# New Sunday Times Feature - Diary of a Private Investor



## Brendan Burgess

Colm Fagan is an active private investor and former President of the Society of Actuaries. He will be doing a monthly column in the Irish edition of the Sunday Times starting this Sunday "The Diary of a Private Investor".  Although I am not a stock picker, I have discussed investment issues with Colm in the past and his approach is far more systematic, independent and critical than the stuff published by stockbrokers

Brendan


----------



## mtk

Article for me had just couple points worth noting
Fads and fashion drive prices
Beware Heroic assumptions 
Lottery approach


----------



## Brendan Burgess

Here is a copy of his first article


----------



## Steven Barrett

Good article. I hope people listen to what he is saying. Investing shouldn't be seat of the pants stuff. 

Had a meeting with a potential client who said he was looking for a return of 4.9%. Very specific return but not an overly ambitious return. While I can't promise anything, I could show him the kind of portfolio that has generated those levels of returns over the long run. Long run? He wanted 4.9% a month!! A meet 58.8% per annum


----------



## Brendan Burgess

Here is his most recent article which deals with stock market volatility.


*Diary of a Private Investor   Colm Fagan  Sunday Times, January 17, 2016*

The purpose of this column is to demystify the world of stocks and shares by recounting one person’s adventures in this world.  It does not purport to give advice. 

“Are you beating the professionals?”  It’s a question I am regularly asked at this time of year, when the financial sections of the newspapers publish tables showing the past performance of various fund managers.  My answer is that I am doing well, but I won’t claim any expertise until l have survived a severe downturn.  Like most investors, I suffered badly in 2008; I don’t want to fall to a similar fate in the next recession. 

Guaranteeing no repeat of 2008 carries a hefty price tag.  The most I can earn from genuinely risk-free investments is around 2% a year- if I’m lucky.  I need to earn more than three times that to have a reasonable income in retirement:  6% per annum plus inflation is my target.  For that reason, bonds and deposits don’t feature in my portfolio other than for short-term cash needs and the unexpected rainy day. 

I have put my faith in ordinary shares for around 90% of my portfolio, believing that they will deliver the required return in the long-term.  Over the last seven years, returns have been comfortably ahead of target, but that has been a good period for stock markets; I don’t expect the good times to last forever.  Indeed, recent market falls portend that the good times could end much sooner than we thought just a few short weeks ago.

Temporary price dips don’t worry me: on the contrary, I see them as buying opportunities if the fundamentals of the business are unchanged.  Temporary price dips would be a concern if investments had to be redeemed when prices were down but up to now dividend income and normal turnover of investments have been sufficient to meet voluntary and compulsory cash withdrawals.  (Because of my age, Irish pension regulations compel me to take some money from my investments every year, whether I want to or not.)

Permanent loss of value is a different matter.  I try to reduce that risk by investing in companies that are strong enough to weather a severe recession.  Often, that means choosing companies with little or no debt, even though that can be a drag on performance in good times:  just as someone who borrows to invest in property can earn a higher return than one who risks only what they can afford, the same is true for companies that borrow to expand or to acquire other businesses.  The danger with such companies is that, in a downturn, all the profits could be eaten up by borrowing costs; worse, if loan covenants are breached, shareholders could be wiped out.  I am prepared to pay the price of lower returns in the good times in order to reduce that risk. 

Some of my worst investment decisions have come from buying shares recommended by others.  As a consequence, I now only buy shares that I have studied myself.  I don’t have much time for research, which means that there are only a small number of companies in my portfolio.  That doesn’t worry me unduly.  It creates concentration risk, but I believe that less than a dozen companies provides sufficient diversification if the companies chosen are financially and strategically resilient and if there is little overlap between them in terms of risk exposures – a tall order, I know. 

Nevertheless, I recognise that I am running extra risks with a concentrated portfolio and one of my New Year resolutions is to increase the spread of companies in which I am invested.  That means disposing of some of my current holdings to make room for the new arrivals.  In mulling over which stocks to sell, I discovered that I have a condition that psychologists and behavioural economists call the endowment effect.  People with this condition ascribe more value to things merely because they own them.  I recognise myself in that description:  I am prone to believing that the stocks I own are worth more than others I could buy for the same price. Now that I know I have the condition, however, I hope to be better able to counter it. 

A significant proportion of my investments are in UK companies, probably because the Financial Times is my investment bible.  In the last two years, UK exposure has delivered windfall profits:  sterling rose by over 7% against the euro in 2014 and by over 5% in 2015.  In mid-2015, partly in anticipation of Brexit risk, I decided to hedge some of my sterling exposure. I have locked in a fixed euro/ sterling exchange rate until mid-2016 and the present intention is to renew the lock when the current one expires.  I have not hedged my exposure to UK companies that have significant international operations, on the grounds that the underlying businesses are already multicurrency.

I discovered the hard way that I know very little about commodities: I incurred significant losses on Tullow Oil and Barrick Gold (a Canadian mining company), believing about two years ago – wrongly as it transpired – that oil and gold had hit rock bottom.  I cut my losses on both stocks in 2015.  I have resolved to stick to stock-picking in future and not try to predict macro trends, whether in commodities, currencies, or in the overall level of the market.

As we enter a new year, I look forward to continuing to share with you the ups and downs of life as a private investor.  I also hope that 2016 will not be the year that will test the quality of my defences against another 2008-style collapse.

Colm Fagan is an active private investor.  He is a retired actuary and a non-executive director of a number of financial institutions.


----------



## cremeegg

Brendan Burgess said:


> I discovered that I have a condition that psychologists and behavioural economists call the endowment effect.  People with this condition ascribe more value to things merely because they own them.  I recognise myself in that description:  I am prone to believing that the stocks I own are worth more than others I could buy for the same price. Now that I know I have the condition, however, I hope to be better able to counter it.



There is also a condition akin to hypochondria whereby people believe that they must be experiencing every passing fad among behavioural economists.

You are a stock picker. You should believe that the stocks you own are worth more than others you could buy for the same price. Why else would you have bought them.


----------



## mtk

Diary of a rational investor

I throw 20 numbered darts at a list of randomly sorted global large cap  stocks ( top 200 ) as at 1 January. Choosing 200 is a judgement call . 20 is a judgement call based on size of portfolio relatively to dealing costs / currency costs etc .
I blindfold myself in order to avoid bias
I rebalance as follows .I rethrow  the darts on each 1st January
I then buy/sell each of the 20 every 365/20 so every 18/19 days selling them in same order I bought them and so holding each for 1 year .
Repeat


----------



## Brendan Burgess

Hi mtk

Not sure what your point is?

I am a long-term buy and hold investor. I have about 10 stocks and only rebalance when one of them gains so much that I become overweight.

Colm has roughly the same strategy except that he believes he can pick winners (and losers), while I don't think I can.

Both of us should do well compared to the market, because we have very low dealing costs.

You would see most of your gains going in transaction costs and stamp duty, not to mention the cost of the  damage caused by throwing darts while blindfolded.


----------



## mtk

fair point brendan although  i find the massive volatiliy in last few years mean dealing costs are not as big in relative terms ( to gains /losses) as you may expect.
i throw darts from close range  with door locked


----------



## Colm Fagan

cremeegg said:


> You are a stock picker. You should believe that the stocks you own are worth more than others you could buy for the same price. Why else would you have bought them.


Hi Cremeegg.  First of all, it was I, not Brendan, who mentioned the endowment effect, and I think you misunderstand what I was saying.  Of course I believed in the stocks when I bought them, but the point relates to how I feel about them afterwards, when their value will have changed from when I bought them.  That's where the endowment effect comes in.  The illustration of the effect that I particularly liked was when two groups were given objects of approximately equal value, one group getting a coffee mug and the other a chocolate bar.  When offered an exchange, something like 80% of the people who were given the coffee mug said that they would prefer to keep the mug rather than exchange it for a chocolate bar, whilst around the same percentage of the people who had been given the chocolate bar said that they would prefer to keep it rather than exchange it for a coffee mug.


----------



## Sarenco

Brendan Burgess said:


> Colm has roughly the same strategy except that he believes he can pick winners (and losers), while I don't think I can.
> 
> Both of us should do well compared to the market, because we have very low dealing costs.



Hi Brendan

I am attaching a link to a recent Irish Times article on the size of an ideal stock portfolio.

In a nutshell, the article suggests the sweet spot for an active investor that is trying to beat the market is around 30 stocks and anybody trying to simply match a market return should simply buy that market through index funds.

An ultra-concentrated portfolio of only 10 stocks, almost by definition, cannot produce average market returns.  It will either beat or under-perform the wider market (the later being a much more likely outcome).  An ultra-concentrated portfolio of only 10 holdings could never be considered a passive investment approach.

Holding individual stocks obviously avoids fund management charges but commissions on trading or re-investing dividends are significant for individual investors and stockbrokers commonly apply an account maintenance charge.  For all but the largest of stock portfolios, these investment costs will typically exceed the TER and trading costs associated with holding a simple index fund.

http://www.irishtimes.com/business/...e-size-of-the-ideal-stock-portfolio-1.2423050


----------



## joe sod

great irish times article you posted now. 
"The volatility of individual stocks has escalated sharply in recent decades, he says, causing him to change his mind on the idea of 20-stock portfolios."
So volatility has been increasing.
Also interesting when he says
"Ironically, research suggests many fund managers are skilled stock-pickers, but they are undone by an insistence that they be diversified. According to a 2010 study, the top holdings of funds – likely to be high-conviction holdings – easily outperform the market."


----------



## noproblem

The IMF and ECB plus so called Economists change their minds several times a year as to what %'age growth we're going to have based on data that means very little as there's so much luck involved and things happen for no particular reason.  Picking stocks is no different and it doesn't mean an awful lot having big blue chip companies or whatever. One is gambling, nothing else, although some would have us believe that research, price ratio to this that and the other and dividends, etc, etc, etc, will get you much profit or some other fancy name. Amazes me how so many of those genius's lost everything over the past few years


----------



## Brendan Burgess

Sarenco said:


> I am attaching a link to a recent Irish Times article on the size of an ideal stock portfolio.



Hi Sarenco

The wisdom of holding 10 stocks is considered in a Key Post elsewhere. The error in most of the discussion is that the researchers and commentators equate risk with volatility.  This is primarily because they can measure volatility but they can't measure risk.

The only part of that article which would cause me to review the strategy is this:
"Bernstein’s says a handful of “superstocks” have historically accounted for the bulk of market returns."
"Separate research conducted by Longboard Asset Management found that, between 1983 and 2006, 39 per cent of stocks were unprofitable and almost two-thirds underperformed the market. Again, a minority of stocks accounted for all the market gains."

With 10 random blue-chip stocks, the risk that all would be loss makers is vanishingly small .39^10.
The risk that I would pick 10 stocks which all underperform the market is around 1.5%  .66^10. They might well underperform the market but the portfolio could still be profitable.
The most likely outurn (based on the above figures) is that 4 of my stocks will be loss makers and 6 will make gains.
And, of course, I might be lucky in that I pick more than 6 profitable stocks.

I have not kept long-term historical records and maybe I will be able to reconstruct it from my files. My gut feeling is that the gains have far outweighed the losses. I have lost 80% on a couple of stocks e.g. AIB.  But huge gains in other stocks e.g. Ryanair, Aryzta and DCC more than compensate for those losses.  I need to check the records because it's quite possible that I have a selective memory, I might remember the gains and tend to forget the losses.

I also wonder if there is a timing issue here?  During certain periods nearly all stocks go down together and in other periods nearly all stocks go up together. Most people invest over time and so that is a form of diversification in itself.

Actually, when I come to think of it, I did not lose 80% of my investment in AIB.  I lost 80% from the peak to when I sold, but I built up my holding over many years and got a good dividend return during those years. So my actual loss was a lot less than 80%.  Similarly my Aryzta shares are down 50% from their peak. But I bought them years ago when they were IAWS and so my gains on the share are still huge, although they feel like a loss maker to me now. 

The other diversification which virtually all of these studies ignore is that most people have other assets e.g. their home and their pension.  There is absolutely nothing wrong with a 35 year old who has €100k equity in their home and a secure job investing their €10k of free cash in one share.  Of course, they probably should pay down their mortgage instead.


----------



## Brendan Burgess

Colm Fagan said:


> When offered an exchange, something like 80% of the people who were given the coffee mug said that they would prefer to keep the mug rather than exchange it for a chocolate bar, whilst around the same percentage of the people who had been given the chocolate bar said that they would prefer to keep it rather than exchange it for a coffee mug.



Hi Colm

That is a very interesting analysis. 

When it comes to stock picking it's important. Professional active investment managers keep switching from chocolate bars to coffee mugs and back again. They run up stamp duty and transaction costs in the meantime which wipe out their gains. 

So a passive fund is more likely to outperform by buying a few coffee mugs and a few chocolate bars and sticking with them.

Brendan


----------



## Brendan Burgess

It reminds me of the Setanta Focus 15 fund. 

[broken link removed]





They seem to have got all their outperformance in 2009 and 2010. 

Brendan


----------



## Sarenco

Brendan Burgess said:


> I also wonder if there is a timing issue here?



Hi Brendan

The fact that the majority of stock market gains come from a relatively small number of stocks is actually pretty consistent across time.

From 1926 through 2009, US stocks produced a total annualised return (with all dividends reinvested) of around 9.7% per year. However, if you exclude the top 10% of performers, the return would only have been 6.2%. If you exclude the top 25%, the return becomes slightly negative at -0.6%.  The top 25% of performers actually accounted for more than 100% of the returns.

For the period 1983-2008, US stocks returned almost 10% a year.  However, during this period, about 40% of stocks had a negative return and about 20% of stocks lost nearly all of their value. 64% of all stocks underperformed the broader market. Obviously a small number of stocks are responsible for the vast majority of the gains - about 10% of stocks recorded returns in excess of 500%.

In 2015, the total S&P500 return was modestly positive.  However, if you remove 9 outperforming stocks from the index (including Disney and Netflix), the return actually turns negative.

Diversification is not simply about moderating volatility - it also helps to ensure that a portfolio has a reasonable number of winners and avoids having an oversized number of turkeys.

There is obviously the possibility that some or all of a portfolio of 10 stocks chosen at random will feature amongst the top performers.  However, there is a far greater probability that some or all of those 10 stocks will feature amongst the under-performers.  The market does not compensate unsystematic risk.

None of the above is to suggest that a skilled active manager cannot outperform the wider market with a high conviction portfolio of around 20-30 stocks.  However, as the Setanta Focus fund adequately demonstrates, the problem is that it is extremely difficult to maintain any such outperformance over the medium to long term.

Incidentally, an actively managed fund does not necessarily imply a high portfolio turn-over.  There are plenty of active managers that make minimal changes to their portfolios from one year to the next.


----------



## Brendan Burgess

Hi Sarenco

Thanks for that. Some very interesting data there.



Sarenco said:


> From 1926 through 2009, US stocks produced a total annualised return (with all dividends reinvested) of around 9.7% per year. However, if you exclude the top 10% of performers, the return would only have been 6.2%.



But presumably had I excluded the bottom 10%, the return would have been a lot higher?

Is that argument not like me saying I have a 10% annualised return on my portfolio - if I exclude my stupid investment in AIB? (I have heard card players claim that they are consistent winners, if they exclude the times they played while drunk.)



Sarenco said:


> In 2015, the total S&P500 return was modestly positive. However, if you remove 9 outperforming stocks from the index (including Disney and Netflix), the return actually turns negative.



Interesting, but how typical is that?




Sarenco said:


> Diversification is not simply about moderating volatility - it also helps to ensure that a portfolio has a reasonable number of winners and avoids having an oversized number of turkeys.



That is the bit I need to think more about.  It's quite likely that one or maybe two of the shares I currently own will collapse completely. The problem is that I don't know whether it will be Ryanair, CRH, DCC etc.  In the past, the collapses were more than compensated for by the stars. But maybe none of my portfolio will shine over the coming years.

If Ryanair doubles, my portfolio increases by 5%. If I have 100 shares, my portfolio would increase by only 0.5%.  So I would need a lot of winners in the 100 shares.

It probably needs someone to run lots of models of portfolios of 10 shares to see how often they crashed completely and how often they did very well.  I am sure that someone must have done this.


----------



## cremeegg

Colm Fagan said:


> Hi Cremeegg.  First of all, it was I, not Brendan, who mentioned the endowment effect, and I think you misunderstand what I was saying.  Of course I believed in the stocks when I bought them, but the point relates to how I feel about them afterwards, when their value will have changed from when I bought them.
> 
> That's where the endowment effect comes in.  The illustration of the effect that I particularly liked was when two groups were given objects of approximately equal value, one group getting a coffee mug and the other a chocolate bar.
> 
> When offered an exchange, something like 80% of the people who were given the coffee mug said that they would prefer to keep the mug rather than exchange it for a chocolate bar, whilst around the same percentage of the people who had been given the chocolate bar said that they would prefer to keep it rather than exchange it for a coffee mug.



I think that the chocolate bar and the mug are supposed to stand for two things which provide no points of comparison on which to base a decision. But shares do provide a basis of comparison. If you bought Share A because you thought it had greater growth potential than other similarly prices shares. You can at any later point revisit that question. There may well be such a thing as an endowment effect but where you have points of comparison that effect can be minimised by rational decision making 

In my experience much a greater threat to rational decision making is emotional investment in a share. You decided to buy Share A and you want it to do well to justify your decision. This may also lead you to keep a share irrationally but it is quite different from the endowment effect.


----------



## Sarenco

Brendan Burgess said:


> But presumably had I excluded the bottom 10%, the return would have been a lot higher?



Yes, but excluding the bottom 10% does not have nearly as dramatic an effect on performance as missing out on the top 10%.   The point is that the number of stocks that drive market returns actually represent a relatively small proportion of the overall market - if a portfolio does not contain any of a handful of "super performers" then the portfolio will inevitably lag the market return.



Brendan Burgess said:


> Interesting, but how typical is that?



Very.  If you excluded the top 25% of performers from 1926 through 2009, then US stocks produced a negative return.  On the other hand, including the top 25% gives an annualised return of close to 10%.  That's a difference of over 8,000%!



Brendan Burgess said:


> If Ryanair doubles, my portfolio increases by 5%. If I have 100 shares, my portfolio would increase by only 0.5%. So I would need a lot of winners in the 100 shares.



That's really my point in a nutshell.

The more concentrated the portfolio, the greater the likelihood that the portfolio will outperform the market.  But the reverse is also true - the more concentrated the portfolio, the greater the likelihood that the portfolio will underperform the market.

Given the fact that the majority of stock market gains come from a relatively small number of stocks, you can see that the probability is far higher that a concentrated portfolio will underperform (as opposed to outperform) the market, simply because there is a greater probability that a concentrated portfolio will miss out on the "super performers".

A randomly selected portfolio of 10 stocks is twice as likely to feature in the bottom 20% of stocks (whose value went to zero) than the top 10% of "super performers".


----------



## Brendan Burgess

You answered a different question. I was asking how typical was it that 9 stocks out of 500 accounted for the whole return. You answered by excluding 25% of the stocks or 125. 

It would be hard to pick 10 stocks out of 500 and not have one or two in the top 25%.

It would be easy to pick 10 stocks out of 500 and miss out on all the top 9. 



Sarenco said:


> A randomly selected portfolio of 10 stocks is twice as likely to feature in the bottom 20% of stocks (whose value went to zero) than the top 10% of "super performers".



I am now completely confused. 
Do I need to pick shares from the top 2% (9/500)? 
Do I need to pick the 10% of super performers? 
or Do I need to pick the the top 25% who account for all the growth? 

They are very interesting questions.  I am not concerned about picking a few of the shares that will do well this year. My holding period is indefinite so I would like some of the shares which outperform in the long term, knowing that I will pick some of the duds.


----------



## Sarenco

Hi Brendan 

To be clear, I didn't actually say that 9 stocks accounted for the entire 2015 return - I said that if you excluded the top 9 performing stocks, the return of the S&P500 would have changed from modestly positive to modestly negative.  In other words, the return on the majority of individual stocks that constitute the index was not zero - it was negative.  

I set out the figures that I have showing the impact of excluding the top 10% and 25% of performers over an extended time period.  I'm afraid I don't have comparable statistics showing the impact of excluding the top 2% of performers but the point is that there is a wide distribution of returns across individual stocks that make up the market.  

You can't capture the market return by simply picking a sufficient number of stocks from the top 25%, 10% or 2% of performers.  The only way to reliably capture the market return is to buy the entire market.

