Understanding your attitude to risk and learning from mistakes

csgohan4

JohnWinder said:

Diplodicus said:

I don't understand the aversion to holding individual shares. Funds to me seem far more complicated, opaque and risky.

See if this helps. Firstly, let’s not lump all funds together. We don’t need to consider the Woodford’s and the like, only the broadly diversified, cap weighted index funds. They’re complicated, risky and opaque enough, but manageable.
The problem with individual shares is you take on market risk, the risk all companies face with economic, political, regulatory etc circumstances, but you also take on the idiosyncratic risks peculiar to that company such as the CEO walking out or a competitor popping up with a killer product. The fund holder has those risks too, but they’re diluted because they hold so little of each stock (since they hold 2000+ in the fund).
With that extra risk comes the opportunity to outperform the market or underperform the market; the fund can’t do those, since it tracks the market (closely hopefully). The fund investors can only ever get the market returns, and face market risk (plus a tiny idiosyncratic risk as above - not every company will lose its genius CEO at the same time). But the investors, as a whole group, who decide to only hold selected shares, can only get market returns also, and so your expected or average return can only be the market return despite taking more risk.
Or try this: if someone intent on holding only one stock is competing in the market with someone who holds 2000 stocks but wants 2001, then the one stock man will bid up the price of the stock until it becomes too risky to pay any more for it. Now, the 2000 stock man with the same risk tolerance will be able to pay a bit more for that same stock because it represents only a tiny risk to him. As a consequence, the one stock man (or 10 or 30 stock man) is always over paying for the risk he is comfortable in taking. It’s a bad deal.
In essence, there’s an element of gambling in it that doesn’t exist with a broadly diversified fund. No sin in that, but that’s what puts some people off individual shares.

To be fair there is always a time for individual shares, but not for beginners. I hold shares purely because of opportunity the recent economic down turn brought in March 2020 and like many others have done reasonably well in some and not so in others

Others have done better than some, I know Bowlhead invested in William Hill at their bottom, selling at their height, would probably netted x10 in value. Very shrewd and didn't occur to me a the time. He also made a decent profit on Underarmor and RDSB. 


If it was any other year, it would be index trackers all day. I hold a substantial amount in RR/IAG as well as a few others, in a way recovery stock investing. 

However on the same token I have lost money on biotech and seen my astronomical returns on CINE evaporate leading to a sell off with no loss due to inexperience and following the herd off the cliff. 

Shares are not for the faint hearted and the potential to see your share worth drop 20-30%+ in a morning is not pleasant. 

jamesd

sevenhills said:

Prism said:

It is true that many likely believed that but anyone who put the slightest bit of effort in could see that it wasn't safe at all. Woodfords fund is not a good example of a solid fund.

Are there any funds that investors should avoid now?

Any where a renowned and successful manager has a major change in what they do, besides Woodford going it alone another former star switched to China investing and did very badly.

Any fund where the human manager has changed, until the replacement has proved themselves with those assets and that specific team and fund brief.

Diplodicus

JohnWinder said:

Diplodicus said:

I don't understand the aversion to holding individual shares. Funds to me seem far more complicated, opaque and risky.

See if this helps..The fund investors can only ever get the market returns.. But the investors, as a whole group, who decide to only hold selected shares, can only get market returns also, and so your expected or average return can only be the market return despite taking more risk.
Thank you, that is a good presentation, easy to understand, concise and the arithmetic is comfortable. It helps me appreciate the appeal of broad index tracker funds. I would certainly recommend them on that basis, compared to delegating investment decisions to a paid adviser, though those unwilling to leave the safety of a deposit account will fare worse still. We all like to feel we are moving forwards all the time - "every post a winning post" - and most would seize on the promise of a bang average outcome if they could, as far as possible, avoid a backward step. Index tracker funds appear to deliver, and would be particularly suitable for those who would suffer "sleepless nights" holding a share certificate.
The only cloud on the horizon, I suppose, is that even the most passive of investors has to make an active choice at some point, unless there is a Lifetime Everything Everywhere tracker available; but a great option for many.

Or try this: bid up etc..
No thank you. I don't think this model flies quite straight. It appears conflicted and further elaboration will likely not help its cause.

In essence, there’s an element of gambling in it that doesn’t exist with a broadly diversified fund. No sin in that, but that’s what puts some people off individual shares.

I think the comparison between share ownership and gambling is misleading, implying a negative expectation. Playing sport would provide a better analogy to taking on risk imo. 

jamesd

JohnWinder said:

Diplodicus said:

I don't understand the aversion to holding individual shares. Funds to me seem far more complicated, opaque and risky.

