An Investing Thread

[Sarastro]

A while back there were various posters (definitely including @Bravo_Bravo and @Charlie_Cong) on a thread discussing investing, but I can't seem to find it or a nominal headline "investing" thread. So here is one.

Particularly given the rollercoaster that the market charts look like over the past 12 months, I'm curious how everyone on here who dabbles has done, and what they think, lessons identified, learned and even possibly applied? I am happy to get the ball rolling.

My % return over the year has gone down somewhat, but it was unsustainably high before, and is still at a pretty healthy 50%. There were several factors behind this:

1. I got COVID smack bang in the middle of the crash and was too ill to do anything much for about 6 weeks, so didn't take advantage of the dip.
2. My potential buy list for the year was pretty evenly split between 33% no movement (avoided), 33% averaging a 91% increase (my selection), and 33% stocks which have gone on a run of 3000% - US solar and NIO Chinese EV - (avoided, unfortunately).
3. I chickened out of a buy that I made, then sold pretty quickly following what was an obvious manipulation ploy, but which also played into my fears about the stock), but that cost me a 500% rise in that stock over the year.

So I'm in that fine position of being healthily up in reality, but having taken a huge hit in opportunity costs.

The lessons I have learned from this are:

- My narrowing process is solid, my selection is not. From now on I'm rolling the dice on my potential buy list, or buying smaller and buying it all, rather than selecting myself. This has actually held true for several years (the average performance of my narrowed list is higher than my selections from it).
- Increasingly the price of stocks in a fad interest (e.g. Tesla, EV this year) is totally divorced from any underling fundamentals. Much of the market (particularly it seems in the US) is trading at multiples of decades above the actual earnings of a company. This is neither wise nor sustainable. The value of a lot of superstar stocks is almost totally comprised of the confidence of investor money.
- The steepness of the dip this year is fascinating. Try and find another one like it in the records. Almost every major crash has taken years to recover value - this one took months, and despite the (real) massive economic damage wrought. There are a couple of reasons why that might be, but none of them escape the basic premise that capital value has to reside somewhere, and that somewhere will have taken a massive hit by having the world furloughed for 6-12 months. That is not being reflected, at all, in the value of market capitalisations.
- There is no such thing as "value" and "growth" stocks. They are the same thing. The correct differentiation shouldn't be the assessment of the stock, it should be the method of repayment to shareholders: "dividend" stocks are genuinely different because of the nature of how they repay value incrementally over time, which similarly affects the capital price of the share. "Value" and "growth" have become divorced from the reality: both are essentially stocks which, for shareholders, are putting 100% of their value into the capital share price. A value stock can become a growth stock just by the addition of confidence. Similarly, most growth stocks end up being value stocks, with relatively few of them massively losing value, just gaining it more slowly.
- Risk in these conditions is being miscalculated. Where is the downside on most stocks? There is mostly a downside of opportunity cost, not of value. In other words, the value of money lost from stocks in set A does not appear to be related to the value of money gained by stocks in set B.
- If you have made a buy based on risk conditions you were aware of, there is no point in getting rid of it until you have let it play out a bit, even if those risks materialise. In other words, if you risk X in order to gain 5X, be prepared to lose X.

So I freely admit that this may partly be because I'm not looking at the full picture. It may be that others here have been looking at more traditional stocks that have been hammered, but certainly in the areas and industries I've looked at (which are not exclusively flashy tech etc ones), there appears to be a distinct lack of downside from the economic downturn and pending dep/recession. Is this all being funded by the resumption of printing money activities by governments around the world? At some point inflation has to hit, surely? Or, we are looking at a current market bubble, or set of bubbles, in a number of industries.

Curious to hear opinions.

 

[Just_plain_you]

You need to articulate why you are investing. Otherwise it will make no sense to you nor to.anyone reading your posts.

www.monevator.com is a great site.

Oh and trying to beat the market is a fools errand.

Stick as much as you can into your pension, especially if it is an army one (but DYOR as they say).

 

[Bravo_Bravo]

@Sarastro

Here you go mate.

"(366) What to do now the Stock Market has crashed. | Army Rumour Service" https://www.arrse.co.uk/community/threads/what-to-do-now-the-stock-market-has-crashed.299104/

 

[Sarastro]

You need to articulate why you are investing. Otherwise it will make no sense to you nor to.anyone reading your posts.

www.monevator.com is a great site.

