Demoralizing Realization that I can't beat an Index Fund

[epower]

I've been researching the markets and stock picking on the NZX primarily (with the odd ASX purchase) for approximately 8 years now.

Over the past week I've scoured through all my prior stock buys, sells and taking into account the commissions, foreign exchange and opportunity cost of the funds sitting in a cash management account waiting to buy the next opportunity. I've gone back to my very first buy in early 2010, Ryman Healthcare.

I've come to realize that after countless hours of reading annual reports, press releases, analyst research reports, etc that I would have been far better off to simply just drip feed into an index fund of the NZX50 or S&P500.

I was going well until year 4/5 but then my career took up a lot more of my time and energy and I moved into management roles in my later 20s. I made a couple of horrendous mistakes in my investments in the past year or two, Slater & Gordon being the big one. Then a new partner (now wife) came along and she is much more interesting than looking at annual reports in my weekends.

So all in all, a roller coaster ride with countless hours of reading and research all for the same result that could take me 10 minutes annually to replicate buying an index fund. Very demoralizing and a very big hit to the ego as I was sure that I outpaced the index even with the odd big loss.

I've thought about creating a "virtual portfolio" to keep my inquisitive side alive but it doesn't feel the same without my own cash on the line.

Anyone else come to the same conclusion or want to chip in with a story or two?

[sonny n share]

Yes it can be discouraging when your picks don't work out.



Have some in index and some in individual ?Index will be a smoother ride.
Individual will be more volatile.


The sharetrader picks for 2018 have done pretty well so far this year ?
https://sites.google.com/view/sharetrader-picks-2018/home



NZ top 50 fees have gotten cheaper if you have over $10k
https://www.interest.co.nz/personal-finance/93031/simplicity-launches-investment-funds-track-nzx-top-50-and-nz-bond-market





Over 10 years
Ryman is +20.78%pa
FNZ +7.37%pa
according to sharesight.com

[Pipi]

I hear you mate. I have come to the same conclusion. I don't have the experience or the time really. And have now bought into several index funds, where I drip feed into monthly. Will still keep my stocks that I have, as they were long term buys.

[Balance]

https://www.cnbc.com/2018/01/03/why-warren-buffett-says-index-funds-are-the-best-investment.html

Unless one is a Warren Buffett - hard to beat the index.

[Pipi]

https://www.cnbc.com/2018/01/03/why-warren-buffett-says-index-funds-are-the-best-investment.html

Unless one is a Warren Buffett - hard to beat the index.

So true Balance, I read all this and thought about it about 5 years ago. Wish I had got into them then. I'm 18 years off retirement, so if I keep feeding into them, hopefully it will give me a comfortable retirement.

[Balance]

So true Balance, I read all this and thought about it about 5 years ago. Wish I had got into them then. I'm 18 years off retirement, so if I keep feeding into them, hopefully it will give me a comfortable retirement.

I had a debate with a very prominent fund manager on exactly the same topic at an investment forum years ago in New Plymouth - he worked for AMP.

Got my aggro up when he and a few other fund managers kept on blaming the 'market' for their poor performances (while collecting huge fees) and how they did try to beat the market!

Basically I told them that collectively they were the market so how can they blame the market?

Fair to say he and the other fund managers there spent the rest of the time at the forum justifying why they were the exceptions!

[voltage]

very good points, all the research does show that over a 10 year period very very few managers can outperformance an main index. So all you need is the new low cost NZ50 and a couple of global vanguard ETFs which you can access cheaper on the ASX. You will now out perform most managers. However, I do like some direct holdings like Visa, Google. Perhaps limit this to 25% of your portfolio.

[zgnz]

I take a split portfolio approach. (currently about 66% indexes)

Most of my individual picks are high conviction/opportunistic buys (for the long term) -- Usually only a few companies, within my circle of competence.

Works well for me, as I can be very selective, and not have to spend all day researching or watching the portfolio!

[huxley]

Great post mate. I think letting the index do the heavy lifting is a wise decision, you could however keep a (relatively) small percentage in some high conviction investments. But like you say, if you’re got better things to do with your time you may not be interested in this either.

[silverblizzard888]

It is indeed a very demoralizing view to see that putting a lot of time into understanding stock investing and then researching companies to invest in and then realising that you aren't beating the market. Beating the market isn't easy, but certainly doable, though you need to have a good disciplined and consistent approach. I don't know what you've been investing into, but as you mentioned one of your investments was Slater and Gordon, this tells me you have an target of undervalued companies trying to make a turnaround. In my experience trying to pick a good turnaround is often quite hard because everyone wants to get it at the bottom, though without consideration that things can always get worse. Turning a company around isn't easy and especially one with a lot of debt, if one thing is to go by, is to stay away from companies who have large debt and have no prudence in reducing it or lack of ability to pay it back in a short frame of time.

