Understanding your attitude to risk and learning from mistakes

JohnWinder

Diplodicus said:

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.

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. 

Perhaps the model is weak; probably, more like. But can you tell us its weaknesses. We all hope for a better understanding of how the world works.

As to gambling. The analogy is less than perfect. With gambling the 'house' wins; with share ownership the expected return is market return (in the mathematical sense) I suppose. Perhaps 'having a go' or 'trusting one's hand' or 'being in the running' is closer to it.

tebbins

george4064 said:

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.

Not at all, I welcome a good discussion!
@5 yes that first source is old and very much relates to the dot-com/Enron era, which is quite specific. The Lazonick paper suggests genuine reinvestment - including importantly in developing and retaining people for the long-term (I think human capital is oft overlooked) - hasn't been taking priority over investor payouts and substituting M&A as "capex". M&A is just assets changing hands, a zero sum game. So i agree that high total payout (dividends + buybacks) ratios can be a concern i.e. value-extraction.

My point is more that a sound business, that generates enough spare cash to payout to investors after costs, tax and capex, demonstrably has a working business model that perhaps some longshot growth company doesn't (I am straw Manning and using emotive language I admit). I would see this as a balanced view in between growth and income.

Re 6 I think there's a lot to be said for longevity, I think the average age of the FTSE 100 is about a century, of the S&P500 is about 18. If you were betting on who had the better approach to life, would you pick a fresh adult or someone who'd made it to 100? Just because they are old does not mean they are slow. The FTSE 100 is still a net equity issuer, still raising capital unlike the S&P500 since 1982 for which buybacks exceed dividends and equity issuance. The 100's dividend payout ratio to me implies working business models. If you take out speculation and buybacks pushing up the S&P500s price and doing the opposite to the FTSE 100 since the latter started to underperform in the mid 2010s, I suspect FTSE 100 earnings and dividends have actually grown faster.

Re 7 it's not that i don't think PE aren't clever, it's more that while the rest of is have to play the game of providing goods and services others value to earn a living, PE cheats the game, it's a capitalism hack. I don't like it. I think PE should be restricted to long-term buyers only.

Until the 1990s, nearly 90% of UK plc was owned at home, now thanks to the globalisation train the rest of the world is the majority owner (https://www.ons.gov.uk/economy/investmentspensionsandtrusts/bulletins/ownershipofukquotedshares/2018#beneficial-owners). This is a separate issue, perhaps I should write a blog about the malaise in 21st neoliberal British capitalism.

Diplodicus

The “outbid model” does not impress. Firstly, a retail investor in mainstream stocks doesn’t move the market. But if he did, overbidding would be a losing strategy. In reality, both the discriminating and the diversified investor trade side by side but, because the discriminating investor is trading with more conviction he, if anyone, should be happier with the deal. So the presentation doesn’t work as a psychological prop either.

It doesn’t matter how you spread your chips on the roulette table; whether you play red or one number or any combination, expected return is the same. But around the table, winners and losers. Most people would rather not tempt fortune, even if the house were paying over the odds, and prefer a strategy that, as far as possible, eliminates chance and leads to an average outcome. Which is where your preferred models are really useful. Your point.

 I prefer the analogy of playing sport to taking on risk. There’s a good reason sport is on the school curriculum, besides keeping our children fit and cultivating future Olympians. Those are good results but even more importantly, sport should show people how to be good losers as well as good winners. Then our youngsters will have a healthy tolerance for the buffeting life is going to give them later, and be happier with their fortune. My point. 

older_and_no_wiser

Well, my lessons learnt after being invested for 30+ years but only really being aware of what it's all about for 6 months...

Stick with your choices and don't over check your investments. I'm guilty of this. I have apps on the phone and check my pensions and investments every day. I really shouldn't but I'm addicted!

Invest mainly in Global trackers and multi asset funds (funds of funds).

Diversify the above with a few satellite active funds in emerging markets and small caps. These are the areas where an active fund can be an advantage. These will satisfy your desire to dabble but not put your portfolio at risk if they underperform. 

Don't watch too many YouTube videos on investing. Again, I'm guilty of this as it plants so many seeds and you start doubting yourself. However, a few good channels will help you with a strategy. Eg. Pension Craft and Meaningful Money with Pete Matthew.