Hope that makes sense.


----------



## Brendan Burgess

Sarenco said:


> The only way to reliably capture the market return is to buy the entire market.
> 
> Hope that makes sense.



It does. But I am aiming for a good return. I am not aiming to capture the market return. If I get a real return of say, 4%, while the stock market earns a return of 8% due to Google and Microsoft, that is a bit disappointing for me, but it's not the end of the world. 

I would be much more worried about losing money over the longer term because I had picked an unlucky selection of bad ones whereas the market as a whole performed normally.

Brendan


----------



## joe sod

In the Sunday Times article the author says that he made a mistake investing in commodity stocks like tullow oil and barrick gold. But I'm wondering if he had invested in shell a blue chip major rather than tullow oil would he have done the same thing. The fact that oil companies and commodities are highly cyclical is now very much to the fore. But back in 2009 - 2012 when oil prices were high airline stocks like Ryanair and aer lingus were on the floor and trading at fractions of their current valuations having fallen substantially from their 2007  levels. Then everybody was advised to stay away from them due to the highly cyclical nature of their business. I think aer lingus floated at 2.50 euros and fell as low as 65 cent in 2012. Lots of people have mentioned the stellar performance of Ryanair but are people forgetting the highly cyclical nature of airline stocks. I'm just trying to compare investing in airline stocks and investing in commodities and is, it basically the same thing.


----------



## mtk

Great thread and article with real insight ....... the devil is in the detail I think

Is it in pension ( ARF?) wrapper or not ?
Tax implications and provider /broker charges

What is the approx size of the author's  portfolio?
To compare man. charges of a "fund" etc. vs self directed charges
Dealing costs depend on volume (as well as frequency)


----------



## Colm Fagan

I'm in bed now, having struggled through the day with a bad cold, but I'll try to give answers to some of the questions/ comments (all very welcome, I should add).
1.  Is it a pension wrapper or not?
  There's a combination of an ARF, an AMRF, and a non-exempt portfolio.   Strategically, I look at the portfolio as a single entity, but naturally try to hold the high dividend stocks in the ARF/ AMRF and the low dividend stocks in the non-exempt portfolio.  More often than not though, the decision on which "pot" to take money from when an investment opportunity arises is wherever there is spare liquidity.  Obviously too, I have to ensure there's enough liquidity in the ARF at the end of each year to pay the "pension" mandated by regulation.  My stockbroker is the administrator (or whatever the term is) for the ARF/ AMRF, but it's on an execution only basis.   I make all my own investment decisions. I think the charge for what they do is exorbitant, especially as it's expressed as a percentage of assets under management, but I probably wouldn't get it any cheaper elsewhere. 
2.  What is the approx size of the portfolio?
  That's a closely guarded secret!  Suffice to say that it is into 7 digits but nowhere near 8.   On the question of dealing costs, I used to deal fairly frequently a couple of years ago, but much less often now, and each deal is a significant size.  At present, six stocks account for around 80% of the total portfolio.  As per the article, I'm trying to diversify a bit more, but not too much.
3.  Made a mistake buying Tullow Oil and Barrick Gold, but what if I'd invested in Shell say?
It would make no difference.  The point I was trying to make is that I've realised that I'm useless at predicting future trends for currencies, commodities, etc. and have decided to stick with stock-picking for companies whose success depends on providing real goods or services, the demand for which is reasonably predictable (probably not in cyclical industries).  On that thinking, I wouldn't go near an oil major or minor again.
4.  Emotional investment in a share is a greater threat to rational decision-making than the endowment effect?
  I can see the similarities but I definitely see myself in the description of the endowment effect, and it is different from emotional investment.   Some of the literature on this "condition" is fascinating.  Definitely not something to be dismissed as theoretical nonsense.
5.  Concentrated or diversified portfolio?
 The answer depends on what you're trying to achieve.  I don't give a sugar about matching or beating the market or pooled fund returns over either the long-term or short-term.   I'm simply trying to get a good "real" rate of return in the long-term, provided of course that I'm satisfied that dividends and "normal" turnover of investments will be sufficient to meet my "income" needs (real or forced by regulation) and that I won't have to cash investments at the wrong time.  Some of my friends have challenged the 6% real return target as being unreasonably high, but I think it can be achieved.  I reckon I have a better chance of reaching the target with a concentrated portfolio of good quality companies, bought at reasonable prices, and which are well diversified in terms of risk exposures - and that doesn't necessarily mean industry sectors; it means internal and (more importantly) external risks that could hit their businesses.  One example of such a risk I'm facing at present is China.  Two of the companies in my portfolio, with very different businesses, both have high exposure to China, albeit one is at the retail level and the other at the wholesale level.  
I'd better tuck in with my Lemsip now!!


----------



## Fella

Hi Colm , 

I bought the paper to read your diary , it's enjoyable reading. Are you going to be recommending shares to buy?

You seem to be investing a long time well I'm guessing that seen as you have 7 figures invested, what would you do if you where starting out again ? 
What advice do you have for someone who is beginning to invest ? 

I'm 34 and have 250k in equities mostly made up of investment trusts now, they have dropped a bit seen as I only started recently , I don't see myself needing that money until retirement , what's the best way to grow it in your opinion?
 Do you recommend people see a financial advisor or trust in themselves? 
I don't max out pension as I am a low tax payer. 

Thanks


----------



## Gordon Gekko

Hi Colm

Get well soon. Why do you think that you can pick winners more effectively than (say) the fund managers of Morgan Stanley Global Brands or Finsbury Growth & Income Trust?

Regards

Gordon


----------



## galway_blow_in

joe sod said:


> In the Sunday Times article the author says that he made a mistake investing in commodity stocks like tullow oil and barrick gold. But I'm wondering if he had invested in shell a blue chip major rather than tullow oil would he have done the same thing. The fact that oil companies and commodities are highly cyclical is now very much to the fore. But back in 2009 - 2012 when oil prices were high airline stocks like Ryanair and aer lingus were on the floor and trading at fractions of their current valuations having fallen substantially from their 2007  levels. Then everybody was advised to stay away from them due to the highly cyclical nature of their business. I think aer lingus floated at 2.50 euros and fell as low as 65 cent in 2012. Lots of people have mentioned the stellar performance of Ryanair but are people forgetting the highly cyclical nature of airline stocks. I'm just trying to compare investing in airline stocks and investing in commodities and is, it basically the same thing.



ryanair was on the floor from 2009 to 2012 due to the fact that ireland and europe was in a deep recession and equities were in a profound bear market across europe until draghi replaced the truly awful trichet as ECB president  , had nothing to do with the price of oil , bar ryanair and perhas IAG , no major airlines stock price is doing well right now , the major american airlines got nothing out of low oil prices since mid 2014 , ditto with easyjet ,  you might think that low oil prices automatically corellate with higher stock prices for airlines but thats not the case


----------



## Sarenco

Gordon Gekko said:


> Finsbury Growth & Income Trust?



Actually Finsbury Growth & Income (FGT) is an excellent example of the sort of high conviction, low turnover portfolio favoured by Brendan and Colm.

As at 31 December 2015, FGT had a grand total of only 24 holdings.  Its portfolio manager employs the sort of fundamental stock analysis favoured by the likes of Warren Buffett and rarely adds new holdings to the portfolio or exits a position once acquired.  The portfolio has a significant sectoral bias in favour of defensive consumer stocks (Diageo and Unilever are major holdings).

Over the past ten years, FGT shares have generated total returns in excess of 10% per annum and shares in the trust have outperformed the MCSI World Index (TR) by over 40% over this period.

Obviously past performance is not indicative of future returns and it seems improbable that this (if any) level of outperformance will continue into the future.  It should also be noted that FGT employs a moderate level of leverage, which can obviously enhance returns in good times.

A highly-concentrated portfolio of this nature would not be my cup of tea but I could think of any number of worse options for an equity investor.


----------



## Colm Fagan

A few comments on various points:

*Will I recommend shares to buy?*  Definitely not!  The column tells what I am doing and why.  I leave it to others to decide if they agree or not with my reasoning.  I am not qualified to give financial advice and I have no aspirations in that regard.

*“I’m 34 and have 250 K in equities”.*  Lucky you!  When I was 34, even 44, I hardly had two brass farthings to rub together and was up to my neck in debt, but that’s neither here nor there.

*Finsbury Growth & Income Trust?  *I don’t know much about this particular company, but it is an investment trust and one key difference between an investment trust and a unit linked fund or unit trust is that the share price of an investment trust is determined by the balance between buyers and sellers, while for a unit trust it is equal to the net asset value.  For investment trust, the share price can vary significantly from the net asset value, either upwards or downwards (normally downwards).  That’s an additional uncertainty to be borne in mind.  I see that in FG&I’s case, the share price is marginally greater than the net asset value.  I have been a long-term investor in another vehicle of this nature, where the share price is at a discount of 12.5% to the NAV.  That particular company has delivered a shareholder return of an average 13.5% per annum over the last 15 years; I’ll probably write about it in one of my future columns.  I much prefer to be invested in a vehicle where the share price is at a discount to NAV than where it's at or above NAV.  My worry about FG&I is that the share price could fall to a substantial discount from NAV if anything were to happen to the main man.

*Does a guy in his attic in Ireland think he can pick winners better than Morgan Stanley’s top analysts?  *First of all, I have nice little office at home, thank you, so I don’t have to retreat to the attic!  Seriously, I don’t think I can pick winners better than the top professionals (but the truth is that many of them are little more than juniors, with no real experience of business).  Nevertheless, my record stands up well against the average professional fund manager.  The private investor has a lot of advantages over the professional that often go unrecognised.  I don’t have the time to go into what those are at the moment; they will probably form the subject matter for another “private investor” column.  More importantly, and this might qualify as a political statement, I think professional fund management is a form of socialism, where a plethora of financial institutions and financial advisers separate the ultimate owners of businesses, i.e. you and me, from the people ultimately responsible for using wisely the money we have given them, i.e. the directors and managers of those businesses.  I want to cut out the middleman; I want to feel a genuine sense of ownership of the companies where my money is invested; I want to understand more about its products and services, its sales volumes and margins, its long-term strategy.   Ultimately, the value I place on the share is derived after putting all these considerations into the pot.  I can compare that derived value with whatever the market is offering at the moment and thus decide whether to buy, hold or sell the share.  I lose all that immediacy and ability to assess the reasonableness of the market value when I put my money in a unit trust or investment trust.


----------



## Dan Murray

Just a few comments.....

Firstly, I think it's great that Colm has been prepared to actively engage with the AAM community.....even from his sick-bed. In the interests of debate, I’d like to offer my $0.02

Articles like this can serve to educate the less financially savvy, _me fein_ included. Due to Colm’s stature, he will be recognised as a thought leader and consequently is likely to influence thoughts and actions, generally. For these reasons, I would be a little concerned about some of the potential takeaways from the most recent article. Colm could reasonably argue that he never actually said some of the points that I am about to be make……my counter argument is that these points could be reasonably be inferred  - Anyway, here goes….

1. The lack of diversification.

Is it really advisable to have 90% plus of one’s retirement savings in equities?

[My own view is that almost irrespective of the average return achieved, the typical human is really not emotionally equipped or designed to deal with the inevitable gyrations of the equity markets with their life’s savings. I think this is especially true in advanced retirement (and I may well be further along this road than Colm and others!) And would you even want to be concerned about market movements in advanced years?]

Also, is it really advisable to hold such a concentrated portfolio within one asset class? or perhaps more bluntly, is it really advisable to hold a concentrated portfolio of equities below a certain level of _financial IQ_?

[If you want a brutal example, go to the AGM of AIB/BOI even to this day! I feel sorry for these folk in part because I believe “they knew not what they were doing”. Since _Einstein Neary_ infamously assured us all of the robust good health of our banks, in spite of the banks’ collapse, the ISEQ is now considerably higher. And yes, I get it that the ISEQ is not in itself the paragon of diversification.]

2. The target return


Brendan Burgess said:


> The most I can earn from genuinely risk-free investments is around 2% a year- if I’m lucky.  I need to earn more than three times that to have a reasonable income in retirement:  6% per annum plus inflation is my target...



I think I misunderstood this when I read it first time round.

I think what Colm is saying is that he _needs_ a 6% return (and that his target is higher again, 6% plus inflation).

Here, I wonder……

6% nominal is attainable but already ambitious in retirement…….why would you strive for heroic returns (i.e. 6% plus inflation)?


If an ordinary Joe plans his retirement on the basis that his fund needs to deliver a 6% return in retirement, then it is probable that sooner or later, we will have a hungry old fogey or two out there.
To me, needing a 6% nominal return in retirement (when inflation expectations are as muted as they are) is kind of a failure in some element financial/lifestyle planning.

Also, and again a personal take, but taking more risk that you need to (by targeting a 6% real return) is akin to the Mexican Fisherman fable.


----------



## Colm Fagan

Dan
Excellent points, and well made.  If I were in your shoes and someone else were in mine, I would probably have said something similar!  Anyway, I'll try to provide responses of equal calibre to the questions - not necessarily disagreeing with you - but it will probably be this afternoon at the earliest before I can get round to it.
Colm
PS:  Once again, just in case any of the readers are confused, it was I, not Brendan, who made the 2% and 6% comments in the box.


----------



## Colm Fagan

Coming back as promised with a more detailed reply to Dan Murray’s thoughtful contribution:

I take Dan’s point that people could take wrong inferences from what I wrote.  Dan himself picked up on the subtlety of me needing to earn 6% for a reasonable income in retirement rather than expecting to earn 6%.  The problem I always face when writing the column is that there is never enough space to say all I would like to say, in particular to expand on subtleties such as this.  If I had the time to expand on what I wrote, I would say that I can survive if I don’t get the 6% plus inflation but it will mean having to cut back on my (and probably more importantly my wife’s!) lifestyle; it might also mean having to downsize our home sooner than I would have intended, dipping more heavily than planned into the money that our children might have thought was part of their inheritance, et cetera.  Dan is also quite right that needing a 6% return in retirement is indicative of a failure of financial/lifestyle planning.  For a variety of reasons, I ended up without any entitlement to a DB pension and had to make up a significant pension shortfall in a short number of years.  Let that be a lesson to all you youngsters!

On the other side of the return equation, some of my friends rightly noted that my estimate of 2% a year from risk-free investments was optimistic.  I won’t bother going into the detail of how I justified it, but it serves to illustrate that you need to be extremely wealthy (or lucky enough to have a secure DB pension) if you want to ensure an adequate risk-free income.  On the “optimistic” assumption of a 2% risk-free return, one would need to have €500,000 set aside for each €10,000 of annual income.  Each of us can do our own sums on how many times €10,000 we need.  Either way, you need to have a big pile set aside.  Of course you can enhance your income by dipping into capital but the problem with that is that, once you start dipping into capital, you won’t be getting any more interest on that part of your money, so you need to dip deeper each successive year for the same income.  There is always the worry that you will last longer than your capital.  (This is the cue for my life assurance buddies to talk up the merits of guaranteed annuities - but then, what about the risk of future inflation?)

Dan also takes issue with my decision to have 90% plus of my retirement savings in equities, asking if it is advisable to hold such a concentrated portfolio within one asset class.  I definitely disagree with him here.  Calling equities “one asset class” is far too simplistic.  There is as much variation within what are broadly called “equities” as there is between the traditionally recognised separate asset classes of equities, bonds, property, commodities, et cetera.  There was a lot of thinking behind the statement in my column that “less than a dozen companies provides sufficient diversification if the companies chosen are financially and strategically resilient and if there is little overlap between them in terms of risk exposures - a tall order, I know.”  Of course, their market values will move in tandem – it’s in the very nature of the stock market - but don’t confuse that with how the underlying businesses are affected.

One very important point in my article was that dividend income and normal turnover of investments are sufficient (or at least have been sufficient up to now) to meet voluntary and compulsory cash withdrawals.  That means that short-term market value movements don’t worry me.

My approach to equity risk and how I view short-term movements in market values can best be illustrated by the example of my largest single holding.  It’s a UK company.  I made my first investment in it 20 years ago at £4 a share and a dividend yield of slightly under 3%.  Not once in that 20 year period has the company come back to shareholders looking for more capital and the dividend has been paid faithfully every year.  In that time, the dividend was cut just once but was restored to higher than its previous level within two years.  The dividend is now over four times what it was when I first bought the shares and the share price itself has also increased more than fourfold, so the dividend yield is now also slightly under 3%.  If I had gone to sleep 20 years ago and woken up now, I would be a happy man, without a care in the world.  What was there to worry about in that 20 year period – dividends arrived faithfully every year and are now four times their starting level and the share price has quadrupled for a total return of over 10% per annum (as an aside, it is well above the target of an average annual 6% plus inflation)?

Yet, in the last 12 months alone that company’s share price has gyrated between a low of £16 and a high of £26.50, a difference of an incredible 65%.  If short-term movements in market values worried me, I would have had three heart attacks in that period, but they don’t worry me - at least not for that particular company.  There are others like it.  The gyrations don’t worry me because I know that the company is sound and will deliver in the long-term.  Yes, sometimes I may be a bit annoyed with myself for paying more to increase my holding than I would have paid if I had bought the extra shares a few weeks later or for selling a few shares in order to reduce my holding for a price lower than might have been possible at a different time, but all of these transactions are at the margin; the real story is the Rip Van Winkle return after a 20-year sleep.  It's more difficult, if not impossible, to get to that state of equanimity when you hold shares through a unitised investment vehicle.

Of course there is long-term risk but, as stated in the article, I try to reduce that by investing in companies that are strategically resilient and strong enough to weather a severe recession.  Yes, it is hard work, but I enjoy trying to identify companies that meet my criteria - sad, I know.  The workload is reduced by the fact that the portfolio is concentrated and has been built up over quite a number of years.  As an aside, I haven’t had as much time to research possible additions to or deletions from the portfolio in recent months as I would have liked; writing the column and contributing to this and other fora take up some of the time that would otherwise be spent in research.

Finally, I don’t think that a target return of 6% plus inflation is overly heroic for an equity fund.  I arrived at 6% by looking at what I thought the companies in which I am invested should return in the long term.  I was then relieved to see that the figure tallied well with long-term realised returns on major equity indices.


----------



## Brendan Burgess

Dan Murray said:


> Is it really advisable to have 90% plus of one’s retirement savings in equities?
> 
> [My own view is that almost irrespective of the average return achieved, the typical human is really not emotionally equipped or designed to deal with the inevitable gyrations of the equity markets with their life’s savings. I think this is especially true in advanced retirement (and I may well be further along this road than Colm and others!) And would you even want to be concerned about market movements in advanced years?]



This is one which I think needs to be dealt with as it reflects the popular view, which I think is very wrong. Many people seem to think that as you approach retirement, you should get out of equities and into cash.  This may have had some sense when people had to buy an annuity on retirement. I would argue that it makes no sense now. 

(Eamon Porter has an excellent article on it here 
*"Should the elderly be less conservative investors?"*)

Most people who manage their own pension funds have the option to switch from a pension fund to an ARF on retirement, so the actual level of the stockmarket at age 65 is no longer very relevant.

But where should a 65 year old who owns their own home free of a mortgage invest? Their investment timeline is probably 20 to 30 years and the best return over 20 to 30 years is most likely to be the equity market.  So they should be 100% in equities. Of course there is a risk that they will outlive their fund. But the risk is much higher if they put the money on deposit or in bonds.

Those who have an annuity pension should definitely invest their free assets in the equity market. They have automatic diversification/protection against a long-term collapse in the equity market.

And, of course, owning shares directly is the most tax-efficient.  There is no payment of tax every 8 years. And on death, there is no CGT.  OK, there are collective investment vehicles which are treated like shares, but you have to pay for research to get these funds and you have to be absolutely sure that the tax treatment won't change compared to the treatment of shares.

You might change your strategy when you go into a nursing home and your funds _and _life expectancy is limited.  So if a nursing home is going to cost €80,000 a year and I have only €300,000 left, I probably would put it in cash, assuming I was only going to live another 3 or 4 years. If I invested in equities,  a crash in the stockmarket would see me unable to pay my  nursing home fees.

Brendan


----------



## Brendan Burgess

Colm

I would suggest that you should also incorporate the value of your home into your retirement planning. 

If your fund does not achieve the required 6% and it bombs out before you die, you will have your mortgage-free home to fund a few more years. 

You can either trade down or raise some form of life loan. 