... Firstly, let’s not lump all funds together. We don’t need to consider the Woodford’s and the like, only the broadly diversified, cap weighted index funds. ... The problem with individual shares is you take on market risk, the risk all companies face with economic, political, regulatory etc circumstances, but you also take on the idiosyncratic risks peculiar to that company such as the CEO walking out or a competitor popping up with a killer product. ... The fund investors can only ever get the market returns, and face market risk (plus a tiny idiosyncratic risk as above - not every company will lose its genius CEO at the same time). But the investors, as a whole group, who decide to only hold selected shares, can only get market returns also, and so your expected or average return can only be the market return despite taking more risk.

1. You wrote about not lumping funds together and asserted that funds can get only the market return but used trackers as an example and they can only get below market return from the share performance (but more from things like stock lending). The ones you excluded are active funds and because they don't hold the whole market they can individually do better or worse than the market depending on which shares they use and this is normally obvious when you compare the performance of the funds within a sector.

2. Individual shares don't perform the same as a whole market. That's why they are more risky and why individual investors who hold them will get different results.

3. Individual share investors as a whole won't get just market results. Individuals are more likely to get below market results due to inadequate research and monitoring and what investors as a whole get is irrelevant because it's individual investor performance that matters to people choosing the individual share route.

The market performance is the combined outcome of the share performance of everything held by everyone and that includes individuals holding shares, active funds and trackers. But nothing causes them all to have the same performance and they don't, as trivial examination of performance charts makes obvious.

If someone is content with a little below market performance in exchange for minimal effort, tracker funds are what they should be using. There's still some work because there can be significant differences in performance between tracker funds tracking the same market. That can be due to high charges for products sold to captive audiences, difference in things like stock lending or the type of replication used to try to match the market.

Step away from those and you're making a deliberate choice to not take market returns. What you get then depends on the ability of the team you choose in a fund or your own ability if you use individual shares.

Shares have lots of opacity. Funds of any type add another layer on top through their management policies, individual human and team biases and charging structures.

george4064

Been investing since 2012, here are a few things I’ve learnt along the way;

1. Try to enjoy the negative periods as much as the positive periods (buying more shares/units with the same £ each month etc)

2. Pick a strategy and stick to it, make some rules but try keep it simple.

3. Rebalance your portfolio, but not too often to let your winners run a bit.

4. Try not get suckered into star manager new fund/trust launches, I naively invested in the Newton Emerging Income Fund launch (I think this fund merged with another fund) and the Woodford Patient Capital Trust (no explanation needed!). Both of them I sold out before the s… really hit the fan.

5. Don't invest for income unless you really need that income. I’ve come to learn that for an investor seeking total return, companies paying a big dividend is often a sign that there isn’t much growth prospects for that company. (I won’t go into detail on this, but it’s well documented elsewhere).

6. Try keep your UK home bias reasonable. However much we love UK plc or how cheap we think the UK market is, it doesn’t change the fact that relative to other markets there just isn’t near enough growth prospects here in our domestic market.

7. Don’t rule out private equity investment vehicles because their fees are “too high”. I don’t have the figures to hand but it’s quite scary seeing how the number of publicly listed companies is dwindling compared to privately owned companies.

Probably more I could list, but that’s all for now.

tebbins

george4064 said:

Been investing since 2012, here are a few things I’ve learnt along the way;

1. Try to enjoy the negative periods as much as the positive periods (buying more shares/units with the same £ each month etc)

2. Pick a strategy and stick to it, make some rules but try keep it simple.

3. Rebalance your portfolio, but not too often to let your winners run a bit.

4. Try not get suckered into star manager new fund/trust launches, I naively invested in the Newton Emerging Income Fund launch (I think this fund merged with another fund) and the Woodford Patient Capital Trust (no explanation needed!). Both of them I sold out before the s… really hit the fan.

5. Don't invest for income unless you really need that income. I’ve come to learn that for an investor seeking total return, companies paying a big dividend is often a sign that there isn’t much growth prospects for that company. (I won’t go into detail on this, but it’s well documented elsewhere).