Ask questions on these forums. So much good advice here! 

DiamondLil

Been investing since 1994; my attitude to risk is the same as it's always been - hope for the best, accept that the worst is possible and be comfortable with that.

In the early days, I simply drip-fed monthly and forgot about it, checking only every six months when the paper statements arrived by post.

Now retired for 18 years, and with the advent of technology, I can check more often; but if anything, my attitude to risk has become more adventurous. I have much less time remaining in which to enjoy my retirement so the risk isn't as great for me as when approaching or just beginning retirement.

JohnWinder

The “outbid model” does not impress.

True, retail investors don't move the market, or do many active fund managers whose fund hold 50 stocks for that matter. Nonetheless, the problem still remains for the 'one-stock' investor, or the two-stock or even 50-stock man if it's possible to own even more. The people who own many stocks face little risk in buying another stock because its failure will barely affect them, unlike the person buying only one stock. The price is indeed set not by the retail one-stock man, but by the totality of all active investors, many of whom can and do hold many stocks. Those many-stock people are happy to pay higher prices for any one stock because it represents little risk to them; not so the one-stock man who must pay their prices but take on more risk.

It's called undiversified risk, because it's the risk that comes with not being as diversified as you can be. And, so the theory goes, you shouldn't expect to be rewarded for taking undiversified risk because you don't need to take that risk. Companies will pay us a return for taking the risk of investing with them, and they will sell their stock for as high a price as they can which is the price the diversified investor is prepared to take. The undiversified investor has to pay the same price for the stock but is taking on more risk but gets the same return as the diversified investor - uncompensated risk. You don't need to take it and you don't get rewarded for it.

Just because you trade with conviction doesn't get you a better deal, even if you feel happier with the deal. Now, as to the size of the effect, I have no idea.

 I prefer the analogy of playing sport to taking on risk.

True, taking risk at sport can teach you how to take the good results with the bad. But we're talking about adults here, investing, gambling or playing sport. Losing at sport is a risk for adults as investing is, but that doesn't illustrate how one-stock investing is more or less risky than multi-stock investing. Investing, you can choose to either get market returns or you can take the 'one-stock 'risk on getting more or finishing up with less - that's gambling at its heart I think.

Alexland

older_and_no_wiser said:

Don't watch too many YouTube videos on investing. Again, I'm guilty of this as it plants so many seeds and you start doubting yourself. However, a few good channels will help you with a strategy. Eg. Pension Craft and Meaningful Money with Pete Matthew.

These are the by far some of the most sensible Youtubers and have both admitted that they invest 80%+ of their S&S money in the Global All Cap index. It just goes to show you can have a keen interest in the detail of investments and personal finance while also having the self control to run a sensible long term portfolio.

older_and_no_wiser

Alexland said:

while also having the self control to run a sensible long term portfolio.

"Self control"....oh yes, very important! I'm still working on that one ;-)

Alice_Holt

older_and_no_wiser said:

Don't watch too many YouTube videos on investing. Again, I'm guilty of this as it plants so many seeds and you start doubting yourself. However, a few good channels will help you with a strategy. Eg. Pension Craft and Meaningful Money with Pete Matthew.

      Monevator is very helpful source of info -  https://monevator.com/highlights/


     When I first started investing in the early 1980's there wasn't a great deal of information available. Reading the Money Observer monthly magazine and the FT helped improve my understanding, but not before I'd made a few missteps (e.g an insurance linked investment product with front loaded commission fees ! ). 
   I then settled on global IT's (Alliance, Bankers, Scottish Mortgage, etc) purchased through their low cost savings schemes, together with UK All Share trackers. My intention, at that stage, to invest monthly and build capital from income, later enabled me to comfortably retire at 51 (after redundancy). I subsequently moved to a completely new career after volunteering at my local advice charity. 

   There is a lot to be said for investing with the aim of achieving an element of financial independence.  
  

sevenhills

Alice_Holt said:

     When I first started investing in the early 1980's there wasn't a great deal of information available. Reading the Money Observer monthly magazine and the FT helped improve my understanding, but not before I'd made a few missteps (e.g an insurance linked investment product with front loaded commission fees ! ). 
   

I forget where I read it, but it stated that the online investor now has more information available than the pro-investor back in the day.