Of course, your "investment" in your home is very financially efficient. The income, i.e. rent saved, is tax-free. There is no CGT. And it's ignored for means tested benefits.  And you don't have to sell it to avail of nursing home care. 

Brendan


----------



## Sarenco

There are good reasons to always hold at least a proportion of your assets in fixed income instruments:

Dry powder.  When stocks plunge in value you have the resources available to buy stocks at their now reduced price.
Liquidity.  Avoids the need to crystallise a loss by selling shares after they fall in value simply because you need to put food on the table (or because the taxman effectively requires you to make a withdrawal).
Diversification.  When stocks suffer a sharp fall in value there is tendency for bonds (particularly safe government bonds) to rise in value - the "flight to safety" effect.
Emotional.  Most people can't handle the market volatility associated with stocks without knowing that the value of at least a proportion of their portfolio is relatively stable.
Time.  Beyond a certain age, people simply don't have the time to wait for a rebound in stock prices following a significant drawdown.
Risk.  Stocks are inherently risky.  If you have sufficient assets or income to meet your needs you may simply have no need to take the risks associated with holding a significant proportion of your portfolio in stocks.
People can certainly take different positions about the precise proportion of fixed income investments that they should hold at any given age depending on their need, ability and willingness to take risks but most people naturally become more risk adverse as they get older.


----------



## Ceist Beag

Sarenco said:


> There are good reasons to always hold at least a proportion of your assets in fixed income instruments:
> 
> Dry powder.  When stocks plunge in value you have the resources available to buy stocks at their now reduced price.
> Liquidity.  Avoids the need to crystallise a loss by selling shares after they fall in value simply because you need to put food on the table (or because the taxman effectively requires you to make a withdrawal).
> Diversification.  When stocks suffer a sharp fall in value there is tendency for bonds (particularly safe government bonds) to rise in value - the "flight to safety" effect.
> Emotional.  Most people can't handle the market volatility associated with stocks without knowing that the value of at least a proportion of their portfolio is relatively stable.
> Time.  Beyond a certain age, people simply don't have the time to wait for a rebound in stock prices following a significant drawdown.
> Risk.  Stocks are inherently risky.  If you have sufficient assets or income to meet your needs you may simply have no need to take the risks associated with holding a significant proportion of your portfolio in stocks.
> People can certainly take different positions about the precise proportion of fixed income investments that they should hold at any given age depending on their need, ability and willingness to take risks but most people naturally become more risk adverse as they get older.


This perfectly illustrates to me why it would be extremely risky to have 90% of your savings in equity. I'm looking to set up a portfolio this year and to me a mix of bonds, cash savings and investments (index funds) makes most sense given my limited knowledge and time that I can contribute to managing the portfolio.


----------



## Dan Murray

Firstly Colm - thank you for such a lengthy and comprehensive rubbishing of my post  - only kidding - very interesting thread with strong inputs also from Brendan, Sarenco and Ceist Beag.

I will reflect on all the points raised but am unlikely to revert for a few days as I'm off shortly to the Cotswolds to do my own fundamental analysis in advance of The Festival in March. I mentioned "a few days" because whilst we get back on Sunday, if past performance has any indicative qualities whatsoever, I'm likely to be _picture no sound_ for a further day or two. I'm sure Sarenco will diagnose the various heuristics such behaviour represents!

In passing, went to see The Big Short last night - very interesting and very, very funny. Strong buy.


----------



## Colm Fagan

Hi Dan,

Enjoy the Cotswolds, and while you’re enjoying yourself, think of me, stuck at home minding grandchildren!

Actually, after the discussion of recent days, I have decided to sit all five of them down for a serious chat.  I’m going to tell them that they are my equivalent of junior bondholders: if grandad’s investments fail to generate a return of 6% per annum over inflation for the rest of his days, then they get nothing when he kicks the bucket.  The three-year-old may have some difficulty following it all, but she’s intelligent so she’ll probably understand.  Come to think of it, she’s probably the one who will ask if Trichet will come to their rescue.  I’ll have to tell her that no, he won’t; he will only be prepared to force the Irish taxpayer rescue their parents, the senior bondholders, if returns fail to beat 4.5% per annum over inflation.


----------



## Sarenco

That's very clever Colm!

Joking aside, it's really not that long ago that the fruits of your offsprings' direct labour was the only retirement plan available to the vast, vast majority of people.  In a sense, part ownership of any business is just a claim on the future profits of that enterprise so maybe things haven't really changed that much.

My take-away from this thread is that there is no "one true way" to achieving an acceptable level of financial security in retirement and there are equally valid ways of constructing an appropriate portfolio depending on a very wide range of individual circumstances and emotional dispositions.

Ah, who am I fooling? 

I think your approach to investing is totally bonkers!


----------



## cremeegg

I am struggling with two words being used freely here. Risk and Diversification.

*Risk*. We are told that over the long term equities provide good returns. If we accept that assumption, what is risk. Of course there will be short term falls in equity values but unless one caught by a personal cash requirement and is a forced seller, why is this considered a risk. (I understand that there is a technical definition of risk in terms of quarterly volatility, but I don't think that is how the term is generally used, nor can I see any connection with the general usage).

*Diversification*. If an investor believes in an efficient market then it would not matter what shares she buys, they are all priced appropriately by the market. An investor should seek to buy the whole market as different shares representing different risk/reward profiles would give better returns than any single share. It seems to me that this is what BB is trying to approximate when he talks about buying 10 shares.

But this discussion is all about stock picking. Thinking that you can identify Share A that will perform better than all other shares. Then why buy share B which will perform less well than Share A. I can understand that a stock picker would reluctantly buy more than one share to protect against unforeseeable bad news for Share A, but not that she would actually seek diversification as an end in itself.


----------



## Sarenco

Well one risk is that the higher expected returns of equities over less volatile investments might not be realised over an investor's time horizon.  Long term government bonds outperformed local stock market returns on a cumulative basis for almost 50 years in each of Germany, Italy and Japan and we recently experienced a 30-year period where long term US Treasuries outperformed the S&P 500.

Absolutely agree that choosing to hold a small number of stocks from the thousands of investable, publicly traded equities across the globe is stock picking.  I've no problem with that if your objective is to outperform the broader market but otherwise I don't see the logic of holding such a concentrated portfolio.


----------



## Sarenco

Brendan Burgess said:


> So they should be 100% in equities. Of course there is a risk that they will outlive their fund. But the risk is much higher if they put the money on deposit or in bonds.



Actually, that's not true - at least historically, using US data.

There have been 60 complete rolling thirty-year periods between 1926 and 2014.  Making inflation adjusted withdrawals at a rate of 4% from a 100% stock portfolio (S&P500) over any of those 30-year periods had a portfolio success rate of only 93%, whereas making withdrawals at the same rate over any of the same 30-year periods from a portfolio of 50% stocks and 50% intermediate US government bonds had a 100% success rate.  That ignores investment costs and taxes.

While stocks have invariably outperformed bonds over 30-year investment periods, the risk of receiving low, or negative, returns early in a period when withdrawals are made from a portfolio of investments has a significant impact on the success of a given portfolio.

The takeaway?  The historical data suggests that a 65-year old retiree shouldn't be 100% in equities.


----------



## Sarenco

Wollie said:


> I would like to understand how those figures were derived.



Hi Wollie

Here’s the underlying study (which has subsequently been updated with data through 2014) - http://www.retailinvestor.org/pdf/Bengen1.pdf

You are quite right that the study assumes drawdowns are made on an annual basis (on the last day of each year) and the Ibbotson data employed in the study assumes that all income (interest and dividends) is continuously reinvested.  The study also assumes continual rebalancing (maintaining a consistent allocation between stocks and bonds) and that there are no investment costs or taxes.


----------



## Colm Fagan

Thanks to everyone who posted comments on my Sunday Times column of 17 January.  I got so much value from your comments that I'm repeating the exercise with yesterday's column.   I look forward to your reaction.
Colm

*Diary of a Private Investor   Colm Fagan  Sunday Times, February 7, 2016*

_The purpose of this column is to demystify the world of stocks and shares by recounting one person’s adventures in this world.  It does not purport to give advice.  _

Owning shares is not for the fainthearted.  That was proved to me once again by recent gyrations in the share price of Renishaw, a British engineering company that is my largest individual investment, accounting for over 25% of my portfolio.  In the past four months, the share price has fluctuated from a high of £20.50 (€27) to a low of £16, a difference of 28%.  This volatility is despite the fact that there have been no price-sensitive developments of note for the company in the period, with the results for the half-year to December 31, 2015 confirming guidance given for the full year to June 30, 2016.  God knows what would have happened to the price if the company had made a big announcement.  This is the sort of volatility shareholders must live with.

Short-term price fluctuations don’t concern me unduly - what matters is the long-term.  In the long-term, Renishaw has delivered.  I bought my first shares in the company over 17 years ago at a dividend yield of slightly more than 2.5%.  The dividend has grown by an average of more than 8.5% a year since.  The dividend yield is once again slightly over 2.5%, which is close to the average for the entire period.  This means an average return of more than 11% a year over the 17 years, comfortably beating inflation, which averaged 2% a year.  Nice. 

My target return for the future is inflation plus 6% a year.  I will get this return if the dividend yield stays around 2.5% and dividends grow by an average of inflation plus 3.5% a year - 2.5% dividend plus 3.5% real growth in dividends equates to my target 6% real return.  The company aims to pay around 50% of profits in dividends, and to reinvest the other half in the business, so the question becomes: will profits grow on average by the same 3.5% a year in real terms in future?

There are a number of drivers for Renishaw’s success.  One is the strength of the commitment at the top.  The joint founder and chairman, Dubliner Sir David McMurtry, owns more than a third of the company; his shares are worth approximately £460 million at the current price of £17.43 a share.  It’s good to know that his interests are aligned with mine. 

Another success driver is the company’s unswerving long-term focus on a set of core competencies, centred round metrology, the science of measurement.  From this core competence, Renishaw has branched out, with an appropriate degree of caution, into specialised areas of healthcare and additive manufacturing, more colloquially known as 3-D printing.

The company eschews mergers and acquisitions, other than small bolt-on acquisitions aimed at enhancing its competencies in key areas.  It prefers to grow organically.  This is in tune with my own philosophy.  I believe that organic growth is best, and that mergers and acquisitions generally fail to deliver long-term value for the acquiring company. 

It also helps that the company’s strengths are in a specialised and obscure area of business, where there is likely to be less intense competition.  It is said that, during the Californian gold rush, the only guaranteed winners were the merchants in the unglamorous business of selling picks and shovels - not the prospectors who used them.  Renishaw is a modern-day equivalent of those merchants.  Manufacturers of electronic consumer products, modern-day equivalents of the Californian prospectors, are among its biggest customers.  Let them have their occasional bonanzas; I’m happy to stick with the company that generates a steady income.

The most important driver for Renishaw’s success to date, however, is the strength of its commitment to research and development (R&D).  Year after year, through good times and bad, it invests around 15% of revenues in R&D.  The chairman firmly believes that there is a strong correlation between the proportion of revenues invested in R&D and the rate of growth in profits.  If he’s right, and I have no reason to doubt him, then my target return of inflation plus 6% per annum is safe.

Of course there are risks, lots of them: demand could fall, particularly in China; margins could be hit by competition; the supply chain could fail, causing the company to be unable to meet customer deliveries; R&D could be misdirected.  My biggest concern is the need to ensure a successful transition of the management team to the next generation: the chairman and chief executive is 75; his deputy is 76; the finance director is 66.  I love to see fellow senior citizens doing well, but we can have too much of a good thing.  Nevertheless, I am confident that the board will be able to oversee a successful transition to a new management team when McMurtry and his colleagues at the top eventually decide to call it a day.

While I may reduce my holding slightly to keep my New Year’s resolution of reducing risk by diversifying my portfolio, I still believe that Renishaw will deliver the target long-term return.

_Colm Fagan is an active private investor.  He is a retired actuary and a non-executive director of a number of financial institutions._


----------



## joe sod

Therefore with regard to the stock market the price the market places on a stock is most of the time wrong swinging from optimism to pessimism. At the moment the market is illiquid therefore if you sell you will probably not get the correct price for stocks you hold. But everyone is of the, opinion that stock markets will continue to fall so everyone seems to be selling in the hope that they can buy back in cheaper later. Even though by doing this they are already selling cheap.


----------



## Monksfield

I disagree profoundly with Eamon Porter's advice that ARFs should be 100% in equities.

Only investors (ARF or otherwise) with a very strong risk tolerance should ever be 100% in equities. Even where the person has the risk appetite I believe such a strategy really only suits people with long time horizons *and* who are making regular contributions. 

Because ARFs are depleting, even if only at 5%, volatility consistently erodes their value - the effect is the opposite of 'pound cost averaging'. They are therefore unsuited for a fully equity strategy even where the investor is very risk tolerant - which most people are not, young or old.


----------



## mtk

Colm Fagan said:


> . I believe that organic growth is best, and that mergers and acquisitions generally fail to deliver long-term value for the acquiring company.


Hi Colm Nice piece, I 100 pc agree.
I think they are driven by among other things 
1 executive egos
2 pressure to be seen "to do something " by market. 
plus many more- any other thoughts?
mtk


----------



## Colm Fagan

Monksfield said:


> Because ARFs are depleting, even if only at 5%, volatility consistently erodes their value



I’m struggling to understand what you mean by this statement.  Does it relate purely to ARFs that are invested in a unitised fund, where units must be cashed in order to generate the mandated “income”, or does the statement also hold true for ARFs that hold direct investments?   As per an earlier posting, my experience to date has been that liquidity in the fund, from a combination of dividends and “normal” turnover of investments, has been sufficient to generate the required “income”, without having to cash investments.  In that situation, volatility has only a marginal impact.

For what it's worth, I'm 100% with Eamon Porter and Brendan on the value of a high equity content in an ARF.


----------



## Sarenco

I think Monksfield is talking about “sequence of returns” risk - the idea that, even if short-term volatility averages out into favorable long-term returns, a pensioner could still be in trouble if the sequence of those returns are unfavorable.  In other words, long-term returns over, say, 30 years don’t matter if the returns are so bad in the early years of retirement that a pensioner runs out of money before the good returns finally show up.

The sequence of returns doesn’t matter when there are no withdrawals from a pension pot, even when there is extreme volatility.  For example, a €100,000 pension pot that experiences (total, real) returns of -50% and +100% in successive years finishes with the same balance as a pension pot that has returns of +100% and -50% in those years.

However, if a pensioner has to withdraw €50,000 from the pot at the end of Year 1, the sequence of returns is very relevant.  With the “good” sequence of returns, the pension pot grows 100% from €100,000 to €200,000 and easily funds the €50,000 withdrawal and, after the 50% drop in Year 2, the pension pot finishes with €75,000. By contrast, with the “bad” sequence of returns, the pension pot falls 50% to €50,000 in Year 1, the €50,000 withdrawal completely depletes the pension pot down to zero and the subsequent 100% return in Year 2 is now irrelevant.

That's obviously a rather extreme example but hopefully it illustrates the concept.


----------



## Colm Fagan

Thanks for the explanation, Sarenco.  I understand the theoretical point, but it’s of little or no consequence in the real world of direct investing (at least insofar as I have experienced it) for the reasons outlined in my earlier posting, i.e. dividends and normal turnover of investments usually mean that shares don’t have to be sold to satisfy the legislative requirement to take an "income" of 5% or whatever.


----------



## Sarenco

It's not really a question of liquidity - by "return" I'm referring to the total return (income and capital gains/losses), less costs and inflation.


----------



## Sarenco

Here's a link to a short note by BlackRock showing the impact of the sequence of returns on three hypothetical portfolios over a 25 year period.



Obviously if an investor has sufficient assets/flexibility to only ever need to withdraw from the income generated by a portfolio in a given year then the sequence of returns is largely irrelevant.


----------



## mtk

Sarenco said:


> Here's a link to a short note by BlackRock showing the impact of the sequence of returns on three hypothetical portfolios over a 25 year period.
> 
> 
> 
> Obviously if an investor has sufficient assets/flexibility to only ever need to withdraw from the income generated by a portfolio in a given year then the sequence of returns is largely irrelevant.



+1
Steady withdrawals over long term can impact more More than expected if early returns are bad even if returns even out over time.


----------



## Monksfield

The point about depleting funds and volatility is very, very basic. It concerns the mathematical interaction of market falls and rises on a fund which is depleting. A fund which is neither added to or suffers withdrawals gets the market return whatever the pattern of returns. In any pattern of returns which includes losses (as in, the real world) a depleting fund has a reduced amount to capture the next market lift. Take the actual quarterly or annual returns from any market you like and model the outcome for an invested value; then repeat it for one which is depleting - adding back the amount withdrawn, the outcome is always worse. The greater the amount being withdrawn, the bigger the loss of return. The sequence of returns can certainly exacerbate the problem.


----------



## Colm Fagan

The example quoted is based on the highly theoretical assumption of an investor having a single asset which doesn't pay a dividend, and which he/she cashes on a single date every year to provide an income.  It bears no relationship to real-world investing, at least not to my experience of it.  I had a quick look at my portfolio activity for last year.  For every €100 worth of assets held at the start of year, I got a dividend income of €3 but generated further cash flow of €44 from share disposals, the vast bulk of which was reinvested to buy other shares.  I understand that my turnover rate is actually below the average for professional investors.

It is obvious from these figures that the income requirement of €5 or whatever can be met without difficulty from normal cash flow within the fund, without ever having to consider forced sale of an asset when prices are depressed.  It shows the ridiculousness of the theoretical construct from which the conclusion was derived.   That is very, very basic.


----------



## Colm Fagan

Sorry, I shouldn't have added the final sentence to my previous comment, but I got the impression from a quick read of Monksfield’s post that he/she was talking down to me.   I realise now that that probably wasn't the case. 

Obviously, I’m well aware of the phenomenon of pound cost averaging, but I would like to see if the rule still holds true in the type of real-world situation I’m talking about.  I realise that it would be difficult to model.  My gut feeling is that it does not apply in the real world.


----------



## Duke of Marmalade

Ah the illusion of Dollar Cost Averaging.  In the 1970's this was in the tool kit of every unit trust salesman.  Made them sound very learned.  It has long since been discredited by mainstream financial mathematics but still rears its head from time to time, these days mostly from life assurance salesmen.

The financial mathematical argument goes as follows.  Let's say you have a simple model of the market.  You expect it to grow by 5% per annum albeit with volatility.  You are evaluating _ex ante_ an investment scheme.  Let's say the scheme is to invest 1 a year for 10 years.  Well you expect the first 1 to earn 5% p.a. for 10 years.  You expect the second to earn 5% for 9 years etc.  Now we do not know at what price we will buy those units in year 2 etc.  If the price is "high" we will buy less units and if the price is "low" we will by more units.  DCA argues that this is a "beat the market" system in that the excess units bought on the low exceed the deficit units on the high.  But _ex ante_ and even at the point of investing in year 2 etc.  our expected outcome is entirely unaffected by any supposed DCA "windfall", it remains 5% p.a.

The illusion arises from the following plausible illustration.  The wiggles of a path from start to finish about a constant path tend to be geometrically symmetrical; the oft quoted example is the path that starts at $1 goes to $2 ($.5) in year 2 then to $.5 ($2)in year 3 and finishing back at $1.  Yes indeed a basic mathematical inequality underpins the DCA assertion on these assumptions.  But besides the fact that in reality this geometric symmetry is often not actually realised it still remains that this is a big "so what?".  Put another way there is no such thing as an investment system/algorithm which of itself adds value.  DCA argues that the very simple strategy of investing regular amounts adds such value.


----------



## Monksfield

I was certainly not talking Colm or anyone else down - just disagreeing profoundly with Eamon Porter and the 100% equity policy for ARFs. If you have a very strong risk appetite and enough in the ARF or outside it not to be concerned about running out of money, no problem - you will almost certainly maximise your return by going 100% equity. For the majority of people for whom the ARF is likely to have a huge bearing on their standard of living if they live long enough, the issues are very serious (and 100% equity is most unwise).

Colm seems to be losing sight of the underlying argument in referring to the income generated meeting withdrawals. The analysis does not differentiate between capital and income: income is part of the return. The fact is that if money is being taken out of a fund regularly, the pot of money is systematically deprived of return by the volatility of the returns it experiences.It is just how the mathematics works, not a philosophical argument.