Actual the inverse is true (https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.researchaffiliates.com/documents/FAJ_Jan_Feb_2003_Surprise_Higher_Dividends_Higher_Earnings_Growth.pdf&ved=2ahUKEwjIkYSml-jyAhXXQkEAHV_0DN4QFnoECAQQAQ&usg=AOvVaw0BzEOaS7KH5i-kGpzE2Yfe&cshid=1630856888156) and in most markets historically, most of your total return after inflation came from dividends (https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/credit-suisse-global-investment-returns-yearbook-2021-summary-edition.pdf&ved=2ahUKEwi-iP7El-jyAhWhnFwKHTURB04QFnoECC4QAQ&usg=AOvVaw1TeVIBw704vh2x25VoBPHw).
Chasing growth is where people tend to fall down.
Also, especially in the US, share buybacks have overtaken dividends (https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.ineteconomics.org/uploads/papers/WP_54-Lazonick-Value-Extracting-CEO-Mod-2017.pdf&ved=2ahUKEwi0qrXrl-jyAhXxnVwKHfQCB5gQFnoECAYQAQ&usg=AOvVaw0EvRQwW5i6BkLSJ6qsVhvS). So it's a myth that a high dividend is bad because it limits growth prospects.

6. Try keep your UK home bias reasonable. However much we love UK plc or how cheap we think the UK market is, it doesn’t change the fact that relative to other markets there just isn’t near enough growth prospects here in our domestic market.

Relative to which, based on what? 

7. Don’t rule out private equity investment vehicles because their fees are “too high”. I don’t have the figures to hand but it’s quite scary seeing how the number of publicly listed companies is dwindling compared to privately owned companies.

Private equity cheats the system through asset-stripping, cost-cutting, gearing, and clever tax planning. It creates no value and is a plague within capitalism (IMHO). There is no evidence that private equity managers are on aggregate any better than tracker funds over the long run.

Probably more I could list, but that’s all for now.

I fully agree with 1-4.

Thrugelmir

jamesd said:

JohnWinder said:

Diplodicus said:

I don't understand the aversion to holding individual shares. Funds to me seem far more complicated, opaque and risky.

... Firstly, let’s not lump all funds together. We don’t need to consider the Woodford’s and the like, only the broadly diversified, cap weighted index funds. ... The problem with individual shares is you take on market risk, the risk all companies face with economic, political, regulatory etc circumstances, but you also take on the idiosyncratic risks peculiar to that company such as the CEO walking out or a competitor popping up with a killer product. ... The fund investors can only ever get the market returns, and face market risk (plus a tiny idiosyncratic risk as above - not every company will lose its genius CEO at the same time). But the investors, as a whole group, who decide to only hold selected shares, can only get market returns also, and so your expected or average return can only be the market return despite taking more risk.

3. Individual share investors as a whole won't get just market results. Individuals are more likely to get below market results due to inadequate research and monitoring and what investors as a whole get is irrelevant because it's individual investor performance that matters to people choosing the individual share route.

The market performance is the combined outcome of the share performance of everything held by everyone and that includes individuals holding shares, active funds and trackers. But nothing causes them all to have the same performance and they don't, as trivial examination of performance charts makes obvious.

If someone is content with a little below market performance in exchange for minimal effort, tracker funds are what they should be using. There's still some work because there can be significant differences in performance between tracker funds tracking the same market. That can be due to high charges for products sold to captive audiences, difference in things like stock lending or the type of replication used to try to match the market.

I'll eternally ask the question which market?  The term market is generic. There's many too choose from, not least from the increased level of accessibility of ETF's to retail investors  . Even multi asset passive fund managers make active decisions as to the markets they track and the allocations they rebalance to.  For many years lower fee costs have resulted in strong performance (aided by a broad global bull market for equities and bonds) for the likes of Vanguard. This advantage is rapidly dissipating. As the playing field levels.  If "market" returns are disappointing for a period then avoiding the dog stocks may well prove a profitable strategy.  A sector of the market the pure trackers cannot avoid. 

PS. No one is disputing the research on the S&P 500. It's the most highly researched market in the world. Not a reason to justify other markets being viewed in the same manner though. 

newatc

What have I learnt in my investing journey?

Don't over complicate things.

Try to keep costs low.

Understand your objectives and pick a portfolio strategy that fits it.

If you think you may have made a mistake fix it otherwise leave your portfolio alone.

Look at rebalancing if you are adding new money, otherwise ignore it.

george4064

tebbins said:

george4064 said:

Been investing since 2012, here are a few things I’ve learnt along the way;

1. Try to enjoy the negative periods as much as the positive periods (buying more shares/units with the same £ each month etc)

2. Pick a strategy and stick to it, make some rules but try keep it simple.

3. Rebalance your portfolio, but not too often to let your winners run a bit.

4. Try not get suckered into star manager new fund/trust launches, I naively invested in the Newton Emerging Income Fund launch (I think this fund merged with another fund) and the Woodford Patient Capital Trust (no explanation needed!). Both of them I sold out before the s… really hit the fan.

