New Sunday Times Feature - Diary of a Private Investor

Thank you Colm. Your question implies that Company X has done well though. The kernel of my point is that even with a team of CFAs, accountants, actuaries, quants guys, etc, my friend’s strategy can pick a dud through no fault of their own. For example, if the fellas in the lab are gaming the emissions tests or the finance team are colluding in an accounting fraud. As a result, they diversify; not to track the market, but to reduce the risk of a black swan event in respect of one of their stockpicks carrying them out. My concern about your approach is that one black swan event in relation to one of your stockpicks kills you (metaphorically!). I find your analysis and style of writing very interesting nonetheless and welcome the fact that you’ll continue to produce material.
 
Gordon Gekko said:
Your question implies that Company X has done well though.
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Gordon. No, I'm not implying that company X has done well. All I'm saying is that the price at which our friend buys into it reflects the accumulated wisdom of all the experts. The guy in the attic can choose a dud just as easily as anyone else - and I assure you that yours truly has picked his share of duds in my time. As promised to Brendan earlier, I do plan to give updates on them at some stage, not now.
I also believe in diversification, but I think that a dozen shares or even less, provided they are well diversified in terms of industries, geographies, customer types, business strategies, et cetera, are sufficient; you don't need to have at least 30 companies in your portfolio. Yes, there will be much greater short-term volatility but much of that will wash itself out in the long term. I've just looked at the relative performance of my own portfolio over the last four years against the chosen benchmark. In one month, the performance trailed the benchmark by 8.6%, in another month it trailed the benchmark by 6.1%. Such variances from benchmark returns would be completely unacceptable in a professionally managed fund, but I have learned to live with the volatility. The important point is that, in each calendar year, my portfolio beat the benchmark by a wide margin. In the end, it's long-term performance that matters, not short-term volatility.
 
if the price someone buys a stock at reflects the accumulated wisdom of whatever number of experts , how come that stock can be 15% lower within a week if for whatever reason the market drops and everything gets sold , apple stock was $100 less than two years ago , its profits are not up 70% since then , rationale and fair valuation goes out the window on a regular basis with equities

individual companies or even outright sectors are often heavily shorted and the price held down

this to me places a serious question mark over the claim that the price you pay for a stock is always what it should be
 
Colm Fagan said:
I don't know what to make of this comment. Of course the chairman/ majority shareholder didn't know the share price was going from £18 to £52. What he knew was that, as the top person in the business, it was his job to run it to the best of his ability. If he did the job well, the share price would increase and the value of his shareholding with it.
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My point is lots of people know companies inside out it doesn’t add value , when you bought renishaw it was valued fairly it’s price rise has nothing to do with your knowledge or understanding of the stock , it’s easy to be judge in hindsight that you made a great play and convince yourself that you know what your doing but more than likely you don’t and your point about beaten the market is irrelevant, if you only hold a small number of stocks i’d expect you to beat the market that’s kinda obvious but your been rewarded for taken extra risk , you only need to be unlucky once to wipe out a large part of your portfolio or a black swan event like all of your key holdings crashing bad together it could happen why take the extra risk when you can get the market average.
 
Colm Fagan said:
Gordon,

Your comment about the guy in the attic deserves a more comprehensive response, as it goes to the heart of my philosophy.

Let's play a little mind game. Suppose the investment world is inhabited completely by experts with their CFA's, quants - and actuaries, Brendan. No one else inhabits this particular world. Now suppose expert A, with their team of quants, CFA's and actuaries, decide that they want to sell company X from their portfolio. They need to find someone to buy it, and at a price that is acceptable to them. Now we also have expert B, who also has their team of experts. They decide that they want to buy company X and add it to their portfolio. Again, they have to find someone who is prepared to sell it, and at a price acceptable to them. Thus, the teams from expert A and expert B get together (virtually of course) and agree a price P at which they complete the transaction. Everyone is happy that their experts have done a great job.

Now enter the poor guy from the attic. He just wants to buy shares in company X. He completes the transaction at the prevailing market price, which happens to be P. Thus, he gets the benefits of the accumulated expert wisdom of the teams from expert A and expert B, without paying a penny.

This is of course what the passive funds are doing, but the guy in the attic has an advantage over the passive funds. Every time there is a shift in the market, be it a rights issue, a share buyback, an IPO, et cetera, the passive fund has to buy and sell a small number of shares in every security it holds and incurs costs in so doing (incidentally, the advent of Mifid 2 has highlighted the extent of those costs, to the annoyance of Vanguard, et cetera). Meanwhile, the poor guy in the attic trundles along with his buy and hold strategy, completely oblivious to all that is happening around him and all the expert wisdom that's being bandied around. After five years, who do you think is going to be better off?
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Interesting I never thought of it like that !


Regarding the chairman etc owning a high percentage of the plc. Personally I would expect this would severely limit challenge . Execs /managers are less likely to report any issues / accounting or other "scandals" and more likely to be silenced IMHO .

In fact with my own ( limited ) experience this could be a disaster.
 
Fella said:
My point is lots of people know companies inside out it doesn’t add value , when you bought renishaw it was valued fairly it’s price rise has nothing to do with your knowledge or understanding of the stock , it’s easy to be judge in hindsight that you made a great play and convince yourself that you know what your doing but more than likely you don’t and your point about beaten the market is irrelevant, if you only hold a small number of stocks i’d expect you to beat the market that’s kinda obvious but your been rewarded for taken extra risk , you only need to be unlucky once to wipe out a large part of your portfolio or a black swan event like all of your key holdings crashing bad together it could happen why take the extra risk when you can get the market average.
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if someone picks ten stocks , the chances of eight or nine of them failing to beat the market are a lot higher than most people think , if you just buy a fund which tracks the market , most companies within that fund are not doing exceptionally well , its a small number of companies which disproportionately drive gains in the combined market

this makes picking individual winners even harder than we think and most people are not smart enough to spot market beating stocks , if most fund managers ( who are very smart people in terms of numbers ) cant beat the market most of the time , what chance have regular folk ?
 
Hi Colm

The guy in the attic has an advantage over an index tracking fund because he is not forced to trade.

I have never understood why they track the index. Why don't they just buy the top 20 ish shares and only adjust it occasionally. This would cut down on the dealing costs.

But I don't think you have any advantage over the armies of stock analysts. Even if you have, you won't know unless you analyse all your investment decisions ever.

Brendan
 
galway_blow_in said:
if someone picks ten stocks , the chances of eight or nine of them failing to beat the market are a lot higher than most people think
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As Colm has pointed out, that is not what he is trying to do.

I have a portfolio of about 10 stocks. I don't actually care if I am behind or ahead of the market.

I would care if there were a significant risk that I would have big losses overall while the market as a whole did well.

But the biggest risk is a long-term decline in shares which will hit all holders of shares.

Brendan
 
Brendan Burgess said:
The guy in the attic has an advantage over an index tracking fund because he is not forced to trade.
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I think it is a disadvantage also , I don't trust people to make decisions , for me Colm is already showing lots of biases he is too attached to certain stocks . I would trust a computer to automate decisions over a human 100% of the time , humans suck at decision making and don't realise the biases they have towards things.
 
Colm
Is there a link to the original articles?
I'd be interested to know how you arrived at choosing the stocks you choose.
 
Colm Fagan said:
Quite frankly, I'm sceptical about that statistic. Over what time period are "all stock market gains" measured? 12 months, I reckon, which is irrelevant from the perspective of a long-term investor. Does it make any allowance for reinvested dividends, which are a vital component of a long-term investor's armoury?
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The statistic is based on the total return (dividends reinvested) of 3,000 US stocks between 1983 and 2007. The research is referenced in the Irish Times article that I linked to earlier in the thread.

Perhaps an even more stark statistic is that since 1926 less than half of US stocks managed to outperform cash (T-Bills).
https://www.irishtimes.com/business...e-for-lousy-bets-new-research-shows-1.2969824
Colm Fagan said:
... the average dividend yield is around 4% per annum.
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The MSCI World index is currently reflecting a yield of 2.24% - a long way short of 4%. In any event, it's total (net) return that ultimately matters.
 
Hi Colm ,
I missed your article in the Sunday Times. I totally agree with you re the number of shares that you need to hold.
Could Brendan make an exception and allow you to mention all your shares ? I for one would be seriously interested.
 
I fail to see how holding (say) 8 or 10 or 12 stocks isn’t inherently riskier for “one man and his dog” when people with far greater resources can get hoodwinked into buying what looks like a great company but which collapses in value due to some unforeseen event. With 30 stocks, it’s less calamitous if one goes south, but with (say) 10, you’re looking at a serious diminution of wealth.

Colm, as an aside, from memory I’ve seen some interesting stuff you’ve written around the ARF and drawdown phase; perhaps you’d share that and stimulate a discussion in another thread? Many thanks.
 
Brendan Burgess said:
As Colm has pointed out, that is not what he is trying to do.

I have a portfolio of about 10 stocks. I don't actually care if I am behind or ahead of the market.

I would care if there were a significant risk that I would have big losses overall while the market as a whole did well.

But the biggest risk is a long-term decline in shares which will hit all holders of shares.

Brendan
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i dont think its unfair brendan to assume that you would be more skilled when it comes to numbers and finances than your average person on the street , beit understanding balance sheets etc , i dont mean to personalise it but the average person is not trained in important numbers when it comes to earnings per annum etc and therefore not able to judge which companies are in better shape than others bar at a very basic level , hence why many believe the average person has little chance of beating the market

i did a bit of switching in the past month , sold a little of my etf holdings and bought shares in two irish companies , one is the biggest in the country , the other is a food company based in kilkenny , combined purchased was 20 k , if im dead wrong about them , ive only put 14 % of my portfolio in individual companies
 
Brendan Burgess said:
I have never understood why they track the index. Why don't they just buy the top 20 ish shares and only adjust it occasionally. This would cut down on the dealing costs.
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Believe it or not, there's a fund that follows exactly this approach - it's called the Voya Corporate Leaders Trust Fund.

The fund was established in 1935 and acquired an equal number of the 30 leading US stocks at that time. The fund cannot acquire new stocks under its charter so holdings have only changed due to spin-offs or mergers.

So how has it performed?

Well, it has slightly under-performed the S&P500 (before fees) over the last 10 years, with slightly higher volatility (standard deviation), but it's a perfectly reasonable approach and has performed well over the long-term -
https://individuals.voya.com/product/mutual-fund/profile/voya-corporate-leaders-trust-fund-series-b
 
Sarenco said:
Believe it or not, there's a fund that follows exactly this approach - it's called the Voya Corporate Leaders Trust Fund.

The fund was established in 1935 and acquired an equal number of the 30 leading US stocks at that time. The fund cannot acquire new stocks under its charter so holdings have only changed due to spin-offs or mergers.

So how has it performed?

Well, it has slightly under-performed the S&P500 (before fees) over the last 10 years, with slightly higher volatility (standard deviation), but it's a perfectly reasonable approach and has performed well over the long-term -
https://individuals.voya.com/product/mutual-fund/profile/voya-corporate-leaders-trust-fund-series-b
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Hi Sarenco,

Do you mean that, were it set up today, it might hold (say) Apple, Coca-Cola, Citi etc, and that 100 years from now it would just hold the companies that have survived?

i.e. how many of those 30 companies are now gone? e.g. Kodak etc.

Thanks.

Gordon
 
Gordon Gekko said:
Do you mean that, were it set up today, it might hold (say) Apple, Coca-Cola, Citi etc, and that 100 years from now it would just hold the companies that have survived?
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Yes, that's the basic idea.

Here's a good history of the fund -
https://www.linkedin.com/pulse/revisiting-80-years-sloth-kevin-mcdevitt-cfa

FWIW, I personally wouldn't touch this fund with a barge pole - it's way too concentrated for my taste. Having said that, it's hard to argue with its long term performance and it certainly demonstrates that portfolio trading costs matter. A lot!
 
I can't believe it! I take a few hours off and come back to see lots more comments. I won't be able to respond to all of them, as I have a wife, children, grandchildren, pastimes, some "real" work, all of which/whom need my attention from time to time, not to mention the occasional bit of snow shovelling, et cetera.

I’ll just make a few comments now. I will try to come back on others over the next few days, if they haven't already been responded to by others.

Gordon, thank you for asking about my proposals on ARF drawdown. I would really appreciate engagement from AAM contributors on the proposals I put to the Society of Actuaries in Ireland at the start of February as I feel that, if implemented, they could work wonders for retired members of DC schemes. The presentation and commentary that accompanied it can be found under the "Past Events" tab of the website of the Society of actuaries, www.actuaries.ie. Brendan may be able to make them directly accessible through the AAM website. I'm also relying on Brendan to set up a new thread for discussing them, if he thinks that's a good idea.

Moneymakeover asked for a link to the original articles that appeared in the Sunday Times. Once again, I'm asking Brendan if there is any easy way they can be accessed from the AAM site. Brendan, I'll be happy to send you the articles if you don't already have them.

Thanks Sarenco for the link to the academic paper on proportions of stocks that beat cash or that account for virtually all of the stock market gains. I'll do my best to make the time to read the paper.

Robert, I wouldn't advise you to consider replicating my portfolio. Some of the stocks in it are ones that I have gone sour on (and/or they have gone sour on me!) but where I haven't had the courage to sell yet. (Incidentally, the rump of stocks in this "for sale" category don't count for my 10/12 stock portfolio). I do hope eventually to get around to mentioning all the stocks that I am more than happy to hold on to or that I have just bought. By the way, the holdings in the various companies vary enormously. That's another important consideration.
 
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