----------



## Colm Fagan

Monksfield said:


> The analysis does not differentiate between capital and income


  Of course it does; that’s what causes the poor results in the BlackRock simulations where the fund is depleted fast: investments must be cashed when prices are down.  An artificially simple example illustrates my point:  if dividends exactly cover the investor’s income needs every year, then none of the investments will have to be cashed, and the value of the fund at the end (after income has been taken) will be exactly the same, irrespective of the route by which it arrives at the end point, assuming returns each year as per the BlackRock example.  The amount of the investor’s income will vary from year to year, of course, but dividends are far more stable than stock prices, so the income will not be nearly as volatile as prices.


----------



## Sarenco

I think we may be talking at cross purposes.

Colm is obviously describing a variable withdrawal strategy where an investor only withdraws from the income generated by a portfolio.  As I noted in an earlier post, if an investor has sufficient assets/flexibility to only ever need to withdraw from the income generated by a portfolio in a given year then the sequence of returns of that portfolio is largely irrelevant.

The BlackRock example refers to three hypothetical investors that withdraw a constant euro amount from their respective portfolios each year.  In this example, the amount withdrawn from each portfolio equated to 6% of the opening portfolio balance and the same amount, adjusted for inflation at an assumed rate of 3%, was withdrawn every year thereafter.  The three hypothetical portfolios in the BlackRock example each generated an annualised return of 7% per annum but one portfolio was still exhausted during the 30-year withdrawal period because of the order in which the portfolio returns were generated.

I suspect that the vast majority of retirees will not have sufficient assets/flexibility to pursue Colm’s variable withdrawal strategy to any material extent and will need to withdraw (and spend) something very close to a constant euro amount from their pension pots every year, simply to fund their lifestyles.  Volatility matters hugely to such retirees for the reasons already outlined and therefore I would be strongly of the opinion that the vast majority of ARFs should never be anything like 100% in equities.


----------



## North Star

I would agree with Sarenco, and feel that not only do most retirees not have the flexibility to have a variable withdrawal strategy, most will not be aware of the risk of sequence of returns and the subsequent need to reconsider a 100% equity buy and hold strategy when in their de-accumulation i.e ARF phase. We show clients who have successfully held a buy and hold approach whilst accumulating their funds, what happens in a 5% withdrawal phase if we have a bear market followed by a bull market versus a constant 5% return after costs example. Our working example isn't as dramatic as Blackrock's where one fund is exhausted, as we have both fund values returning to equivalent values after 10 years of a notional cycle. Even in this reasonably benign projection the retiree's income is approx 37% lower over the period and a higher level of nominal growth is required in the 'bear followed by bull' portfolio to equal the 5% constant return portfolio. Clearly the  income would be higher if we were to model a 'bull followed by bear' cycle. After a long bull run in equities, for ARF holders perhaps its a reasonably good time to reassess if a 100% buy and hold equity strategy is the best/optimal approach.


----------



## Colm Fagan

I agree that we are talking at cross purposes, and there is nothing to be gained from prolonging the discussion.  We both picked extreme artificial examples:  the BlackRock extreme example assumed investment in a single asset that did not pay any dividend, and which is cashed once a year to provide the required income; my equally extreme example assumed that the income requirement was less than the dividend each year.  The reality is somewhere in the middle, but my earlier point was that the “somewhere in the middle” situation is confused further by the fact that, in the real world, investments are constantly being turned over.  My contention (based on my own experience) is that this makes the BlackRock example completely meaningless but I can understand that others may take a different view.


----------



## Sarenco

Fair enough Colm.

I certainly take the point that the hypothetical portfolios in the BlackRock simulation do not purport to reflect the actual experience of any real life portfolio over the period.

Having said that, the annualised total return (income and capital gains) of the S&P500 wasn't actually far off 7% over the last 30 years, with an average inflation rate of around 3%, so I don't think these inputs look particularly extreme.


----------



## Colm Fagan

NO!!   The point I'm trying (in vain) to make is that it has absolutely nothing to do with the total return on the index; it's how the return is made up between dividends and capital gains/losses.  If it's entirely capital gains, then your analysis is correct, but it's not!  The BlackRock simulation is completely misleading in that respect, as it assumes zero income.


----------



## Sarenco

I'm sorry Colm - I'm obviously missing your point completely.

I really don't understand why you think the BlackRock simulation assumes that the return is made up entirely of capital gains/losses with zero income.

Total return is computed with dividends reinvested, which means that making withdrawals from dividends during a market drawdown means missing out on lower-priced reinvestment opportunities.  In other words, surely an investor should be neutral about whether withdrawals are made from the income or principal component of their portfolio?

Absolutely accept that dividends are less volatile then stock prices and if you can afford to largely withdraw from income alone then that very significantly reduces sequence of returns risk.  However, you seem to be saying something beyond that.


----------



## Duke of Marmalade

Brendan Burgess said:


> I have locked in a fixed euro/ sterling exchange rate until mid-2016 and the present intention is to renew the lock when the current one expires.


A little bit of trivia.  The £IR broke with £Stg on 30th March 1979.  Today the £IR touched parity (€=£.787564) with £stg almost 37 years after the break.  Surely this is unique in exchange rate history.


----------



## Colm Fagan

One big advantage of being anonymous is that no one knows when you make a fool of yourself.  Sadly, that’s not the case for me in this instance!  I completely overstated my argument in my last contribution.  You are right, of course, Sarenco, and I was wrong.  I still stand by my earlier statement that dividends, even at a relatively low level, combined with “normal” turnover of investments, are normally more than sufficient to meet compulsory withdrawal requirement.  It may be just the comfort factor of not having to cash investments at the “wrong” time, but it’s very real for me.


----------



## Sarenco

Many thanks for the response Colm.  I'm sure I'm not alone in greatly valuing your contributions to this forum.

I certainly wouldn't discount anything that touches on the psychology of investing - it's hugely important in my opinion.  Finding a degree of comfort in an uncertain world is really key to the whole issue.


----------



## Duke of Marmalade

Clearly Colm's articles have stirred some interest for I am given to understand that next Sunday the _Sunday Times_ will be pitting Sean Casey of New Ireland fame and supporting the Unit Linked Party against our hero Colm Fagan of the DIY Party.  Surely PaddyPower will open a book


----------



## mtk

Duke of Marmalade said:


> A little bit of trivia.  The £IR broke with £Stg on 30th March 1979.  Today the £IR touched parity (€=£.787564) with £stg almost 37 years after the break.  Surely this is unique in exchange rate history.



Yes I noticed this fascinating fact too the famous 1.27 rate €/£ is back 


Sarenco said:


> Many thanks for the response Colm.  I'm sure I'm not alone in greatly valuing your contributions to this forum.
> 
> I certainly wouldn't discount anything that touches on the psychology of investing - it's hugely important in my opinion.  Finding a degree of comfort in an uncertain world is really key to the whole issue.


+ 1


----------



## Duke of Marmalade

I will defer judgement on the Great Debate till later but for now merely reflect some puzzlement at the graphic used to illustrate the contest.  As I understand it Colm's approach is presented as being akin to buying smarties whilst Sean's is a most precarious dangling from a cliff outcrop with only a rope attached to a young lady standing on top of the cliff saving you from certain death.


----------



## Raskolnikov

Just wanted to say I really enjoyed this discussion, it has confirmed a lot of what I have learned in the 10 years since I first started investing.

1. I have found one of my biggest mistakes in investing is selling winners too soon. When I examined the winners I have had in my portfolio, I have found that by selling too soon, I have denied myself some massive returns. In one case (Apple), I bought shares at the adjusted split price of $13, sold at a 100% profit at $26, only for the shares to go up to $104 today (a 700% return, instead of the 100% return I got). My justification at the time was that Apple was expensive, and that if I sold, I could buy in at a cheaper price later. Of course, I never got the chance to buy cheaper. The error was obvious - market timing on my behalf. The lesson learned? When you have a quality company, don't be afraid to keep holding. Colm mentioned that the first company he ever bought decades ago is now well in multi-bagger territory. Colm is not alone here, Lord John Lee followed a similar strategy with spectacular returns - http://www.ft.com/intl/cms/s/0/ec659efe-c40f-11e5-b3b1-7b2481276e45.html#axzz453CyZCiq

2. You should diversify a little in terms of the number of stocks, but a lot in terms of industries/sectors. There's no golden number, but I think 10 stocks reasonably balanced is a decent enough number to protect you from a shock to one or two. It's also important to diversify sectors. Having 1 oil company is fine, but filling the portfolio with oil companies is not a good idea. Again, I agree with Colm's thesis on this - put your eggs into a few baskets, but watch the baskets closely.

3. Don't try to time the market, invest often. The one exception I make to this is that I do like to keep a small amount of uninvested money set aside to invest if the market goes down 20%. I have a handy rule set up where if an index drops 20% below a moving average, I get an alert to buy stocks. At that point, I don't listen to the news, don't listen to experts, I just buy. It's only in the last 3-4 years of investing that I have actually had the discipline to do this, and the strategy has paid off nicely.

4. Don't be afraid to sell a company that is under-performing. Companies generally can under-perform for two reasons, either due to a downturn that occurs across the sector that company operates in (beware!) or because the company itself slipped (maybe a bad acquisition, or a bad management strategy). The trick is to identify if the downturn is a blip, or something more serious. Tesco was one of these companies that caught me. I think it was about 4 years ago they had their first profit warning. I didn't want to sell on one bad piece of information, and ended up hanging on for another 2 years as bad new just continued to flow. At that point, I looked across the sector, saw that retail was just a mess, and cashed out. Ended up with a slight loss on that one, but at least I gave it a chance and cut my losses before things got worse.

Those would be the major things I have learned and have worked well for me. Colm, I'd be interested to here your thoughts on the bottom two points, if you're still around.


----------



## Colm Fagan

Hi Raskolnikov

Thanks for your very interesting comments.  I will try to deal with them below, but first I’m afraid that I have to impart some sad news (well, sad for me anyway): the Sunday Times “Money” section has been dropped with effect from Sunday last, April 3, which means that “Diary of a Private Investor” will no longer appear in the paper.  It was fun while it lasted!

On your first point (holding on to winners instead of selling them too soon), I agree wholeheartedly.  My investment strategy now is completely different to what it was say ten or even five years ago.  I used to be like a magpie, picking of lots of stocks here, there and everywhere, based on something I might have read that impressed me, and then selling them when they had generated a nice profit.  Of course, quite a lot of them were duds, and I didn’t have a disciplined approach to getting rid of them.  As recounted in the column, I now try to make a detailed evaluation of a share before buying it.  I build up a picture of how I think the business will progress over the next number of years.  If progress is broadly as I had expected, and the share still represents good value at whatever is the prevailing price from time to time, then I’m happy to hold on, having no regard to how the price has progressed in the past.  "History is bunk."  In practice, this has resulted in me holding onto shares longer and has also led to greater concentration in the portfolio.  I can’t say for certain that the new strategy is delivering better results than before, but I am much more relaxed than previously about short-term fluctuations in share price, provided the fundamentals remain sound (in my opinion of course).

On your second point, I’ve already made my position on diversification clear in the column and on this forum.  I agree with you that 10 stocks are sufficient, provided there is sufficient diversification.  It’s not sufficient to diversify in terms of sectors however.  For example, I now realise that I have a lot of exposure to China through my two biggest holdings, Renishaw and Apple, even though they operate in quite different sectors and one is dependent on retail customers (Apple for iPhone sales to Chinese customers) and the other on wholesale customers (i.e. Renishaw for sales of precision measuring equipment to Chinese manufacturers).  On the other hand, companies can be in the same sector with very little correlation between them.  Two of my larger holdings are in the insurance/ reinsurance sector:  Phoenix Group Holdings and Munich Re, but they are as different as chalk and cheese.

On your third point (keep something in reserve to be able to buy cheap when prices have fallen), what you’re doing seems  reasonable but I cannot reconcile myself to keeping more than 5%, or 10% at most, in cash.  It’s absolutely dead money and will cost you in the long term.  In situations like that, what I have done in practice (as I did a few weeks ago) is to cash whatever investments have fallen the least in value.  My bond holding is disappearing fast as a consequence!

I’m running short of time, so I’ll come back to you on your final point tomorrow.  I’m going out for what should be a really exciting evening – a dinner for retired actuaries!!!!


----------



## Colm Fagan

Hi Raskolnikov

Coming back on your final point, re selling a company that’s underperforming, you’re absolutely right again: we shouldn’t be afraid to sell, but all sorts of psychological as well as technical factors come into play.  That is true even for the professionals.  We all find it hard to admit that we made a mistake. 

To your list of reasons why a company is underperforming, you can add supply and demand, de-rating, and even fashion.  Supply and demand can be a factor for small-cap companies with limited liquidity.  The analysts don’t cover them and the share price can be determined in the short-term simply by whether someone is trying to offload or to buy a line of stock.  I tend to treat such fluctuations as opportunities to buy more (if the price has dropped) or to offload a few shares (if the price has increased).  Obviously, I could be wrong in my judgement, in which case, if the price has fallen, I could end up with too much of a poorly-performing, illiquid stock.  It has happened.   

If a company is de-rated, obviously the market now thinks that growth prospects are not as good as was thought previously.  I always start from the premise that even the highest-flying companies –the Facebooks, Amazons, etc. of this world - will eventually be de-rated.  They just can’t grow  like topsy forever.  When I factor in the possibility (certainty?) of future de-rating, I generally find myself shying away from such stocks.  That has cost me dearly by causing me to miss out on the FANG’s of last year, but it also spared me some of the sharp falls in the same stocks in the early part of this year. 

My strategy for trying to avoid duds is to buy a small amount of a stock initially.  I then study carefully news of its progress, financially and strategically, for a period.  At the end of the “trial” period, I decide whether to buy more or get rid of the stock, based on the price prevailing at that time, not what I bought at originally.  Daimler, the German carmaker (Mercedes, etc.) is in the “trial” period at the moment.  I’m down quite a bit on what I paid for the share.  The company’s financial performance is excellent, but the share price isn’t responding.  I think the major fear in the market (besides the risk of lower sales in China if there’s a severe slowdown there) is whether Google, Apple, etc. will eat its dinner in a few years’ time.  There is also the threat from Tesla, the electric carmaker.  The market is obviously treating those threats very seriously, but is it overly worried by them?  I’m still not sure which way to jump.  If I decide to sell rather than add to my holding, I’ll take some consolation from the fact that the loss won’t be nearly as great as it would have been if I had decided to make a big investment in the first place. 

Psychological factors dwarf technical considerations when it comes to selling.  I mentioned earlier in this column the endowment effect, whereby we ascribe more value to things we own simply because we own them.  One of the contributors remarked (quite correctly) that this phenomenon is related to having an emotional investment in a stock.  Both conditions could be at play for my largest holding, Renishaw, which is showing a considerable loss over the last 12 months, but which has stood me very well over the course of almost two decades.  I know the top management team (and they know me at this stage from asking questions at AGM’s!); I like the fact that the boss owns almost half the company; I empathise with their strategy of constantly investing for the long-term and of maintaining a strong balance sheet; and with their antipathy towards analysts and their refusal to meet them on a one-to-one basis, as it would mean treating them better than private investors.  That may cloud my judgement to their many flaws. 

I’ve prattled on for far too long.  I’ll finish now.


----------



## Colm Fagan

A couple of days ago, I published an update on LinkedIn of the now-defunct "Diary of a Private Investor" column, which appeared in the Sunday Times for a few months in 2015/ 2016.  During the time the column appeared in the Sunday Times, I enjoyed the feedback and challenge from AAM readers.

The people on LinkedIn are timid by comparison: I have had only one response so far to Thursday’s posting, and no challenge whatsoever. I decided that the best way to get the desired challenge was to put it on AAM; hence this posting.

This is it.  I'm sure AAM readers will rise to the challenge!

_Firstly, I am pleased that the companies that got favourable mention in my Sunday Times column have fared well in the meantime.  There were just three of them, so it's easy to give an update._

_Renishaw featured twice, on 4 October 2015 and on 7 February 2016.  Its share price increased from £18.80 at end 2015 to £25.28 by end 2016 and then more than doubled, to £52.45 by end 2017.  In my column of 7 February 2016, I said that Renishaw accounted for over 25% of my equity holdings.  The proportion represented by Renishaw is much the same today._

_Apple was the subject of my column on 6 December 2015, when its share price was $117.  At end 2017 the price had increased to $169.27 and it has increased still further since then, to $178 at time of writing.  It accounted for 18% of my equity holdings at end 2015; that proportion has now fallen to 9%._

_Phoenix Group Holdings, the third company to get favourable mention in my Sunday Times column, might seem at first glance to be the black sheep of the family.  Its price was £9.17 at end 2015; it fell to £7.35 by end 2016 and increased to £7.56 by end 2017.  But movements in share price only tell part of the story.  I do not invest in bonds: I think they're too expensive.  Phoenix is my bond proxy.  The dividend yield over the last couple of years has averaged over 7%; I believe it's a safe 7%. The 7% from Phoenix compares with barely over 1% that I could get from a government bond.  A second reason why share price movements don't tell the full story as far as Phoenix is concerned is that the sharp price fall in 2016 was mainly due to a rights issue in October 2016. This entitled me to buy 7 extra shares for every 12 I already held, at a discounted price of £5.08 per share.  Any shares I didn't take up in the rights issue, I could sell the rights in the open market.  The third factor to be considered is movements in the Euro/ Sterling exchange rate over the period.  As we know, sterling fell sharply following the Brexit vote in June 2016, but I had shielded my Phoenix exposure from movements in the exchange rate movements in two ways: (1) by borrowing in sterling to invest in a portion of my shareholding - borrowing at (say) 3% to invest in something yielding 7% seemed smart – and (2) by taking out a sterling hedge for the balance of my exposure to Phoenix.  Taking all these factors into account, I reckon that I lost about 3% (in euro terms) on Phoenix in 2016, but gained close to 12% in 2017._

_I still like those three shares and plan to hold onto them for the foreseeable future.  I recognise however that it will be difficult if not impossible to do as well on them in future - Apple and Renishaw in particular - as I have done over the last couple of years.  _

_Given my low-turnover, "buy and hold" strategy, I'm happy to add one good share to my portfolio each year.  Last year, I added Samsonite, the luggage company, as a core holding.  I bought my first shares in Samsonite in May 2017, at HK$29.30 each, and increased my holding in July, at HK$30.83, in November at HK$33.98 and in January 2018 at HK$34.70 a share.  It is now my fourth largest holding, marginally behind Apple.  The current share price (1 March 2018) is HK$34.70.  It's worth adding that the share purchases were made by borrowing in Hong Kong dollars.  This reduces the exposure to currency risk but, as the best magicians say, it's not a trick to be tried at home without careful consideration of the risks involved.  I’m hoping that Samsonite’s results for 2017, to be announced within the next few weeks, will justify my confidence in the company.”_


----------



## Brendan Burgess

Hi Colm 

Very interesting reading. 



Colm Fagan said:


> In my column of 7 February 2016, I said that Renishaw accounted for over 25% of my equity holdings. The proportion represented by Renishaw is much the same today.



I had shares in DCC which had done so well, that I was too overweight in them. So I sold half and bought Renishaw based on your story.

So thanks for that.  Mind you it was the most roller coaster of a ride I had had up to then. ( It has since been outdone by my spread bet on Bitcoin.) 

However, no matter how good any share is, you simply should not have 25% of your fund in it. 

Let's assume that you are among the .000001% of the analysts who can pick winners. 

Even so you can still make mistakes.  Or  something unforeseeable might happen and wipe out the shares. 

I found it very hard to part with my DCC shares and I had a big CGT bill, but it was the right thing to do. 

Fond as I am of my Renishaw shares, they are now too big a part of my portfolio. I won't sell half of them, but as I need cash, I will sell them down. 

I get attacked for suggestion that a portfolio of 10 blue chip shares is enough.  Some of the others here must be getting heart attacks when they see you with 25% of your portfolio in one share.

Brendan


----------



## Brendan Burgess

As a general point on the article and picking winners. 

Is there a survivorship bias here?  If one of your big three had crashed, would you have come back and told us about it? 

I could pick three shares which had done very well for me.  But for you to assess my stock picking performance, I would have to tell you about all the shares I have bought ever.  The Power Securities I chose when I was a stock picker that fell to zero.  I think I had another share which fell to zero as well. 

Colm - I am sure you have picked duds in the past? Maybe even recently?  Could you tell us about your errors? 

