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Time to get cautious?

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
CryptoPlankton
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Re: Time to get cautious?

#450484

Postby CryptoPlankton » October 15th, 2021, 9:30 pm

GoSeigen wrote:They accept that they are relying on other price sensitive traders to ensure the index pricing is "correct". Else their claim that index investing will beat active investing would very obviously be wrong [active investors would simply take the other side of a mispriced trade].

I'm sorry, but we seem to be talking cross purposes. I bought some VWRL in my SIPP because the expectation is that the global economy will grow in the long term and take the market higher. I am relying on that, rather than traders (who are bound by the economic conditions of their day), to give me a better return over that long term than remaining in cash. I don't claim that, or even care whether, this investment will beat "active investing".
GoSeigen wrote:Yes, I think there are times that index investors will lose money due to the activity of value-conscious (active) investors. I won't go into the mechanics but it's not hard to work out.


Again, I don't see how the relatively short-term activity of active investors will prevent my investment benefiting from long-term global economic growth?

Anyway, as far as the subject in hand is concerned, as usual I think it depends on personal circumstances. FWIW, I'm happy to stay mostly invested, but have trimmed back a little on U.S./tech and, like others, have a little dry powder should the opportunity arise. My view is to always position yourself in a way that makes you comfortable, but try not to trade any more than is necessary to achieve that comfort.

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Re: Time to get cautious?

#450504

Postby GoSeigen » October 15th, 2021, 11:32 pm

CryptoPlankton wrote:
GoSeigen wrote:They accept that they are relying on other price sensitive traders to ensure the index pricing is "correct". Else their claim that index investing will beat active investing would very obviously be wrong [active investors would simply take the other side of a mispriced trade].

I'm sorry, but we seem to be talking cross purposes. I bought some VWRL in my SIPP because the expectation is that the global economy will grow in the long term and take the market higher. I am relying on that, rather than traders (who are bound by the economic conditions of their day), to give me a better return over that long term than remaining in cash. I don't claim that, or even care whether, this investment will beat "active investing".

I'd guess if we're at cross purposes it may be because I am not seeking to personalise the discussion at all; I'm deliberately writing in general terms -- but perhaps you're interpreted what I wrote as a criticism of your style? [EDIT: Not your fault BTW: I am not the world's greatest communicator and often dashing off replies in a hurry...]


GS

CryptoPlankton
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Re: Time to get cautious?

#450509

Postby CryptoPlankton » October 16th, 2021, 12:27 am

GoSeigen wrote:
CryptoPlankton wrote:
GoSeigen wrote:They accept that they are relying on other price sensitive traders to ensure the index pricing is "correct". Else their claim that index investing will beat active investing would very obviously be wrong [active investors would simply take the other side of a mispriced trade].

I'm sorry, but we seem to be talking cross purposes. I bought some VWRL in my SIPP because the expectation is that the global economy will grow in the long term and take the market higher. I am relying on that, rather than traders (who are bound by the economic conditions of their day), to give me a better return over that long term than remaining in cash. I don't claim that, or even care whether, this investment will beat "active investing".

I'd guess if we're at cross purposes it may be because I am not seeking to personalise the discussion at all; I'm deliberately writing in general terms -- but perhaps you're interpreted what I wrote as a criticism of your style? [EDIT: Not your fault BTW: I am not the world's greatest communicator and often dashing off replies in a hurry...]


GS

Not taken as a criticism at all, I only used the example of my investment in VWRL (my only index tracker and < 5% of my total investments, so really not representative of my "style" *) to try to illustrate that not all index investors think like or claim the things you believe "they" do. Perhaps though, because I have a specific niche and purpose for my holding, I'm not typical and just not able to appreciate your point(s). Anyway, probably a topic to be left for another thread - if anyone is actually interested enough to start one (not me!).

CP

*The very idea that my approach to investment could be called a style made me smile!

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Re: Time to get cautious?

#450652

Postby JohnnyCyclops » October 16th, 2021, 6:56 pm

Simplistically, half of all active trades will beat the average and half of all active trades with be worse than the average. That's not the same as 'half of all traders' and I recall numbers like 70% of active stock traders lose money.

