Investors again show why they suck at investing

[vand]

It's an open secret that the average/median/typical investor in the stock market captures only a fraction of the the returns delivered by the stock market - while some may point the finger at active management, fees, and stock picking, there is also a far more important and simpler reasons - they cannot control their emotions and exhibit poor investor behaviour - they buy HIGH and sell LOW.

Fund flows confirms it:

https://www.morningstar.co.uk/uk/news/2 ... ecade.aspx

£27bn inflows into an easy, peaky market in 2021 turned into £23bn outflows as they piled for the exits in 2022.


Unfortunately this is the way it HAS to be! Stocks go up because people buy them, and they go down because people sell them. If you want to be a successful investor then you have to acknowledge and accept this.

[GoSeigen]

Unfortunately this is the way it HAS to be! Stocks go up because people buy them, and they go down because people sell them. If you want to be a successful investor then you have to acknowledge and accept this.

Not surprising they invest poorly if they believe this sort of thing. Stocks' prices do NOT go down because people sell them and they do NOT go up because people buy them. They go up for a number of reasons, none to do with buying, rather they rise because:
1. The issuer is paying smaller dividends than its long term earnings stream
2. Investors are demanding lower yields than previously
3. The issuer is recognised as becoming more profitable
etc

and the converse for falling prices.

There's a great amount of defeatism about active investing these days. I bought into The Motley Fool's DIY approach and have no regrets at all with 14% CAGR after tax and costs over 22 years of active investing during which I completely rejected the above folk "Wisdom". Thinking is difficult [Jung] but investors who can think for themselves have every chance of doing very well.

GS

[Dod101]

Unfortunately this is the way it HAS to be! Stocks go up because people buy them, and they go down because people sell them. If you want to be a successful investor then you have to acknowledge and accept this.

Not surprising they invest poorly if they believe this sort of thing. Stocks' prices do NOT go down because people sell them and they do NOT go up because people buy them. They go up for a number of reasons, none to do with buying, rather they rise because:
1. The issuer is paying smaller dividends than its long term earnings stream
2. Investors are demanding lower yields than previously
3. The issuer is recognised as becoming more profitable
etc

and the converse for falling prices.

There's a great amount of defeatism about active investing these days. I bought into The Motley Fool's DIY approach and have no regrets at all with 14% CAGR after tax and costs over 22 years of active investing during which I completely rejected the above folk "Wisdom". Thinking is difficult [Jung] but investors who can think for themselves have every chance of doing very well.

GS

This is of course typically controversial stuff from GS. Stocks do not necessarily go up in price because the 'issuer' is paying smaller dividends than its long term income stream. I assume by 'issuer' he is referring to the quoted trading entity. The NAV will increase in the circumstances he describes but the stock will not automatically increase in price.

Investors do not often 'demand lower yields than previously'. They will often accept lower yields, but I have not seen them 'demand' them. In any case lower yields are a result of the increased share price, usually arising from more buying of the share.

Stock prices rise because the issuer is recognised as becoming more profitable. Again there is no automatic increase in the share price but that will usually happen. Why? Because of increased demand for the share, another way of saying 'because more people are buying'.

Dod

[Urbandreamer]

I think that it's a good idea to follow the OP's link and judge how well it ties in with their thesis.

Personally, I can't see any evidence that the article links outcomes with buying and selling, or "suck at investing".

There is plenty of "evidence" that active investors fail to "outperform the market" out there, but not in that article.
Such "evidence" also makes the assumption that active investors aim is to outperform the market, and may judge their performance against a metric that is inappropriate.

There are also articles that show "time in the market" performs better than "timing the market", but again it's not mentioned in the OP's article.
Such evidence also tends to ignore the Montgomery Burns effect. That companies lose their market and that some degree of equity replacement is needed over a long investment timescale.

[GoSeigen]

Unfortunately this is the way it HAS to be! Stocks go up because people buy them, and they go down because people sell them. If you want to be a successful investor then you have to acknowledge and accept this.

Not surprising they invest poorly if they believe this sort of thing. Stocks' prices do NOT go down because people sell them and they do NOT go up because people buy them. They go up for a number of reasons, none to do with buying, rather they rise because:
1. The issuer is paying smaller dividends than its long term earnings stream
2. Investors are demanding lower yields than previously
3. The issuer is recognised as becoming more profitable
etc

and the converse for falling prices.

There's a great amount of defeatism about active investing these days. I bought into The Motley Fool's DIY approach and have no regrets at all with 14% CAGR after tax and costs over 22 years of active investing during which I completely rejected the above folk "Wisdom". Thinking is difficult [Jung] but investors who can think for themselves have every chance of doing very well.

