Why buy UK?

[Bubblesofearth]

Quite a few of us on TMF who focused on small cap oils generated annual returns of 30% or more over the same period.

Don't leave out the part where you got out at just the right time as well. The story doesn't have quite the same zip to it without that bit.

[NotSure]

Quite a few of us on TMF who focused on small cap oils generated annual returns of 30% or more over the same period.

Don't leave out the part where you got out at just the right time as well. The story doesn't have quite the same zip to it without that bit.

Not to take anything away from SH, but this is a classic example of survivorship bias. I remember a lot of similar schemes on TMF that ended in poor returns or worse (Lloyds, Marconi, to name but a couple). No-one posts about those ever, let alone decades later.

[tjh290633]

Don't leave out the part where you got out at just the right time as well. The story doesn't have quite the same zip to it without that bit.

Not to take anything away from SH, but this is a classic example of survivorship bias. I remember a lot of similar schemes on TMF that ended in poor returns or worse (Lloyds, Marconi, to name but a couple). No-one posts about those ever, let alone decades later.

Lloyds was the first share that I top sliced because it was overweight in 1997. Marconi likewise in 2000-01, before it came tumbling down. Like an idiot I started buying back as it fell, until they stopped the dividend. Just about broke even.

But you are no doubt thinking about 2008-9, when Lloyds had a rights issue and an open offer, both about 30p. If you took up both, things are not too bad.

TJH

[SalvorHardin]

Don't leave out the part where you got out at just the right time as well. The story doesn't have quite the same zip to it without that bit.

Not to take anything away from SH, but this is a classic example of survivorship bias. I remember a lot of similar schemes on TMF that ended in poor returns or worse (Lloyds, Marconi, to name but a couple). No-one posts about those ever, let alone decades later.

Agreed, but there's more to it than just picking the one share.

What had been identified by a group of us on TMF in the early 2000s was a systematic undervaluation of smaller companies' oil reserves by the stockmarket and the slow response of the market to new discoveries and reserve upgrades. Not just for a few companies but for the entire sector. This sort of thing shouldn't happen according to efficient market theory (the intellectual underpinning behind tracker funds), but does nevertheless. In addition to the usual array of financial professionals, some of us had considerable experience in the oil industry which helped tremendously.

Quite a few of us regularly met up at AGMs (particularly Soco) and investor events such as Oil Barrel. Soco wasn't the only money maker, though it was the best known (and most envied). Small (and not so small) fortunes were made on many other oil companies such as Dana Petroleum, Encore Oil, Tullow Oil, Dragon Oil, Aminex, Northern Petroleum, etc. (I've only mentioned the ones I made serious money on but there were many more). It wasn't quite like shooting fish in a barrel, but it was pretty close. I've never seen anything like it since, nor do I expect to do so. TLF doesn't have the critical mass of investors and specialists that TMF had and times are different. The other really successful group of investors on TMF was PaulyPilot's action groups.

The wheels started to fall off the wagon with the 2008 financial crisis, but by 2009 lots of us had got out or had seriously downsized our positions. A big trigger for many of us with Soco concerned a poor bad discovery report for a highly anticipated exploration well off the coast Vietnam (ISTR called "Deep E").

As Jim Royle would have said had he been part of the TMF Oil & Gas crowd, "Efficient market theory. My [expletive deleted]!!"

[NotSure]

....What had been identified by a group of us on TMF in the early 2000s was a systematic undervaluation of smaller companies' oil reserves by the stockmarket and the slow response of the market to new discoveries and reserve upgrades. Not just for a few companies but for the entire sector. This sort of thing shouldn't happen according to efficient market theory (the intellectual underpinning behind tracker funds), but does nevertheless. In addition to the usual array of financial professionals, some of us had considerable experience in the oil industry which helped tremendously......

Agreed - I only followed it loosely, but, e.g. SOCO was a genuinely overlooked opportunity with all the evidence in the public domain.