If we take an entire market index as a proxy for the 'average', given it reflects all 'players' in that market, on both ends of the trades, then an index investor will take an approximate median position on results. They will underperform some active investors, and outperform others. The key, though, is a successful active investor has to remain successful over five, ten, fifteen years. Few achieve it, and those that do in professional investing are usually only identified retrospectively. The index investor will remain in their median, ~50th percentile position, year on year.

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Re: Time to get cautious?

#450957

Postby Bubblesofearth » October 18th, 2021, 11:07 am

JohnnyCyclops wrote:Simplistically, half of all active trades will beat the average and half of all active trades with be worse than the average. That's not the same as 'half of all traders' and I recall numbers like 70% of active stock traders lose money.



The bulk of market gains are driven by a lot less (I forget the exact figure) than half of all stocks. Therefore more than half of all active trades will lose money. Those that make money will of course include trades into the 'big winner' stocks. However, if the strategy is to actively trade then, depending on trading criteria, the trader may not sit in the winning stock long enough to benefit from the bulk of the gains.

Plus of course dealing costs will ensure that over 50% of traders lose money.

BoE

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Re: Time to get cautious?

#451004

Postby Hariseldon58 » October 18th, 2021, 1:30 pm

This has been an interesting and wide ranging thread.

Index investing can provide a great way to obtain equity returns at low cost, VWRL is a good starting point and you won’t go too far wrong over the long term.

Active investors help provide price discovery and if 99% of investments were held passively then there might be problems with some stocks trading at prices that did not represent a sensible value, at that stage active investors would swoop and get great returns and set up a feedback loop to correct the situation.

I was looking to post a link to the video of the Berkshire Hathaway meeting where WB asked half the audience to imagine they were the entire market and trade amongst themselves , compared to the other half of the audience who were in trackers, it was a good thought experiment.

If we look at a generalist trust line Foreign and Colonial, it fishes in the same water as VWRL and provides similar returns from a large portfolio, gearing helps to offset the additional costs, as does the discount it tends to trade at.

It’s a pretty good argument for either active or passive management can well fulfill investor needs.

The investment game is much harder than it looks !!! It should be so easy to hold the market and drop the obviously bad companies but I’ve seen no evidence that anyone can do it over the long term and that tends to support the hypothesis that index investing is a reasonable choice for most investors over time.

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Re: Time to get cautious?

#451040

Postby GoSeigen » October 18th, 2021, 4:12 pm

CryptoPlankton wrote:]

*The very idea that my approach to investment could be called a style made me smile!


:)

The most scathing comment I can remember being made about me outside of school was by my wife's Greek Cypriot cousin Nicholas -- who'd more aptly be named Narcissus. Anyway, I'd just had all my hair shaved off; my wife mentioned my new hairstyle to the Dandy in an SMS, to which he replied "I wouldn't call that a hairstyle; has your husband ever actually had a hairstyle?"

GS

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Re: Time to get cautious?

#451614

Postby OhNoNotimAgain » October 20th, 2021, 12:26 pm

GoSeigen wrote:I'm not getting cautious, just less bullish. I'm paying down a bit of debt using interest payments and any other spare cash. Still significantly leveraged though with most positions in FTSE and overseas stocks with modest short positions on S&P500. Also hold a few short Dec puts against FTSE futures, more will be added while I hold my view that the market is mid-cycle and will continue to grind up.


GS


"The mathematical expectation of the speculator is zero."

"Clearly the price considered most likely by the market is the true current price: if the market judged otherwise, it would quote not this price, but another price higher or lower."

Louis Bachelier 1900

hiriskpaul
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Re: Time to get cautious?

#451988

Postby hiriskpaul » October 21st, 2021, 1:19 pm

For many investors, the thing to be most cautious about is on following the advice of the person looking at them in the mirror. That person will often propose classic "anti-patterns", such as buying high/selling low and holding on to an investment that lost money instead of moving to one that will make it back.

Basic pitfalls are easily avoided by simply shovelling money into a cheap global tracker, regardless of price, and shovelling it back out when you need it, regardless of price. That will deliver market returns at very low cost, which will beat the returns achieved by the majority of retail investors. Market outperformance is impossible, but so is the significant underperformance that most retail investors end up with. A step up in sophistication is to hold a fixed proportion of savings in cash and/or investment grade bonds and regularly rebalance with the global tracker. That will likely deliver lower returns than with the 100% equity approach, but will reduce the tail risk of running out of money when drawing down.

