Why have these guys been consistently so lucky?

[colin]

Fredbloggs previously wrote
In my own portfolio I now own just two funds, Fundsmith, Chelverton Growth

and subsequently we have

I still hold (meaning Hargreaves Special situations) but with other stuff too as new opportunities came along.

3 - By no means a universal truth and nowhere have I said such a thing

You have certainly implied quite strongly that you believe past performance to be an indicator of future performance.

[AleisterCrowley]

I have said I am either lucky or I do my homework
Well, it's not an 'either/or' is it, as you imply in the next sentence
It's probably a lot more down to luck than you'd think - there are a lot of psychological biases involved

[AleisterCrowley]

Why not? It can't be anything except luck or homework can it?
Yes, but it's NOT one or the other - it's probably both. And studies suggest that trying to pick a fund based on past performance is not effective and luck probably dominates.
I really don't understand why psychology or anything else comes into it.
Read a bit of Kahneman;
https://en.wikipedia.org/wiki/Daniel_Kahneman

[AleisterCrowley]

Investment isn't just 'stock picking' - there's asset allocation, risk management, cost reduction, taxation issues

Of course I pick individual stocks, but I believe I can do better than average. I also know that I'm probably mistaken...

[AleisterCrowley]

How did you know about my chimp?
I try to keep him out of sight as he's 'undocumented'...

[Lootman]

I am astonished that all these people come to a web forum where the main topic is how to be a more successful investor and then just say they're simply lucky if they make any money. And if they made any money last year, they'll have a no better than evens chance of doing the same this year.

I find it hard to believe.

Anyone who comes to TLF (or TMF in its day) with a claim that a very simple, easy method can reliably beat the market is going to get a fair amount of stick. The conventional wisdom is that there is no easy, free lunch nor any magic silver bullet that guarantees out-performance.

Such a view is not negative or nihilistic. It is often held by people with a great deal of experience in the markets. For instance I have been investing for over 30 years, and worked in the fund business for about half that time. And I probably am less confident that I can beat the market now than when I started out (and knew much less).

Such doubts of the ability for anyone to beat the market, at least easily, is even formalised into investment theory via modern portfolio theory, and is reflected by the enormous growth of index funds that followed from that.

So the idea that you can just buy last year's winner and know it will be this year's winner would strike most here as rather naive. That said, there are some arguments for so-called "momentum investing", which is basically what you are describing. But I think at minimum you'd need to actually crunch the numbers to satisfy yourself and everyone else that you actually have beaten the market. And, if so, without taking more risk than the market.

Finally, if you believe your strategy works, then you should welcome criticism of it, because that can teach you how it can be even better. And at least people here think that your idea is worth commenting about

[SalvorHardin]

OK, please tell me how you make your decisions if it doesn't involve sticking a pin in a list of companies or just guessing. What do you do that gives you the edge over a chimp who picks your stocks for you.

If you are mistaken in your ability and you do not do better than a chimp, then why don't you give up and just leave it to the chimp?

My strategy, which has evolved over the last 25 years, is to buy-and-hold companies with strong moats (as defined by Warren Buffett) and keep an eye on their moats; in particular for techological changes which can breach a moat by commoditising a product. If I can't reasonably visualise where the company can realistically expect to be in ten years time I won't invest - so that rules out most high-techology specialists.

Amongst my largest holdings are Berkshire Hathaway, Madison Square Garden, Union Pacific, Diageo, Disney, Canadian Pacific and Unilever, all of which have strong moats. Disney's 80%-owned subsidiary ESPN is losing its moat due to the declining popularity of cable TV in America, but I'm banking on legalised sports betting and Disney's streaming service compensating for this. Most of my other holdings have decent moats.

I keep roughly 25% in investment trusts.This is as a backstop, they provide my income to live on and give me access to markets which are a bit difficult as a private investor (e.g. private equity, India).

I also keep an eye open for special situations where there seems to be a serious underpricing by the market. This lead to truly spectacular returns on small oil explorers (e.g. Soco) in 2000-07, where there was initially a massive discrepancy between the price paid for oil reserves in a trade sale to that quoted by the stock market ("drilling on Wall Street") at a time when the oil price was being pushed up by rising demand for oil in the developing world. For these I'm not concerned about moats so much, more about the mispricing. If the mispricing doesn't leap out at me I won't invest (my margin of safety).

I have bad years, notably 2008 when I was down by almost 50% because I had a lot in small oils. I've trounced the FTSE100 (including dividends) over the last twenty years by several hundred percentage points.

A good example of a recent discrepancy was Juventus (yes, the Italian football club). In August 2016 A.C. Milan was sold for something like 750 million Euros. Juventus' market value at the time was something like 230 million. Juventus, a more famous club with better accounts and a bigger support base, was massively underpriced so I piled in. Within a year Juventus' shares were up by around 250% and I sold.