If you can profit off stocks it means you have a good instinct for stocks, but if you can't beat the market then I'd say thats more to do with your approach rather than being bad at beating the market. Before you invest into a company you have to consider what can go wrong as much as what can go well. You have to look at the return and make a fair judgement of what you would expect the return to be. Generally I make it my target to get at least 20% return (beating the market) and I plot a strategy calculating how much I need each company to perform to get to my targets, if a company isn't performing its gone. You have to be cut throat in picking companies, no room for secondary performance, you want the best companies, companies with good management who grow beyond everyones expectations. Most people buy companies with the sight of a positive return, but if you want to beat the market then you aren't just looking for a positive return, you have to look for companies that will show an out performance return.

For a while I was kind of stuck in a rut, I kept investing without getting sizable returns, I acted more on hoping a company with a good story would do well or turnaround for that matter and out perform their forecast, but more often than not companies perform to their forecast or below. I have realised that betting on the best companies for the long term will achieve you a better return than the market than trying to out smart the market and picking possible undervalued plays that might be turning around. We are all playing with our time and money, so you have to be strict on time with your stock investments.

Its fair if you dont have much time then an index fund might suit you more since it performs better than a lot of asset classes without requiring too much of your time, though you shouldn't feel bad about all the time you're spent learning investing because as most of us will agree investing is a very entertaining activity. Maybe you might come back to it in the future, if not at least you know how the stock market works and how companies build value. As well as knowing what the index really is, while most people who only invest in the index have no idea how it really works, almost like putting your money in a black box since you don't know whats in it, but for you at least you can break it down and understand whats in it. As most people above have pointed out you don't need to take one approach or the other, you can invest majority into a index fund and keep a little play money to pick you own companies and tailor your approach.

[Leftfield]

Managed Funds aren't for me.

Indeed, I hold the view that if I spend roughly the same time each week managing my wealth as we do managing my health (say via exercise), then there are huge benefits for me and my family, both in both financial returns and knowledge.

For 8 yrs I invested in index funds and Kiwi Saver while employed. Aside from the employment benefits and contributions I achieved 8 to 15% pa over that time.

Upon retirement and over the last 4 years I have managed my own share market investments, sticking to NZX companies, and my annual returns have averaged well above those of managed funds or NZX top 50. If I told you my actual returns I doubt I would be believed, but suffice it to say my investments are currently growing each year at a level higher than my old annual salary.

I've tended to avoid dividend yield stocks (as I've found them rather over-priced in terms of risk/reward.) I've avoided IPO's and concentrated on capital growth companies (long term tax free capital gain is my goal) with investments in companies such as XRO, ATM, PPH, SKO, and THL (one of my favourite dividend stocks.) My aim is to only invest in shares that are outperforming the NZX top 50 index.

I very much enjoy managing my own investments and the daily routine of checking their progress, and refining my skills. That said, I appreciate others do not enjoy managing their own investments, nor are willing to learn the FA and TA skills needed. For those people managed funds, or index linked units are good options.

[Marilyn Munroe]

An excellent book on this subject is;

A Random Walk Down Wall Street

Author:Burton Malkiel

It was first published in 1973 but is still relevant. Here is the link to the Wikipedia page for the book;

https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

Boop boop de do
Marilyn

[shasta]

I've been researching the markets and stock picking on the NZX primarily (with the odd ASX purchase) for approximately 8 years now.

Over the past week I've scoured through all my prior stock buys, sells and taking into account the commissions, foreign exchange and opportunity cost of the funds sitting in a cash management account waiting to buy the next opportunity. I've gone back to my very first buy in early 2010, Ryman Healthcare.

I've come to realize that after countless hours of reading annual reports, press releases, analyst research reports, etc that I would have been far better off to simply just drip feed into an index fund of the NZX50 or S&P500.

I was going well until year 4/5 but then my career took up a lot more of my time and energy and I moved into management roles in my later 20s. I made a couple of horrendous mistakes in my investments in the past year or two, Slater & Gordon being the big one. Then a new partner (now wife) came along and she is much more interesting than looking at annual reports in my weekends.

So all in all, a roller coaster ride with countless hours of reading and research all for the same result that could take me 10 minutes annually to replicate buying an index fund. Very demoralizing and a very big hit to the ego as I was sure that I outpaced the index even with the odd big loss.

I've thought about creating a "virtual portfolio" to keep my inquisitive side alive but it doesn't feel the same without my own cash on the line.

Anyone else come to the same conclusion or want to chip in with a story or two?

This is all part of the learning process so what you have been doing hasn't worked, time to reflect on your goals and personal situation, then look at where you fell short.

Start a new plan of what it is you want to achieve, what part of the markets do you understand/interested in?