Brendan


----------



## mtk

Colm Fagan said:


> A couple of days ago, I published an update on LinkedIn of the now-defunct "Diary of a Private Investor" column, which appeared in the Sunday Times for a few months in 2015/ 2016.  During the time the column appeared in the Sunday Times, I enjoyed the feedback and challenge from AAM readers.
> 
> The people on LinkedIn are timid by comparison: I have had only one response so far to Thursday’s posting, and no challenge whatsoever. I decided that the best way to get the desired challenge was to put it on AAM; hence this posting.
> 
> This is it.  I'm sure AAM readers will rise to the challenge!
> 
> _Firstly, I am pleased that the companies that got favourable mention in my Sunday Times column have fared well in the meantime.  There were just three of them, so it's easy to give an update._
> 
> _Renishaw featured twice, on 4 October 2015 and on 7 February 2016.  Its share price increased from £18.80 at end 2015 to £25.28 by end 2016 and then more than doubled, to £52.45 by end 2017.  In my column of 7 February 2016, I said that Renishaw accounted for over 25% of my equity holdings.  The proportion represented by Renishaw is much the same today._
> 
> _Apple was the subject of my column on 6 December 2015, when its share price was $117.  At end 2017 the price had increased to $169.27 and it has increased still further since then, to $178 at time of writing.  It accounted for 18% of my equity holdings at end 2015; that proportion has now fallen to 9%._
> 
> _Phoenix Group Holdings, the third company to get favourable mention in my Sunday Times column, might seem at first glance to be the black sheep of the family.  Its price was £9.17 at end 2015; it fell to £7.35 by end 2016 and increased to £7.56 by end 2017.  But movements in share price only tell part of the story.  I do not invest in bonds: I think they're too expensive.  Phoenix is my bond proxy.  The dividend yield over the last couple of years has averaged over 7%; I believe it's a safe 7%. The 7% from Phoenix compares with barely over 1% that I could get from a government bond.  A second reason why share price movements don't tell the full story as far as Phoenix is concerned is that the sharp price fall in 2016 was mainly due to a rights issue in October 2016. This entitled me to buy 7 extra shares for every 12 I already held, at a discounted price of £5.08 per share.  Any shares I didn't take up in the rights issue, I could sell the rights in the open market.  The third factor to be considered is movements in the Euro/ Sterling exchange rate over the period.  As we know, sterling fell sharply following the Brexit vote in June 2016, but I had shielded my Phoenix exposure from movements in the exchange rate movements in two ways: (1) by borrowing in sterling to invest in a portion of my shareholding - borrowing at (say) 3% to invest in something yielding 7% seemed smart – and (2) by taking out a sterling hedge for the balance of my exposure to Phoenix.  Taking all these factors into account, I reckon that I lost about 3% (in euro terms) on Phoenix in 2016, but gained close to 12% in 2017._
> 
> _I still like those three shares and plan to hold onto them for the foreseeable future.  I recognise however that it will be difficult if not impossible to do as well on them in future - Apple and Renishaw in particular - as I have done over the last couple of years.  _
> 
> _Given my low-turnover, "buy and hold" strategy, I'm happy to add one good share to my portfolio each year.  Last year, I added Samsonite, the luggage company, as a core holding.  I bought my first shares in Samsonite in May 2017, at HK$29.30 each, and increased my holding in July, at HK$30.83, in November at HK$33.98 and in January 2018 at HK$34.70 a share.  It is now my fourth largest holding, marginally behind Apple.  The current share price (1 March 2018) is HK$34.70.  It's worth adding that the share purchases were made by borrowing in Hong Kong dollars.  This reduces the exposure to currency risk but, as the best magicians say, it's not a trick to be tried at home without careful consideration of the risks involved.  I’m hoping that Samsonite’s results for 2017, to be announced within the next few weeks, will justify my confidence in the company.”_



Hi colm 
Very interesting update
How do you borrow in HK$ and Sterling ? what are the basic mechanics?
thanks


----------



## Sarenco

Colm Fagan said:


> _Last year, I added Samsonite, the luggage company, as a core holding._


Good to hear from you again Colm.

As an aside, Samsonite played an important role in investing history - their pension fund was the first institutional investor to employ a passive, index-tracking strategy back in the early 1970s.


----------



## Brendan Burgess

Sarenco said:


> their pension fund was the first institutional investor to employ a passive, index-tracking strategy back in the early 1970s.



Yes, but didn't they drop that after Colm attended the AGM last year? 

Brendan


----------



## Colm Fagan

As I guessed, AAM contributors came up trumps.  Lots of comments and questions. Thank you.

I'll try to take the comments in order.  I won't be able to answer everything now, but I will address them  at some stage.

Brendan, I agree with you in theory that I have far too high a proportion of my portfolio invested in Renishaw, but this particular share has been part of my life for 20 years now and it is more than an investment for me.  I attend regular investor days and AGM's and I now know the company and its people very well (although, as a non-engineer, the technology of the business is still a complete mystery to me).  It's a bit like, when I owned my own business, or a high proportion of it, I didn't think it was wrong to have so much of my net worth tied up in one company.  Also, I feel I owe something to Renishaw at this stage, given that the shares are worth 10 times what I paid for my first tranche so many years ago.  I won't worry if I have to give back some of what I've earned. 

Besides, whilst I recognise that the share price is now quite elevated (although less elevated than it was a few weeks ago), the risks of a significant fall are low, I reckon.  The company has no borrowings, lots of cash and properties on its balance sheet and a shed full of patents that are given a zero value in the published balance sheet.

I'll respond to the other comments from you and others later.


----------



## Colm Fagan

Brendan Burgess said:


> I get attacked for suggestion that a portfolio of 10 blue chip shares is enough.


Brendan and I are on the same page on this. The subeditor in the Sunday Times titled one of my articles "Diversification is a false God, believe me". I almost got into trouble with the actuarial profession for committing a sin of investment heresy with that headline (which I didn't write), but I stand firmly by my belief that less than a dozen shares is sufficient, provided they are sufficiently diversified.  I do agree though that 25% in one share is more than a bit rich.  I've already dealt with that criticism above.



Brendan Burgess said:


> Is there a survivorship bias here?


There isn't a survivorship bias, in the sense that Renishaw, Apple and Phoenix were the only companies mentioned in my Sunday Times column that I said I would hold on to. I didn't pick and choose which ones to give an update on.  You're right though that I would probably have been reluctant to give an update if some or all of them had turned out to be turkeys.  If that had been the case, I'm sure others (not you of course  - you’re too much of a gentleman!) would have reminded me and the world about it.



Brendan Burgess said:


> Colm - I am sure you have picked duds in the past?


Of course I have, one of them very recently.  I'm still trying to work out what to do with it.  Dealing with investments that have turned sour always poses challenges.  Do you sell or hold on, in the hope of them coming good?  I plan to devote an entire article to the question at some future date. Unfortunately, you’ll have to wait until then to hear about my disasters.



mtk said:


> How do you borrow in HK$ and Sterling ? what are the basic mechanics?


Very simple. What I call borrowing in currency X to invest in a share denominated in currency X, other people call a spread bet. Think about it.  If you're still puzzled, come back to me.

Finally, Sarenco, I didn't know of Samsonite's claim to fame in the pensions world.  Thanks for educating me.  I like Brendan's aside


----------



## Brendan Burgess

Colm Fagan said:


> this particular share has been part of my life for 20 years now and it is more than an investment for me. I attend regular investor days and AGM's and I now know the company and its people very well (although, as a non-engineer, the technology of the business is still a complete mystery to me).



I still don't agree with you. In fact, I would say that you are too involved to make a clear decision on this.

You can still attend all the investor days and AGMs while holding 10% of your portfolio in Renishaw. 

As I am a shareholder in Renishaw myself, I don't want to ever have to say "I told you so." 



Colm Fagan said:


> It's a bit like, when I owned my own business, or a high proportion of it, I didn't think it was wrong to have so much of my net worth tied up in one company.



It's not really like that at all. When you own your own business,  it's not really that easy to sell off part of it. You don't want anyone else to own part of it anyway.



Brendan


----------



## Colm Fagan

Brendan Burgess said:


> You don't want anyone else to own part of it anyway.


O yes I did!  I think that's one of the reasons for its success, which thankfully continues to this day, that I managed to transfer ownership to colleagues.


----------



## Gordon Gekko

Hi Colm,

I disagree with your approach. What if (for example) it’s discovered that Renishaw’s Finance Director has been up to no good on the accounting side of things and the stock tanks? Or something analagous to the Volkswagen emissions scandal rears its ugly head? History is littered with examples of good companies brought to their knees by something that comes straight out of leftfield. Academic research suggests holding a minimum of 30 companies for that reason; I believe that your approach is flawed, but I admire the fact that you are willing to have a view and articulate that view without the veil of anonymity.

Gordon


----------



## Colm Fagan

Hi Gordon,


I don't want us to get too hung up on a particular company.  I accept that I have too many shares in Renishaw, probably about 10% of my portfolio too many. No argument on that.  Because it has done so well for me in the past, I'm prepared to cut it some slack.  I won't lose too much sleep if the value falls significantly. Of course I don't expect the value to fall.  The founder owns or controls over 50% of the shares.  He knows the company, its business and its finances backwards.  There is no way that the Finance Director could pull the wool over his eyes, or that he would leave the company open to the risks of a Volkswagen like emissions scandal.  This is partly the point I was trying to get at in my response to Brendan about it being like me owning my own company. I trust the chairman/MD to look after my interests as well as his own.

On the more general point about needing to own shares in a minimum of 30 companies, I completely disagree.  My understanding of the academic research is that this is the number of shares one should own to be able to broadly match the performance of the overall market.  But I have no desire whatsoever to match the performance of the market.  I don't care if the performance of my portfolio is significantly better than, or worse than, the broader market in the short term. I'm only concerned about the long-term. I'm confident that, over any five-year period, a well-chosen portfolio of a relatively small number of stocks - a dozen or less - will do better than the market.


----------



## Sarenco

Colm Fagan said:


> I'm confident that, over any five-year period, a well-chosen portfolio of a relatively small number of stocks - a dozen or less - will do better than the market.


The problem, of course, is that you will only know with absolute certainty that your portfolio was well-chosen with the benefit of hindsight.  

When you consider that only 25% of stocks have been responsible for virtually all stock market gains, you start to see the challenge of any stock picking strategy.


----------



## Jim2007

Brendan Burgess said:


> I get attacked for suggestion that a portfolio of 10 blue chip shares is enough.  Some of the others here must be getting heart attacks when they see you with 25% of your portfolio in one share.



Except that these are not blue chip stocks, in reality at least two are small caps or possibly micro caps and holding large blocks of such stocks in a portfolio makes it a high risk exercise.  In the abstract it does not look too bad, but it is worth keeping in mind that small caps tend to do best coming out of a recession and that the fall in sterling tend to push sterling companies upwards. And you would want to get a considerably higher return on such a portfolio to make the risk worth while.  

If you actually take the time to dig into some of the blue chips you'll find that many offered a much better return at a lower risk - many of the five year price ranges would have offered up grains of between 100% - 200%.  So you would probably have done at least as well if not better by concentrating in blue chips.


----------



## Fella

Hi Colm ,

I remember buying the paper to read your article it was well written , I didn't buy any more additions because I don't believe anyone can beat the market long term , maybe Warren Buffet but been Warren Buffet gives him a huge advantage.

To me your article could be called "Diary of a guy buying random stocks he likes" I mean its impossible to know IMO if there is any skill involved its too small a sample size and we may never have enough sample size to ever know.

Lets take Renishaw , its pure luck this company has done well for you is my reaction and there is no skill here but it can't ever be proved I think you bought it at a fair value , it's easy to convince yourself your making good plays but there is too much information out there and there is always people with more information than you have.



Colm Fagan said:


> The founder owns or controls over 50% of the shares. He knows the company, its business and its finances backwards.



What I'd say to that comment if he didn't know the share price was going to go from 18-52£ then hes unlikely to know the future direction of the share price , well maybe he did know it was going to go to 52£ maybe he should of bought more then , who knows for me your diary is about a guy picking random stocks and posting random results , before I opened my trading account I opened a demo account and picked random stocks just to practice the buying and selling process I logged on recently as to show someone how nice the platform was to use and the stocks in the demo account where still there and everyone was up nearly 300-400% I had no clue what I was picking I could fool myself and think I did but I didn't.

The average person is better off buying a balanced portfolio of shares that tracks the stock market , I would expect a higher return for holding a smaller portfolio but also you are more likely to have a higher loss in a falling market. 

It's a well written piece but what is the average investor supposed to learn from it , I'm unsure if your recommending samsonite or not , I won't be buying it anyway I'd rather buy into foreign and colonial investment trust and own a small part in 1000's of companies. But all the best with it.


----------



## Colm Fagan

Sarenco said:


> When you consider that only 25% of stocks have been responsible for virtually all stock market gains, you start to see the challenge of any stock picking strategy.



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?  Again, I suspect that the answer is no, which once again makes the statistic meaningless, bearing in mind that the average dividend yield is around 4% per annum.  Can you tell me the source so that I can try to get answers to the questions I raised? 


Like Gordon Gekko’s 30 companies, this is another of what I classify as financial urban myths - statistics that have an academic veneer but which mean absolutely nothing when examined in detail - that are cooked up by professional investment managers to frighten the ordinary Joe Soap off the stock market.


----------



## Gordon Gekko

Hi Colm,

Again, fair play to you for engaging with people publicly without the blanket of anonymity.

However, I cannot accept your arguments. You are an actuary as I understand it, a respected profession for sure; I have no doubt that you’re an extremely intelligent guy. Nonetheless, how can you, essentially a fella in his attic, hope to outperform professional fund managers with all their resources? I have a friend who was a stellar stock picker with a global investment bank (as in $10m+ bonus per year). He left and set up in his own concentrated strategy with a small (circa 10) team around him. That’s a team of CFAs, accountants, quants guys, etc. And even then, there are plenty of people who would lampoon my friend’s efforts to generate alpha and outperform the market. How can “one man and his dog”, albeit an actuary, possibly hope to do well over the long-term?

Gordon


----------



## Colm Fagan

Jim2007 said:


> at least two are small caps or possibly micro caps and holding large blocks of such stocks in a portfolio makes it a high risk exercise.


Why not go the whole hog and say that all three, including Apple, are small or micro caps!  No more need be said about Apple. The other two are firmly in the top 350 shares in the UK All-Share index, a long way from being small cap or micro cap!


----------



## Colm Fagan

Fella said:


> What I'd say to that comment if he didn't know the share price was going to go from 18-52£ then hes unlikely to know the future direction of the share price , well maybe he did know it was going to go to 52£ maybe he should of bought more then



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.


----------



## Colm Fagan

Gordon Gekko said:


> Nonetheless, how can you, essentially a fella in his attic, hope to outperform professional fund managers with all their resources?


Gordon, thank you for your kind comments. I didn't say that I hoped to outperform professional fund managers with all their resources. What I am saying is that, over the long term, I believe that I can do broadly as well as them after they have taken their pound of flesh to pay for their high salaries and bonuses, not to mention earning a healthy profit margin for the institutions that employ them. As an ordinary investor, I have two advantages over the professionals, neither of which can be sneezed at. Firstly, I have a genuine long-term perspective.  No matter how vociferously the CFA’s, quants, accountants, etc. protest that they are taking a long-term view, their main priority is still their bonus at the end of the year.  That is their primary focus, not the long-term performance of the investments they are managing.  That misalignment of interests can damage long-term investment performance.  Secondly, I have the experience of a lifetime in business.  Like many people in my situation, I believe that I can recognise a bluffer at twenty paces - and there are a surprisingly high number of them at the highest echelons of business.  One of my primary assessment tools for deciding whether or not to invest in a company is the language/ style/ clarity of the chairman's and chief executive’s statements that accompany the annual and half yearly reports, not the fancy measures used by CFA’s and quants.  Of course, I study the numbers but more important to me are the strength of the belief of the top people in the strategy of the company, their confidence and ability to see it through, and the values they are inculcating in their employees. I believe that I can get reasonable answers to those questions from studying the bosses' comments accompanying yearly and half-yearly reports.  Quants can't measure those "soft" factors.


----------



## Brendan Burgess

Colm Fagan said:


> No matter how vociferously the CFA’s, quants, accountants, etc.



Hey! What about the actuaries?


----------



## VoiceofReason

Thank you for the update Colm, I read and enjoyed your articles in the Sunday Times and was disappointed when they were discontinued.

Apart from the update that has sparked this discussion have you any plans or desire to publish on a more regular basis as I'm sure many of us would enjoy the content, given the debate your update has generated on a snowy weekend.

I mulled over Renishaw when you mentioned it and I regret not purchasing some, opting instead for such safe havens as UK utilities and energy companies, that has proven to be poor judgement on my part but hey its only money and I am learning all the while.


----------



## Colm Fagan

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?


----------



## Colm Fagan

VoiceofReason said:


> have you any plans or desire to publish on a more regular basis


Hi VOR
Yes, I plan to publish the occasional update on LinkedIn.  I plan also to add them to this forum, as the quality of contribution from AAM is top class.  The updates help me get my own thinking in order and ultimately help my decision-making.


----------



## VoiceofReason

Glad to hear that Colm, I look forward to your updates and the debate generated.


----------



## Gordon Gekko

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.


----------



## Colm Fagan

Gordon Gekko said:


> Your question implies that Company X has done well though.


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.


----------



## galway_blow_in

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


----------



## Fella

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.



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.


----------



## mtk

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?



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.


----------



## galway_blow_in

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.



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 ?


----------



## Brendan Burgess

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


----------



## Brendan Burgess

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



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


----------



## Fella

Brendan Burgess said:


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



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.


----------



## moneymakeover

Colm
Is there a link to the original articles?
I'd be interested to know how you arrived at choosing the stocks you choose.


----------



## Sarenco

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?


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.


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.


----------



## robert 200

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.


----------



## Gordon Gekko

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.


----------



## Sarenco

Sarenco said:


> 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


Here's a link to the academic paper referenced in the above Irish Times article.  

It's pretty dense but I think it helps to explain why concentrated equity portfolios commonly lag market returns.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447


----------



## galway_blow_in

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



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


----------



## Sarenco

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.


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


----------



## Gordon Gekko

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



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


----------



## Sarenco

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?


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!


----------



## Colm Fagan

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.


----------



## Colm Fagan

Sarenco said:


> 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 Sarenco
The dividend yield on the FTSE 100 at close of business on Friday last was 4.13%.  That is the main benchmark I've been using (expressed in euros).  Your suggested figure is probably more appropriate.


----------



## Daddy Ireland

Hello Colm,

Catching up on this entire thread from the outset.

When you get a chance I am interested to know if you still hold or have been buying into FTSE blue chips in the last 18 months with sterling averaging approx .88 to the euro over that time as you stated back in 2015 that  the majority of your holdings were in UK companies. There are a large number of top FTSE household named companies offering dividend yields of between 5% to 7%.  I would think most of these blue chips should be able to maintain the dividend.  My thinking is that with Brexit sterling should not get any worse than .95 to the euro over next number of months and that there may even be a chance of Sterling strengthening against the euro and even it weakened to .95 no doubt over time it will come back again to its current position.  In your actuarial opinion would you see my idea of availing of current dips of buying 10 or so well diversified high dividend yielding UK blue chips as a very risky idea or has it a reasonable chance of success?  I can live with dips in the market but am fed up of getting zero return on my money in the bank and top UK companies offer attractive dividend yields. Thanks.


----------



## galway_blow_in

the problem with holding the ftse 100 or any other index is they are completely and utterly in thrall to what happens in the u.s market

no european market ever goes anywhere ( at any time )  unless the u.s market is also moving to the upside and the u.s market is far more diversified than the ftse 100 , the uk stock market is heavily dependent on energy , finance and natural resources companies 

you might as well just own the s + p as it always always does the best over any duration anyway


----------



## joe sod

VoiceofReason said:


> I mulled over Renishaw when you mentioned it and I regret not purchasing some, opting instead for such safe havens as UK utilities and energy companies, that has proven to be poor judgement on my part but hey its only money and I am learning all the while.



Sometimes sectors like UK utilities are out of favour for very long time, I think jeremy Corbyn is holding the "sword of damacles" over the UK utility sector which explains why the shares have done so bad over the last year and more. The US technology sector was out of favour for a very long time even as recently as 5 years ago, stocks like Microsoft and Intel could be bought at a fraction of their current value. I think the prevailing wisdom then was that these tech companies were old hat and would be wiped out by the new tech companies, it didn't happen in fact some of the new tech companies actually did not have any deep technology or intellectual property at the back of it all. With regard to UK utilities, these now regarded also as old energy, the future is renewables etc etc until a week like last week comes along and suddenly the UK is short of gas and power.


