The Lemon Fool

I found this interesting, based on an academic paper on behavioural finance. From the respected Morningstar investment website. Snippets...

' Learning to Live With Investment Risk
When stock markets get volatile, and asset prices fall, just learn to look the other way, says Morningstar's Ben Johnson ...

'Benartzi and Thaler claim that these two effects can help solve the equity risk premium puzzle. They found that investors who checked in on their portfolios once each year behaved as though they had a planning horizon of one year, even though their planning horizon – a measurement of how far away they were from their long-term goal – may have been decades away.

But the odds of losing money in risky assets with positive expected returns, like stocks, declines with time. Benartzi and Thaler argue that investors’ perception of risk increases as they check in on their portfolios more frequently, so they demand a large equity risk premium to compensate for the greater variability of returns....

“The longer the investor intends to hold the asset, the more attractive the risky asset will appear, as long as the investment is not evaluated frequently.”
I think that the less often we look at our portfolios, the less likely we’ll be upset and tempted to tinker. Tinkering rarely – if ever – helps us meet our long-term goals. It more likely results in costs, both directly measurable and implicit. The measurable costs include commissions and taxes. The largest implicit cost of tinkering is opportunity costs.'
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Those are just a few Excerpts [vs copyright], it's not a long article, anyone interested might consider reading it in it's whole.
http://www.morningstar.co.uk/uk/news/17 ... .aspx?ut=2

It comes down to the emotional roller coaster of investing when there are substantial market movements.

Good morning,

...even though their planning horizon – a measurement of how far away they were from their long-term goal – may have been decades away.

This argument occurs very often and appears at first glance to be wonderful and sensible and is in my view simply so irrelevant to the private investor that it could be considered wrong.

Most private investors don't have significant investments until their late 40s or even later so the hold for a decade argument doesn't apply. If you buy the correct share then yes buy and forget, if you buy the wrong share you are past working age and have no new capital to try again.

As I recall it the HYP started out with a similar article, someone with something like £7 million bought blue chip stocks and lived on capital growth and dividends, forgetting that most people don't start their portfolios with a few million here and a few million there.

Am I allowed to post this link as it is a site of mine that addresses the issue of long term holding? (I have flagged it for a mod's opinion)

http://www.beginnerssharedealing.co.uk/ ... mHold.aspx - the top page

http://www.beginnerssharedealing.co.uk/ ... sBarc.aspx - Following Barclays from 2002 and reinvesting, the loses exposed.

It is a very long read!

Bye

Ian

I am not going to start another discussion on HYP according to pyad but I can see merits to both approaches. The pyad hyp has the benefit of simplicity but I do not see it as ideal for the 'builder' where an approach like IanSmithISA's is probably better as an accumulator of capital. OTOH not many people who are working fulltime are likely to have the time to devote to it.

To 'Invest and forget' is in my experience highly dangerous unless you have the £7 million or so that ISISA mentions. Most lesser mortal need to keep a close eye on their invested assets. Personally I take a middle course. I am one who lives off his dividends, reinvests some of the excess income but also gives some to grandchildren. I am not afraid to trade occasionally, and do not regard any share as 'forever' Having just sold all of my SSE, there is the living proof.

I have said in the past that taking the advice of professional investors is not always the best idea because their aims are not necessarily ours, a point that ISISA has made.

Dod

DiamondEcho wrote:
"I think that the less often we look at our portfolios, the less likely we’ll be upset and tempted to tinker.

Tinkering rarely – if ever – helps us meet our long-term goals. It more likely results in costs, both directly measurable and implicit.

The measurable costs include commissions and taxes. The largest implicit cost of tinkering is opportunity costs."

http://www.morningstar.co.uk/uk/news/17 ... .aspx?ut=2

Well, with just 292 days to go until the start of 'No Look November 2019', people have got some time to think about how they might like to ween themselves off those more-frequent portfolio-peeks.....

Cheers,

Itsallaguess

As someone who has practiced something like invest and forget for many years (in my case it is buy and hold but monitor), I reckon that the key factor is to invest in companies which possess what Warren Buffett calls "strong moats". Things like very popular brands, patents, network effects, a high regulatory cost to enter its markets, geographical restrictions (e.g. American Railroads), etc.

https://www.investopedia.com/ask/answer ... icmoat.asp

If there isn't something which makes a company's goods and services stand out from the competition, or makes it difficult for the competition to erode its market share, then over time the company will be reduced to being a price taker. But a company with a strong moat will be able to grow its business over time, often taking market share from weak moat companies.

Some sectors (e.g. banking, insurance) are inherently prone to excesses which do not favour shareholders. The combination of greed plus the ability to massively gear up a business is something which I prefer to avoid. Banking has a good moat in that it is difficult for new entrants to enter the market due to regulation strongly favouring incumbents (and the need for huge amounts of capital), but the industry is far too prone to contagion and bad management.

