AI correction

[tjh290633]

Early stages? US and Japanese markets are up 2.5X over the past 10 years. CAPE ratio on the S&P500 is sitting around 34, some 1.7 standard deviations above its long-term average.

BoE

EDIT: Added 2. below.
1. What's the point of this quibble?
2. What are the practical limits of the S&P's deviation from "its long-term average"? Can the average itself not increase? Can the index not remain above its average for long periods? Can profitability not improve? Is inflation impossible?

GS

In the comments about tracker funds, I see some possible misconceptions. As I understand it, tracker funds buy the market constituents at their index weight. If that index weight changes, so does the value of their holdings, so no buying or selling is needed. If the have to create more units or dispose of units, then presumably they buy or sell all the holdings at market weight at the time. This surely can only affect the index as a whole.

My personal preference is to adopt an equal weighting approach, where a new holding is bought at my median holding value. Once bought they invariably deviate from median value. If they exceed a certain multiple of the median value, then I trim the holding by 25%. This is then reinvested in the lowest valued holding with the highest yield. This avoids investing in any share not currently paying a dividend or depressed because it has reduced its dividends considerably. Often the holding trimmed has a lower than average yield, because the price has risen so much.

Because I am seeking to increase dividend income, this approach helps me to achieve my objectives. It also tends to make my portfolio outperform the main index, from which most of my holdings have been drawn. This is, I feel, the reason why equally weighted indices tend to outperform the market weighted indices.

Looking at the relative price movements of my holdings during successive calendar years, it is obvious that this year's winners are often drawn from last year's losers. Hence the system ensures that buys are usually at a low price, while sales are at high prices.

Apart from the fact that an equal weighted portfolio is far more suited to a private investor, this system should lead to enhanced returns and outperformance.

TJH

[Sorcery]

I've seen articles in the last week or so saying that Nvidia has made a killing from selling it's highly priced chips but there is no sign that the implementation of such chips are showing up as increases to productivity, job reductions or increased profits. That will be the measure of the paradigm but no sign so far other than improvements to mobile phone photo editing. At the moment AI implementation just seems to be another, rather expensive, overhead.

This article looks quite good. It gives soundbites but also gives some of the details behind the soundbites.

https://www.theverge.com/24075086/ai-in ... e-earnings

I loved the comment on that article :

One of my colleagues likes to quip "Copilot saves you as a programmer from all of the tedious effort of 'creating code' and instead lets you focus on the thing programmers really love - debugging code that you didn't write."

debugging code that you didn't write is the pits if you missed the sarcasm.

[Hallucigenia]

I've seen articles in the last week or so saying that Nvidia has made a killing from selling it's highly priced chips but there is no sign that the implementation of such chips are showing up as increases to productivity, job reductions or increased profits. That will be the measure of the paradigm but no sign so far other than improvements to mobile phone photo editing.

It's going some way beyond photo editing - I gave some examples over on the AI Endeavours thread (and I suggest that talking about that kind of thing is best done there, and save this thread for market-related commentary). But if you think that it is just about photo editing then you don't know enough about it to comment - it is already proving transformational in areas such as protein modelling.

That's not to say there's not a lot of hype either, it is always the way of such things, but you don't get hype without nuggets of something real at the bottom of it. And there's always the Gartner hype cycle :

[mc2fool]

Answers to your questions: Yes, No, Maybe

Not necessarily in that order.

The questions you really have to ask yourself:

Q. Why am I posting these questions here?
Q. Do I think a bunch of random anonymous people on the internet have better insight and research compared to any other set of random amateur or professional investors?
Q. Am I simply seeking confirmation to feed my existing biases?
Q. How am I going to evaluate the responses and predictions provided here to determine how accurate they are likely to be?
Q. Given all of the above, how am I going to adjust my investment strategy in light of the information provided?
Q. Why do I think this is likely to give me an edge in relation to my investment decisions?
Q. Why aren’t I simply investing in a globally diversified passive fund and allowing time and global capitalism determine the answers for me?