----------



## Colm Fagan

Sarenco said:


> Here's a link to the academic paper referenced in the above Irish Times article.
> 
> It's pretty dense but I think it helps to explain why concentrated equity portfolios commonly lag market returns.
> https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447


Hi Sarenco

Thanks for the link.

I had a quick look at the paper.  I think the reason for the disconnect between the results in the paper and my scepticism about them, from observing and investing in the stock market over many years, is that the paper simply looks at numbers of stocks and gives no weighting whatsoever to market capitalisations. A 400 lb gorilla is given the same weighting as an ant.

One observation near the start of the paper is that the single most frequent outcome for the results is a loss of 100%, i.e. the companies went bust.  As we all know, companies have a high chance of going bust in the early years. On this topic, I can't help recounting my experience on the first anniversary of setting up my own business. I threw a party to mark the occasion, and told the assembled guests that the reason why I had thrown the party was that I had heard that 90% of businesses failed in the first year; the fact that I had survived justified the party.  One of the guests - who amazingly is still a good friend - responded by asking if I had heard that 95% have gone bust by the end of the second year!

That little anecdote helps to explain the Professor's results and also why I am so sceptical of them. I would reckon that a significant number of his sample were small, young companies, that just didn't survive to maturity.  I am loath to invest in publicly quoted companies that haven't demonstrated their long-term viability.

At this point, I could make a general point about academic research, that the aim is to get publicity by coming up with something unexpected, even though you have to go through contortions to arrive at the result. This to me is one of those examples.


----------



## Sarenco

Colm Fagan said:


> I think the reason for the disconnect between the results in the paper and my scepticism about them, from observing and investing in the stock market over many years, is that the paper simply looks at numbers of stocks and gives no weighting whatsoever to market capitalisations.


That's certainly true Colm.  Still, it's a striking statistic that 96% of publicly traded stocks in the US since 1926 collectively generated lifetime dollar gains that matched gains on one-month T-Bills – the entire net excess return came from only 4% of stocks.

I've no doubt that the results would be considerably less dramatic if you screened out stocks on the basis of their size, profitability, etc.

However, the fact remains that stock market returns are driven by a small minority of "overachievers", which is one of the principal challenges of any concentrated, stock picking strategy.


----------



## cremeegg

"Diversification is a false God"

Great headline, even if it did not reflect the article.

An investor could decide to buy only the share with the best prospects, after all why buy the second best share.

There are two objections to this. 

First that the investor may have miss-identified the best share. This always strikes me as a trivial objection, if you do not trust yourself to identify an opportunity stay away. If you do trust yourself, invest and accept the results of your efforts.

The second objection is that the share with the highest expected value, to borrow a phrase from gambling, still has the possibility of a bad outcome. The lotto sometimes has a positive expected value. You have a 1 in a million chance of turning a €1 stake into €2m. That does not mean you should remortgage your house to buy lotto tickets.

Diversifying is to reduce your own exposure to such negative results.


----------



## Duke of Marmalade

Just catching up on this thread; I've been busy defending common sense against an onslaught from bitcoin barbarians, whilst you guys have been enjoying yourselves

I remember the original article and was tempted to exchange some of my Prize Bonds for Renishaw.  Alas my risk aversion is of the chronic variety, but I do sleep nights.

I think I go along with the argument that Colm was "lucky" to beat the market with a concentrated portfolio.  I also think Warren Buffet was lucky.

This discussion would have had a very different colour in 2010. Though I am persuaded by one of Colm's favourite themes - the Bernanke Put Option, one that he highlighted again in his thought provoking presentation to the Society of Actuaries on DC pensions.  

Here's the way the argument goes.  I think if the markets had been left to run their course during the crisis we would possibly have had a meltdown which would have knocked us back to the Stone Age.  The financial models do allow for the possibility of such a meltdown.  But what happened is that the powers that be (I'm with TheBigShort on this) pulled out all the stops to save the situation.  Most notable and enduring of all is QE.  There can be little doubt that QE is behind the strong recovery in stock markets in recent years.  I'm not saying that is a bad thing but it does seem that the stock holding classes (which includes workers' pension funds) have a sort of buyer of last resort in the central management of our economies.  So whilst I myself will remain mostly in "safe" assets, I think over the medium term there are systemic reasons for believing equities will out perform.

What little part of my portfolio (an ARF) is invested in equities I chose one of those funds which purported to invest in, I think, only 20 stocks.  I sort of felt that I should take a slight "punt" if I was putting my toe in the water.  I didn't track it very closely but I don't think it significantly outperformed a fully diversified approach, at least certainly not to the extent of Colm's portfolio.

I did actually once try picking my own 10 stocks as per Brendan's advice.  The volatility kept me awake and glued to Bloomberg and within a matter of weeks I threw in the towel.

I think the following quote from _fella _needs a clarification.



Fella said:


> ...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 ...


Modern Portfolio Theory argues the opposite.  You get rewarded for overall stockmarket risk but you do not get rewarded for concentration risk.  The reason being that the latter can be avoided whilst the former cannot.  But I think he meant that Colm was lucky which, as I said, I think I agree with.


----------



## Martyn

Colm Fagan said:


> At this point, I could make a general point about academic research, that the aim is to get publicity by coming up with something unexpected, even though you have to go through contortions to arrive at the result...


Can you cite any academic research to back up that claim, Colm?


----------



## zephyro

Colm Fagan said:


> The dividend yield on the FTSE 100 at close of business on Friday last was 4.13%.  That is the main benchmark I've been using (expressed in euros).



Are you hedged against EUR/GBP Colm, otherwise presumably this has had a significant effect on your returns in euro terms?



Daddy Ireland said:


> I can live with dips in the market but am fed up of getting zero return on my money in the bank and top UK companies offer attractive dividend yields.



Why not invest in top eurozone companies then and avoid the FX risk, or do you actually want to bet on EUR/GBP too?


----------



## galway_blow_in

zephyro said:


> Are you hedged against EUR/GBP Colm, otherwise presumably this has had a significant effect on your returns in euro terms?
> 
> 
> 
> Why not invest in top eurozone companies then and avoid the FX risk, or do you actually want to bet on EUR/GBP too?



hedging is unimportant when most of the companies on that index draw profits from overseas

investing in the eurozone is a waste of time , the u.s market determines which way the eurozone ( and uk ) stock  market goes ,, it also outperforms the eurozone stock market almost all of the time and all of the time over a significant period ,  its quite extraordinary really but as sure as night follow day if the s + p or dow close in the red at 9 pm irish time , the european stock markets will be down the following morning


----------



## Colm Fagan

Martyn said:


> Can you cite any academic research to back up that claim, Colm?


Hi Martyn
It's quite prevalent.  I saw it most recently in behavioural psychology.  See https://retractionwatch.com/2017/02...d-studies-nobel-prize-winner-admits-mistakes/
I've also seen it many times in other areas of science.  I can't recall the details:  I'm not an academic researcher!
PS:  Needless to say, I'm not saying that it's true for ALL academic research.  It's a completely understandable phenomenon.  If I do a study and conclude that roast beef doesn't cause cancer, no-one will notice, but if I can find some way to adjust the statistics or the statistical significance test I'm using, to conclude that it DOES cause cancer, then I'm onto a winner in terms of publicity.


----------



## Sarenco

galway_blow_in said:


> the u.s market determines which way the eurozone ( and uk ) stock  market goes ,, its also outperforms the eurozone stock market almost all of the time and all of the time over a significant period ,  its quite extraordinary really but as sure as night follow day if the s + p or dow close in the red at 9 pm irish time , the european stock markets will be down the following morning


As previously pointed out to you on other threads, this statement is simply untrue.  

European stocks have outperformed US stocks over significant time periods - including the decade to the end of 2010.  You are also conveniently ignoring currency effects.

In any event, the past is not prologue.  European stocks are less richly valued than US stocks by almost every reasonable measure, which implies an expectation of higher future returns.


----------



## Colm Fagan

zephyro said:


> Are you hedged against EUR/GBP Colm, otherwise presumably this has had a significant effect on your returns in euro terms?





galway_blow_in said:


> hedging is unimportant when most of the companies on that index draw profits from overseas


I agree with both of you!

If you go back to my update from Saturday last, #79 in this thread, I said that I had hedged my exposure to Phoenix in two ways: (1) by borrowing in sterling to pay for a portion of the investment and (2) by taking out a sterling hedge for the balance of my investment in that company.  I hedged my Phoenix exposure because practically all its revenues and costs are denominated in sterling.

I didn't hedge my foreign currency exposure for either Renishaw or Apple.  In Renishaw's case, even though it's a sterling denominated stock, the vast bulk of its profits are earned outside the UK.  Thus, if sterling weakens, its revenues increase in sterling terms.  A high proportion of its distribution costs will also be in the currencies of the countries where the sales are made, but the major proportion of its R&D costs will be in sterling (at least I think they are).  Thus, we have the perverse situation that a fall in the value of sterling will, all other things being equal, cause its value in sterling terms to increase by more than sterling has depreciated. Sounds complicated when I say it like that, but it is actually quite straightforward.


----------



## Daddy Ireland

And so Colm if I am reading you correctly and coming back to my earlier post buying UK blue chips with big international exposure even with a weakened sterling is not a bad idea.


----------



## Colm Fagan

Duke of Marmalade said:


> I think I go along with the argument that Colm was "lucky" to beat the market with a concentrated portfolio. I also think Warren Buffet was lucky


Hi Duke

I'm happy to be put into the same "lucky" bucket as Warren Buffett!

I agree with you to some extent, but not completely.  One of my core beliefs is that we are buffeted by good luck and bad luck throughout our lives, in investment as well as in more important aspects of our lives. The trick is to minimise the harm caused to us by bad luck and to surf the wave as best we can when  good luck comes our way.  I try to reflect that belief in my approach to investment.  My general approach is to dip my toe in the water initially and get to know the company and its industry as best I can.  Sometimes I conclude after the initial courtship period that I’ve bought a dog and do my best to limit the damage.  Other times, I conclude that I've unearthed a real winner.  In those cases, I pile in. That is broadly what has happened with Renishaw over the years and also with the other companies where I have big holdings.  It also helps to explain the highly concentrated nature of my portfolio.


----------



## Colm Fagan

Daddy Ireland said:


> And so Colm if I am reading you correctly and coming back to my earlier post buying UK blue chips with big international exposure even with a weakened sterling is not a bad idea.


First of all, sorry for not coming back to you earlier.

I confess that I have no views whatsoever on particular market sectors - be they UK blue chips, US technology, European small caps, whatever.  I am an unashamed stock picker.  I invest in particular companies because I think they have good prospects at the prevailing price, not because I like that particular sector.  You could be right in your views on FTSE blue chips, but you would need to ask someone who has the big picture perspective, which I don't have unfortunately.


----------



## Brendan Burgess

I have posted all of Colm's original articles here 

*Colm Fagan's Diary of A Private Investor*


----------



## Gordon Gekko

I think that Daddy Ireland is speaking to the point that it doesn’t matter what currency a truly international company is listed in; its share price will adjust accordingly to take account of currency. If all of UK plc’s earning are in the US and Sterling collapses in value, UK plc’s share price should soar commensurately.


----------



## Daddy Ireland

Thanks Colm.


----------



## Martyn

Colm Fagan said:


> Hi Martyn
> It's quite prevalent.  I saw it most recently in behavioural psychology.
> 
> ...
> 
> I've also seen it many times in other areas of science.  I can't recall the details:  I'm not an academic researcher!
> PS:  Needless to say, I'm not saying that it's true for ALL academic research.  It's a completely understandable phenomenon.  If I do a study and conclude that roast beef doesn't cause cancer, no-one will notice, but if I can find some way to adjust the statistics or the statistical significance test I'm using, to conclude that it DOES cause cancer, then I'm onto a winner in terms of publicity.


We digress from the thread topic, but joking aside, I think that's too cynical, unfortunately, and assumes that most academics are driven primarily by publicity. I'm not an academic but I highly doubt that's true. I know academics rely on sufficient funding and publicity may help to bring that, but I'm sure (or at least, I hope!) that more value the respect of their peers through publication in a journal such as Nature than the wider publicity of generating a headline in the Daily Wail.


----------



## Colm Fagan

Thanks Brendan.


----------



## Sarenco

Colm Fagan said:


> I'm happy to be put into the same "lucky" bucket as Warren Buffett!


Berkshire Hathaway common stock has failed to materially outperform the S&P500 for well over a decade at this stage and Warren Buffett routinely advises retail investors to put their money in index funds.

Which raises an interesting question - has it become more difficult for stock pickers to beat or even match market returns?

Have technological advancements reduced arbitrage opportunities for diligent investors that are prepared to research individual stocks (in other words, has the Internet made markets more efficient)?

Has the fact that the overwhelming bulk of money in the stock market is now professionally managed removed the "dumb money" from the market that can be exploited?

I don't pretend to have the answers to these questions but if the greatest stock picker in history can't beat the market anymore, what chance do the rest of us have?


----------



## galway_blow_in

Sarenco said:


> As previously pointed out to you on other threads, this statement is simply untrue.
> 
> European stocks have outperformed US stocks over significant time periods - including the decade to the end of 2010.  You are also conveniently ignoring currency effects.
> 
> In any event, the past is not prologue.  European stocks are less richly valued than US stocks by almost every reasonable measure, which implies an expectation of higher future returns.



since 2012 how have european stocks measured  up against the u.s market ?

the answer is as follows

the IUSA ( euro denominated etf ) has risen 88.57%

the IEUR etf has risen 26.18 %

slam dunk !

the european market is cheaper for several reasons

its less friendly to corporations than the usa

its a weaker and less dynamic economy by a distance 

its always been this way that u.s stocks are more expensive


----------



## Colm Fagan

Martyn said:


> We digress from the thread topic, but joking aside, I think that's too cynical, unfortunately, and assumes that most academics are driven primarily by publicity.


Martyn
I completely agree that many academics - probably the vast majority - are not driven by publicity.  It was a cheap shot.  I'm sorry for saying it.


----------



## Sarenco

galway_blow_in said:


> since 2010 how have european stocks measures up against the u.s market ?


US stocks have clearly outperformed European stocks over the last 8 years.

But you said that European stocks have never outperformed US stocks over any material time period in the past, which is simply untrue.

Again, the past is not prologue.


----------



## galway_blow_in

Sarenco said:


> US stocks have clearly outperformed European stocks over the last 8 years.
> 
> But you said that European stocks have never outperformed US stocks over any material time period in the past, which is simply untrue.
> 
> Again, the past is not prologue.



ok let me put it this way , the u.s market as a rule outperforms the european market most of the time and the european market follows movements in the u.s market more than the u.s market apes the european market


----------



## Gordon Gekko

I’ve seen that argument advanced many times; people talk about the US being “expensive” and Europe being “cheap”, but perhaps that should be the case if the US companies are better and the environment is more favourable?


----------



## Sarenco

galway_blow_in said:


> ok let me put it this way , the u.s market as a rule outperforms the european market most of the time and the european market follows movements in the u.s market more than the u.s market apes the european market


There is a high degree of correlation between stock markets in all developed markets if that's your point.  However, the correlation between different markets has never been perfect.

The US stock market has certainly been one of the best performing markets of the last 100 years (incidentally, it wasn't the best performing national market).

But that's the past - don't confuse outcome with strategy.

Would you have said the same thing about Japan, which was the biggest stock market on the planet at one point back in 1989?

Things change - markets don't follow "rules".  If they did, investing would be easy.


----------



## galway_blow_in

Sarenco said:


> There is a high degree of correlation between stock markets in all developed markets if that's your point.  However, the correlation between different markets has never been perfect.
> 
> The US stock market has certainly been one of the best performing markets of the last 100 years (incidentally, it wasn't the best performing national market).
> 
> But that's the past - don't confuse outcome with strategy.
> 
> Would you have said the same thing about Japan, which was the biggest stock market on the planet at one point back in 1989?
> 
> Things change - markets don't follow "rules".  If they did, investing would be easy.




all i know for certain is that europe follows the u.s down like clockwork

hence why i believe you might as well for simplicity and diversification just own the s + p


----------



## Martyn

Colm Fagan said:


> Martyn
> I completely agree that many academics - probably the vast majority - are not driven by publicity.  It was a cheap shot.  I'm sorry for saying it.


Ah, I wasn't chasing an apology! 

But fair play to you.


----------



## galway_blow_in

Gordon Gekko said:


> I’ve seen that argument advanced many times; people talk about the US being “expensive” and Europe being “cheap”, but perhaps that should be the case if the US companies are better and the environment is more favourable?



yes and yes and dont take the opinion of an average idiot like me either

there are many industry  articles which argue that u.s stocks are naturally more richly valued , whatever political instability trump has brought to america , its a whole lot more together than the eurozone , bar germany , no major large country in europe has seen its stock market move anything worth risking money for  in nearly twenty years , i include the uk due to the horrible currency effect back to euros from sterling

the ISFA amsterdam etf which tracks the FTSE is down nearly 4% since this time sixteen years ago

https://finance.google.com/finance?q=AMS:ISFA&ei=B7mdWpiAJ4nsU8vfpbAC


----------



## Brendan Burgess

galway_blow_in said:


> dont take the opinion of an average idiot like me either



Hi gbi 

I wouldn't say you are an average idiot. 

Brendan


----------



## Sarenco

galway_blow_in said:


> all i know for certain is that europe follows the u.s down like clockwork


It doesn't.  

Just look at what happened after the dot.com crash or in the immediate wake of the financial crisis.  It is simply untrue that there is a perfect correlation between US and European stock markets.  

Simply repeating a falsehood over and over again does not make it true.

And that's before you even start to consider the fact that currency risk is uncompensated.


----------



## joe sod

Sarenco said:


> Which raises an interesting question - has it become more difficult for stock pickers to beat or even match market returns?
> 
> Have technological advancements reduced arbitrage opportunities for diligent investors that are prepared to research individual stocks (in other words, has the Internet made markets more efficient)?



I would have thought the internet and computers made markets more volatile. For example the big sell off a few weeks ago where the dow falls a 1000 points in a couple of hours, where is the efficiency and rigour here when everything gets sold off together. To me that is still plain old panic even if done by computers. There are large sectors of the market for instance emerging markets 2 years that get sold off to such a huge extent and then turn around and experience rapid rise, that is hardly efficient markets in operation because surely other market participants would buy if they thought it was too cheap so it would always be at correct price, this clearly does not happen with emerging markets.
Also with regard to most money in the market being professionally managed, are you sure, I thought most money in market or a large proportion is now exchange traded funds with much less being professionally managed


----------



## Sarenco

joe sod said:


> I would have thought the internet and computers made markets more volatile.


I don't see any reason why efficient markets should be less volatile than (relatively more) inefficient markets.  I would have thought that effective price discovery requires a significant degree of price volatility.

In any event, as it happens, we have just lived through the least volatile period in stock market history -
https://www.askaboutmoney.com/threads/2017-an-extraordinarily-calm-year-for-the-stock-market.206558/


joe sod said:


> Also with regard to most money in the market being professionally managed, are you sure, I thought most money in market or a large proportion is now exchange traded funds with much less being professionally managed


Yes, I'm sure.  

ETFs (or index trackers generally - not all ETFs are passively managed) still only represent a fraction of the market.  

In any event, ETFs (or funds generally) are professionally managed investment vehicles.  I'm drawing a contrast with individual stock pickers (like Colm and Brendan) that represent a vanishingly small portion of the overall market.


----------



## Jim2007

Colm Fagan said:


> Why not go the whole hog and say that all three, including Apple, are small or micro caps!  No more need be said about Apple. The other two are firmly in the top 350 shares in the UK All-Share index, a long way from being small cap or micro cap!



And that is the best you can do?  Both of the stocks are small caps no matter what index they appear in and the portfolio selection was high risk and failed to deliver the kind of returns one would expect when compared with a less risky blue chips selection over the same period.  At this stage best ignored and forgotten.


----------



## Jim2007

Sarenco said:


> Berkshire Hathaway common stock has failed to materially outperform the S&P500 for well over a decade at this stage and Warren Buffett routinely advises retail investors to put their money in index funds.



You are taking this out of context - Buffet advises index investing as opposed to investing in Berkshire as at this stage it can deliver at least as good a return as Berkshire at probably a slightly lower risk.  The problem with Berkshire is that it is simply too big and no matter how well the stock picking goes it will have little impact on overall returns.