There is a ton of good ideas/philosophies among this forum with experienced investors/traders who have done well over the short and long term.

There are a few posters i have always kept an eye on and what they are looking into/buying, but ultimately you have to work out a system that best works for you and be flexible enough to change it when things don't go as planned.

Its already been mentioned, but check the NZX/ASX comps and see how others think and what they have bought/selected, will give you leads/ideas

Personally i stick to the ASX as the NZX at the moment looks fully/over valued, my first run through a company is to read the latest presentations, if i see anything i don't like that's the end of the process and i move on. I probably have 15 - 20 companies on close watch at any time and hold just 5 stocks.

There are plenty of LIC's especially on the ASX if you are looking at more passive investments paying steady dividends with reasonable yields if you dont have the time to research individual companies.

I find having your own skin in the game keeps you focussed, virtual portfolios don't have the same emotive response.

[traineeinvestor]

The evidence is pretty clear that very few investors will outperform the index over any reasonably lengthy time period and a low cost index fund is usually the best approach for most investors (especially those not inclined to devote a reasonable amount of time managing their investments). It's hard to beat a no-load index fund if its TER is low enough.

The flip side is that the costs of fund managers etc mean that an investor willing to spend a reasonable amount of time on the exercise should be able to outperform an actively managed fund. There really is no excuse for voluntarily paying a front end load or an active management fee.

That said, as a retiree, it's not the index I want to beat – we live off the income from our investments and my objective is for our income stream to increase faster than my personal rate of inflation without taking on undue risk. The later includes having adequate diversification. Our portfolio includes real estate, index funds, actively managed funds, directly held equities, bonds, precious metals and wine. The later is more like an investment in future drinking than a serious part of the portfolio.

My equities are weighted towards companies which pay dividends and away from exciting growth opportunities which don't – I've been around long enough to know that for every ATM (congrats to everyone who got on board with this one), Tencent, Alibaba or Netflix, there are dozens of highly promising and exciting companies that disappear into obscurity. And, yes, I've invested in enough of these over the years to have learned that boring stocks work better for me.

[epower]

So as above if the majority agree it’s difficult to beat the market and put 90% into index funds and ‘play’ with the rest, why are you doing it? Purely because you enjoy the process of stock picking as more of a hobby? One that’s lined your pocket rather than emptying it?

[blackcap]

So as above if the majority agree it’s difficult to beat the market and put 90% into index funds and ‘play’ with the rest, why are you doing it? Purely because you enjoy the process of stock picking as more of a hobby? One that’s lined your pocket rather than emptying it?

In NZ if you invest in the NZ top 50 index fund (FNZ) you still pay a good .6% or thereabouts to the manager. With enough capital you can still beat this index fund by virtue of not having these annual fees by replicating or close enough to or just building your own, well diversified, portfolio. (Other than its a lot of fun too)

[huxley]

So as above if the majority agree it’s difficult to beat the market and put 90% into index funds and ‘play’ with the rest, why are you doing it? Purely because you enjoy the process of stock picking as more of a hobby? One that’s lined your pocket rather than emptying it?

Hmm, I dunno if it’s fair to characterise funds not allocated to an index fund as “play” money. As has been mentioned above, you may have individual investment goals which are not necessarily best served by indexes, such as an income focused portfolio, etc etc etc.
In the end, I think each has its place and I wouldn’t want to be too complacent and be lulled into thinking you should just blindly follow an investment strategy, particularly if your investment horizon is far off in the future..
One argument, based on game theory, says index funds have been successful instruments simply because most of the market is 'active'.. if the investment ecosystem were to move (as it appears to be doing so) more towards passive vehicles, perhaps there would be more opportunities to outperform the market average simply due to capital being more likely to be misallocated, into poor performing securities... SKT (cough cough).


Just some thoughts.. rambling really..

[BeeBop]

May well be hard to beat in a bull market but it could be different in a non-bull market where value stocks can come into their own. I don’t have figures or evidence to present, however, in bear markets, I haven’t done too badly e.g. 2000s and with the one or two stocks I owned in 2007-2009 (I had money out of the market then and was paying down debt and then went back in with avengence in 2010).

[Beagle]

https://www.harbourasset.co.nz/

No work, solid returns. Before anyone says they've made mistakes, so has everyone else.

[zgnz]

So as above if the majority agree it’s difficult to beat the market and put 90% into index funds and ‘play’ with the rest, why are you doing it? Purely because you enjoy the process of stock picking as more of a hobby? One that’s lined your pocket rather than emptying it?

So speaking as someone with a split direct/index portfolio, I recognize beating the index is hard, as it's essentially making bets against the consensus view... and since I don't have enough 'against the consensus' bets available to me to provide a diversified enough portfolio, holding some indexes allow me to sleep soundly at night (and is a safe bet for my longer term goals.)