I avoid banks and most other financials (Berkshire Hathaway is the big exception). That's an industry where the shareholders are routinely stitched up by insiders - see the last financial crisis. What you avoid can be just as significant for your investment returns as what you invest in.

[Lootman]

I avoid banks and most other financials (Berkshire Hathaway is the big exception). That's an industry where the shareholders are routinely stitched up by insiders - see the last financial crisis. What you avoid can be just as significant for your investment returns as what you invest in.

Me too, although I think there are a few exception as well as BRK.

JP Morgan has been impeccable during and after the crash, and is probably the safest bank on the planet. They bought Bear Stearns and Washington Mutual when there was blood in the streets.

Visa and Mastercard take a haircut from every card transaction and really aren't in the same boat.

And the big trust and custody banks like State Street are, again, mostly immune from the risks of the rest of the sector. Maybe some life assurers too, e.g. Met Life.

[SalvorHardin]

@SalvorHardin, thank you. I can understand why you have that outlook. You share that with several esteemed professionals too, I think. Now, I have to say that when you look at economic moat, return on equity, market positioning, dividends, growth and related strategies etc..... This is mostly backward looking. Yet, we are told that the past has no bearing on the future. It's all down to luck. Is it? Was it bad luck that Carillion went bust? No. Does the history demonstrate there were problems there? Yes indeed.

Myself, no I do not think ignoring the past is a great idea, not quite. Without looking at the past health of those terrific companies you hold, how would you build your portfolio? Are buying last year's (or last decade's) winners? Maybe. Are you buying next years winners? We do not know. But you are trying very hard to stack the deck in your favour. I think you are doing your homework, you need a modicum of luck. But clearly, you are not outsourcing your stock picking to the chimps.

I would look for strong moats, things which distinguish a company's products from the competition and make it difficult for its products to be turned into commodities. Brands, geographical features (it's impossible to build another railroad to directly compete with Union Pacific), patents, etc.

It's not so much backward looking except that a company's past is what has created its current products and moats. Rather it is looking at the present situation and then considering how the business' future might evolve. I spend more time looking at things like this rather than the numbers.

Carillion didn't have any moat to speak of, except maybe a bit from economies of scale. It competed in sectors of the economy where profit margins are wafer thin. And the market was signaling that something was questionable given that its yield was much larger than everything else in the sector.

[genou]

No, there is more to it than simply luck.

The problem is that no-one has been able to identify what that "more" is, and there has been a lot of research . The one thing that research has established is that past performance really, really, really is no guide to the future (which makes the new KIIDs with their mad extrapolation of performance all the more galling ) , which leaves us with "luck", which is a fair approximation for nobody having a clue what's going on.

I would comment that the idea that a private investor "doing his homework" can generate an edge on the market strikes me as bonkers.

The vast bulk of my investments are passive. The portion that isn't is my wild guess at what will generate a higher income than the passives, but that's a triumph of hope over experience.

[genou]

Let's compare how your trackers did against my funds over the last three years, then we will know for sure eh?.

You are not getting the views that are being put to you. The comparison will prove nothing. There was, as far as all research can demonstrate, no way to know when you picked those funds how they would go on to perform. So there is no argument to be had about choice of investments other than as an exercise in hindsight, which is otiose. You really need to go and read some Kahneman, as suggested up thread.

This isn't a competition ( at least in my view ), it's an attempt to tease out what investment strategies will win over the long term. Not all of them are replicable :

An FT reporter, working through a standard set of questions, once asked him ( the Duke of Westminster ) what advice he’d give to young entrepreneurs keen to emulate his success.

“Make sure they have an ancestor who was a very close friend of William the Conqueror,” he replied.

[genou]

Question is - Why are those funds managers consistent out performers?

Nobody knows. All the research says it is random. Which means you can't know which manager to pick. Which seems to be an answer you do not wish to accept.

If you really feel the need to do meaningless ( and I mean that as a statement of fact, as far as we know from all the research to date, not polemic ) comparisons, I hold

VEVE
SWDA
VFEM

as about 50% of my share portfolio. VEVE/SWDA is because it's sometimes convenient to have automatic accumulation.

[genou]

Thank you our posts crossed. Far from being meaningless, the real world says different. I won't accept broad brush your assertion because I do not invest broad brush. We all know an average fund in an average year will under perform. You are not posting facts you're posting information that supports your premise. I'm doing the same. That's fine. I'm interested in making money not following some dogma. Thanks again.

I'm not conscious that I am posting any information that is broad brush. There really are no patterns. There is no way to know how a manager will perform by looking at his track record. The real world says the performances were different - but there is no recognised method you can show that would have allowed you to say that your choice was better than mine at the time that the choice was made .

PS - Twenty years out performance is random? Pull the other one!

Hold the other one out. That is what all the research says, and this is an issue that has been studied to death. I'll leave this here, as I'm just repeating myself.

[ADrunkenMarcus]

However, the point I want to illustrate is am I bonkers to hold the funds, or not? To me, it is pretty obvious.