Sarenco said:


> I don't pretend to have the answers to these questions but if the greatest stock picker in history can't beat the market anymore, what chance do the rest of us have?



Not at all, the problem facing such people is size, the bigger the portfolio being managed the bigger the opportunity needed to make a significant impact.  That said,  much of what passes for stock picking today is more based on lucky hunches and following the crowd rather than a deep knowledge of a couple of sectors and countless hours of analysis.


----------



## Sarenco

Jim2007 said:


> You are taking this out of context - Buffet advises index investing as opposed to investing in Berkshire as at this stage it can deliver at least as good a return as Berkshire at probably a slightly lower risk.


Sorry Jim but I'm not taking anything out of context.  I am fully aware of the rationale that Mr Buffett has offered for his advice.


----------



## Brendan Burgess

Sarenco said:


> I'm drawing a contrast with individual stock pickers (like Colm and Brendan)



Hi Sarenco

Just to clarify, I am not a stock picker as such. I don't believe that I can pick winners and losers. 

I have a portfolio of 10 largish shares held for the long term.  Yes, I had to "pick" them at some stage but they were for diversification and maturity e.g. my most recent additions were Siemens and Bayer.  I don't read their accounts and have no idea whether they are any better or worse than other companies in their industry other than the fact that they are large and the thousands of Colms around the World have decided what their market price should be. 

Brendan


----------



## Colm Fagan

I've now completed my latest update on "Diary of a Private Investor", which may be of interest.
*
Diary of a Private Investor  Update #2 1 April 2018*

The original intention for this update was to tell of an investment disaster - and I have had quite a few.  This has been such a bad quarter for me investment-wise however that I decided some good news was in order, to take my mind off the bad news.  Therefore, I do not propose to squeal on any of the investments that contributed to the negative 5.9% overall return return on my portfolio in the quarter to 31 March.  Instead, I will focus on an investment, or more correctly a negative investment for reasons that will become clear, that contributed +0.9% to overall performance in the quarter.  Without it, I would have been down 6.8% in the first three months.  Not pretty.

Elon Musk, founder, chairman and chief executive of Tesla, the electric car company, has been described as a visionary genius.  The Board of Tesla obviously thinks so.  Just a few weeks ago, they granted him stock awards that could be worth up to $55 billion if certain targets are met over the next few years.  Shareholders also agree.  They have bought Tesla’s shares in droves, pushing its price to more than $300 a share by the time I looked at it in January last.

The latest accounts available at the time (and still the latest available) were for the quarter ended 30 September 2017.  Despite all the hype surrounding Tesla, the accounts did not make pretty reading.  They showed a loss in the third quarter of more than $600 million, and losses for the first three quarters of 2017 of almost $1.3 billion.  The corresponding losses for the first three quarters of 2016 were $554 million, so the company appeared to be getting more loss-making by the quarter.

Per the balance sheet, the losses of $1.3 billion in the first nine months had been funded by new money from shareholders eager to buy into the Tesla story, but more shareholders mean more mouths to be fed when and if the company eventually turns profitable.  Long-term debt increased by more than 60% in the 12 months from September 2016 to September 2017, from $5.9 billion to $9.6 billion.  The figures for long-term debt corresponded closely to the amounts invested in property, plant and equipment at both dates, so bond-holders have first dibs on tangible assets.  The total value of the company, equity and debt, was around $60 billion.

I concluded there was no way Tesla could be worth $60 billion.  Even if it succeeds in persuading shareholders, banks and bond holders to keep shovelling in cash during the loss-making years (and I had my doubts, in which case the company could be close to worthless), the established car-makers are not exactly sitting on their hands, waiting for Tesla to blow them away.  They are investing heavily in electric car technology and driverless cars, both core areas of expertise for Tesla.  Competitors also have countless years' experience of car manufacturing.  Despite stories about electric cars having fewer moving parts and being easier to assemble than traditional vehicles, I didn't think Tesla could ever match that expertise and experience.

I decided therefore to short Tesla, i.e. to borrow shares from a long-term holder and sell them at the prevailing price, in the hope of buying them back later at a lower price and returning them to the long-term holder.  I would obviously have to pay the long-term holder for borrowing the shares, but the borrowing cost isn’t prohibitive (I reckon it’s costing me around 3% pa – the cost varies between spread bet providers).  I opened the short position at $310 a share on 4 January.

My timing wasn't great.  The share price kept rising through the month.  The more it rose, the more I was losing.  Within weeks, it had risen to over $355 a share, so I was losing $45 on every share I’d shorted.  I had to decide whether to cut my losses or soldier on in the hope that the price would eventually fall.  Spread bet companies encourage clients to put in stop losses, so that the position is automatically closed if losses reach a certain limit.  The argument is that this reduces the risk of being wiped out if the share price moves sharply in the wrong direction.  I don't believe in stop losses.  If I thought Tesla was overvalued at $310, I thought it was even more overvalued at $355 a share.  If anything, my doubts about Tesla’s long-term viability had increased as time went by and as news came through of production problems and other difficulties.  Therefore, on 23 January, with the price at $355.54 a share, I did the only logical thing: I increased my short position rather than cut my losses.

Finally, the price started to fall.  On 29 January, with the price at $349.66 a share, I added even further to my short position.  The price has hardly stopped falling since.  At the time of writing, it is down to $266.33 a share, so I’m sitting on a nice profit.

I am tempted to take some chips off the table, but have decided to keep the position open for the next few weeks at least.  We should know before the end of April if I’ve made the right call, as key numbers are due out this month on sales and year-end financials.  If the results go my way, I may finally pluck up the courage to come clean on the disasters!


----------



## Duke of Marmalade

Colm,

You should avoid labeling Updates as "April 1"


----------



## jpd

Are we now discussing a share?


----------



## joe sod

Colm Fagan said:


> I don't believe in stop losses. If I thought Tesla was overvalued at $310, I thought it was even more overvalued at $355 a share. If anything, my doubts about Tesla’s long-term viability had increased as time went by and as news came through of production problems and other difficulties. Therefore, on 23 January, with the price at $355.54 a share, I did the only logical thing: I increased my short position rather than cut my losses.



good for you and a good call, but was not the famous quote "markets can stay irrational longer than you can stay solvent" coined based exactly on this thinking. For example the irish banks were in trouble long before the 2008 financial crash, if you started shorting in 2005 you would have been right about the banks precarious situation but you would have been wiped out trying to maintain a short that long against an ever rising banks share price over that period.


----------



## Colm Fagan

jpd said:


> Are we now discussing a share?


I'm doing no different to what I've always done on this forum, telling what I've done with my investments.  I have a vague recollection of Brendan explaining how it is different from discussing a share.  I defer to him to answer your question.

Duke, I agree that it would have been better to have chosen a different date for posting the update!


joe sod said:


> you would have been wiped out trying to maintain a short that long against an ever rising banks share price over that period.


You're right, and there have been situations where I had to concede defeat even though I still felt I was right in my judgement.  But I still don't believe in hard coding limits for closing out a position. Each situation must be evaluated on its merits at the time.  Spread bet companies want clients to trade - that's how they make their money - so they're happy for limits to be placed on positions: it improves their margin.  They don't really like people who hold onto positions (long or short) for a long time, as they make very little money on them.


----------



## RedDevil

You all are to be thanked for your contributions. Which I read with great interest.

I have decided after nearly ten years to go back into the market and have been working out an investment strategy. 

The past twenty four hours I have been considering diversification and number of shares one should hold, thus I was drawn to this discussion.

I was badly burned by the banks in the past but I think that I may have it together now.

The overpriced house is mortgage free and the pension is reasonable.

It is just about a bit extra being available for my adult children and having a bit of a challenge.


----------



## elacsaplau

This is a little tongue in cheek. Sometimes directions are delivered through indirections.

********************

At the start of the year, I concluded there was no way Reinshaw could be worth £3.8 billion.

I decided therefore to short Reinshaw, i.e. to borrow shares from a long-term holder and sell them at the prevailing price, in the hope of buying them back later at a lower price and returning them to the long-term holder. I would obviously have to pay the long-term holder for borrowing the shares, but the borrowing cost isn’t prohibitive (I reckon it’s costing me around 3% pa – the cost varies between spread bet providers). I opened the short position at £53.15 a share on 4 January.

My timing wasn't great. The share price kept rising through the month. The more it rose, the more I was losing. Within weeks, it had risen to over £57.65 a share, so I was losing £4.50 on every share I’d shorted. I had to decide whether to cut my losses or soldier on in the hope that the price would eventually fall. Spread bet companies encourage clients to put in stop losses, so that the position is automatically closed if losses reach a certain limit. The argument is that this reduces the risk of being wiped out if the share price moves sharply in the wrong direction. I don't believe in stop losses. If I thought Reinshaw was overvalued at £53, I thought it was even more overvalued at close to £58 a share. If anything, my doubts about Reinshaw’s valuation had increased. Therefore, on 23 January, with the price at £57.65 a share, I did the only logical thing: I increased my short position rather than cut my losses.

Finally, the price started to fall. On 24 January, with the price at £56.40 a share, I added even further to my short position. The price has hardly stopped falling since. At the time of writing, it is down to £45.06 a share, so I’m sitting on a nice profit.

I am tempted to take some chips off the table, but have decided to keep the position open for the next few weeks at least. We should know before the end of April if I’ve made the right call. If the results go my way, I may finally pluck up the courage to come clean on the disasters!


----------



## Colm Fagan

elacsaplau said:


> This is a little tongue in cheek. Sometimes directions are delivered through indirections.


Nice one!  Hoist by my own petard, one might say.   It's inevitable, when you put your neck on the line, as I'm doing with the column. 

There is one big difference between the two companies.  Renishaw doesn't have a penny of debt, lots of cash on the balance sheet, and is generating hefty profits on an ongoing basis.  Yes, the share price got ahead of itself in January.  I admitted as much in my posting of 3 March (#79 in this thread) when I wrote that it would be difficult if not impossible to do as well on Renishaw (and Apple) in the future as I had done in the past.  Nevertheless, I'm still confident that, five years from now, I'll be happy with the return from Renishaw, starting from its current price.  It won't shoot the lights out either, I reckon.  

Tesla, unfortunately is a very different position.  It has to keep scrambling for cash to keep the show on the road.  The best case scenario is that it survives its current funding crisis by issuing new shares, but any such issues will dilute the eventual payback for other shareholders. As an aside, Renishaw hasn’t issued even a single new share since I first bought into the company 20 years ago, not even share awards for senior executives. Thus, there has been no dilution whatsoever of my interest in the company.   If Tesla succeeds, Mr. Musk will walk away with shed loads of shares, diluting the interests of other shareholders.


----------



## elacsaplau

Bravo Colm,

Fair play to you for taking a little bank holiday banter in the spirit it was intended. The symmetry was too good for this poor troll to resist!!

Following your promptings, I will actually go kick those Tesla tyres myself.

I am even going to award you additional kudos points for retorting to my Shakespearian provocations with such an apt quote from the self-same play.


----------



## Colm Fagan

I could also add that my March 3 posting was after Renishaw had fallen quite a bit from its January highs.  As an aside, I sold some Renishaw shares at £57.85 in January, reckoning that the price had gone above what I  considered its fair value of around £55, but I then ruined it all by buying back exactly the same number when the price had fallen to £52.88 later in the month!  I'm not a genius.  I make mistakes like everyone else.  As I said at the start of this month's update, I'm trying to pluck up the courage to write about my failures.  I definitely wouldn't put Renishaw into that category.


----------



## Colm Fagan

It's a long time since I studied Hamlet, but I still recall some of the better lines.


----------



## mtk

"Hamlet" is that where rich New Yorkers go for the summer in their teslas ?


----------



## Colm Fagan

Is it a slightly different spelling, with an "s" at the end?


----------



## owenmcg

Colm Fagan said:


> Is it a slightly different spelling, with an "s" at the end?



Hamlets = a few villages so answer is NO, its just Hamlet


----------



## Colm Fagan

Forget it!  I thought you meant the Hamptons!  
Interesting things happening to Tesla's share price today, by the way.  Traders must have read my column at the weekend!


----------



## elacsaplau

Hi Colm,

Did you hear about Mr. Musk's "April Fool" tweet yesterday? If not -  worth a look - probably did not go down well.

Of course, if the tweet does come to pass - you'll be entitled to feel a little smug - you might even go as far as rejoicing with an "oh my prophetic soul!"


----------



## Colm Fagan

I did indeed see it.  Thought it was the most stupid thing ever.  
To be honest, I wouldn't like to see them going bust.  He truly is a visionary genius - and visionary geniuses do stupid things at times.   
That's the problem with shorts.  You're betting on something nasty happening to a company and the people in it.  I much prefer to be long on a share.  Then you want them to succeed.


----------



## Duke of Marmalade

Colm Fagan said:


> It's a long time since I studied Hamlet, but I still recall some of the better lines.


To short or not to short?


----------



## Colm Fagan

Nice one Duke!  
I flew out to the Canaries this morning, confident that my gains on Tesla during yesterday's session would pay for the holiday - and more.  Now I find all my imagined gains gone down the Swanee!  
Better start trying to sun myself!


----------



## Duke of Marmalade

Colm Fagan said:


> Nice one Duke!
> I flew out to the Canaries this morning, confident that my gains on Tesla during yesterday's session would pay for the holiday - and more.  Now I find all my imagined gains gone down the Swanee!
> Better start trying to sun myself!


Now I know why I invest in Prize Bonds.  I can enjoy my holidays


----------



## Colm Fagan

If I were depending on Prize Bonds, I wouldn't be able to take a holiday!


----------



## mtk

Not into cars myself but my mate bought a tesla  last year and got invite to factory in tilburg . Still raving about it. !


----------



## IdesofMarch

Duke of Marmalade said:


> To short or not to short?


To hedge or not to hedge, hedging is always best, especially when you are betting.


----------



## Gordon Gekko

Duke of Marmalade said:


> Now I know why I invest in Prize Bonds.  I can enjoy my holidays



And Bray isn’t the worst place in the world to be fair.




It’s the fourth worst.


----------



## mtk

Deleted


----------



## ballyb100

Well done Colm. I’ve really enjoyed this discussion and the openness you have offered about the shares.


----------



## Colm Fagan

Thanks bb.  
I thought I'd share with AAM contributors an exchange with a contributor on another forum, who asked if there was a different timeframe for short positions than for long positions.  Here was my answer:
_"You raise an interesting question about timeframes, which are very different for shorts than for long positions. If I have a long position in a company, I'm happy to keep it open forever; in fact, some of my long positions are over a year old. Dividends paid in the meantime are credited to the account. Generally, dividends are higher than the cost of the "borrowing" on the long position, so even if the price goes nowhere, you're winning. With shorts, you have to plan when to get out. The cost of keeping a short position open isn't high (at least not for the shorts I've initiated to date), but any dividends paid on the stock are debited to your account (needless to say, there's no risk of that with Tesla!). There is also the risk of a takeover, which could cause a massive increase in price, potentially wiping you out. That's a theoretical risk with Tesla, but most unlikely, IMO. One must be suitably humble however and remember that the market price of a stock represents the accumulated wisdom of experts, some of whom think it's undervalued, others that it's overvalued, so it doesn't pay to be too dogmatic in one's views!"_
I should add that I didn't mean to imply that a year is close to "forever" for holding a long position open!  I should have clarified that I've been active in the spread bet market for not much more than a year, and it took me a while to find the right strategy, which is "buy and hold" for long positions.  I have no intention of closing out the vast majority of my long positions any time soon.  A final comment of course is that spread bets, be they long or (more particularly) shorts, are definitely NOT for widows and orphans.  I had almost twenty years' experience of investing before I  ventured seriously into these instruments.  I'm still learning by the day.  Hopefully none of my future lessons will be catastrophically expensive.


----------



## mtk

Colm Fagan said:


> Thanks bb.
> I thought I'd share with AAM contributors an exchange with a contributor on another forum, who asked if there was a different timeframe for short positions than for long positions.  Here was my answer:
> _"You raise an interesting question about timeframes, which are very different for shorts than for long positions. If I have a long position in a company, I'm happy to keep it open forever; in fact, some of my long positions are over a year old. Dividends paid in the meantime are credited to the account. Generally, dividends are higher than the cost of the "borrowing" on the long position, so even if the price goes nowhere, you're winning. With shorts, you have to plan when to get out. The cost of keeping a short position open isn't high (at least not for the shorts I've initiated to date), but any dividends paid on the stock are debited to your account (needless to say, there's no risk of that with Tesla!). There is also the risk of a takeover, which could cause a massive increase in price, potentially wiping you out. That's a theoretical risk with Tesla, but most unlikely, IMO. One must be suitably humble however and remember that the market price of a stock represents the accumulated wisdom of experts, some of whom think it's undervalued, others that it's overvalued, so it doesn't pay to be too dogmatic in one's views!"_
> I should add that I didn't mean to imply that a year is close to "forever" for holding a long position open!  I should have clarified that I've been active in the spread bet market for not much more than a year, and it took me a while to find the right strategy, which is "buy and hold" for long positions.  I have no intention of closing out the vast majority of my long positions any time soon.  A final comment of course is that spread bets, be they long or (more particularly) shorts, are definitely NOT for widows and orphans.  I had almost twenty years' experience of investing before I  ventured seriously into these instruments.  I'm still learning by the day.  Hopefully none of my future lessons will be catastrophically expensive.


It's great to  see someone so knowledgeable who so aware of their strategies' limitations. Such self awareness is so often missing in the madness of crowds.


----------



## Colm Fagan

mtk said:


> It's great to see someone so knowledgeable


I don't feel knowledgeable at the moment, having decided not to close the Tesla short at the end of last month, when the share price was down to $266.   It would cost me almost $30 more a share to close it today, but I plan to leave the position open, at least until the results for 2017 are published early next month.  
I feel even less knowledgeable as I prepare for my next update, which (on current plans) will discuss a share that has turned out to be a disaster for me.  All will be revealed in a few weeks!


----------



## cremeegg

I once read an article in a local freshet, not the place you might expect original advice. It made the point that if you identify a share which is underpriced by the market, you must ask yourself, can you foresee a reason why the market will change its view and revalue the share. If the market undervalues the share today it may well still undervalue it next year as well.

Tesla is be overvalued on traditional metrics, may face a cashflow crunch, but that does not mean the market will abandon it.

There are a number of potential game changers that may alter Teslas position. Some _deus ex macina _may fund its cash needs for the next 5 years. Elon Musk may announce that he has developed a transformative battery. Tesla's value is built on hope. Not a wise thing to short in my opinion.


----------



## moneymakeover

There is the small matter of profits.

If a company makes them the share price goes up regardless of opinion.


----------



## cremeegg

moneymakeover said:


> There is the small matter of profits.
> 
> If a company makes them the share price goes up regardless of opinion.



My observation is has been that an unfashionable company can remain undervalued for an extended period of time. Equally a fashionable company can remain overvalued longer than seems reasonable. "The market can stay irrational longer than you can stay solvent."


----------



## Duke of Marmalade

Slightly off topic but a friend who is retiring is asking me how to invest her ARF.  I am reluctant to say mainly equities as I think we could be in a QE induced bubble.  Is advising a drip feed into the market over say three years to reduce timing risk good advice or just a cop out?


----------



## cremeegg

Well if you keep your own money in prize bonds, why would you advise your friend to invest in equities.


----------



## Duke of Marmalade

cremeegg said:


> Well if you keep your own money in prize bonds, why would you advise your friend to invest in equities.


A very good point.  I am extremely risk averse, currently in Nice Airport getting tanked up for my flight.
I suppose the fact that I have an adequate DB pension rather perversely means I don't need to take risks with my humble savings pot.
Being asked to advise friends on these matters illustrates the huge difficulties leading me to believe there is no such thing as the correct advice just the pointing out of the pros and cons of all the options.