Of the direct bets I do make, they usually perform well.

If you are still interested in stock picking, it maybe a case of going away and reading more literature (e.g. Peter Lynch, Benjamin Graham, Warren Buffett letters etc) to find a strategy/style framework that better works for you. Also don't limit yourself to just the NZX.

[BobbyMorocco]

https://www.harbourasset.co.nz/

No work, solid returns. Before anyone says they've made mistakes, so has everyone else.

That's really good returns considering the NZX50 has gone up by my calculations 14% per year over the last five years. Harbour have returned 16.81% per year after fees over the same timeframe. And that's been done in an environment where it should me more difficult for active investing to outperform passive investing. No doubt they'll perform better than the benchmark in a downturn too.

Are there any local fund managers that have managed to get better returns than this over a reasonable period of time?

[bull....]

https://www.harbourasset.co.nz/

No work, solid returns. Before anyone says they've made mistakes, so has everyone else.

looking at there performance over 5 years or 10 years or longer they havnt beaten the index , also a quick take on most fund managers in nz over similar years show none i can find that have.

this suggests a low cost etf index fund in hindsight would have substantially out performed most fund managers in nz who charge a performance fee on top of there normal fee's this enriching themselves at the expense of investors in the funds.

In this day and age it very hard for fund managers to justify such huge fees for active underperformance.

personally im a trader who actively manages my own portfolio and am very pleased with my results over the long term

[bull....]

NZX 50 (New Zealand) Yearly Returns



Year


Beginning Price


Ending Price


Gain or Loss


Percent Gain or Loss




2005


3064.44



3370.51



306.07


9.99%




2006



3370.51




4055.47



684.96


20.32%




2007


4055.47


4041.38


-14.09


-0.35%




2008


4041.38


2715.71


-1325.67


-32.80%




2009


2715.71



3230.15



514.44


18.94%




2010


3230.15



3309.03



78.88


2.44%




2011


3309.03



3274.71



-34.32


-1.04%




2012


3274.71



4066.51



791.80


24.18%




2013


4066.51



4737.01



670.50


16.49%




2014


4737.01


5568.28


831.27


17.55%




2015


5568.28


6324.26


755.98


13.58%




2016


6324.26


6881.22


556.96


8.81%




2017


6881.22


8398.08


1516.86


22.04%





www.1stock1.com/1stock1_767.htm (http://www.1stock1.com/1stock1_767.htm)

say returns dont include divs

[GTM 3442]

I run a number of distinct portfolios. Essentially they all add up to something pretty much like a "Balanced" Fund. I also have a small Kiwisaver fund - also of the "Balanced" type - to which I no longer make contributions.

So I benchmark my total portfolio against my Kiwisaver fund. Purely on valuation at the end of the month, for that month only, as it's too bl**dy tricky trying to strip out the cumulative effect of new money going into the "me" portfolio.

Since I started doing this in September 2015:

I have had 25 positive months, the Kiwisaver fund has had 19 positive months
I have had 6 negative months, the Kiwisaver fund has had 12 negative months

On average I make 1.5% per month, the Kiwisaver fund makes 0.5% per month

I'm the first to admit that this is a cobbled-together gerrymandered methodology. But how else do you do it?

As an afterthought, I am expecting to out-perform the Kiwisaver fund in 2018 because I will be out of some declining markets, whilst the Kiwisaver fund has to stay invested in it's full spectrum of declining markets.

[Beagle]

That's really good returns considering the NZX50 has gone up by my calculations 14% per year over the last five years. Harbour have returned 16.81% per year after fees over the same timeframe. And that's been done in an environment where it should me more difficult for active investing to outperform passive investing. No doubt they'll perform better than the benchmark in a downturn too.

Are there any local fund managers that have managed to get better returns than this over a reasonable period of time?

Australasian Equity Fund has beaten the NZX50 even after fees and taxes for the last 5 years. Best long term performer I know of but I'm not pretending to have an encyclopedic knowledge of other funds returns by any means. Disc: I have no financial relationship with them.

[bull....]

i must be confused ? there figures dont match
ones to march and the other figures are to december?

[BobbyMorocco]

i must be confused ? there figures dont match
ones to march and the other figures are to december?

The comparison I made was looking at the value of the NZX50 on 28.2.2013 and then again on 28.2.2018. The value had increased around 92% over those five years which works out be to be 14% annualised. The harbour website claims they have returned 16.81% per annum over the same five year period.

Also note the figures you used in your table above for the NZX50 are from a gross index so those returns includes dividends.

The way I see it Harbour appear to know what they're doing and at some point in the future I might allocate some funds for them to play with.