There are some systematic market timing approaches that may add value. Even if they don't add value, they may still end up avoiding the occasional huge market drawdowns that can lead to sleepless nights. Using CAPE values for example to increase cash/bond allocations when equity markets are high, reduce when CAPE is low. There are also various TA trend following approaches that seem to have some merit, Meb Faber's simple 10 month moving average for example. The difficulty with any market timing strategy though is sticking with it. There will be periods when these methods simply don't work. If the last half a dozen buy/sell signals were duds, it becomes increasingly difficult to believe the system hasn't stopped working.

Handing over money to middle men to try to get better returns is another option, but the long term track record of doing that does not look so great. It is frequently possible to get lucky in the short term, but the chances of staying lucky reduce as the investment term increases. The extra costs of employing those middle men compounds up, but their luck/skill typically doesn't. There is also the belief problem of staying the course with active managers, just as there is with systematic market timing. Even if one is convinced that they have found a fund or wealth manager that will deliver more than they cost, there will inevitably be periods of underperformance. That is when the doubt starts to grow over one's belief in the miraculous abilities of the middle men, and the inevitable "Do I stay or do I go now?" question increasingly nags away.

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Re: Time to get cautious?

#452143

Postby GoSeigen » October 22nd, 2021, 6:18 am

OhNoNotimAgain wrote:
GoSeigen wrote:I'm not getting cautious, just less bullish. I'm paying down a bit of debt using interest payments and any other spare cash. Still significantly leveraged though with most positions in FTSE and overseas stocks with modest short positions on S&P500. Also hold a few short Dec puts against FTSE futures, more will be added while I hold my view that the market is mid-cycle and will continue to grind up.


GS


"The mathematical expectation of the speculator is zero."

"Clearly the price considered most likely by the market is the true current price: if the market judged otherwise, it would quote not this price, but another price higher or lower."

Louis Bachelier 1900


This is rubbish. Fama was thoroughly discredited by events of 2008-9, I don't know how you can keep parroting this nonsense.

GS

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Re: Time to get cautious?

#452158

Postby GeoffF100 » October 22nd, 2021, 8:31 am

GoSeigen wrote:Fama was thoroughly discredited by events of 2008-9, I don't know how you can keep parroting this nonsense.

That is a bold statement. How about some evidence? Show us what he claimed (not what someone else claimed he claimed) and show us clear evidence that what he claimed would happen did not happen. I am sure that he did not claim that markets never have sharp declines.

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Re: Time to get cautious?

#452183

Postby OhNoNotimAgain » October 22nd, 2021, 10:06 am

GoSeigen wrote:
OhNoNotimAgain wrote:
GoSeigen wrote:I'm not getting cautious, just less bullish. I'm paying down a bit of debt using interest payments and any other spare cash. Still significantly leveraged though with most positions in FTSE and overseas stocks with modest short positions on S&P500. Also hold a few short Dec puts against FTSE futures, more will be added while I hold my view that the market is mid-cycle and will continue to grind up.


GS


"The mathematical expectation of the speculator is zero."

"Clearly the price considered most likely by the market is the true current price: if the market judged otherwise, it would quote not this price, but another price higher or lower."

Louis Bachelier 1900


This is rubbish. Fama was thoroughly discredited by events of 2008-9, I don't know how you can keep parroting this nonsense.

GS


I didn't know there was a connection between MPT and banks making loans to people who did not have the ability to service them. Please explain.

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Re: Time to get cautious?

#452420

Postby Bubblesofearth » October 23rd, 2021, 8:56 am

OhNoNotimAgain wrote:

I didn't know there was a connection between MPT and banks making loans to people who did not have the ability to service them. Please explain.


haha, you'll be lucky. It's another one of those obscure and ambiguous comments that rely on the psychic ability of the reader to peer into the mind of the poster in a futile attempt to try to discern whatever it is he/she is intending.

BoE

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Re: Time to get cautious?

#452430

Postby GoSeigen » October 23rd, 2021, 9:50 am

OhNoNotimAgain wrote:
I didn't know there was a connection between MPT and banks making loans to people who did not have the ability to service them. Please explain.