----------



## Colm Fagan

Duke of Marmalade said:


> Being asked to advise friends on these matters illustrates the huge difficulties leading me to believe there is no such thing as the correct advice


Duke.  You're right about the huge difficulties, but I do think there is a solution.   Managing my own DC pension pot for the last 20 years and chairing a company-sponsored DC scheme for the last 6 years have given me a good understanding of the  huge challenges facing members of DC schemes, both before and after retirement.  Even though I consider myself fairly knowledgeable on financial matters, I too feel lost at times on how to address the trade-off between risk and return (and it is a real trade-off; there's no getting away from it).  God knows how people without a financial/ risk background can be expected to address the problem.  AAM readers will know my solution:  invest 100% (or more!) in equities.  I recognise that others won't share my risk appetite, yet their best hope by far of receiving an adequate income throughout their (hopefully) long years of retirement is to invest the absolute maximum possible in real assets - equities, property, and other assets with similar characteristics.  My recent paper to the Society of Actuaries, which I plan to reprise (with revisions to my thinking) to the Institute of Pensions Managers and to the IAPF over the next few weeks, proposes a resolution to the conundrum, to allow people with high levels of risk aversion to enjoy the long-term pay-offs from high levels of investment in real assets.  I published the proposals on the the AAM Pensions Forum for comment.  Any further comments will be appreciated.


----------



## Duke of Marmalade

Colm, what about drip feed to reduce timing risk?


----------



## elacsaplau

Colm Fagan said:


> I recognise that others won't share my risk appetite, yet their best hope by far of receiving an adequate income throughout their (hopefully) long years of retirement is to invest the absolute maximum possible in real assets - equities, property, and other assets with similar characteristics.




Colm,

In terms of income drawdown in retirement, if you have any evidence to support this statement, I'd love (and be amazed ) to see it.

In the U.S., others like Wade Pfau and M.McClung have produced very detailed research to the exact contrary.


----------



## Colm Fagan

Duke of Marmalade said:


> Colm, what about drip feed to reduce timing risk?


First of all, Duke, glad you survived the flight.  Another case of risk aversion overcome!  I'm a great believer in the adage "It's not timing the market that counts, it's time in the market."  Being out of the market is costly.   Having said that, I'm sure you can demonstrate that there's less risk by drip feeding.  It must be true.  As a stock-picker, my version of drip feeding is to put money into stocks that I expect will have low correlations in terms of exposure to specific markets, economic conditions, etc.


elacsaplau said:


> In terms of income drawdown in retirement, if you have any evidence to support this statement, I'd love (and be amazed ) to see it.


My evidence is my own research for the paper mentioned above. Importantly, my approach in its purest form involves pooling across generations and across market peaks and troughs (through smoothing), with a constant flow of new money and exits, although some limited analysis indicated that it also worked for single cohort entries.  The presentation, and the results of the analysis, are on the Society of Actuaries website.



elacsaplau said:


> In the U.S., others like Wade Pfau and M.McClung have produced very detailed research to the exact contrary.


I am not aware of the research you mention.  I'll try to get round to studying it sometime; won't be able to for a few weeks.  A key aspect of my conclusion is the assumption (realistic) that the withdrawals are taking place over many years (I assumed 5% per annum withdrawals from an initial investment) and that money is taken monthly (also realistic).  I don't know what time period (and time intervals between withdrawals) the researchers you quote looked at.


----------



## Duke of Marmalade

Well Colm I think my approach to fear of flying can be supported by rational argument.  I was running a 1 in a million chance of departing this mortal coil in that 2 hour flight.  When I multiply the utility at risk by 10^-6 I still get a very large number, but hey let's not get off topic.

My question on the drip feed is serious and I now recognise in myself that well worn criticism of financial advisors that they like to minimise their own risks of being seen to give bad advice.  If I advise "drip feed" then I I'm on a win-win situation - if markets go up, the client is happy that she didn't put it all in cash and if they fall  they see the wisdom of not plunging day one into equities.


----------



## elacsaplau

Colm Fagan said:


> My evidence is my own research for the paper mentioned above. .



Colm,

Your proposal involves a pooling approach which has many merits which I have already acknowledged elsewhere previously. However, my question was a specific reference to the high-lighted quote.

The statement I was questioning was about individual investment allocations. The very reason pooling has merits (apart from improved charges) is that it minimises investment and longevity risks. On an individual basis which is what we are talking about here and implied by your statement (the one that I was questioning), all-in equity is simply not the most effective strategy as certain individuals will, sooner or later, get clobbered by a sequence of return risk.

In my opinion, the evidence produced by the gentlemen referenced is both extensive and conclusive - hence the reason for stating that I would be amazed if contrary credible evidence is available. I have looked at this deeply and have never seen any credible contrary material.


Duke,

There are piles of analysis on averaging-in investing (DCA or ECA, if you will). Asset allocation and withdrawal strategy are the key as per material referenced earlier. I'd love to see credible Euro based comparative studies for many reasons!!


----------



## cremeegg

Duke of Marmalade said:


> Colm, what about drip feed to reduce timing risk?



You know the answer on this. You cannot time the market. Except of course when it is overvalued. Like now. Unless of course its not.


----------



## Colm Fagan

elacsaplau said:


> In my opinion, the evidence produced by the gentlemen referenced is both extensive and conclusive - hence the reason for stating that I would be amazed if contrary credible evidence is available.


As I said, I haven't studied their work.  I am satisfied however that the approach I proposed (which involves smoothing across time and across cohorts) allows 100% investment in suitably diversified real assets.  I'm out of commission for a few days from tomorrow.


----------



## elacsaplau

Colm,

In the context of this discussion, your comments which I high-lighted in post 200 have/had a definite implication/inference at individual investor level. I believe these comments to be simply incorrect and provided extremely reputable supporting sources. Larry Swedroe is another who has much useful material in this context also. For many reasons, I'd love to be shown contrary evidence. If credible contrary evidence does exist, I'll be beyond gracious in my acknowledgements!

This has nothing to do with your pooling proposals which as I have said have many merits!


----------



## moneymakeover

When you say a mix between bonds and equities is recommended, can cash substitute for bonds?

I agree it seems risky to have 100% allocation of equities. 

It seems obvious that's risky.


----------



## moneymakeover

A quick read of an interview with Pfau demonstrates the value in having a percentage in an annuity
In the event that a person lives a long time the annuity continues to pay. It's a pooled bond that had advantage when one lives a long time.

So back to question asked by Duke
How about 25% into annuity
And then drip feed the 75% into equities over say 5 years

At that rate year 1 25% annuity 15% equity
Year 2 30% equity
Year 3 45% equity
Year 4 60% equity
Year 5 75% equity


That doesn't account for withdrawals


----------



## elacsaplau

Duke,

I've been thinking about your question.

If I was going to an adviser, what I'd like to now is:

1. What is the asset allocation that has best chance of success?
2. Do I immediately place funds on this basis or do I average in?
3. What is the withdrawal strategy - i.e. from which asset classes?
4. How is the portfolio balancing done?

My contention is that for the *individual or individual couple* (for the avoidance of doubt I needed to mention this ) that these are the right questions! There's a whole branch of finance that examines this question in the U.S. generally referred to as safe withdrawal* rates - I am unaware of any publicly available comparative evidence-based studies in Euroland. It will be interesting to get the comments on this from the financial planners within the AAM community.

The bottom line is that a couple, both aged 60, seeking an annuity with 100% reversion and a modest enough 2% escalation rate, would receive an initial annual income of just over 2% according to the Irish Life calculator just now. That is - for a million Scooby-doos, the annual pension is €20,280 - which is highly unattractive in my opinion.

There must be a way to improve on this - whilst restricting "bomb-out" risk to the absolute minimum. When minimising bomb-out risk is a concern, a 100% or a 100% plus! return seeking asset allocation is just not a good idea.

*not to be confused with family planning, Irish-Catholic style!!


----------



## Duke of Marmalade

elacsaplau said:


> Duke,
> 
> I've been thinking about your question.
> 
> If I was going to an adviser, what I'd like to now is:
> 
> 1. What is the asset allocation that has best chance of success?


Thanks for the comprehensive reply _elac_.  I too have been playing with the Irish Life annuity calculator and your example is very close to that of my friend. Yes annuity rates are awful.  But the problem with this question is what does it mean?  Investing in emerging markets may have the best chance of success but it also has the "best" chance of failure. My initial thoughts are to "advise" some balanced passive fund, possibly with global diversification.  Having said that I think any investment in govies at these levels is very bad value.


elacsaplau said:


> 2. Do I immediately place funds on this basis or do I average in?


That's the question I am currently grappling with.  I think averaging in reduces timing risk for her and for me as her "advisor". Referring to an earlier comment I think "sequencing of return risk" is mainly concentrated in the early years.  If you get off to a good start you are reasonably protected against future bad runs in the market.


elacsaplau said:


> 3. What is the withdrawal strategy - i.e. from which asset classes?
> 4. How is the portfolio balancing done?


I envisage only one asset class so these questions become redundant.

On annuitisation I feel fairly confident in saying not now.  But maybe at age 75 some annuitisation should be considered.  At that age the mortality kicker is greater than the additional return you might expect from investing in equities.  The point about insuring longevity risk is it can be deferred unlike other risks such as mortality or health where you might defer it till it becomes an uninsurable risk.


----------



## elacsaplau

Excellent observations, Duke.

I am hosting lunch today - seemed like a good idea at the time! - so I better get the shrimp on the Barbie prompto. There's a lot in it - arguably deserving of its own thread so we don't bring Colm's thread off on a tangent - albeit an important one.

So a few comments for now:

1. Kick the tyres on the material produced by the three guys I referenced last night - you'll enjoy it - there's some smart thinking therein!

2. Your comments on "emerging markets" (and by extension return seeking assets generally) are spot on - generally will provide the best outcome but in this case, generally ain't good enough (until Colm's "pooled" solution gains traction.......this stuff is highly personal!)

3. Similarly, Euro-govies are really problematic in translating the US research to the Irish ARFer / income drawdowner.

4. Agreed that "sequencing of risk" is significantly skewed in its impact on the early years (_tús maith leath na h-oibre_ and all that).

5. I need to consider the bit about one asset class. [Presumably, if your pal is in a balanced fund - there's more than one asset class? The research I referred to is very interesting and it involves having different pots of return seeking and defensive assets and examines the optimal basis for withdrawing funds. I honestly never thought about how this applies in a "balanced" fund environment which is pure dumb of me. I need to think about the implications of this.]

6. Regarding annuitisation - fair comments. Just to add - I remember reading (some time ago so I'm a little hazy on the detail) a pretty convincing analysis by Larry Swedroe as to why deferred annuities are a very valuable tool for the "healthy" retiree (i.e. one buys an annuity at say age 60 that only starts paying out from age 75 or something.) The idea being that a % of one's retirement fund is allocated to such a product. [Interestingly, a bit of an overlap here with Colm's pooled solution!]

It goes without saying that US annuities are way higher than ours anyway due to the difference in sovereign yields. There is no such product available in these shores - unless something has changed very recently.


----------



## Duke of Marmalade

Upon mature reflection drip feeding is illogical.  After the end of the drip feeding period you are right back where you started.  Transaction costs aside, you still have the choice of being fully invested, fully in cash or somewhere in between and if drip feed was the right choice in the beginning then cash in and drip feed all over again is the right choice at the end of the period.  Of course you might think current markets are artificially high, as I do, but that inexorably says don't go in yet, wait for the correction.  However, it would be hubris on my part to give that advice to my friend.  This is difficult


----------



## elacsaplau

Duke,

Where's the money coming from? - as in is it from a DC arrangement or what? [Where money is coming from a DC arrangement, in the "normal" scenario, averaging-in would not be a particular issue because the money has already been invested. Make sense?]


----------



## Duke of Marmalade

elacsaplau said:


> Duke,
> 
> Where's the money coming from? - as in is it from a DC arrangement or what? [Where money is coming from a DC arrangement, in the "normal" scenario, averaging-in would not be a particular issue because the money has already been invested. Make sense?]


No it's from a DB arrangement.


----------



## Colm Fagan

elacsaplau said:


> Colm,
> 
> In terms of income drawdown in retirement, if you have any evidence to support this statement, I'd love (and be amazed ) to see it.
> 
> In the U.S., others like Wade Pfau and M.McClung have produced very detailed research to the exact contrary.



I’ve now had a chance to look at Wade Pfau’s conclusions.

First of all, we are comparing apples and oranges:  my proposed approach differs in a number of key respects from the approach described by Wade Pfau so his conclusions cannot be used to draw any conclusions from the work I’ve done.  I think I’ve explained my approach in some detail, and I stand by my statement, as quoted by you in post #200 on this thread.  If you disagree, let me know which of my conclusions/ assumptions you don’t accept, and we can take it from there. 

In this response, I would like to focus exclusively on Wade Pfau’s work and explain why I have serious reservations about his methodology and conclusions.  In a nutshell, he takes a highly theoretical approach, which ignores the reality of stock market investing. 

To keep things simple, I’ll just focus on the scenario where he assumes 100% investment in equities (he also looked at bonds and bills, in varying percentages for all three). 

He assumes 100% of the money is invested in the index at the outset.  Then 4% (or whatever) is withdrawn each year by cashing the required number of units.  Taking this approach, he found that the money ran out in a significant proportion of past time periods. 

Let’s look at what this means for a real-life portfolio invested in equities, not his artificial construct. 

1.  He assumes that every single cent is invested in equities at the start, with no cash being retained in the fund.  This is wrong (but it’s only a minor mistake).  Every equity fund has a small liquidity element, probably less than 5%.  This cash element will in practice be used if needed to meet withdrawals in the first few months.  As we shall see later, however, it may not even be needed.  If the liquidity in the fund is used to fund “income” payments, it will have to be replenished to ensure the liquidity level never falls below (say) 1%.

2.  He assumes that all dividends are reinvested immediately, even if the equities thus purchased are sold again within minutes to fund “income” requirements.  That’s a ludicrous assumption.  If someone is taking a constant “income” from the fund, they will hoard whatever dividends they’ve received until the next “income” payment is due, thus reducing the number of shares that need to be sold to fund the regular outgo.

3.  Much the same is true for stock turnover within the fund.  The mechanics of this depend on whether the fund is being managed actively or passively.  Let’s assume it’s being managed passively (the argument is even stronger for an actively managed fund).  Some people think that a passively managed fund has little or no stock turnover.  That’s what’s implied by the term passive.  It’s far from the case.  A passive fund must track the index, so if a stock is removed from the index, the fund must sell the shares in that particular stock and buy ones in the stock that replaces it in the index.  Similarly, a share buyback, which reduces the number of shares in issue, requires a passively managed fund to sell some of its holding of that share.  The opposite is true for rights issues, or IPO’s.  As an aside, managers of passive funds objected to Mifid II’s decision to include the costs of these purchases and sales in the costs of such funds.  Here again, Mr Pfau in his wisdom assumes that, if a company is removed from the index, the fund will sell shares in that company, then buy the shares in the company that replaces it in the index and immediately sell those shares again to pay the “income” to the beneficiary.  Very intelligent behaviour, I don’t think.  In real life of course, when the fund sells the shares in the company that has been removed from the index or that has completed a buyback, it will not reinvest if it needs the money to pay an “income” to beneficiaries (assuming it’s already used up dividend receipts and hasn’t enough cash for the “income”).  In fact, rebalancing is much easier in a fund where there is a continuing flow of new money or a regular outflow than where there is no net change in the money invested in the fund.

4.  He assumes that the investment strategy for a fund devoted exclusively to paying a continuing regular income to beneficiaries is exactly the same as for a fund with no requirement to deliver a regular “income”. Once again, that is completely unrealistic and artificial.  I’ve looked at my two biggest portfolios to explore the truth or otherwise of this assumption.  One of the portfolios is my ARF, from which I am required by law to take an “income” of 6% every year.  The other is the home for the proceeds from selling my shares in the business where I once was a major shareholder. I don’t have to take an “income” from that portfolio.  Both portfolios are invested virtually 100% in equities.  I decide the equities to hold in both portfolios.  The average dividend yield on the portfolio from which I must take 6% per annum is *more than three times the dividend yield on the portfolio from which I don’t have to take a regular income*.  The average dividend yield on the two portfolios combined is probably not too far off the average dividend yield for the index.  I would think my experience is not untypical of the market. 

5.  I’m sure there are other artificial assumptions that I haven’t considered.  For example, it’s likely that Mr. Pfau assumes that “income” is taken in one lump sum at the end of each year.  In real life, income is taken gradually throughout the year.  This assumption probably has a significant impact on the conclusions. 

What do these differences mean in practice.  I don’t know.  I can only relay my own experience.  My ARF has been in drawdown since 2010 and I don’t recall a single instance of having to cash an investment to meet the “6% income” requirement.  Note that I’m NOT saying that the fund returned more than 6% each year.  No.  I’m only saying that the 6% “income” requirement each year was met by a combination of dividend receipts, or temporarily allowing the level of liquidity in the fund to fall, or holding back proceeds from selling stocks that I’d gone cold on instead of reinvesting the entire proceeds in stocks that I preferred at that time.  There was also an element of timing when I took the “income”, i.e. I didn’t take it on the same date each year; instead, I took it when I thought the time was opportune.  That safety valve wouldn’t be available to a professional manager who promised to deliver €X per month to a beneficiary, but it hasn’t played a significant role in the end result of not being forced to sell investments to meet the income requirement.  The consequences for Mr Pfau’s conclusions don’t need to be spelt out. 

Let me know if you still believe Mr Pfau. 

I will reiterate what I said at the start, that my proposed approach is quite different.


----------



## elacsaplau

Colm,

Is there a certain amount of times that I need to say the same thing?

Let's start by agreeing - I too think it's a mighty fine idea not to conflate apples and oranges. However, how we apply this belief in practice seems to differ somewhat. Here's my sense of the recent twist in this debate. I'll admit to getting very trigger happy with the quote function....

1. The venerable Duke asked a question about the asset allocation strategy of his friend (singular/solo/individual, etc,). It was a query at the individual level and not a question in relation to your pooling proposal. Let's call it a query in relation to *apples.*

2. You replied


Colm Fagan said:


> I recognise that others won't share my risk appetite, yet their best hope *by far* of receiving an adequate income throughout their (hopefully) long years of retirement is to invest the absolute maximum possible in real assets - equities, property, and other assets with similar characteristics.



I took this, as mentioned previously, as a comment in relation to the Duke's query about the individual - a reply about _*apples*_

3. I questioned this comment because I have seen piles of research saying exactly the opposite to your assertion.



elacsaplau said:


> In terms of income drawdown in retirement, if you have any evidence to support this statement, I'd love (and be amazed ) to see it.
> In the U.S., others like Wade Pfau and M.McClung have produced very detailed research to the exact contrary.



I was talking about _*apples*_.

4. This was met by your response:



Colm Fagan said:


> My evidence is my own research for the paper mentioned above. Importantly, my approach in its purest form involves pooling across generations and across market peaks and troughs (through smoothing), with a constant flow of new money and exits, although some limited analysis indicated that it also worked for single cohort entries.



In other words - for some reason in post 201, in response to my question about apples, you started to talk about your pooling proposals - let's enjoy ourselves and call this a reply about *oranges.
*
5. I politely tried to get the debate back on track and in my next post (203), I again clarified in an attempt to avoid the confusion:



elacsaplau said:


> Your proposal involves a pooling approach which has many merits which I have already acknowledged elsewhere previously. *However, my question was a specific reference to the highlighted quote.*



........where the highlighted quote was in relation to the statement that you made as set out in point 2 above.

In other words, I was asking can we stay talking about *apples not oranges* please.

I thought that that should clarify things!

6. In your next post 205 - guess what?



Colm Fagan said:


> I am satisfied however that the approach I proposed (which involves smoothing across time and across cohorts) allows 100% investment in suitably diversified real assets.



Hey - you're back on to *oranges* again?

7. At this stage, I'm beginning to wonder what form of words, if any, I can use to politely keep everyone on the same page - so I go with:



elacsaplau said:


> In the context of this discussion, your comments.........
> *This has nothing to do with your pooling proposals which as I have said have many merits!*



A desperate imploration for you to stay with *apples*

********************************
*
So when I saw your post just now - with a "first of all, *we* are comparing apples and oranges".......I just laughed and cried.........This is getting old! It's just too hard work! 


My energy to debate this further has pretty much all but evaporated. At the outset, I was simply asking you whether you had any credible evidence to support your original assertion (i.e. the one that I challenged as per point 2 above).

I continue to wish you good luck with your pooling proposals, your beloved *oranges*. Also, I think there may be merit to some of your criticisms of Wade's methodology in his study of *apples *but my sense is that his central thesis remains valid. As a by the by, have the Society of Actuaries in the Ireland or the UK done anything on this particular question? If yes - what does it say? If not - that would be somewhat curious.

I know I'm giving you a little hard time - but I must admit to finding the oranges/apple thing a little irritating. Also, you are a thought leader and many people will be influenced by you and some will just follow you. