New Sunday Times Feature - Diary of a Private Investor

Sarenco

Frequent Poster
Messages
5,668
Nice add of “relative to their long-term averages”.
Mean reversion is a financial theory suggesting that asset prices and returns eventually return back to the long-run mean or average of the entire dataset.

Perhaps you have a different understanding of the phrase?

You said that CAPE is based/built on mean reversion. It's not. It's a valuation metric.

Can CAPE (or any other valuation metric) be applied in executing a mean reversion trading strategy or to prove (or disprove) the existence of mean reversion? Sure - nobody suggested otherwise. But that's not the same thing as saying that CAPE is based/built on mean reversion.

CAPE can also be cited in any other number of other contexts. The idea that CAPE (or any other valuation metric) is meaningless unless viewed through the prism of mean reversion (or any other financial theory or trading strategy) makes no sense.

As it happens S&P500 CAPE has shown no tendency to revert to mean in recent decades. Does that make it a meaningless valuation metric? I don't think so but you are entitled to your own views.

Regardless, CAPE is not based/built on mean reversion.

It seems a shame that you feel the need to resort to ad hominem. Oh well.:(
 

Fella

Frequent Poster
Messages
374
Warren Buffett — 'There seems to be some perverse human characteristic that likes to make easy things difficult. '

I've no clue what CAPE is but I reckon Warren Buffett should wear one for telling people people what to do , just invest in a low cost index tracker and your going to beat most people that mess about.
Of all the ways I've made money investing is the simplest buy and hold cheap investment trusts regularly and come back in 20 years. It's like people want to make it more complicated picking individual shares or timing the market , I spent hundreds of hours trying to automate ways to make money on Betfair / amazon etc and the dream was to have a passive income . I think if people are investing in stock market and messing around to much they should go try something else like selling on amazon or trading Betfair , because investing is great its hands off passive income its the dream.
 

Colm Fagan

Frequent Poster
Messages
336
@Fella. I presume that comments like
t's like people want to make it more complicated picking individual shares or timing the market
and
I think if people are investing in stock market and messing around to much they should go try something else like selling on amazon or trading Betfair
are aimed at people like me who like to buy real shares in real businesses rather than simply invest in an index tracker.

I compare myself to the guy (or gal) who goes to the races to admire the quality of the horses and to experience the thrill of seeing them and their riders compete, as opposed to someone who goes to the bookies and puts a bet on some horse that the tipster in his local paper has recommended, and that represents nothing more than a name and a number.

For a start, you won't hear me talking about CAPE, Beta, Alpha and similar esoteric terms. I do not see investing as a mathematical exercise. I like to study a company’s accounts and to read the chairman's and chief executive's statements accompanying the Annual Report. I like to participate in earnings calls and to attend AGMs whenever possible. I ask management the occasional question on how the business is going. I actually like doing that, I have the time for it, and it has helped me to earn a good return on my investments. As it happens, I have beaten the relevant indices hands down, but I recognise that a lot of the performance has been due to luck (particularly by having such a heavy weighting in Renishaw and, to a lesser extent, in Apple and a few other good performers - with the occasional dog thrown in to prevent me losing the run of myself). But achieving good performance isn’t the primary objectives nor has it been the primary benefit from holding shares directly. The main payback derives from the fact that, by having a real interest in the businesses, I am more inclined to stay with the company through thick and thin and less likely to sell when things look bad. I can sleep easier at night if I know the business is doing OK despite the (hopefully temporary) price fall. It also means that I invest a much higher proportion of my savings in equities and leave less in cash and bonds than would be the case if prices were just numbers in a report from an index fund provider. Such a strategy has been shown to deliver the goods in the long-term.
 

Sarenco

Frequent Poster
Messages
5,668
Hi Colm

I hope you don't take this the wrong way but are you at all concerned that the day may eventually come when you won't be able to follow what's going on at the races?

Similarly, does your next of kin share your enthusiasm for attending race meetings?
 

Colm Fagan

Frequent Poster
Messages
336
are you at all concerned that the day may eventually come when you won't be able to follow what's going on at the races?
I presume that you're asking what happens when I get too old to manage my investments actively. Firstly, as you've probably gathered from my updates to date, I have a buy and hold approach with my key holdings. I don't envisage making many changes in future either. Also, I have contingency plans in case anything happens to me, so that someone I trust will take over decision-making. If all comes to all, the money can be put into an index tracker: I agree with @Fella that this is the best approach for someone who just wants an investment that will deliver results in the long-term, without wanting to look under the bonnet.
does your next of kin share your enthusiasm for attending race meetings?
My next of kin have seen the results over many years; in fact, the diary started a number of years ago as my way of explaining to my nearest and dearest what I was at. She knows nothing about the stock market, but she knows the main companies I've invested in and she knows why I'm invested in them (thanks to the diary). That gives her more peace of mind than if our money was in some faceless fund.
 

Sarenco

Frequent Poster
Messages
5,668
That's exactly what I was driving at Colm.

A few years ago I had to help sort out a portfolio of individual stocks for an elderly relative who is, well, no longer at the races. Frankly, it was a bit of a nightmare and I remember mumbling to myself a few times that our life would have been a lot easier if he had just invested in a darn fund.

But it sounds like you have your bases covered.
 

Colm Fagan

Frequent Poster
Messages
336
A few years ago I had to help sort out a portfolio of individual stocks for an elderly relative
I take your point. I recall when I started investing first, I had share certs stuck in boxes, which I was likely to mislay, etc. Now, I don't hold any share certs and none of the dividends etc. come directly to me (they couldn't anyway for my ARF and AMRF holdings); all my accounts are with recognised providers and I hope there would be relatively little bother if I were to cock my clogs.
 

Fella

Frequent Poster
Messages
374
@Colm Fagan I wasn't really directing my point at you buy my point was aimed in general at any private investors.I have nothing against you and I applaud you putting your investments up for everyone to scrutinise .

I would bet money that a random selection of n shares picked by a monkey would perform as well as your top n shares over any given time period if I was getting odds above evens.

My opinion is you have beaten the market through luck and no skill , I don't believe its possible to beat a liquid market , buying Apple or short Telsa in the opinion you know more than the market imo is crazy , by all means buy Apple or short Telsa but understand that whenever you do so you are buying or selling at a fair value and you have no advantage over the market. I don't think its possible to tell if someone is lucky or unlucky even in a lifetime of investing with a small amount of holdings like you have.

I get that you enjoy the research in these companies and following the progress its much more exciting than just buying an index , I often make irrational bets myself and I like to convince myself that I had an edge but I know I didn't.
 

Colm Fagan

Frequent Poster
Messages
336
I don't believe its possible to beat a liquid market , buying Apple or short Telsa in the opinion you know more than the market imo is crazy , by all means buy Apple or short Telsa but understand that whenever you do so you are buying or selling at a fair value and you have no advantage over the market.
@Fella, you're in danger of attributing God-like qualities to "the market". Don't. You like quoting Warren Buffett. Well, you should take heed of another of his quotes: "Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence."
 

spanners

Frequent Poster
Messages
58
I would bet money that a random selection of n shares picked by a monkey would perform as well as your top n shares over any given time period if I was getting odds above evens.

My opinion is you have beaten the market through luck and no skill , I don't believe its possible to beat a liquid market , buying Apple or short Telsa in the opinion you know more than the market imo is crazy , by all means buy Apple or short Telsa but understand that whenever you do so you are buying or selling at a fair value and you have no advantage over the market. I don't think its possible to tell if someone is lucky or unlucky even in a lifetime of investing with a small amount of holdings like you have.
Whilst I agree with you that for the vast majority of investors a tracker is the most suitable investment, I struggle to understand why those who do pick individual shares are rubbished so enthusiastically by those who don't. It does not seem to happen with any other asset class when somebody uses their opinion/knowledge/expertise to inform their investment decisions.

I have a friend who sold a small online business in 2005 and suddenly found themselves with about €2.5m in cash. Having no experience of anything other than this business, he met with various financial advisors to find out how best to invest it.

After meeting with these guys and weighing up their advice he decided to ignore it all and put the whole lot into Google shares. I thought he was insane and told him so, and his response was that he felt all the advisors, when pressed with detailed questions, actually had a very basic understanding of the investments they recommended. He said he was much more comfortable putting the money in something he personally had a very high knowledge of rather something on the strength of a third party's limited knowledge. He pointed out that the only reason he had managed to grow his own business was thanks to products and services Google offered, so riding his entire cash wealth on the fate of Google was little different to the situation when he had his entire wealth tied up in the business.

Obviously this has worked out fantastically well for him, and far better than the expected returns from the advisors, some of whom would be still showing a substantial loss.

I am not for a minute suggesting that everyone should run out and put all their money in one stock because they like the products! There will obviously always be outliers like this, but I share the story because I recently asked him whether he thought it was luck or skill that he outperformed the market so spectacularly, and I thought his response was very interesting.

He said that he had never given a moments thought to beating the market, and the best decision he made was not actually the specific Google investment, but to ignore the advice he received. Because he was lucky enough to have no knowledge or experience of investment theory and best practice, he was confident in his judgement/skill in deciding that the advisors were wrong.

There are still people who think he just got lucky, but if he had put the same funds in a different asset class, say some commercial property somewhere that worked out well, I think most people would put the success down to an expertise and knowledge of that sector.
 

spanners

Frequent Poster
Messages
58
He was insane. Just because it worked out, it doesn’t mean he was right to do it.
I kind of agree with you.

But essentially that means I think that somebody was incorrect to trust his own judgement on something he was particularly well informed about, in favour of trusting the judgement of a third party on something he knew nothing about.

That seems counterintuitive!
 

Gordon Gekko

Frequent Poster
Messages
3,689
I kind of agree with you.

But essentially that means I think that somebody was incorrect to trust his own judgement on something he was particularly well informed about, in favour of trusting the judgement of a third party on something he knew nothing about.

That seems counterintuitive!
It was the size of the position that was particularly crazy.

He put the whole €2.5m into one stock. €1m would have been a massive position.
 

Colm Fagan

Frequent Poster
Messages
336
I struggle to understand why those who do pick individual shares are rubbished so enthusiastically by those who don't. It does not seem to happen with any other asset class when somebody uses their opinion/knowledge/expertise to inform their investment decisions.
Thank you spanners. You've articulated my thinking perfectly.
Let's suppose I decided to move house, and someone rubbished my decision with comments like:
I would bet money that a random selection of n shares/houses picked by a monkey would perform as well as your top n shares/houses over any given time period if I was getting odds above evens
I'd look at him as if he had two heads.
I think the fact that share prices are quoted continuously has something to do with it. Maybe, if estate agents were shoving notes in our letterboxes nearly every day telling us how much our house had increased or decreased in value that day, we would look at property as an asset class in the same way as some people look at shares.
We can bring this analogy to your interesting story about your friend investing the entire proceeds from his business in Google. I don't think it was so crazy. Let's suppose that your friend was a real property expert. He could see that, due to changes in planning laws, etc., property in a certain part of the city was likely to jump in price. He knew of a particularly attractive property in that part of the city that was being valued by the market in ignorance of the changes that were going to take place in that locality. He decided to buy it, even though it represented a very high proportion of his net wealth. He didn't mind though, because the house was in excellent condition and was pretty certain to increase substantially in value when those planning permissions were granted and everyone wanted to build in that part of town.
 

Fella

Frequent Poster
Messages
374
@Colm Fagan
My beliefs are based on looking at results of millions of bets placed against Betfair on efficient markets . I was part of a forum which analysed results of advantage players who placed millions of bets each over their lifetime and we then produced a graph and found that everyone who layed (shorted) arbitrage bets over years was down at Betfair and up at the bookie and would have been better off letting the bets at the bookmakers run without laying them. I'm talking about hundreds of people placing 100's of bets each day/week and looking at statistics over 5-10 years.
I used this as a way of making money and the markets are never 100% efficient ok there may be some crazy times where you can pick up some value but generally and over any long period of time you are buying and selling efficient markets at a fair value you actually make a loss on spread and commissions. I know many professional gamblers making big money from Horse racing markets who know nothing about horses , who will make more money long term a value punter who believes in an efficient market or an expert who follows horse racing his whole life and studies form etc? I'd have my money on the former.
 

Colm Fagan

Frequent Poster
Messages
336
@Fella
In reply, I'll quote from the very first sentence of my very first column, dated 6 September 2015:
"The broadcaster George Hook reckons buying shares is a form of gambling: “I don’t back horses and so I don’t buy shares”. Hook is wrong. There is a fundamental difference between the two. The average gambler may hit the occasional lucky streak but is a sure loser in the long-run, whilst the average share buyer should make a profit, provided they have a reasonable spread of investments and a sufficiently long investment horizon."
 

Fella

Frequent Poster
Messages
374
@Fella
In reply, I'll quote from the very first sentence of my very first column, dated 6 September 2015:
"The broadcaster George Hook reckons buying shares is a form of gambling: “I don’t back horses and so I don’t buy shares”. Hook is wrong. There is a fundamental difference between the two. The average gambler may hit the occasional lucky streak but is a sure loser in the long-run, whilst the average share buyer should make a profit, provided they have a reasonable spread of investments and a sufficiently long investment horizon."
Betfair trading is the same as the stock market its 100% book and you only lose money on the spread and the commissions , I am not really explaining myself very well but basically what I am saying is taking any position on Betfair you would expect to return long term negative to the tune of the spread and commissions its very hard to beat Betfair and only a tiny % do and I am not sure if they are lucky or skilled.
On the stock market you have a positive expected market return but to beat the market returns long term you would need your picks to be value when you place them I don't believe you have an edge over the market in choosing to short Telsa or Buy Apple the weight of money in this market would suggest to me its highly likely you bought at a fair value and you have no edge .
I don't think we are likely to agree on this :)
 
Top