Hope that helps.

Degsy

I totally agree with Degsy67 and particularly the last sentence - Why aren't I simply investing in a globally diversified passive fund and allowing time and global capitalism determine the answers for me?

Umm, well it's curious that you totally agree with Degsy67 and particularly the last sentence given that you run a single holding portfolio of just an actively managed investment trust.

So why aren't you simply investing in a globally diversified passive fund and allowing time and global capitalism determine the answers for you?

[LooseCannon101]

I totally agree with Degsy67 and particularly the last sentence - Why aren't I simply investing in a globally diversified passive fund and allowing time and global capitalism determine the answers for me?

Umm, well it's curious that you totally agree with Degsy67 and particularly the last sentence given that you run a single holding portfolio of just an actively managed investment trust.

So why aren't you simply investing in a globally diversified passive fund and allowing time and global capitalism determine the answers for you?

When I started investing in F&C Investment Trust (FCIT), about 25 years ago, I was a relative newbie.

About 10 years ago I made the conscious decision to stick with it as it effectively tracks its benchmark - the All World Equity Index. Actually, over the past 10 years FCIT has beaten this benchmark.

I also like the simple and cheap savings scheme, the dedication and skill of the fund manager - Paul Niven, and the trust's ethos - prudent, growth-centered investing for the long term.

Pound-cost averaging, dividend re-investment and the odd lump sum together with compounding of around 12% have enabled my life savings to grow to the point where I'm Financially Independent and Retired Early (FIRE).

[Oggy]

You might at least state your assumptions clearly. You're assuming markets price stocks correctly. They do not. Far from it. If markets mostly priced stocks correctly your faith in the power of trackers might be justified…

Asking me to state my assumptions is fair however you’ve then presumed to assume what my assumptions are and you got your assumption wrong so I felt I had to respond.

I’ve tried in the past to find stock picking strategies which work for me. You correctly identified that in my early stages of my investment journey I went all in on HYP investing. Through this I learned a lot with a portfolio which over time reached about £100k but which delivered results which were below that of simple passive index funds despite hundreds of hours of effort on my part. I now manage a seven figure portfolio through a passive index investing approach. My returns last year exceeded the size of my previous HYP portfolio. That wasn’t because I did anything clever other than better understand myself over time.

My only assumption is that despite my research, knowledge, mathematical abilities, skills extracting data into spreadsheets and decades of experience analysing data and improving businesses, I don’t have an edge when it comes to investing. That’s why I use index investing.

If others think they can find an edge then best of luck to them.

Degsy

(Retired at 55, relaxing in the back garden, sharing some thoughts here for the benefit of others, heading out for a few weeks in Thailand next week)

I like this approach, principally because nobody has yet persuaded me that there is a better one - longer term at least. I am in with a variety of global trackers, S&P500 trackers - either "pure" S&P or skewed slightly. The exception is Fundsmith - principally as I think Terry Smith is a genius and the returns cannot be argued with. I too don't posses the financial acumen to know any better than the market, so my view is to simply let them do the work. The only thing I have to do is keep an eye out for a crash - but even then, doing nothing may be the best option.

[mc2fool]

Umm, well it's curious that you totally agree with Degsy67 and particularly the last sentence given that you run a single holding portfolio of just an actively managed investment trust.

So why aren't you simply investing in a globally diversified passive fund and allowing time and global capitalism determine the answers for you?

When I started investing in F&C Investment Trust (FCIT), about 25 years ago, I was a relative newbie.

About 10 years ago I made the conscious decision to stick with it as it effectively tracks its benchmark - the All World Equity Index. Actually, over the past 10 years FCIT has beaten this benchmark.

I also like the simple and cheap savings scheme, the dedication and skill of the fund manager - Paul Niven, and the trust's ethos - prudent, growth-centered investing for the long term.