Oh and trying to beat the market is a fools errand.

Stick as much as you can into your pension, especially if it is an army one (but DYOR as they say).

I mean, to increase the amount of money I have invested...like basically all investors, excepting some niche institutional cases. The bigger the increase, the better. It's not a complex idea.

An investment portfolio is a pension, in essence, just potentially a much better performing one (with the added risk that it may go down). In the US they are almost the same thing, with many people holding a 401k instead of a pension.

I'm not asking for advice, I'm asking what people who were already looking at markets and investing think about what they have observed over the past year (or, from the discussion on this previous thread, looking to update the predictions we were making then with the benefit of hindsight).

 

[Bravo_Bravo]

My own personal portfolio is up about 33% since I wrote that article.

Buh and hold, don't try to time the markets...

 

[Sarastro]

@Sarastro

Here you go mate.

"(366) What to do now the Stock Market has crashed. | Army Rumour Service" https://www.arrse.co.uk/community/threads/what-to-do-now-the-stock-market-has-crashed.299104/

Thank you for the link, but don't think it's the one I was thinking of (I posted in that one).

Also, doesn't have your opinion of the last year as at Dec 2020. I'm totally on board with the standard "don't sell in a dip, buy and hold long" advice. What I'm more interested in is opinions on what I see as the remarkably quick recovery this year following the March crash. Leave out the FTSE (because Brexit is a variable), but the S&), NASDAQ, NYSE composites are all back above their (arguably inflated) February 2020 positions, despite the fact that we are meant to have suffered a massive global economic downturn.

Seems to me that deserves some explanation.

 

[Sarastro]

If you bought the dip, you were trying to time the markets. You were also behaving perfectly sensibly. It's not always magic.

To put it another way, when you buy and hold, when do you buy. The day of a report when the stock jumps, or the day after it falls? You are always timing the market to some degree, because you always have to buy at a defined point in time. That's not the same thing as trying to eke out incremental daily / weekly changes in price, which, it's correct, is foolish.

 

[Effendi]

Chose the wrong pony to back a couple of years ago and it dropped around 70%. I decided to stay with it and weather it out over the long term and recently it has been steadily climbing back up and is predicted to exceed my initial investment. Longer term can pay off, my option was to sell at the loss and then try to trade my way back up into profit. I am all for buy and hold.

Some inside dirt on the Musky one's car factories: He is building a huge pick up truck factory down near Austin, Texarrse, along with another facility that is going to be a battery production factory for his entire vehicle range.

Some inside dirt on @mazon: Here at DFW airport they have recently moved from a huge rented on airport facility to their own on airport buildings, which they built. They have their own fleet of aircraft whizzing around the US delivering and collecting too and I see them neatly rowed up outside their facility.

 

[Just_plain_you]

I mean, to increase the amount of money I have invested...like basically all investors, excepting some niche institutional cases. The bigger the increase, the better. It's not a complex idea.

Of course but are you an active investor or a passive one? Are you trading maximum risk for maximum reward? Is this a long term portfolio or a bit of fun on the side?

 

[Sarastro]

Of course but are you an active investor or a passive one? Are you trading maximum risk for maximum reward? Is this a long term portfolio or a bit of fun on the side?

I'm a dual US citizen, the tax implications of which mean you basically have to be an active investor (there are punitive capital gains rates for a large range of investment types outside the US). That said, I invest on a minimum timeline of a year (again, punitive US tax if you sell in less than 12 months), and in reality everything I buy I would be happy to or expect to hold for at least 5 years. Long term / fun on the side is, I think, a false premise. The values and risk are the same regardless. It's a differentiation that makes sense if you're a professional or institution who has relatively easy access to a range of investment vehicles and are offsetting different ones: this is not the case for most individual investors. It's all real money, so everything is long term, defined by the range of your life expectancy. Beyond that, you always want to maximise your returns within the shortest possible time period while minimising the risk of any net loss. There is no hard number for any of those values. As an individual, I can't see any reason you would want to do anything else: even "tax efficiency" has a threshold value where it stops being worthwhile, because the value of selling, taking certain profit now and reinvesting the capital exceeds the relative loss in tax and risk that profit will be lower when you do.

