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  • FIRST POST
    • JustAnotherSaver
    • By JustAnotherSaver 11th Aug 19, 7:08 PM
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    JustAnotherSaver
    For those familiar with Lars Kroijer and his views
    • #1
    • 11th Aug 19, 7:08 PM
    For those familiar with Lars Kroijer and his views 11th Aug 19 at 7:08 PM
    I've been meaning to ask this on here for some time now but keep failing to get round to it. There was a bit in the book that if i remember right i wanted to refer to but it looks like i've left the book at work. There was also a thread on here i saw within the last month or so that made me think of this even moreso but i've ended up leaving it that long that i can't find it now. Typical


    Someone on here, i forget who, suggested i read the book, so i started & a lot of what he says seems to make sense to me. "Do you have an edge" gets repeated throughout. No i certainly do not is my answer.

    A couple years ago i had another book suggested to me on here & Lars Kroijer seems to be basically echoing that one, or at least so far as i've read he seems to be echoing it.


    The more i read it the more i agree that not only do i not have an edge but how do 99% of people have an edge? Likely they do not. They're either lucky or i don't know what.


    Which brings me here. From reading in these forums, i could be wrong but it appears that the majority and not the minority believe they have an edge, certainly amongst the regular posters and it makes me wonder - why is that.


    The other book i had (name of which i forget as i've loaned it out although i can try and get the title if it helps any) basically suggested cheap multi asset index trackers (i'm hoping i've got the correct term down there, i have a habit of not doing!) are the best way forward for the average Joe and that historically they outperform managed funds.

    I think this is the point someone on here steps in and says absolutely everything is managed anyway. I don't know enough to argue that point but clearly that person must know what these others are on about when they refer to managed vs otherwise?
    The Lars Kroijer Investing Demystified book i'm reading seems to be going down the same path, as far as i've read.



    The thread on here that i referred to which was posted recently, many spoke of actively managed funds in their portfolio and how it is either totally actively managed or mostly actively managed. So when i'm reading that most people don't have this 'edge' that Lars Kroijer mentions in his book, i'm wondering ... how come most of the regulars on MSE actually do??


    I understand that the responses to this are probably going to result in me questioning life itself and my mind will explode from the pushing and pulling - how people on both sides of the fence make sense and i don't know who's 'right' but what the hell. After reading the book i'm just curious on the stance from others.

Page 5
    • Thrugelmir
    • By Thrugelmir 17th Aug 19, 9:05 AM
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    Thrugelmir
    So you are saying that a diversified portfolio wouldn`t have performed better than one heavy on Japan based investments, and that somehow people didn`t know that markets can crash and diversification can offset this to an extent back then?
    Originally posted by Crashy Time
    I simply making my observation on the basis that I worked in the investment department of FPLO for some time in that era. Hence my comment of it being a very different investment world. Japan became an economic powerhouse in the 70's. Exchange control restrictions were prevalent , not possible for foreigners to buy shares in many overseas markets. Not that there was the research available to make informed decisions. Corporate Governance was likewise much poorer. The top Japanese companies therefore appeared almost Blue Chip with there huge export potential. Sony Walkman was the Apple iphone of it's day.

    Likewise there was no robo trading to maintain portfolios. Systems were paper based. Settlement of trades was measured in days and weeks , not seconds. There were no "Vanguards" offering low cost options to small investors.

    The MSCI has 1651 constituents. The top ten are currently all US companies accounting for around 13% of the index. If they lost 60% of their value permanently what's the potential impact on your long term return? Crashes aren't always just numerical events.
    Last edited by Thrugelmir; 17-08-2019 at 11:25 AM.
    “If the financial system has a defect, it is that it reflects and magnifies what we human beings are like. Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility.”
    ― Niall Ferguson
    • Sailtheworld
    • By Sailtheworld 19th Aug 19, 8:32 AM
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    Sailtheworld
    As an investor you'll never stop learning. Keep an open mind. Read, research, attend and listen. Perhaps you'll have inside knowledge of the industry you work in.

    There's a place for passive and active funds within a diversified portfolio. As there's a universe of investment opportunities out there.

    Suggest you read "Harriman's New Book of Investing Rules: The Do's and Don'ts of the World's Best Investors". A well balanced book that will open up your horizons.

    If everyone trod same road there'd be no market so to speak. As a private investor there'll be opportunities to exploit. Unearthing them is the art. Time and patience is a neccessity. As not a question of simply taking wild punts on speculative price movements.
    Originally posted by Thrugelmir
    Amazon, Netflix etc are todays darlings. How long for who knows.
    Originally posted by Thrugelmir
    Seems like a contradiction. You're intelligent, read, research, attend and listen but you don't know any more than a dullard like me as to when (or if) Amazon & Netflix will fall from grace. I may as well buy a tracker, attend a few less events (which are nothing but sales pitches anyway) and use the spare time to invest in exercise or relationships.