Smith's record from 4 December 2003 to 31 December 2017 showed a 16.7% CAGR compared to 9.6% CAGR of the MSCI World Index: viewtopic.php?p=136952#p136952 I'd say holding him instead of a tracker is a good idea.

Best wishes

Mark.

[SalvorHardin]

I would comment that the idea that a private investor "doing his homework" can generate an edge on the market strikes me as bonkers.

The thing is that a lot of academics have a lot of credibility riding upon efficient market theory, which is the justification for the claim that investors can only outperform the market by chance.

But efficient market theory is built on very dodgy foundations, as the behavioural economists have shown. The problem is that there aren't many research grants available to show that markets are not efficient (and not many jobs in academia for those who hold that view).

It has been well explained by Warren Buffett in 1984 in the Superinvestors of Graham and Doddsville.

https://en.m.wikipedia.org/wiki/The_Sup ... Doddsville

P.S. It does require quite a bit of work, mostly reading. And patience. And the nerve to not be panicked out of positions. And to often go against the crowd. I find that arguably the most important skill is finding the investments to avoid and then avoiding them.

[AleisterCrowley]

Here's Warren Buffet again..
https://www.moneyobserver.com/news/warr ... cker-funds

'Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.'

While he conceded that active outperformance is not impossible, he argued the problem simply is that the great majority of managers who attempt to beat the market will fail.

Further he [WB] said some investment professionals will be lucky over short periods. 'If 1,000 managers make a market prediction at the beginning of a year, it's very likely that the calls of at least one will be correct for nine consecutive years.

'Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet. But there would remain a difference: the lucky monkey would not find people standing in line to invest with him.'

Back to luck, and monkeys, again... oook ook

[hiriskpaul]

Don't belittle monkeys with pins as they can make damned good fund managers!

Take 1000 blindfolded monkeys and have them pick 30 stocks from a broad cap weighted index, such as the Russell 1000 or MSCI World, with a pin. Invest equally in those 30 stocks, then a year later have the monkeys do the same thing again.

Historically the average return of those monkeys over rolling 10 year periods will have beaten the index most of the time. The reason is that this process over weights both small cap stocks and value stocks.

Not only are monkeys better than average than a broad index, they are far better than fund managers as they work for peanuts. Also, the top percentile over a 10 year period will have the track record of truly gifted stock pickers.

[tjh290633]

A good few years back, one of the suggestions to account for the observed outperformance of an HYP, relative to the market, was the adoption of nominally equal weighting and infrequent dealing. Compared with a fund, dealing is required there as funds flow in and out. Not so with an IT unless they are indulging in discount control. For them equal weighting is impractical.

However, not being followers of fashion might have a lot to do with it.

TJH

[colin]

But efficient market theory is built on very dodgy foundations, as the behavioural economists have shown. The problem is that there aren't many research grants available to show that markets are not efficient (and not many jobs in academia for those who hold that view).

I think that 'Value Investing' as described is one of the processes which makes the market efficient, when relatively less money in the total market is being managed by people with a value approach then there are more opportunities available to those who do follow such an approach, as investors begin to see the rewards enjoyed by such funds money then flows in the direction of 'Value' funds which makes the opportunities harder to find because the market has become that more efficient, the market has been made more 'efficient' by the action of the value investors.

Did not Investors Chronicle run a screen looking for value shares to find that recently they had to relax the strictness of their value criterion and look more toward Aim stocks to create a value portfolio? I can't remember all the details but I am sure they did.
The literature available seems to indicate that their have been long periods when Value investing under performed Growth investing and perhaps the reason is that the behavior of fund managers tends to make the market efficient over time but the behavior of investors repeatedly knocks back the process as investors become over enthusiastic about growth stocks.

[Lootman]

The literature available seems to indicate that their have been long periods when Value investing under performed Growth investing and perhaps the reason is that the behavior of fund managers tends to make the market efficient over time but the behavior of investors repeatedly knocks back the process as investors become over enthusiastic about growth stocks.

Rather than try and second guess whether it is the turn of growth or value to out-perform, I prefer to look at myself rather than the numbers. In other words part of the skill in investing is knowing yourself.

So for example I feel sure there are periods when value works best. But I am just not very good at picking value investments. Too many of them end up being value traps or yield dogs, and then the very worst thing I can do is double down on them. Also, value investing requires poring over numbers and accounts, and I'd rather stick pins in my eyes.

Whereas growth investing is more about a narrative, a story. I am not competing with the numbers jockeys but rather looking for trends and ideas that will succeed. And since personally I find that easier (and more interesting) then that is the right approach for me.

Of course all this is about picking shares, whereas the OP was really talking about picking people who pick shares. Personally I don't use open ended funds so that style is less interesting to me. Successful open-ended funds rapidly become too big and then the magic usually vanishes. The best performing funds often have a lot of investors in them, who joined at the peak, and who haven't done very well.