Genuine question - do you think these "overlooked" gems still exist, with all the computing power that can now applied to the problem? Can I really hope to spot something that most have missed? Especially without a bit of insider knowledge (not inside information - that's different)

[NotSure]

Not to take anything away from SH, but this is a classic example of survivorship bias. I remember a lot of similar schemes on TMF that ended in poor returns or worse (Lloyds, Marconi, to name but a couple). No-one posts about those ever, let alone decades later.

Lloyds was the first share that I top sliced because it was overweight in 1997. Marconi likewise in 2000-01, before it came tumbling down. Like an idiot I started buying back as it fell, until they stopped the dividend. Just about broke even.

But you are no doubt thinking about 2008-9, when Lloyds had a rights issue and an open offer, both about 30p. If you took up both, things are not too bad.

TJH

Thanks for your honesty. Note, I didn't say all these schemes ended in disaster. I am including schemes that generated average returns. It's mainly the multi-baggers that get brought up well onto the future, not the "lots of hard work to end up with tracker returns" (or worse).

[SalvorHardin]

....What had been identified by a group of us on TMF in the early 2000s was a systematic undervaluation of smaller companies' oil reserves by the stockmarket and the slow response of the market to new discoveries and reserve upgrades. Not just for a few companies but for the entire sector. This sort of thing shouldn't happen according to efficient market theory (the intellectual underpinning behind tracker funds), but does nevertheless. In addition to the usual array of financial professionals, some of us had considerable experience in the oil industry which helped tremendously......

Agreed - I only followed it loosely, but, e.g. SOCO was a genuinely overlooked opportunity with all the evidence in the public domain.

Genuine question - do you think these "overlooked" gems still exist, with all the computing power that can now applied to the problem? Can I really hope to spot something that most have missed? Especially without a bit of insider knowledge (not inside information - that's different)

They probably exist, but are becoming harder to find before the rest of the market spots them and builds it into their share prices.

I haven't found anything close to what happened in small cap oils since the 2000s (to be fair I don't look as hard nowadays). I suspect that similar opportunities do exist, but finding them is going to be difficult. Whilst the behavioural economists have shown that the markets are not as efficient as the efficient market hypothesis claims, the amount of scrutiny that the stockmarket gets is going to increase with the spread of Artificial Intelligence. So in theory these opportunities should be arbitraged away more rapidly.

Now it may be that AI is going to be nowhere near as effective as is claimed, but that's another story.

[GeoffF100]

I fully accept that global trackers may be in for a very extended period of poor performance and that active may come to the fore...

The global market may indeed come in for an extended period of poor performance, but active investors will do no better. Passive investors buy x% of every share in issue. Active investors hold the remaining 100% - x% of every share in issue. The average (before costs and taxes) performance of the active investors is always the same as that of the passive investors. Some active investors will beat the market, and some will not. The total number of dollars of outperformance of those who beat the market equals the the total number of dollars of underperformance of those who do not. The active investors can make money at the expense of other active investors, but they cannot make money at the expense of the passive investors.

[JohnW]

I'm not sure the success of the oil and gas group is a repudiation of the efficient market hypothesis. The group identified some price errors, traded making the price closer to what it should have been. To that extent the market was inefficient while that was happening, then it got 'efficient'. Some investors they bought from lost out presumably. I think that's what we're all saying: there are only market returns to be had overall, so if some get more others must get less.
But to the extent that it demonstrates the market is not efficient, how do we go about exploiting the inefficiencies reliably?

[NotSure]

They probably exist, but are becoming harder to find before the rest of the market spots them and builds it into their share prices.

I haven't found anything close to what happened in small cap oils since the 2000s (to be fair I don't look as hard nowadays). I suspect that similar opportunities do exist, but finding them is going to be difficult. Whilst the behavioural economists have shown that the markets are not as efficient as the efficient market hypothesis claims, the amount of scrutiny that the stockmarket gets is going to increase with the spread of Artificial Intelligence. So in theory these opportunities should be arbitraged away more rapidly.

Now it may be that AI is going to be nowhere near as effective as is claimed, but that's another story.

AI is the latest buzz, but powerful Machine Learning algorithms applied to vast data sets have been around a while now.

Fair play to active investors, but it's well beyond my abilities and time to "beat the market" when the market has so much knowledge and resources. As GS pointed out, try to avoid fads etc. and think about asset allocation (based on both one's age and one's take on the macro conditions) but beyond that, good luck to all!

[Lootman]

"The real reason the FTSE is failing is that UK plc, along with the rest of Western Europe, has turned its back on capitalism. The basic fiduciary duty of company management to maximise profit for shareholders has been replaced by the need to appease all stakeholders"

That is exactly the problem. For example it is considered a matter of public importance if dividends are paid out (e.g. water companies) or how much management is paid. There is talk of strong profits being "windfalls" which should attract a special tax. And of course those of us who risk capital to build wealth are enjoying "unearned" income. And those who build successful UK companies (Branson, Dyson, Terry Smith) leave the UK to escape taxation and criticism.

Given that mentality how can our stock market ever match the US or Asia?

[GoSeigen]

I think that's what we're all saying: there are only market returns to be had overall, so if some get more others must get less.

No need to include me in that "we" or "all": I don't hold that view, it's quite illogical in my opinion. It mischaracterises "the market". The market is not primarily a mechanism for dividing up a fixed pot of "market returns". That is circular.

The size of the pot itself is determined by the market and how well it is operating. If it allocates most capital to poorly-performing businesses the post will be small. Some may get nothing while others get less. If it allocates most capital to great companies the pot will be larger. Some may do very well and others just quite well.


Passive investors can continue believing the opposite, but it's going to be hard for anyone to disabuse me of my misconceptions. LOL.


GS

[SalvorHardin]

"The real reason the FTSE is failing is that UK plc, along with the rest of Western Europe, has turned its back on capitalism. The basic fiduciary duty of company management to maximise profit for shareholders has been replaced by the need to appease all stakeholders"

That is exactly the problem. For example it is considered a matter of public importance if dividends are paid out (e.g. water companies) or how much management is paid. There is talk of strong profits being "windfalls" which should attract a special tax. And of course those of us who risk capital to build wealth are enjoying "unearned" income. And those who build successful UK companies (Branson, Dyson, Terry Smith) leave the UK to escape taxation and criticism.

Given that mentality how can our stock market ever match the US or Asia?

In the long term our stockmarket can't. The establishment's love of high taxes and over regulation will act as a nail in the coffin of the British economy.

We're in a state of managed decline, made worse by a slavish adherence to net zero.

Jeremy Clarkson said over the weekend that the government has highly incentivised farmers to stop growing food via net zero related schemes, which greatly weakens British food security and the economy as a whole (series 3 of Clarkson's Farm starts this Friday).

In the short term though I have considerable faith in the idea that the combination of foreign takeover bids and companies moving their primary listing to America will provide a boost to share prices.

I'm expecting Diageo to move to America. But it shouldn't expect its PE ratio to get up to Brown-Forman's level as it has the millstone of its whisky business being in Scotland, a country that is even more hostile to business than England.

[Bubblesofearth]

The global market may indeed come in for an extended period of poor performance, but active investors will do no better. Passive investors buy x% of every share in issue. Active investors hold the remaining 100% - x% of every share in issue. The average (before costs and taxes) performance of the active investors is always the same as that of the passive investors. Some active investors will beat the market, and some will not. The total number of dollars of outperformance of those who beat the market equals the the total number of dollars of underperformance of those who do not. The active investors can make money at the expense of other active investors, but they cannot make money at the expense of the passive investors.

You are making the assumption that the average price paid by active and passive investors is the same. This will not necessarily be the case and if the price paid is not the same then average performance will also differ.