You made that connection, not me.

The notion that the market sets the "correct" price for a security was trashed (and regularly is) by the extreme volatility of that period in which the "correct price" could change 20% or more from hour to hour. Those prices had nothing to do with the value of the businesses and everying to do with the emotional state of the (few) particular market participants trading at those prices. e.g. how is it ever rational that a security can be priced at 69p to buy it and simultaneously at 79p to sell it? Which would Fama or his predecessor claim is the "correct" price? That is exactly the kind of trade I was participating in during Dec 2008 (as the buyer and seller respectively I hasten to add).

Yes, you could say markets find the correct price except when they don't but that is begging the question is it not?

GS

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Re: Time to get cautious?

#452431

Postby GoSeigen » October 23rd, 2021, 9:55 am

Bubblesofearth wrote:
OhNoNotimAgain wrote:

I didn't know there was a connection between MPT and banks making loans to people who did not have the ability to service them. Please explain.


haha, you'll be lucky. It's another one of those obscure and ambiguous comments that rely on the psychic ability of the reader to peer into the mind of the poster in a futile attempt to try to discern whatever it is he/she is intending.

BoE


It's a discussion board. If the comment is not understood then it can be questioned as OhNoNotimAgain did. No need to get passive-aggressive about it.

GS

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Re: Time to get cautious?

#452460

Postby GeoffF100 » October 23rd, 2021, 11:31 am

GoSeigen wrote:Which would Fama or his predecessor claim is the "correct" price?

They would not make any such claim. The clue is in the name: Efficient Market Hypothesis.

Definition of Hypothesis by Merriam-Webster: A hypothesis is an assumption, an idea that is proposed for the sake of argument so that it can be tested to see if it might be true.

Why do some people love misrepresenting what others said in an attempt to rubbish their reputations? A more constructive approach is to try to understand why Fama & French won the Nobel Prize for Economics, and how their work has been carried forward by others.

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Re: Time to get cautious?

#452557

Postby Bubblesofearth » October 23rd, 2021, 9:10 pm

GoSeigen wrote:
It's a discussion board. If the comment is not understood then it can be questioned as OhNoNotimAgain did. No need to get passive-aggressive about it.

GS


Sorry, GS, I do try to be well behaved but just occasionally I am no longer able to resist the urge to scream.

BoE

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Re: Time to get cautious?

#453325

Postby Adamski » October 26th, 2021, 7:22 pm

Interesting that in the 2 weeks since this thread started the S&P has gone up 5%!!!! 13-26 October. The US stockmarket is crazy!! And bitcoin and tesla but that's another matter!

I've switched to a more defensive portfolio this month, more in CGT and VLS60 and less in Monks and China tech. Partly as more comfortable with lower volatility. Also I worry the longer this bull market goes up the bigger the fall.

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Re: Time to get cautious?

#453356

Postby GoSeigen » October 26th, 2021, 8:48 pm

Adamski wrote:Interesting that in the 2 weeks since this thread started the S&P has gone up 5%!!!! 13-26 October. The US stockmarket is crazy!! And bitcoin and tesla but that's another matter!

I've switched to a more defensive portfolio this month, more in CGT and VLS60 and less in Monks and China tech. Partly as more comfortable with lower volatility. Also I worry the longer this bull market goes up the bigger the fall.


Why crazy? The bogeymen that were highlighted in the OP have gone away. So that's good news. The market has risen, like some of us said it would. Just the usual climbing of the wall of worry, no?

But you're probably timing it better than the OP in wanting to sell now that the market is at new highs rather than 2 weeks ago when everyone was terrified.

GS

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Re: Time to get cautious?

#453551

Postby absolutezero » October 27th, 2021, 12:37 pm

Adamski wrote:Interesting that in the 2 weeks since this thread started the S&P has gone up 5%!!!! 13-26 October. The US stockmarket is crazy!! And bitcoin and tesla but that's another matter!

I've switched to a more defensive portfolio this month, more in CGT and VLS60 and less in Monks and China tech. Partly as more comfortable with lower volatility. Also I worry the longer this bull market goes up the bigger the fall.

This is because it is not possible to time the market.
Regular monthly investments are the way to go.


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