Thanks for sharing Beagle. I use Milford for my Kiwisaver and am happy with the job they do but perhaps there are even better fund managers out there. This has prompted me to have a look around :)

[Investor]

Australasian Equity Fund has beaten the NZX50 even after fees and taxes for the last 5 years. Best long term performer I know of but I'm not pretending to have an encyclopedic knowledge of other funds returns by any means. Disc: I have no financial relationship with them.

5 years is not long term

[Beagle]

5 years is not long term


Different people will have varying perspectives on that. My challenge to you and to anyone else on here that wants to take this on is to show me another fund manager that's beaten the index for the last 5 years, or a longer period if you so choose. I have to make a decision in the next couple of weeks as a trustee for a family trust on allocation of a significant sum so if there's a better fund manager out there with better consistent medium - long term returns I am all ears.

[bull....]

etfdb.com/compare/highest-5-year-returns/

just goes to show the investment universe is way bigger than nz and so are the potential returns.

if your sticking to nz remember

5 yrs is not long term
fund figures can be applied anyway which the law allows
were they overweight one stock atm? which caused an out performance in 1 year?
there stocks selection for top 10 looks very similar to smartshares nz 50 etf if this was the case then some say it is classified as a closet index fund with higher fees.
the biggest rule of thumb being past performance is no guarantee of future performance
many studies say any fund manager done well will most likely do worse in time to follow

[value_investor]

Great contributions so far. My philosophy on structuring my portfolio changed about 3 years ago when I read "The little book of common sense investing" by John Bogle who started the index movement through Vanguard. Great read on how indexes win long term because of their low cost, low fees and low attention and research required.

I like to keep at least 50% of my portfolio in index funds. I've mostly got this through smartshares in the NZX50 or the US markets. In saying that, I've breached my own rule of 50% just lately because I haven't topped up on the NZX50 tracking index in about 18 months just because I think its overvalued at the moment. I have done very well on these funds and I don't see myself pulling out of them ever. I see them as almost part of my retirement fund.

Same thing with the US markets but the recent volatility has perked my interest again, so I may come back to it soon as I am holding a bit of cash at the moment.

In saying that, my index tracking funds have not done as well at the rest of my portfolio when I group them collectively (one for my index vs individual picks) for the past two years. I've had a few investments that I've done superbly well on (bought SUM in the 4s and AIR in the 1s), however when you exclude out the high fliers then the index beats out the others.

Its definitely food for thought, on the whole I've picked more losers than winners on a individual basis (by losers I mean they haven't beat the index), however the winners have really taken a rocket ship up to the moon. The index acts like a backstop which shields me from becoming too exuberant on the upside.

[Antipodean]

I do it for the enjoyment and excitement. I started with index funds first as a baseline then moved more into active choices. Original plan was to split 50/50 but now I'm 100% active.

I haven't always done as well as the indices year by year but overall I'm tracking about the same. I could look at that as a failure but I have learned a great deal along the way which to me is more valuable than money.

I'm young and fortunate enough to have a 30+ year investment timeframe so now is the optimal time to take risks on the investment front. So I can play in strange and dangerous areas.

As time moves on I will move back into index funds most likely.

[Scrunch]

Different people will have varying perspectives on that. My challenge to you and to anyone else on here that wants to take this on is to show me another fund manager that's beaten the index for the last 5 years, or a longer period if you so choose. I have to make a decision in the next couple of weeks as a trustee for a family trust on allocation of a significant sum so if there's a better fund manager out there with better consistent medium - long term returns I am all ears.

Part of the problem is "short" periods like 5 years is chance. Lets say a fund as a 1/3rd chance of beating the index by at least a little bit, 1/3rd equaling it and 1/3rd chance of under-performing it. If there were 243 funds, one of these by random chance would have beat the index by at least a little bit for every year of the last five years, even if they had no special skill. The 5-yr winner may have achieved the result by superior stock selection skills, but there's enough funds around that it can just be successive good luck.

Then there's the winner's curse - If you create this "great" track record, you are likely to attract a lot of new money. You may now have a sufficiently large pot that you need to change what stocks you buy or the percentage of the company your fund owns. Your strategy could stop working on this increased volume of activity. BIL and GPG are two classic examples of investment based funds that Brierley had involvement in. From memory they were initially fairly successful, they looked for the next big win to keep this performance going and hit a dud.

[Snoopy]

I've been researching the markets and stock picking on the NZX primarily (with the odd ASX purchase) for approximately 8 years now.

Over the past week I've scoured through all my prior stock buys, sells and taking into account the commissions, foreign exchange and opportunity cost of the funds sitting in a cash management account waiting to buy the next opportunity. I've gone back to my very first buy in early 2010, Ryman Healthcare.

I've come to realize that after countless hours of reading annual reports, press releases, analyst research reports, etc that I would have been far better off to simply just drip feed into an index fund of the NZX50 or S&P500.