BoE

[GeoffF100]

The global market may indeed come in for an extended period of poor performance, but active investors will do no better. Passive investors buy x% of every share in issue. Active investors hold the remaining 100% - x% of every share in issue. The average (before costs and taxes) performance of the active investors is always the same as that of the passive investors. Some active investors will beat the market, and some will not. The total number of dollars of outperformance of those who beat the market equals the the total number of dollars of underperformance of those who do not. The active investors can make money at the expense of other active investors, but they cannot make money at the expense of the passive investors.

You are making the assumption that the average price paid by active and passive investors is the same. This will not necessarily be the case and if the price paid is not the same then average.

The price paid by individual passive investors is irrelevant. For simplicity, I have assumed that passive investors have a fixed percentage of the market. A passive investor who holds his investment for the whole of the term under consideration will receive the market return (ignoring costs and taxes). That will be the average return of all the active investors, who may or may not trade during the period (again ignoring costs and taxes).

[GeoffF100]

I think that's what we're all saying: there are only market returns to be had overall, so if some get more others must get less.

No need to include me in that "we" or "all": I don't hold that view, it's quite illogical in my opinion. It mischaracterises "the market". The market is not primarily a mechanism for dividing up a fixed pot of "market returns". That is circular.

The size of the pot itself is determined by the market and how well it is operating. If it allocates most capital to poorly-performing businesses the post will be small. Some may get nothing while others get less. If it allocates most capital to great companies the pot will be larger. Some may do very well and others just quite well.

Passive investors can continue believing the opposite, but it's going to be hard for anyone to disabuse me of my misconceptions. LOL.

JohnW is right that market returns are the only returns to be had overall. That is true by definition. You are right in saying that the market returns are not fixed. I am happy to own x% of each and every company in the market and not trade. I am guaranteed x% of the market return, whatever that is. The remaining 100% - x% of the shares, and their market return, are available to other investors.

[Bubblesofearth]

The price paid by individual passive investors is irrelevant.

The price paid is one of the most important determinants of total return.

BoE

[tjh290633]

The global market may indeed come in for an extended period of poor performance, but active investors will do no better. Passive investors buy x% of every share in issue. Active investors hold the remaining 100% - x% of every share in issue. The average (before costs and taxes) performance of the active investors is always the same as that of the passive investors. Some active investors will beat the market, and some will not. The total number of dollars of outperformance of those who beat the market equals the the total number of dollars of underperformance of those who do not. The active investors can make money at the expense of other active investors, but they cannot make money at the expense of the passive investors.

You are making the assumption that the average price paid by active and passive investors is the same. This will not necessarily be the case and if the price paid is not the same then average performance will also differ.

BoE

Passive investors do not buy shares, they buy a product which invests in shares. You cannot therefore compare active and passive investors. The latter have no idea what the shares concerned were bought at. Nobody tells them and it is not divulged in the investment company's reports.

There is a total misconception.

TJH

[GeoffF100]

The price paid by individual passive investors is irrelevant.

The price paid is one of the most important determinants of total return.

The price paid by individual investors does not affect the total return of all the investors in the market over the last ten years. For every buyer, there is a seller. You just need to add up the returns of all the shares in the market to get the market return. It is irrelevant who owns them. It is also irrelevant when they buy and sell them to each other.

The price that I paid decades ago is not relevant to my return over the last ten years either.

[Bubblesofearth]

The price paid by individual investors does not affect the total return of all the investors in the market over the last ten years. For every buyer, there is a seller. You just need to add up the returns of all the shares in the market to get the market return. It is irrelevant who owns them. It is also irrelevant when they buy and sell them to each other.

The price that I paid decades ago is not relevant to my return over the last ten years either.

You also have market makers. If an active investor, after analysis of a company deems the price too cheap then they will buy. The market maker will mark the price higher and this higher price is what the passive investor will have to pay. The price paid by a buyer is not necessarily the same as that received by the seller. This was graphically demonstrated when the market gapped down on black Monday 1987.

The price you paid decades ago may not affect the last 10 years return but it can still have a dramatic effect on return since purchase.

BoE