GS

This is of course typically controversial stuff from GS. Stocks do not necessarily go up in price because the 'issuer' is paying smaller dividends than its long term income stream. I assume by 'issuer' he is referring to the quoted trading entity. The NAV will increase in the circumstances he describes but the stock will not automatically increase in price.

1. Yes issuer is the issuer of the shares.
2. It was one of three random examples in a no-doubt much longer list.
3. There's a common implicit assumption to the sort of statement I made which I took as read, i.e. "All else being equal".

Investors do not often 'demand lower yields than previously'.

I don't see why not. If you look at bond prices they are doing this all the time. When yields do go down the market prices will necessarily be higher than previously at the higher yields. Some people prefer to think in terms of "multiples" and others "discount rates"; they're roughly equivalent concepts.

They will often accept lower yields, but I have not seen them 'demand' them. In any case lower yields are a result of the increased share price, usually arising from more buying of the share.

This is what I insist is fallacy. There is no more buying of any share. Shares are always bought and sold in equal quantities simultaneously. How can "more buying" possibly occur? The closest statement to the above which might be true is that "in aggregate the market wishes to increase its allocation to the share" but this still does not involve buying more shares -- rather however many are bought and sold, the price of those trades are adjusted upwards, that is all. Another statement people often make is that "more people want to buy" or "buyers are keener than sellers" but I've never found a proponent of this way of thinking who can in any useful way quantify it. It's always just hand-waving (even the legendary Gengulphus).

Stock prices rise because the issuer is recognised as becoming more profitable. Again there is no automatic increase in the share price but that will usually happen. Why? Because of increased demand for the share, another way of saying 'because more people are buying'.

Dod

No, more demand doesn't mean more buying. The price of a share can jump by any amount upon the sale of a single share! You could argue that if the price were still the same as prior to the jump there would be many more "buyers" -- but then you are forgetting there would also need to be many more "sellers" at the price, else how would all the buyers buy the share? The jump in price is what induces the seller to be happy to sell, even if a buyer of only one share is willing to trade. This is all elementary and obvious logic and merely requires a few minutes' sustained thought to appreciate.

The fact is shares are not a consumable item that can be manufactured and sold like a physical good. They are a security which once issued remain in issue to be held by some investor at all times with no subsequent variation in the quantity of shares outstanding. What varies is the price, not people buying more of them. Like I said, poor investment performance is not a surprise if people think of shares as equivalent to consumable items.


GS

[Dod101]

Ok then, let’s say that if there is more demand to buy than to sell, the price will rise and vice versa, the price will fall. What of course we do not know is at any one time, how many sell and buy orders are on a market maker’s books. You are of course correct but are being pedantic about it. The market maker gives the price at any time but he must be influenced by the perceived demand or lack of it.

Dod

[Newroad]

Hi All.

I'm pretty agnostic on this - I think active and passive may each win during certain periods - so much so that my equity investments are 50% active, 50% passive. I would however contribute as follows (source FT Portfolio section)

VWRL (a good proxy for passive) is -1.04% over one year and +130.95% over ten years
FCIT (a reasonable proxy for active) is +10.49% over one year and +75.34% over ten years

I hold both.

You can draw your own conclusions from this, but I would suggest that for those who are global and "active", one might benchmark against FCIT and if you can't outdo it over time, maybe just invest in it (or something similar). Some UK equity income investors cite CTY in a similar context.

If, of course, it's more about having some fun and you enjoy stock-picking or similar - that's fine.

Regards, Newroad

[LooseCannon101]

A lot of investors (retail and institutional) take too much notice of the news which has little or no bearing on company earnings. The financial industry e.g. stockbrokers and business media try to create stories of doom and gloom, and then change tack and say everything's OK the very next day.

My experience of stock prices is that they move according to sentiment, not facts. A boring strategy of long-term buy and hold of a world equity fund e.g. FCIT is never encouraged as it doesn't create revenue for the industry.

[Lootman]

You can draw your own conclusions from this, but I would suggest that for those who are global and "active", one might benchmark against FCIT and if you can't outdo it over time, maybe just invest in it (or something similar). Some UK equity income investors cite CTY in a similar context.

Yeah. GS made a big deal out of (allegedly) making 14% a year. But the last time I checked the returns on my S&P 500 tracker - my largest position - it was up 15% annualised over the last decade with (I feel sure) less risk, effort and cost. (Before dividends and FX gains).

More generally if the index gives you 10% annualised over the last century (and it does) then taking risk to add the odd percent to that seems a marginal enterprise. But if you are trying to make it rather than keep it, then maybe. Poor folks may feel the need to accept more risk than rich folks.

[tramrider]

Hi All.