    Also, it's to be expected that if we work in an industry that we will have higher than average knowledge of that industry compared to the average punter but it's not that helpful. If I work for a telecomms company and earn £100,000/ year, have a company pension and save in the sharesave then don't I already have enough exposure to telecomms?
    • Sailtheworld
    • By Sailtheworld 19th Aug 19, 8:55 AM
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    Sailtheworld
    The MSCI has 1651 constituents. The top ten are currently all US companies accounting for around 13% of the index. If they lost 60% of their value permanently what's the potential impact on your long term return? Crashes aren't always just numerical events.
    Originally posted by Thrugelmir
    You're hinting that the MSCI is overweighted in its top ten constituents. Asking a question where the answer is 7.8% doesn't actually add any value in terms of knowing what to do about it.

    To add value I need to know (or know someone who knows) that (a) this weighting is going to be a drag on returns and (b) what I should buy and sell to correct it.
    • Linton
    • By Linton 19th Aug 19, 9:03 AM
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    Linton
    Seems like a contradiction. You're intelligent, read, research, attend and listen but you don't know any more than a dullard like me as to when (or if) Amazon & Netflix will fall from grace. I may as well buy a tracker, attend a few less events (which are nothing but sales pitches anyway) and use the spare time to invest in exercise or relationships.

    Also, it's to be expected that if we work in an industry that we will have higher than average knowledge of that industry compared to the average punter but it's not that helpful. If I work for a telecomms company and earn £100,000/ year, have a company pension and save in the sharesave then don't I already have enough exposure to telecomms?
    Originally posted by Sailtheworld

    I agree with your analysis but not your conclusion on using a tracker. Despite your lack of knowledge as to the future by using a market capitalisation weighted tracker you are putting a higher % of your money into Netflix and Amazon (and Facebook and Google) than into all their possible competitors combined. How does this make sense?


    On investing in your own industry you must be right that this an extra risk were that to mean investing in your employer. However you may have a greater insight as to which companies are worth investing for the future than the average investor. Unless you believe Telecomms as an industry could have a doubtful future investing in competitors could diversify away some of your employment risk.
    • Sailtheworld
    • By Sailtheworld 19th Aug 19, 10:02 AM
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    Sailtheworld
    I agree with your analysis but not your conclusion on using a tracker. Despite your lack of knowledge as to the future by using a market capitalisation weighted tracker you are putting a higher % of your money into Netflix and Amazon (and Facebook and Google) than into all their possible competitors combined. How does this make sense?
    Originally posted by Linton
    This is what active fund mangers say too. They have an edge and they can see which companies are over-valued in relation to their share of market cap. They also know which of the smaller competitors will thrive in the future. The trouble is that only a small proportion of fund managers really have an edge and outperform a tracker and it's just as difficult to choose a winning fund manager as it is a winning share.

    For me, unhappy not to have an investment edge but not bothered about admitting it, what should I do?


    On investing in your own industry you must be right that this an extra risk were that to mean investing in your employer. However you may have a greater insight as to which companies are worth investing for the future than the average investor. Unless you believe Telecomms as an industry could have a doubtful future investing in competitors could diversify away some of your employment risk.
    Originally posted by Linton
    It's still extra risk even if I invest or short my competitors. Let's say I earn that £100,000 year, my company pension is worth well over what the PPF will cover, and I've got the maximum in sharesaves. Maybe I should have the self-awareness to realise that my edge has served me well but has led to a concentration of risk?

    Also I don't think that it necessarily follows that being good and successful in a job means you gain an investment edge either. They're two different skill-sets.
    • Thrugelmir
    • By Thrugelmir 19th Aug 19, 10:09 AM
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    Thrugelmir
    You're hinting that the MSCI is overweighted in its top ten constituents.
    Originally posted by Sailtheworld
    Nothing to do with being overweight. Share prices are determined by what investors are prepared to pay for future growth and earnings. Euphoria can die at the flick of a switch. In the main stock markets historically have been driven by a very small % of companies. The vast majority actually underperform.
    “If the financial system has a defect, it is that it reflects and magnifies what we human beings are like. Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility.”
    ― Niall Ferguson
    • sendu
    • By sendu 19th Aug 19, 10:13 AM
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    sendu
    I agree with your analysis but not your conclusion on using a tracker. Despite your lack of knowledge as to the future by using a market capitalisation weighted tracker you are putting a higher % of your money into Netflix and Amazon (and Facebook and Google) than into all their possible competitors combined. How does this make sense?
    Originally posted by Linton
    It makes sense because that weighting exists because in aggregate all the professional investors think those companies are the way to go.