5. Don't invest for income unless you really need that income. I’ve come to learn that for an investor seeking total return, companies paying a big dividend is often a sign that there isn’t much growth prospects for that company. (I won’t go into detail on this, but it’s well documented elsewhere).

Actual the inverse is true (https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.researchaffiliates.com/documents/FAJ_Jan_Feb_2003_Surprise_Higher_Dividends_Higher_Earnings_Growth.pdf&ved=2ahUKEwjIkYSml-jyAhXXQkEAHV_0DN4QFnoECAQQAQ&usg=AOvVaw0BzEOaS7KH5i-kGpzE2Yfe&cshid=1630856888156) and in most markets historically, most of your total return after inflation came from dividends (https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/credit-suisse-global-investment-returns-yearbook-2021-summary-edition.pdf&ved=2ahUKEwi-iP7El-jyAhWhnFwKHTURB04QFnoECC4QAQ&usg=AOvVaw1TeVIBw704vh2x25VoBPHw).
Chasing growth is where people tend to fall down.
Also, especially in the US, share buybacks have overtaken dividends (https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.ineteconomics.org/uploads/papers/WP_54-Lazonick-Value-Extracting-CEO-Mod-2017.pdf&ved=2ahUKEwi0qrXrl-jyAhXxnVwKHfQCB5gQFnoECAYQAQ&usg=AOvVaw0EvRQwW5i6BkLSJ6qsVhvS). So it's a myth that a high dividend is bad because it limits growth prospects.

6. Try keep your UK home bias reasonable. However much we love UK plc or how cheap we think the UK market is, it doesn’t change the fact that relative to other markets there just isn’t near enough growth prospects here in our domestic market.

Relative to which, based on what? 

7. Don’t rule out private equity investment vehicles because their fees are “too high”. I don’t have the figures to hand but it’s quite scary seeing how the number of publicly listed companies is dwindling compared to privately owned companies.

Private equity cheats the system through asset-stripping, cost-cutting, gearing, and clever tax planning. It creates no value and is a plague within capitalism (IMHO). There is no evidence that private equity managers are on aggregate any better than tracker funds over the long run.

Probably more I could list, but that’s all for now.

I fully agree with 1-4.

@5. Apologies if I didn’t explain my point very well, the point I was trying to make was that companies with high dividend payout ratios tend to not have particularly good growth prospects ahead (hence why they are distributing their earnings than re-investing). I was not suggesting that a company paying a high dividend itself would limit its growth prospects.

Your article looks very interesting and seems to have been written by some very scholarly people in the field however I did note that the article was written in 2003 and seemed that the data observed was up until 2001. It does look like you are right that that was the best strategy during those years (reference to Figure 2. Scattergram of payout ratio vs subsequent 10 year real earnings growth), however we now live in a very different world (and markets) than back then so I personally would rather invest accordingly to forward looking articles or at least more recent articles.

If it came across that I am a pure growth investor than that was a mistake/error of judgement, I have a more balanced approach and tend to go for passive ETFs (no ‘high income ETFs), active investment trusts (no income ITs) and some individual shares (probably only LGEN is a holding I have that is considered a high dividend payer, but it’s only a small allocation and a bit of fun).

@6. Relative to most other economies, obvious one is the US. Easy to compare when you look at the sector breakdown of the major indices. UK too much in dinosaur sectors and not enough in e-commerce, technology etc.

@7. Totally respect your views and I know of those PE deals where a lot of assets are stripped out. However I think it’s quite clever how they borrow, leverage up to fund their transactions, and on the contrary have seen many examples of the PE industry bringing positive change to the portfolio companies that they invest in.

In terms of PE vs tracker funds, I tend not to compare then against each other directly. As long as the PE IT I hold is performing as it should do, I’m happy. They may be more volatile than many tracker funds but I actually quite enjoy the additional volatility, that attitude will most likely change as I get older and retirement beckons.

Alice_Holt

newatc said:

What have I learnt in my investing journey?

Don't over complicate things.

Try to keep costs low.

Understand your objectives and pick a portfolio strategy that fits it.

If you think you may have made a mistake fix it otherwise leave your portfolio alone.

      All good points, to which I would add - 

      Start early (even if your monthly contributions are small);
      Don't underestimate the impact of compounding;         
      Get to know your own investing mindset;
      Accept that no portfolio will ever be perfect;
      Don't tinker with it just for the sake of change;
      In addition to minimising costs, invest tax effectively;