Time to get cashed up?

[GeoffF100]

When funds are discussed, this typically means open ended funds as worldwide they completely dominate compared with closed ended funds. When net cash is withdrawn, this necessitates the fund selling stocks. Those stocks could go to a variety of different types of investors, but it will be mostly institutional buyers, some of which will be other retail funds. Most private investor money sits in funds now.

Regarding brokers attempting to cash in by doing the opposite of their clients, I suspect that profiting from it is beyond the limits of arbitrage. There are also rules brokers need to be careful of breaking. This sort of thing might look like front running.

Is there any evidence that institutional investors buy more equities at the bottom of bear markets, and sell them at the top of bull markets, beyond simple rebalancing? Defined benefit pension schemes could do this, if they had a crystal ball. Some defined contribution funds could do it too. Most retail funds could not do it, even if the managers wanted to. It may be that the fund investors buy high and sell low greatly out number those who do the opposite, but those investors are, on average, much richer.

An advisory broker would be getting into very deep water if he took opposite positions to his clients. An execution only broker could, however, in principle, sell anonymised data to a large investor who could trade it. It is doubtful whether the trading would show a profit after costs though. I expect the truth here is that private investors do, on average, lose a few basis points per trade to the professionals. Nonetheless, those of us with very low costs, well diversified portfolios, and a ten year plus average holding time do not have too much to worry about that.

[GeoffF100]

There is strong evidence that no fund managers can beat the market, except by chance.

What about beating the market by taking higher risks, a more concentrated portfolio for example? If you define "the market" as the FTSE All share, investing in the top 10 is either going to beat it or under perform it, depending on how the biggest caps perform. It isn't monkeys throwing darts to select the 10 biggest companies, even if you don't know when you do it whether it's a cunning plan or missing out on the growth of smaller companies.

Yes, by "beating the market", I meant after costs. However, many of the individual investors in the study were not trying to do that. They bought concentrated portfolios in small oil companies, for example. Investing was like buying a lottery ticket for them. It is also true that most private investors do not understand risk. The highest performing funds necessarily have concentrated portfolios. Closet trackers are not going to outperform by very much, even if they are lucky. Most retail investors will go for the highest performing fund, oblivious both to the risk and to the futility of trying to beat the market in risk adjusted terms.

[GeoffF100]

Some of the studies referenced in the paper used small trades as a proxy for individual investor trades. That data is publicly available. If small investor trades do lose more than a few basis points, on average, there is noting to stop someone trading this. I am, however, sceptical about whether the trading would be profitable, even if they were the only trader doing it.

I have seen reports on flows in and out of funds. Perhaps there is publicly available data here too. Is the a net outflow at the bottom of bear markets, and a net inflow at the top of bull markets?

[SalvorHardin]

Yes, by "beating the market", I meant after costs. However, many of the individual investors in the study were not trying to do that. They bought concentrated portfolios in small oil companies, for example. Investing was like buying a lottery ticket for them. It is also true that most private investors do not understand risk. The highest performing funds necessarily have concentrated portfolios. Closet trackers are not going to outperform by very much, even if they are lucky. Most retail investors will go for the highest performing fund, oblivious both to the risk and to the futility of trying to beat the market in risk adjusted terms.

Back in 2000 quite a few of us on TMF UK had spotted that the market was grossly undervaluing small and medium oil companies which had proven reserves of oil. So we spent quite a bit of time combing through oil companies' accounts to find candidates (a quick method was to ignore asset values except for cash and the quoted reserves). The rising demand for oil from the developing nations and the inability of the oil industry to quickly increase production (because of a lack of investment in the 1990s) meant that conditions were pointing towards a steady rise in the oil price for several years. The fact that so many oil companies turned into multi-baggers without making further discoveries proved this hypothesis. And some people still think that we were lucky

A lot of these companies were trading at prices which were well below what would have been paid in a trade sale. To me this was very similar to the situation when Warren Buffett bought into the Washington Post in 1975; his argument then was that based on the prevailing private sale prices for similar assets the Post was valued by the stock market at about 25% of its trade sale price [1]. Sometimes markets do get prices seriously wrong.

Efficient market theory isn't perfect; rather it is flawed because it is based on the false assumptions that economic agents are rational utility maximisers who always process information quickly and accurately (psychology tells us otherwise). Modern Portfolio Theory is equally suspect if only because investment returns do not follow the normal distribution (Nassim Taleb's writings go into great detail on this topic).

Conditions haven't come close since then; I've only found three decent multi-baggers in the last five years (Juventus, Madison Square Garden and Integra Gold) and in any event nowadays I'm mostly concerned with preserving real value rather than chasing gains.