Risk is, I think, widely misunderstood. The most common reaction I've had from others to successful investments (i.e. ones that have increased a lot, rapidly) is "well it must be high risk". That's almost never been the case. First, it doesn't actually make sense in the context of all the other investment advice. Successful shares are (often, not always) successful for a reason. All the advantageous qualities or metrics that you saw that inclined you to buy also reduce the risk, because other people can see them too: so they are more likely to buy than not. This is one observation behind "you can't beat the market", that it isn't easy to find these things before others do and price the stock up. The simple question then is: is this reflected in the price? Most often it is. Sometimes it is not. The latter are the stocks you buy, because you've found it before the rush. There are non-trivial numbers of them, because so many other, temporary factors affect share price. As a longish-term investor, you only need to buy a few stocks a year to make a diverse portfolio. Second, the bottom line for controlling risk is the amount of money you invest (as I noted in my first post). The ultimate control is only investing in a given stock what you can afford to lose, all of it. Its probably only worth doing this in really new stocks (things which have the space to rise by thousands of %), but it can be done - again, my first post outlines two sectors and several companies it happened in this year, you can also add to that Zoom and the like. Third, risk should be calculated relative to the opportunity costs, but most people don't intuitively think that way. To invest successfully, risk isn't a simple calculation of whether you have made or lost money, it's how much money you have made relative to what you could have made or lost. Understanding that piece of feedback lets you measure optimal rather than just satisfactory performance. Fourth, number theory: the potential multiple of a downside is 100%, and the potential multiples of an upside are thousands of %. From a £100 investment you can, theoretically, make £9 squillion squillions, and practically many hundreds or thousands. You can only lose £100 (less criminal activity). Limited liability naturally skews investing risk to your advantage, so long as you follow my second point and only invest what you can lose. Fifth, empirically shares simply don't fall as hard and fast as they rise, and bankruptcies among reasonably established companies are comparatively rare. I'd actually argue that funds are higher risk here, because the number of fund or manager scandals that have permanently hobbled the fund price, relative to the number of funds, is much higher than the number of company scandals that irrecoverably kill their share price, relative to the number of companies: BP may never have fully recovered to where it was in April 2010, but it has gotten close, and may do in future. If you question this, well, this is why the market average rises over time, which you surely accept. More value is created than lost. If there is a perception that there is a high risk of losing everything, I'd argue it's more driven by loss aversion than the actual numbers.

In fact, the highest risk investments I've had (i.e. worst performing over the total timeline) have been supposedly low risk ones - solid, well known dividend shares or funds with a long track record behind them. They have basically no room to maneuver, so even when they are underpriced, they often fall and take an incredibly long time to rise again. The opportunity cost of that capital remaining stagnant is substantial, even with dividends (it only makes sense to me in the UK because of the additional tax allowance for dividend income). In decrease terms, it is "safe", since it hasn't declined by much and pays a dividend. In real (opportunity) terms, that is capital that could have made substantially better returns over the same period. Instead, "low risk" (common definition) investment losses are offset by "high risk" (common definition) investment gains - which is the point of a portfolio. But that also tells me the common understanding of risk is simply wrong: the risk is holding relatively underperforming shares.

This is also why I think the common wisdom of "you can't beat the market" is wrong. If you look at outcome distributions for a range of investors, some are going to be above the average, and some below. Those above the line have, by definition, beaten the market. Over the last decade, this would include almost anyone who has invested substantially in well-known technology stocks (i.e. not elite investors). It's simply a distribution problem - I don't actually know what the distribution looks like, because institutions are cagy about their real performance, but certainly the market average is not the top of the distribution, or it's not an average. So some - sectors, companies, investors - are going to be above the average. The trick is simply to maximise ownership of things above the average, and minimise ownership of things below it. Also, I presume "you can't beat the market" also means that over an infinite time period, you will trend towards the average. This is true, but it's also misunderstood: it's a predictable statistical effect (reversion to the mean), but it applies to a probabilistic population not individuals. You can model a large institution or market as a collection of probabilities, and it will make sense - but you will also always find outlier individuals who don't follow the law. A lifetime is not necessarily a long enough timeline to revert to the mean, as an individual. A lifetime of looking at hundreds or thousands of individuals will, yes, revert to the mean, because the data set is thousands of times bigger. This is also affected by number of decisions: sure, if you are day trading on a bourse, you are almost certainly going to revert to the mean. But if you are making a few long-term decisions a year, you can beat the statistics. The point is to be one of those outliers. Again, they do exist...whether it is realistic to expect to be one of them is another matter, that you need to test for yourself.