Pound-cost averaging, dividend re-investment and the odd lump sum together with compounding of around 12% have enabled my life savings to grow to the point where I'm Financially Independent and Retired Early (FIRE).

None of that has any relevance to or answers my point, being that you said you totally agreed with simply investing in a globally diversified passive fund and yet you invest in an active fund. Sounds self contradictory to me...

[GoSeigen]

EDIT: Added 2. below.
1. What's the point of this quibble?
2. What are the practical limits of the S&P's deviation from "its long-term average"? Can the average itself not increase? Can the index not remain above its average for long periods? Can profitability not improve? Is inflation impossible?

GS

In the comments about tracker funds, I see some possible misconceptions. As I understand it, tracker funds buy the market constituents at their index weight. If that index weight changes, so does the value of their holdings, so no buying or selling is needed. If the have to create more units or dispose of units, then presumably they buy or sell all the holdings at market weight at the time. This surely can only affect the index as a whole.

I don't see the relevance of this. The price is the key point. Contrary to what most people think the mere act of buying[selling] does not raise[lower] a share price. The opposite could in fact happen. What is important is how much value does the price give the buyer and how much does it give the seller? If one doesn't care about the price and the other does then it is almost inevitable that in aggregate the latter will get more value from that sort of transaction.

My personal preference is to adopt an equal weighting approach, where a new holding is bought at my median holding value. Once bought they invariably deviate from median value. If they exceed a certain multiple of the median value, then I trim the holding by 25%. This is then reinvested in the lowest valued holding with the highest yield. This avoids investing in any share not currently paying a dividend or depressed because it has reduced its dividends considerably. Often the holding trimmed has a lower than average yield, because the price has risen so much.

Because I am seeking to increase dividend income, this approach helps me to achieve my objectives. It also tends to make my portfolio outperform the main index, from which most of my holdings have been drawn. This is, I feel, the reason why equally weighted indices tend to outperform the market weighted indices.

Looking at the relative price movements of my holdings during successive calendar years, it is obvious that this year's winners are often drawn from last year's losers. Hence the system ensures that buys are usually at a low price, while sales are at high prices.

Apart from the fact that an equal weighted portfolio is far more suited to a private investor, this system should lead to enhanced returns and outperformance.

TJH

Indeed the mere fact that TJH selects shares by dividend yield means he is sensitive to price and in some [albeit crude] manner tries to avoid overpaying. Additionally, he is mostly purchasing individual shares not a basket which might be filled with all kinds of over-priced rubbish over which he has little control.

I'm not going to push my thesis in this thread much further, it's a theme I've written about many times, and it will be interesting to read the analyses of passive vs active investing for this period in a decade or two.


GS

[Lootman]

it will be interesting to read the analyses of passive vs active investing for this period in a decade or two.

It will also be interesting to read in the future how index investing will fail to work for a majority of investors.

Since index investing gives you a market return then it is reasonable to assume that it will work for at least 50% of investors. In practice probably more than that since index investing is almost free of costs at this point; an active strategy has costs.

So for a majority of active investors to out-perform that market return, it would take a minority of large investors to lose a lot.

There will always be some investors who out-perform, either through skill, luck, inside information or taking extra risk and getting away with it. But that doesn't mean that index investing is the wrong choice for most investors.

And of course there is nothing to stop you doing both i.e. an index fund as a core holding and some active bets around it for fun.

[Bubblesofearth]

Since index investing gives you a market return then it is reasonable to assume that it will work for at least 50% of investors.

Depends on what you mean by 'work'. If investors who invest in index funds wish to perform in line with the index, a reasonable assumption given what it says on the tin, then it should work for 100% of them.

As you rightly point out, active funds will on average do worse simply because of the higher charges.

BoE

[Adamski]

Yesterday Super Micro computer down 23%, Nvidia dropped 10%. Could this be start of a tech sell off, or maybe a bull trap next week? Could see AI price deflation or maybe next week, a train wreck? We shall see.

Certainly seems to following the usual trend. We're past the greed phase and the delusion phase. Now well into the denial phase.

How many times have we seen this, classic phases in a bubble? Every year, we're entering a new paradigm with something shiny and new. Only to implode.

Not effecting most of us though except through trackers

[RockRabbit]

And of course there is nothing to stop you doing both i.e. an index fund as a core holding and some active bets around it for fun.

Yes, I agree, this is a good approach for many 'active' investors.

[Whatsitworth]

https://youtu.be/UmCZNrqvt4s?si=YQWsKHk3geIqvcDp

Only 2 minutes long but the last 40 seconds is the all important question

[GoSeigen]

And of course there is nothing to stop you doing both i.e. an index fund as a core holding and some active bets around it for fun.

Yes, I agree, this is a good approach for many 'active' investors.

True, I have a core passive index holding of 5% of index funds, the other 95% is for "fun" active bets.


GS

[GrahamPlatt]

Why the downturn in the US chipmakers?

Maybe this https://yt.artemislena.eu/watch?v=b9oMJ6WmlwU

[Lootman]

Yes, I agree, this is a good approach for many 'active' investors.

True, I have a core passive index holding of 5% of index funds, the other 95% is for "fun" active bets.

A more normal approach would be 90% passive and 10% fun/speculaton.

After all a market return (beta) is typically a lot higher than any alpha you may get if your bets happen to work out.

[RockRabbit]

True, I have a core passive index holding of 5% of index funds, the other 95% is for "fun" active bets.

A more normal approach would be 90% passive and 10% fun/speculaton.

After all a market return (beta) is typically a lot higher than any alpha you may get if your bets happen to work out.

But wouldn't the proportions differ based upon various factors such as personal risk profile, time available to research individual stocks, age etc? For example, I used to be nearer 10% passive, 90% fun, but now I have less time available for investment the ratio is nearer 50:50. I expect that when I'm very 'elderly' I'll be nearer 100% passive.

[Lootman]

A more normal approach would be 90% passive and 10% fun/speculaton.

After all a market return (beta) is typically a lot higher than any alpha you may get if your bets happen to work out.

But wouldn't the proportions differ based upon various factors such as personal risk profile, time available to research individual stocks, age etc? For example, I used to be nearer 10% passive, 90% fun, but now I have less time available for investment the ratio is nearer 50:50. I expect that when I'm very 'elderly' I'll be nearer 100% passive.

Yes, and many start out thinking that they are so smart that they can consistently beat the market. It can be a matter of working at it, as you say. But then it is also an ego thing.

The reality is that the markets are full of professionals who work harder at it than you do, and have more resources and better information. So you are really relying on contrarian or higher-risk bets against the flow, fighting the tape and the Fed, hoping to be proven right.

A passive approach has given you 10% to 15% annually for the last 15 years. How much time and effort do you wish to expend trying to add a few basis points to that? And especially if you are already rich, risk-averse and are more concerned about keeping it rather than doubling it?

[RockRabbit]

But wouldn't the proportions differ based upon various factors such as personal risk profile, time available to research individual stocks, age etc? For example, I used to be nearer 10% passive, 90% fun, but now I have less time available for investment the ratio is nearer 50:50. I expect that when I'm very 'elderly' I'll be nearer 100% passive.

Yes, and many start out thinking that they are so smart that they can consistently beat the market. It can be a matter of working at it, as you say. But then it is also an ego thing.

Yes, that's certainly another factor in my case. As I get older I realise that, overall, I can't beat the market over time. Obviously there are exceptions to this, but I'm not one of them

[GoSeigen]

How far this community has strayed from the principles of the founders of The Motley Fool -- that you don't have to just buy the products of the Wise but can DYOR and invest directly in individual shares! "You can't beat the market" is so defeatist, swallowing the ETF industry marketing pitch without even chewing. Mind you I spent much of the last 18 years writing about the merits of gilts and bonds so I guess I can't really talk...

GS