I'm pretty agnostic on this - I think active and passive may each win during certain periods - so much so that my equity investments are 50% active, 50% passive. I would however contribute as follows (source FT Portfolio section)

VWRL (a good proxy for passive) is -1.04% over one year and +130.95% over ten years
FCIT (a reasonable proxy for active) is +10.49% over one year and +75.34% over ten years

This is a little strange as the AIC website gives FCIT share price total return as +14.7% over one year and +233.8% over ten years.

https://www.theaic.co.uk/companydata/fc-investment-trust/performance

A Google Finance graph of the FCIT share price alone without dividends gives about +180% over ten years.

[Adamski]

Fcit and Vwrl are very highly correlated if look at 5 year graph, comparison. So Fcit is imo a tracker in all but name, in recent history. Getting attention now as outperformed in last month.

[Adamski]

Yes majority of retail investors buy things after gone up and panic sell on crashes. Its human nature. That's why personally I'm better suited to trackers or mixed funds. Not skilled enough to time. Psychologically it's easier to stay invested as you're following a long term 20 year strategy.

[GoSeigen]

Ok then, let’s say that if there is more demand to buy than to sell, the price will rise and vice versa, the price will fall. What of course we do not know is at any one time, how many sell and buy orders are on a market maker’s books. You are of course correct but are being pedantic about it. The market maker gives the price at any time but he must be influenced by the perceived demand or lack of it.

Dod

Well I like being pedantic about things I consider flat out wrong.


GS

[Dod101]

Yes majority of retail investors buy things after gone up and panic sell on crashes. Its human nature. That's why personally I'm better suited to trackers or mixed funds. Not skilled enough to time. Psychologically it's easier to stay invested as you're following a long term 20 year strategy.

I make few changes to my investments but in recent times, I am more likely to take a profit when it is offered than attempt to run my winners, and have resisted selling when the market crashes. It is partly a frame of mind and partly I think advancing years and being a bit better off. You learn as time goes by that most market crashes recover fairly quickly, but you must avoid permanent losses like say Carillion and the disaster of the banks in 2007/8. I conclude that the latter takes some experience but also the courage (if that is the right expression) to act at more or less the right time.

Dod

[Bubblesofearth]

I make few changes to my investments but in recent times, I am more likely to take a profit when it is offered than attempt to run my winners, and have resisted selling when the market crashes. It is partly a frame of mind and partly I think advancing years and being a bit better off. You learn as time goes by that most market crashes recover fairly quickly, but you must avoid permanent losses like say Carillion and the disaster of the banks in 2007/8. I conclude that the latter takes some experience but also the courage (if that is the right expression) to act at more or less the right time.

Dod

Allowing for disasters isn't a problem if they only comprise a small part of your portfolio. They are inevitable and, in the absence of a crystal ball, cannot be predicted. The banking disaster, for example, need not be a portfolio disaster if you only hold one bank in a portfolio of 30 shares. This is the value of wide sector diversification. It's fanciful to think you can get out of shares that will go on to fail.

Conversely it's worth remembering that whilst you can lose 100% on an individual share you can make many multiples of your original investment on shares that go on to multi-bag. So hanging on to winners will more than compensate for the occasional failure. This is how markets, and therefore portfolios that are subsets of markets, evolve. Trying to interfere with that process simply incurs charges and is more than likely to end up leaving you worse off. Unless you are very lucky.

BoE

[Dod101]

I make few changes to my investments but in recent times, I am more likely to take a profit when it is offered than attempt to run my winners, and have resisted selling when the market crashes. It is partly a frame of mind and partly I think advancing years and being a bit better off. You learn as time goes by that most market crashes recover fairly quickly, but you must avoid permanent losses like say Carillion and the disaster of the banks in 2007/8. I conclude that the latter takes some experience but also the courage (if that is the right expression) to act at more or less the right time.

Dod

Allowing for disasters isn't a problem if they only comprise a small part of your portfolio. They are inevitable and, in the absence of a crystal ball, cannot be predicted. The banking disaster, for example, need not be a portfolio disaster if you only hold one bank in a portfolio of 30 shares. This is the value of wide sector diversification. It's fanciful to think you can get out of shares that will go on to fail.

Conversely it's worth remembering that whilst you can lose 100% on an individual share you can make many multiples of your original investment on shares that go on to multi-bag. So hanging on to winners will more than compensate for the occasional failure. This is how markets, and therefore portfolios that are subsets of markets, evolve. Trying to interfere with that process simply incurs charges and is more than likely to end up leaving you worse off. Unless you are very lucky.