“Naturally the disservice done students and gullible investment professionals who have swallowed Efficient Market Hypothesis has been an extraordinary service to us. In any sort of a contest – financial, mental or physical – it’s an enormous advantage to have opponents who have been taught that it’s useless to even try” - Warren Buffett

[1] - Roger Lowenstein, Buffett: The Making of an American Capitalist, 1995 paperback, chapter 8, page 152

[GeoffF100]

[1]“Naturally the disservice done students and gullible investment professionals who have swallowed Efficient Market Hypothesis has been an extraordinary service to us. In any sort of a contest – financial, mental or physical – it’s an enormous advantage to have opponents who have been taught that it’s useless to even try” [/i]- Warren Buffett

[1] - Roger Lowenstein, Buffett: The Making of an American Capitalist, 1995 paperback, chapter 8, page 152

He seems to have changed his mind, as far as retail investors are concerned, and that was before his last ten years of underperformance.

[SalvorHardin]

He seems to have changed his mind, as far as retail investors are concerned, and that was before his last ten years of underperformance.

The problem in comparing portfolio returns for Berkshire Hathaway nowadays is that the stockmarket investments make up an increasingly small part of Berkshire Hathaway. The 2017 annual report shows $170.5 billion of quoted shareholdings as of 31st December 2017. Berkshire Hathaway's market capitalisation as I type this is approximately $481 billion. So the portfolio is roughly 35% of the company (it's not exact due to the presence of a large deferred tax liability which may be more concentrated in the shares than in the rest of the company).

Yet all too often journalists treat the portfolio as if it represented 100% of the company. Furthermore Buffett nowadays doesn't run all of the investments (his share of the investment management is probably at Berkshire's lowest proportion ever since he took over).

The often quoted change in Berkshire Hathaway's NAV isn't the signal that it used to be because of the increasing dominance of the operating companies, whose share of the NAV doesn't reflect their market value but is instead the value of their assets for accounting purposes (anyone who has ever looked at an American property company knows how the book NAV can be wildly divergent from the market value of the properties).

For example, Burlington Northern Santa Fe if quoted separately would probably be valued at something in the range of $80 to $90 billion but its NAV in the books is something like half of this (the takeover price, plus all capital expenditure minus all depreciation since the takeover).

[GeoffF100]

Buffet has never said that any Tom, Dick or Harry can beat the market (in risk adjusted terms). He has always said that it is very, very hard. It is also clear from his use of a tracker fund to provide for his widow that he does not believe that we can identify someone who can beat the market (in risk adjusted terms) for us either. The issue here is whether the Tom, Dick and Harrys not only cannot beat the market (in risk adjusted terms), but, on average, lose to it even before costs.

[tjh290633]

There are SERIOUS questions about HYP. It has worked well for its intended purpose to date, but those questions exist. I personally suspect that a lump sum, no tinkering, HYP may not do well for periods over 30 years. If it does not then it still may be described as meeting it's original objective, but does that count as "it works"?

Can I refer you to viewtopic.php?p=130590#p130590 ? This is only a 20-year snapshot out of 31 years, limited by the data which I have.

Admittedly it does not meet your criteria of a single lump sum, invested in one go and untinkered, but HYP1 indicates the perils of leaving well alone. I have had 76 share holdings since 1987, of which 39 have been lost from the portfolio, either through take-over or delisting (17) or voluntary selling (22), usually for low yield.

The objective was to achieve a flow of dividend income, rising ahead of inflation, coupled with a modicum of capital appreciation. This has been comfortably achieved.

TJH

[Urbandreamer]

There are SERIOUS questions about HYP. It has worked well for its intended purpose to date, but those questions exist. I personally suspect that a lump sum, no tinkering, HYP may not do well for periods over 30 years. If it does not then it still may be described as meeting it's original objective, but does that count as "it works"?

Can I refer you to viewtopic.php?p=130590#p130590 ? This is only a 20-year snapshot out of 31 years, limited by the data which I have.

Admittedly it does not meet your criteria of a single lump sum, invested in one go and untinkered, but HYP1 indicates the perils of leaving well alone. I have had 76 share holdings since 1987, of which 39 have been lost from the portfolio, either through take-over or delisting (17) or voluntary selling (22), usually for low yield.

The objective was to achieve a flow of dividend income, rising ahead of inflation, coupled with a modicum of capital appreciation. This has been comfortably achieved.