I'd also argue that invest and forget requires you to some extent to be fairly resilient in the face of losses, in particularly controlling the human tendency towards loss aversion (for most people to offset the loss of £100 requires them to gain at least £200).

https://en.m.wikipedia.org/wiki/Loss_aversion

SalvorHardin wrote:
I'd also argue that invest and forget requires you to some extent to be fairly resilient in the face of losses, in particularly controlling the human tendency towards loss aversion

One also meeds to be resiliant in the face of gains as the fear of losing these gakns is a real aspect factor. When a share increases in price it is damned difficult to forget about it and let it run

Good evening,

...I reckon that the key factor is to invest in companies which possess what Warren Buffett calls "strong moats".

Thanks, you are an ally, even if you didn't intend it,

Buffet bought into Tesco, a UK supermarket, sold at massive loss but this doesn't appear in discussions.

Buffet bought heavily into Apple and made a fortune, but will he sell out and admit that he bought and sold at the right time, or
just pocket the money and use it to hide losses?

He can do this because he is not bound by the 10-20 year time frame that applies to most retail investors.

Banking has a good moat in that it is difficult for new entrants to enter the market due to regulation strongly favouring incumbents

Becoming a new bank is indeed difficult, but neither Apple Pay or Google Pay are banks, they are front ends on the banking industry just like Paypal. They out-thought the regulators, made their money and became mainstream.

If you have the nerve and a bit of imagination you can bypass things that seem like impenetrable barriers.

In the UK there is a regulation called Legal Deposit that cover new books, magazine and periodicals, this is a massive burden on publishers who are interested in user customised books etc, if you obey the rules it can make some businesses nonviable, if you ignore it and become big enough then it is possible that it won't matter.

Bye

Ian

IanSmithISA wrote:Buffet bought into Tesco, a UK supermarket, sold at massive loss but this doesn't appear in discussions.

Buffet bought heavily into Apple and made a fortune, but will he sell out and admit that he bought and sold at the right time, or
just pocket the money and use it to hide losses?

None of that addresses the point about moats.

He can do this because he is not bound by the 10-20 year time frame that applies to most retail investors.

Wasn't aware of this 10-20 year time frame. And if it exists, why is buffet not bound by it?

Becoming a new bank is indeed difficult, but neither Apple Pay or Google Pay are banks, they are front ends on the banking industry just like Paypal. They out-thought the regulators, made their money and became mainstream.

If you have the nerve and a bit of imagination you can bypass things that seem like impenetrable barriers.

...and bucket loads of cash not available to most companies, which is how Apple and Google did it.

Invest and forget has been a good strategy for decades as economies around the word steadily grew with few major downturns but does anyone think that that is changing? It seems that they are predicting slowing growth world wide for the next 2 decades...also technology is changing at a rapid rate. If I were to invest and forget now it would probably be only in companies like google, amazon etc. Companies that are driving the technology disruption.

DiamondEcho wrote:I found this interesting, based on an academic paper on behavioural finance. From the respected Morningstar investment website. Snippets...

' Learning to Live With Investment Risk
When stock markets get volatile, and asset prices fall, just learn to look the other way, says Morningstar's Ben Johnson ...

'Benartzi and Thaler claim that these two effects can help solve the equity risk premium puzzle. They found that investors who checked in on their portfolios once each year behaved as though they had a planning horizon of one year, even though their planning horizon – a measurement of how far away they were from their long-term goal – may have been decades away.

But the odds of losing money in risky assets with positive expected returns, like stocks, declines with time. Benartzi and Thaler argue that investors’ perception of risk increases as they check in on their portfolios more frequently, so they demand a large equity risk premium to compensate for the greater variability of returns....

“The longer the investor intends to hold the asset, the more attractive the risky asset will appear, as long as the investment is not evaluated frequently.”
I think that the less often we look at our portfolios, the less likely we’ll be upset and tempted to tinker. Tinkering rarely – if ever – helps us meet our long-term goals. It more likely results in costs, both directly measurable and implicit. The measurable costs include commissions and taxes. The largest implicit cost of tinkering is opportunity costs.'
------------------------
Those are just a few Excerpts [vs copyright], it's not a long article, anyone interested might consider reading it in it's whole.
http://www.morningstar.co.uk/uk/news/17 ... .aspx?ut=2

It is just a reminder that the longer you invest the less important capital becomes and the more important income is.

OhNoNotimAgain wrote:It is just a reminder that the longer you invest the less important capital becomes and the more important income is.

No it isn't, but if the only tool you have is a hammer, then every problem looks like a nail.

OhNoNotimAgain wrote:
It is just a reminder that the longer you invest the less important capital becomes and the more important income is.

OhNoNotThisAgain!

GS

Too much emphasis on single stocks. I’m not sure buy and forget can ever be attributed to single stock portfolios like HYP but I think it can to an all world tracker or a couple of global investment trusts