    To do anything else is to make a bet against all other investors. What do you (where "you" is any retail client) know that they don't?

    The answer is almost certainly nothing, even if you work in the industry of the top companies.

    Of course investment professionals have proven in the past they're actually pretty stupid, and it will be proven again in the future, and top US stocks could see a correction in the coming decade. But betting against current market cap still seems like an unnecessarily risky move.
    • Sailtheworld
    • By Sailtheworld 19th Aug 19, 10:32 AM
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    Sailtheworld
    Nothing to do with being overweight. Share prices are determined by what investors are prepared to pay for future growth and earnings. Euphoria can die at the flick of a switch. In the main stock markets historically have been driven by a very small % of companies. The vast majority actually underperform.
    Originally posted by Thrugelmir
    OK. So the answer is 7.8%. I just need to work out what the question is.

    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.
    • Linton
    • By Linton 19th Aug 19, 10:55 AM
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    Linton
    It makes sense because that weighting exists because in aggregate all the professional investors think those companies are the way to go.

    To do anything else is to make a bet against all other investors. What do you (where "you" is any retail client) know that they don't?

    The answer is almost certainly nothing, even if you work in the industry of the top companies.

    Of course investment professionals have proven in the past they're actually pretty stupid, and it will be proven again in the future, and top US stocks could see a correction in the coming decade. But betting against current market cap still seems like an unnecessarily risky move.
    Originally posted by sendu

    The problem is that the investors who set the market price and thus the market cap are largely market traders. They will buy today and sell tomorrow if there is a quick buck to be made. The effect of market trading is to focus attention on a few well known shares giving rise to short term positive feedback - those shares which are traded requently are of special interest to people who trade frequently. Positive feedback represents a risk. By definition people who hold for the long term dont trade often and so are not greatly involved in the price setting mechanism.


    I as a small buy and hold investor believing that in the long term fundamentals will be the main price driver am not interested in betting against or with the market traders. Them meeting or failing to meet their objectives is of little relevence to me. They merely provide an environment in which one has to operate. One cannot predict the future and so it makes sense to spread one's net as broadly as possible which means investing outside the market cap.
    • sendu
    • By sendu 19th Aug 19, 11:22 AM
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    sendu
    They merely provide an environment in which one has to operate. One cannot predict the future and so it makes sense to spread one's net as broadly as possible which means investing outside the market cap.
    Originally posted by Linton
    I'm not sure that this makes sense, given that the stock market is a zero sum game.

    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.

    But if most of your gains are actually going to come from selling shares, then the price set by the traders matters. Which means your investments are bets with or against them.
    • IanManc
    • By IanManc 19th Aug 19, 11:29 AM
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    IanManc
    it makes sense to spread one's net as broadly as possible which means investing outside the market cap.
    Originally posted by Linton
    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.
    • Malthusian
    • By Malthusian 19th Aug 19, 11:53 AM
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    Malthusian
    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.
    Originally posted by Sailtheworld
    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.
    • Linton
    • By Linton 19th Aug 19, 12:28 PM
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    Linton
    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.
    Originally posted by IanManc

    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.
    • Sailtheworld
    • By Sailtheworld 19th Aug 19, 2:09 PM
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    Sailtheworld
    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.
    Originally posted by Malthusian
    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...
    • Prism
    • By Prism 19th Aug 19, 2:21 PM
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    Prism
    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.
    Originally posted by sendu
    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.
    • Prism
    • By Prism 19th Aug 19, 2:25 PM
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    Prism
    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...
    Originally posted by Sailtheworld
    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.
    • Sailtheworld
    • By Sailtheworld 19th Aug 19, 2:40 PM
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    Sailtheworld
    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.
    Originally posted by Linton
    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.
    • Sailtheworld
    • By Sailtheworld 19th Aug 19, 2:51 PM
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    Sailtheworld
    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.
    Originally posted by Prism
    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.
    • Prism
    • By Prism 19th Aug 19, 3:34 PM
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    Prism
    everyone would be outperforming the index which, of course, is an impossibility.
    Originally posted by Sailtheworld
    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.
    • Thrugelmir
    • By Thrugelmir 19th Aug 19, 3:53 PM
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    Thrugelmir
    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.
    Originally posted by sendu
    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.
    “If the financial system has a defect, it is that it reflects and magnifies what we human beings are like. Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility.”
    ― Niall Ferguson
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