TJH

Your last sentence omits the point that "it" (original Pyad HYP) was intended as an alternative to annueties at the point of retirment and I am less than convinced that the original concept desired a "modicum of capital appreciation".
HYP has, I accept, met its objectives as I understand them (alternative to annuety to fund retirment).
However as you yourself admit, there ARE perils in at least one of it's original criteria (leaving well alone). I feel that you are trying to have your cake and eat it as far as arguments go. Ie continiously invest in a HYP type manner while managing the portfolio and cutting low yielders, yet describe it as HYP. As a valid Investment Stratergy I have no quible with what you describe, but I was talking about the original concept and not how you run your portfolio.

There is an argument for addopting phrases like "tradition/Pyad HYP", "HYP light" (tried by some with poor results), "managed HYP" etc. I am sorry if my use of the term "HYP" was ambigious, I meant HYP by Pyad and not a managed HYP in the post that you quoted.

[tjh290633]

There are SERIOUS questions about HYP. It has worked well for its intended purpose to date, but those questions exist. I personally suspect that a lump sum, no tinkering, HYP may not do well for periods over 30 years. If it does not then it still may be described as meeting it's original objective, but does that count as "it works"?

Can I refer you to viewtopic.php?p=130590#p130590 ? This is only a 20-year snapshot out of 31 years, limited by the data which I have.

Admittedly it does not meet your criteria of a single lump sum, invested in one go and untinkered, but HYP1 indicates the perils of leaving well alone. I have had 76 share holdings since 1987, of which 39 have been lost from the portfolio, either through take-over or delisting (17) or voluntary selling (22), usually for low yield.

The objective was to achieve a flow of dividend income, rising ahead of inflation, coupled with a modicum of capital appreciation. This has been comfortably achieved.

TJH

Your last sentence omits the point that "it" (original Pyad HYP) was intended as an alternative to annueties at the point of retirment and I am less than convinced that the original concept desired a "modicum of capital appreciation".
HYP has, I accept, met its objectives as I understand them (alternative to annuety to fund retirment).
However as you yourself admit, there ARE perils in at least one of it's original criteria (leaving well alone). I feel that you are trying to have your cake and eat it as far as arguments go. Ie continiously invest in a HYP type manner while managing the portfolio and cutting low yielders, yet describe it as HYP. As a valid Investment Stratergy I have no quible with what you describe, but I was talking about the original concept and not how you run your portfolio.

There is an argument for addopting phrases like "tradition/Pyad HYP", "HYP light" (tried by some with poor results), "managed HYP" etc. I am sorry if my use of the term "HYP" was ambigious, I meant HYP by Pyad and not a managed HYP in the post that you quoted.

I did not omit anything, as I was describing my own objectives, not those of PYAD.

As you will be well aware, my HYP management comprises putting limits on the weight of individual holdings, on the share of income from any one holding and the amount of portfolio cost attributed to any one share. I also cull holdings whose dividend yield has fallen below about half that of the market, either through a rising share price or by ceasing to pay dividends. I have also sold to avoid non-UK listed companies spun off, like Dr Pepper from Cadbury.

If you describe these prudent measures as having my cake and eating it, I prefer to view them as preserving the overall cake and, perhaps, putting some icing on it. PYAD's original objective was to obtain a good income while retaining the capital, as opposed to giving it away to some organisation to provide an annuity or some other structured product, beloved by the institutions.

TJH

[PinkDalek]

... Your last sentence omits the point that "it" (original Pyad HYP) was intended as an alternative to annueties at the point of retirment and I am less than convinced that the original concept desired a "modicum of capital appreciation".
HYP has, I accept, met its objectives as I understand them (alternative to annuety to fund retirment). ...

This recent post at High Yield Portfolios (HYP) - Practical itself suggests otherwise regarding annuities:

viewtopic.php?p=130716#p130716

[TheMotorcycleBoy]

I'm seriously thinking of disposing of underperforming shares, taking profits on some of my heavier weight ones and getting cashed up ready to buy in case the market turns south in a serious way.

Yes, I know this goes against what the likes of Terry Smith from Fundsmith says, ie, wrong to try to time markets but I just get the feeling that it could all turn south soon and I'd feel a fool later if I acted like a rabbit in the headlights.

Sorry, I'm a little late on this topic. In fact my wife and I (I'm currently posting on her account), are very newbie investors. We are strictly in it for the long haul, dividends and some growth on equities, some corporate bonds, perhaps some gilts if their price ever falls. We bought our first equity about 1 month - just 8k spread across 8 firms that we researched.

Anyway, we are obviously not experts! and would be totally incapable of timing the market, but I actually (probably eat my words in a few months) don't think things in the UK will go south for a while.....Why? Well I'm seeing a lot of negativity at the moment, Brexit uncertainty, Trump, Russia....etc.... I don't think rate increases/inflation are really on the cards since the main reason anything resembling inflation might have happened of late is mainly due to cost of goods rising locally due to the pound tanking after Brexit, and nothing to do with an economy that is over-heating.