It would be interesting to know how much of your underperformance was due to you holding too much cash at times. I think that even if you are a pure index fund investor you should hold cash to take advantage of that surprise market opportunity. Looking at it the other way, not holding cash means that all unexpected market opportunities will be missed. I don't think you should be whipping yourself for holding cash.

The other thing that no-one has mentioned on this thread is the risk taken to get your return. Getting a market return with a lower than market risk portfolio is just as creditable as getting an above market return by taking above average risks. Risk and return always go together. But it is easy to forget this when analysing historical results. That's because once an investment history has played out, then the risk taken to write that investment history is often forgotten.

Not all shares have equal risk profiles going forwards. Particularly those in which the investment case is entirely reliant on future profits, yet the company has a history of not making profits. Speaking personally I would not consider investing in such companies. This means I miss out on all the big gains when big promising companies come good. But I also miss out on the huge capital losses when such companies fail to live up to their promise. For me this has proved an attractive trade off, after I 'learned my lesson' chasing blue sky much earlier in my investing career.

As a value investor you can expect to underperform in a growth market. The benefit of being a value investor will not become apparent until the market has a bad year. At that point you can expect to outperform the market substantially, to the extent that over time you should be able to beat the index by a couple of percentage points per year over time. That doesn't sound much, but it does compound over time.

These days I spend as much time minimizing risk in my portfolio as I do trying to pick my next winner. And by risk analysis, I am not talking about which way the share price is heading!

SNOOPY

[JBmurc]

https://www.cnbc.com/2018/01/03/why-warren-buffett-says-index-funds-are-the-best-investment.html

Unless one is a Warren Buffett - hard to beat the index.

Or one is a share trader focused on high-risk-return sectors... I know I've averaged a touch over 30% over the years(several etc) ...but then I do take my fair share of risks >>and its the fact I'm not trading millions- billions etc ..I know WB stated it would be easy for most to return 20%+ in the small cap space

[huxley]

Perhaps Smartshares should release the ‘Sharetrader index’ :)

[Benny1]

Perhaps Smartshares should release the ‘Sharetrader index’ :)
Nice one! Sign me up 😀

[JBmurc]

Perhaps Smartshares should release the ‘Sharetrader index’ :)

I understand that's basically "Active fund management" not the "passive index fund management" Value investors talking about ...

[JeremyALD]

Not sure if I've beat the index or not, but over the last couple of years I've done pretty well. However I've also made some bloody terrible decisions which has impacted my returns; mainly MPG and TGH. However I enjoy tracking stocks and find it much more interesting and rewarding than index funds, so as long I'm performing close to the market I'm pretty happy. You also are more likely to have a few big winners if you do your research - HLG and ATM are a couple for me that have well and truely covered a few bad investment decisions.

[voltage]

interesting posts. If most investors used index funds what would happen to the share broking industry?
I looked at my returns on the ASX AND i have failed to beat the index over the last 3 years. How can an individual out perform an index when active management cannot over the long term. They have staff employed full time analysing balance sheets. it must come down to luck.

[huxley]

“ If most investors used index funds what would happen to the share broking industry?”

My guess is they would be a leaner industry, but there would probably be opportunities to out perform the passive money anyway . If no one is doing any research how will values be established? The majority of fund managers will just be allocating capital based on the weighting, so if SKT is 2% if the market, we put 2% into SKT, never mind the business model is a bit broken and the stock is arguably a value trap :/

[Snoopy]

How can an individual out perform an index when active management cannot over the long term. They have staff employed full time analysing balance sheets.


There is a 'small cap premium' that has been positively identified by those studying the investment world. Put simply it is much easier for a company with $20m in sales to grow profits by by 100% than it is for a company with $2,000m in sales to do the same. The problem is that if an investment fund tries to chase the small caps, then their very act of buying and selling moves the share price up or down to the extent that the small cap premium cannot be realised.

An advantage for the small investor in NZ is that sharebrokers very rarely cover companies outside the NZX50. So we small investors are not competing with sharebrokers full time analysts to try and out smart them, because such full time analysts are completely absent from the NZX small cap market.

As a Mum and Dad investor without millions to invest, you can invest in small caps without moving the price around too much. However, if you go entirely by broker advice the small cap premium will also likely evaporate, because lost of Mums and Dads acting together can push a share price around. Yet if you keep it small and do your own thinking then some of these small cap premiums can be realized, at least in my experience.

SNOOPY

[Investor]

interesting posts. If most investors used index funds what would happen to the share broking industry?
I looked at my returns on the ASX AND i have failed to beat the index over the last 3 years. How can an individual out perform an index when active management cannot over the long term. They have staff employed full time analysing balance sheets. it must come down to luck.

Well.. in my opinion the main problems with managed funds are: over-diversifying, high transaction fees because of too many investments & having to invest new cash all the time and generally having fairly high weightings in low performing asset classes to avoid upsetting investors who are risk averse and don't like volatility.

[James108]

There is a 'small cap premium' that has been positively identified by those studying the investment world. Put simply it is much easier for a company with $20m in sales to grow profits by by 100% than it is for a company with $2,000m in sales to do the same. The problem is that if an investment fund tries to chase the small caps, then their very act of buying and selling moves the share price up or down to the extent that the small cap premium cannot be realised.

An advantage for the small investor in NZ is that sharebrokers very rarely cover companies outside the NZX50. So we small investors are not competing with sharebrokers full time analysts to try and out smart them, because such full time analysts are completely absent from the NZX small cap market.

As a Mum and Dad investor without millions to invest, you can invest in small caps without moving the price around too much. However, if you go entirely by broker advice the small cap premium will also likely evaporate, because lost of Mums and Dads acting together can push a share price around. Yet if you keep it small and do your own thinking then some of these small cap premiums can be realized, at least in my experience.

SNOOPY
Your right, it's a lot easier to be the smartest person in an empty room.

[Snoopy]

How can an individual out perform an index when active management cannot over the long term. They have staff employed full time analysing balance sheets.


One more pearl of experience to drop on this subject. I will leave it to others to decide if it qualifies as 'wisdom'.

The sharebroking industry is by self reflected customer demand, working with a short term time horizon. Most brokers come up with a list of 'picks for the coming year' in December. Yet if you look at how many managers of NZX50 corporations set out manage their businesses on a year to year basis, I would venture to suggest the answer is none. If you look ten years out, you may get a very different answer to those that the brokers recommend, even though the valuation techniques you use are the same. My specific case in point is the gentailers, a sector in which I held three players: Contact, Mercury and Genesis.

My valuation of the former two includes the contribution from a future power station that will eventually be built by each, using their existing capital structure. I am probably the only dog to value the companies in this way. But if you have a ten year time horizon, valuing the snapshot power picture that is presented today does not make sense. By contrast, the ten year picture for Genesis Energy, in my view, looks pretty dire. Kupe will be virtually extinct. To keep the existing gas infrastructure going will require importation of LNG and all the associated infrastructure for that must be paid for. Big money will be required to replace or seriously upgrade Huntly within ten years. Or will Genesis simply cede their role as a significant generator to other industry players? On a short term basis I see Genesis as well run, and I think many brokers would concur. But I am frightened by the long term headwinds, hence my decision to sell out, albeit at a nice profit, in 2017.

I still hold my positions in Contact and Mercury Energy.

SNOOPY

[Stranger_Danger]

So as above if the majority agree it’s difficult to beat the market and put 90% into index funds and ‘play’ with the rest, why are you doing it? Purely because you enjoy the process of stock picking as more of a hobby? One that’s lined your pocket rather than emptying it?

The reason I do it is because the only upside one can get from owning an index is the return provided by that index.

By researching and owning stocks directly, one also gets the constant education that comes with needing to continually increase your knowledge.

I used to own a (non investing) business and I - and yes, this quote is pretty much stolen word for word from Warren Buffett - found that my experience in investing helped me in business, and that my experience in business helped me as an investor. A lot of people get trapped in the "widget making" aspects of their business, and I found my investing experience, on almost a daily basis, gave me a real advantage over those that were just making widgets by getting me to constantly look at the bigger picture, think more strategically, think of my private business entity as if it was a listed financial investment, and to run it accordingly.

On the other hand, my experience in business helped me a lot in investing. I think a lot of people forget these wiggly moving share price things are actually making widgets, and I found my business experience helped me remember that. Rather than just looking at a share price chart, it would force me to think about what things I could or would do to improve this business, are the current managers moving in that direction, how will I know when a rational plan is being followed by management, how will I measure it etc etc. Also, it helped me a lot when it came to understanding the (often underestimated) change in investor returns that can result from changes to competitive position or regulatory stances.

Bottom line is I found there were massive long term gains that resulted from direct sharemarket investment that simply couldn't have been achieved by turning off my brain and buying an index. While these gains were educational rather than financial, the application of business to investing, and then investing to business, eventually yielded a satisfactory financial outcome.

I'm "retired" now (ie no operating business) and just invest, but I have no problem at all if I spend more than 40 hours a week researching and managing investments. Truth is, I absolutely love it, don't regard it as a job, and prefer it to a wife any day (no offence, ladies!).

On the other hand, if investing is just a means to an end (ie you like money as a tool for acquiring toys and a lifestyle, but aren't intrinsically interested in growing it just for pure fun) and you have a job, a life, kids, a partner etc etc, then I can 100% understand not wanting to put in endless hours on investing.

With that mindset, it is totally rational to buy an index, and that is what I would recommend.