Finally, this all relies on a degree of timing, because you always have to act at a defined point in time. You increase your chances of gains if you buy an underpriced stock than an overpriced stock (even though overpriced stocks often still make remarkable gains), simply because you reduce the range for losses. Similarly, you increase your chances of gains if you buy almost anything in mid-March 2020, or throughout 2009, because the market as a whole is depressed. Equally, as the advice goes, you don't sell your existing investments in those periods, or when your investment is at a loss (unless you think it's irrecoverable, or want to offset the loss against taxable gains). That is all "timing the market", and it's perfectly sensible. It isn't going to make a bad investment a good investment, but it will maximise the margin you can make or lose. I'm pretty sure anyone on here who invests actually does this, which is why I don't understand why anyone says "you can't time the market". You can, and you do. I assume they mean some idiotic behaviour or belief system like making day to day decisions based on technical analysis.

So: you can beat the market, you should and do time the market, and "low" or "high" risk investments are often actually high or low risk investments relative to opportunity. Certainly, there are all sorts of idiotic behaviours that may be the target of those bits of commonly held wisdom, but as I see them explained, they seem to be more articles of faith than reasoned argument (and if there is one thing that's clear about investing, it's that a huge amount of it is faith-based).

I'll caveat all this by saying: of course you can't simply throw a dart at the FTSE-100 and expect to make money. The most important process is narrowing down the vast range of potential investments to a set that will broadly do well, and then providing feedback to yourself so that you adapt the process and correct errors. But that is not magic. Much of the information is publicly available, and there have been, for at least the past decade, a regular crop of solid to superlative winners in any given year. It is not beyond the wit of man to recognise, in advance of the share prices soaring, that online shopping (Amazon, BABA, JD, the lot) has potential to make profits, or that the vastly expanding use of mobile phones will require mobile phone towers to be built and make profits from rental space (Crown), or that graphics chips are being used for many more applications than simply gaming (Nvidia), or that a company's GPU benchmarks are suddenly competitive (AMD), or that people are moving towards electric vehicles (Tesla, NIO), or towards renewable energy (most US solar stocks this year), or that the Chinese economy is going to grow again after its recent recession. Also, none of those stocks (with the possible exception of Tesla and NIO) require you to make bets on risky lossmakers with opaque business models based on the tagline from Field of Dreams. Since that is not beyond the wit of man to identify those shares, it's also not beyond the wit of man to realise that it's not beyond the wit of other men to realise the same thing, so there is a good chance that market money will follow the most visible companies in those sectors. You are using a machine increasingly designed to let you, whether you want to or not, identify the most visible brands in a given sector. You choose a selection to buy, or perhaps split across all, and at some point you are going to own winners. So it goes.

Finally:

Chose the wrong pony to back a couple of years ago and it dropped around 70%. I decided to stay with it and weather it out over the long term and recently it has been steadily climbing back up and is predicted to exceed my initial investment.

This is clearly the only sensible choice. One of the idiocies that I think underpins a lot of investment advice is that it assumes timelines that are too short, presumably based on the crazy timelines trading institutions work on, or stupidities like "day trading" in the US. The correct way of thinking about an investment that has lost 70% like that (look up the TWD chart, I had exactly the same experience buying it at 130 then almost immediately losing 50%) is that you have simply fixed your capital until it rises again. Crystallising the loss only makes sense if you a) invested more than you can lose or are poorly diversified, two other investing idiocies, or b) want to offset a large profit in capital gains, which is reasonable. Fixing your capital is not great either, because it loses flexibility, but it is substantially preferable to actually losing it. As everyone agrees, over the long-term the tide raises most ships, so just hold on until it recovers: the worst only happens when either the company goes bankrupt or you make it happen.

The other "so what" of this is you should have a mentality that you are only ever as rich as you are today. If you have fixed costs that you need to pay now or in the future, then that capital should be in a bank or no-loss investment rather than the market. It seems pretty clear to me (having lived in the City for 10 years) that a lot of the risk and problems in the trading world are incurred by individuals living a lifestyle on the assumption that how rich they will be tomorrow is an incremental increase on how rich they are today, and all the behaviours that drives.

My only claim to authority in all this is that I've done it, and it works (so far, obviously you are only ever as rich as you are today). I'm curious why more people don't do it, or at least try.

PS Incidentally, much of the above seems to chime with the articles on your link Monevator about how to be a successful individual investor.