BoE

I am not sure I agree with that. I think you need a more positive frame of mind. I avoided Carillion and warned at the time of the folly of holding it and I got out of banks in January 2008. I have missed out on a lot of good stuff, but I think avoiding disasters is more important.

Re winners, running them is of course a well known strategy, but that I think is where luck comes in. When is the optimal time to sell? many years back I was very lucky with Tullow Oil which was a 14 bagger for me. That was down to luck but how often have we seen shares rise strongly and then fall back to earth? If we have 'run the winner' without taking a profit what was the point in that?

Dod

[1nvest]

Also factor in cost and taxes.

Generations of 20 year separation, new born 0 years old, parents 20, grand parents 40, great grand parent 60 - by the time the child is 20 the GGP pass leaving a inheritance to the then 20 year olds.

If wealth of £1M above IHT allowance earns 4% gross real, 3% net real after taxation/costs (brokers fees, trading costs, market makers spread, fund fees, dividend taxation ...etc.), then over 20 years that compounds to £1.8M real. IHT of 40% then erodes that back down to near £1M net. Rinse and repeat.

Many savers/investors don't even achieve that rate of return, more often through bad decisions/timing (profit chasing buy-high/sell-low, whatever). Or wealth is passed to direct below heirs, that ends up paying multiple series of IHT.

People think their wealth is theirs, a product maybe of many years of hard work, scrimping and saving. But its just a loan, callable at any time. When you deposit savings into a bank its no longer your money, but the banks money, free to do with what it likes within regulations. Banks no longer require depositors in order to match with lending, they can just create debt out of think air. The state no longer needs to borrow your gold (money), it can just print/spend that devalues all other notes in circulation (a form of taxation, commonly called inflation). When there's no need for the state or banks to receive loans/deposits, then they're inclined to pay little against such loans/deposits.

Much of investing is more about currencies and cost/tax reductions, rather than about stocks and bonds. The last 30 years has seen generosity, tax and cost efficiencies, that is cyclical and in other era's tax/costs can be punitive. We're increasingly seeing a transition/reversal of the cycle. In the 1960's the Beatles sang 'Taxman' ... 19 for you, 1 for me, taxman words in reflection of 95% taxation rates. Broadly historically even basic rate taxpayers have averaged a 38% taxation rate.

When the state knows where all your money is, where it was sourced from and where it is spent, then that becomes total control. In some countries the population are even restricted as to what they might do/buy according to their state recorded citizen point score. When all your movements are monitored by camera and geolocation identification cards phones, you're just living in a open prison, where provided you're a good citizen you're permitted certain benefits/free-movement, or otherwise being isolated/imprisoned.

Many opt to just spend spend spend, enjoy life whilst they can and have others subsidise their housing, care etc. Fortunately there are others that scrimp and save, go without, in order to help fund the spenders. Yachts/jets are popular with those with real wealth, nomads with no single country affiliation, perpetual travellers who at the drop of a hat might relocate away from transitions to punitive regimes.

[micrographia]

I like to read an incomprehensible and irrelevant rant over my coffee as much as the next man, but... .

Average age of mother at birth of first child is steadily increasing and is now a few months under 30 years (its only been lower than 24 for 7 years, consecutively from '67-'73, in the last 84 years). Fathers about 3 years older - bump both up by about a year for age at birth of any child - and it gets higher the better off the parents. So about 30 years/generation for those likely to be hit by IHT. Parents at 30, grands 60, great grands 90. Bit of a difference in your sums then. That's before all the usual methods of maximising generational wealth transfer are applied.

Loved the unlikely combination of GGPs both being alive when when their GGCs are born AND then being vindictive enough to skip 2 generations in their will though . I'd enjoy watching the shenanigans if any GPs tried skipping a single generation with their inheritance in my extended family .

("In some countries..." - well, eventually one maybe, if you believe populist western conservatives with their own axes to grind )

EEM

[Newroad]

Hi Adamski.

What do you think FCIT (closet) tracks?

Further, if indeed it does closet track some index, how has it been able to "outperform" over the last month?

Large global investment trusts will always exhibit a meaningful level of correlation with a global tracker, but they're not one and the same (closet or otherwise).

Regards, Newroad

[1nvest]

I like to read an incomprehensible and irrelevant rant over my coffee as much as the next man, but... .
.
.
Loved the unlikely combination of GGPs both being alive when when their GGCs are born AND then being vindictive enough to skip 2 generations in their will though . I'd enjoy watching the shenanigans if any GPs tried skipping a single generation with their inheritance in my extended family .

Clearly you didn't comprehend that I indicated that when passed to the next direct generation that multiple layers of IHT end up having been paid. But if as you so indicate that you enjoy reading incomprehensible rants your mind isn't up to much