It's a bit like Kane Williamson liking cricket, and practicing and competing his whole life, and me kinda/sorta liking cricket, but really not having the time or caring that much.

If that is my mindset, I'm better buying an index (ie watching the "returns" others, namely the Black Caps, accrue on TV) rather than fooling myself that I could kinda/sorta spend 2 hours a week practicing my cut shot and suddenly wake up and be as good as Williamson. Not gonna happen.

Same with investing. If you love it, you have to do it with a FOCUS and do a lot of it. If you don't love it, stop kidding youself and buy an index.

[DarkHorse]

There is a 'small cap premium' that has been positively identified by those studying the investment world. Put simply it is much easier for a company with $20m in sales to grow profits by by 100% than it is for a company with $2,000m in sales to do the same. The problem is that if an investment fund tries to chase the small caps, then their very act of buying and selling moves the share price up or down to the extent that the small cap premium cannot be realised.

An advantage for the small investor in NZ is that sharebrokers very rarely cover companies outside the NZX50. So we small investors are not competing with sharebrokers full time analysts to try and out smart them, because such full time analysts are completely absent from the NZX small cap market.

As a Mum and Dad investor without millions to invest, you can invest in small caps without moving the price around too much. However, if you go entirely by broker advice the small cap premium will also likely evaporate, because lost of Mums and Dads acting together can push a share price around. Yet if you keep it small and do your own thinking then some of these small cap premiums can be realized, at least in my experience.

SNOOPY

Snoopy raises a key point. If you're talking about medium to large caps - which dominate "the index", at least a weak form of the efficient market hypothesis is common sense. All the information is widely available to professional analysts so it's tough to beat the market consistently.
But small companies are a different kettle of fish. Good companies fly under the radar, while unprofitable speculative stocks are often overpriced. The risk-reward equation goes out the window when, on average, things like low debt, high manager ownership and strong cashflow both reduce risk and increase reward.
So not only does investing part of your capital in small caps increase returns over time, but you're much better off either investing directly using appropriate filters, or via an active manager (eg LIC in Australia)who uses proven selection criteria.

[Valiant]

G'day all, can someone point me in the direction of a thread on managed funds, if there happens to be one? I've had a search around but haven't been able to spot..
Thanks in advance.

[Lawstudent05]

Unsure if there is one.

Not sure if your aware of Smartshares, good index passive investment. I do know Milford Asset Management do managed funds investment and Quay Street.

[sonny n share]

There is the ETF thread
https://www.sharetrader.co.nz/showthread.php?10835-ETF-s

You can compare NZ investment platforms and fees at:
https://thesmartandlazy.com/
https://www.moneyhub.co.nz/investing--saving.html

and learn about other people's stories at:
https://www.thehappysaver.com/

Good luck

[Aaron]

Anyone else come to the same conclusion or want to chip in with a story or two?
I came to the conclusion that I am too lazy to do the required reading to understand an investment also I maybe too stupid but I have been waiting for GFC2 before starting with a deposit into smartshares and a regular automatic payment thereafter. So far not paying off.

I can't see how passive index funds work if they dominate the market though. They are mindlessly buying based on the "price" of the companies not trying to establish the "value" Without active investors no one is doing any thinking.
I am hoping that the increase in passive index funds will work the other way if central banks ever allow markets to fall (I am thinking of the Japanese Central banks ETF purchases). Is there any way that this hasn't helped keep prices going up. Low interest rates are forcing people into shares, easy money and margin lending will be playing a part. If this virtuous upward cycle ever hits a snag there might be a catastrophe and a good investing opportunity.

https://www.bloomberg.com/news/articles/2017-12-10/the-tokyo-whale-s-150-billion-etf-binge-seen-slowing-next-year

The JCB owns 74% of the ETF market. I wonder if Exchange Traded Funds aren't as big on the Nikkei otherwise the 74% figure sounds a little crazy to me. It could almost be like the nationalisation of Japanese industry if a "strong" government got in and demanded control of the JCBs balance sheet. So much being centralised can only be a bad thing in my view.

[Valiant]

Thanks for the direction Lawstudent.
Not looking directly at passive index funds at the moment. I do however have investments in both Quaystreet and Milford Asset, both have performed well over the past few years.

[Valiant]

There is the ETF thread
https://www.sharetrader.co.nz/showthread.php?10835-ETF-s

You can compare NZ investment platforms and fees at:
https://thesmartandlazy.com/
https://www.moneyhub.co.nz/investing--saving.html

and learn about other people's stories at:
https://www.thehappysaver.com/

Good luck

I will check these out. Always interesting to compare the fees across the different platforms and fund types, it all adds up.

[DarkHorse]

Some very pertinent research: https://www.livewiremarkets.com/wires/most-stocks-underperform-and-why-this-is-an-argument-for-active-management