns came about so as to build confidence the drivers of those returns are not now absent. However, simply extrapolating that market performance over the last 10 years is a good guide to market performance over the next 10 years, OR that markets have got ahead of themselves in the past 10 years so returns over the next 10 years will be poor and you're better off selling up, would not be wise. Nor would backing a star fund manager because of their track record while overlooking a change in their investment strategy. So there is nothing fundamentally wrong with using past performance, but it really ought to be more nuanced than extrapolation and just one factor to consider among several.

Thrugelmir

sebtomato wrote: »

It's perfectly possible that some areas will be flat/depressed for very long periods of time (it happened in Japan)

Japan is a historic example of what happens when a market bubble bursts and reality sets in. Secular stagnation is precisely what the Central Banks have been trying to avoid since the GFC.

bostonerimus

The only research I do is strategic ie looking at efficient frontiers and sensible asset allocations. Then I just implement that with a few index funds, I don't bother with individual fund research past what the fees are.