I'm actually optimistic for the next couple of years, and I think things in the UK will improve slowly once Brexit is fully put to bed.....and when the US kicks out Trump and world trade is no longer as fraught.

But personally if things do pick up post-Brexit, post-Trump, then perhaps sometime after then the next major crash could occur.

well here's hoping, I'll put my crystal ball away for now!

Matt

[Pendrainllwyn]

FTSE down around 4% and S&P 500 pretty much flat 2018 YTD. I have no idea where to next but markets aren't making much headway of late and I have a feeling there is more downside than upside risk in the short-term. The world faces many challenges but believe people want to and will find a way. So I am long-term optimist and also in for the long haul.

I have been convinced by numerous people that seeking to time the market is a fools errand. John Bogle of Vanguard fame wrote about the difference in returns earned by open ended mutual funds and the returns actually earned by investors in those funds in his book The Clash of the Cultures, a valuable if dull read. Investors in open ended mutual funds earn significantly less because they have a tendency to buy near the top and sell near the bottom.

How well my blood pressure handles the next inevitable downturn remains to be seen but I think it was Charlie Munger who said if you can't handle a loss of 40% you shouldn't be in the market. I have been warned!

[colin]

Is there any evidence that institutional investors buy more equities at the bottom of bear markets, and sell them at the top of bull markets,

Perhaps not for institutional investors but surly for retail investors this should be quite easy using broad market index trackers. For every £100 in an index tracker hold a smaller amount in a less volatile asset , within the limits of sensible transaction costs maintain the index tracker level at £100 and allow the value of the less volatile asset to float, over time logic would dictate that one invests more money as markets fall and less money as markets rise. Is that what is meant by mechanical market timing? Over time the portfolio would become less and less risky so for those whose priority when investing is above inflation growth then such a strategy would become too conservative to produce meaningful returns so some other rules need to be added, something along the lines of increasing the amount held in equities to a figure above above £100 whenever the value falls below £100 ? or maybe pegging the £100 nominal figure to some general rate of inflation?

[gnawsome]

some other rules need to be added, something along the lines of increasing the amount held in equities to a figure above above £100 whenever the value falls below £100 ? or maybe pegging the £100 nominal figure to some general rate of inflation?

In my simple-minded fashion I try to follow a loose rule that when the market falls 5% I buy with 10% of available cash, when it falls another 5% I buy again. Hopefully I can keep buying as the market falls. I often seem to have a burnt-finger smell but the net worth figure seems to hold up.
Always the biggest problem is -- what do I buy. It never seems to be what is rising at any point

[colin]

In my simple-minded fashion

for me simple strategies are the only ones I am likely to follow!

problem is -- what do I buy. It never seems to be what is rising at any point

I just buy more of whatever index has fallen, guaranteed to rebound at some point, this also helps to even out the volatility of foreign currency index trackers, at least it makes me feel as though I can have some control over un predictable situations , or perhaps i find being completely passive just too dull? such a strategy would be suicide for individual shareholdings though, falling knives and all that.

[GeoffF100]

You can use simple rebalancing, or buy a fund like Vanguard Lifestrategy that does it for you. If the market does always rebound by the time you need it to rebound, that will work well. The main catch is that it may not rebound, or only rebound when it is too late. If that happens, you have bought yourself an automatic falling knife catcher.

[colin]

You can use simple rebalancing, or buy a fund like Vanguard Lifestrategy that does it for you.

could do, but for me the point is too increase the amount of equities bought at lower prices than simple re balancing to fixed percentages can achieve.

If that happens, you have bought yourself an automatic falling knife catcher.

not really a concept that applies to broad markets as a whole, catching falling knives is exactly what a strategy based on a portfolio of index trackers should do, is it not?

[GeoffF100]

Yes, that is what it should do, but that is not always good. If the market falls and keeps on falling, you keep selling your safe bonds to buy more equities. If that processes continues, you get wiped out completely. If you had not rebalanced, you would have lost the equities, but kept the bonds. There are many instances of national stock markets being completely wiped out. A wipe out of the global markets does not look likely, but it could happen nonetheless. Losing your shares would probably not be your greatest worry it that happened though. Anything more aggressive than simple rebalancing, is more likely to run aground.

[colin]

There are many instances of national stock markets being completely wiped out.

if i were that bearish i would not invest at all, thinking that the entire stock markets of the worlds developed economies might come to nothing can only be described as paranoia.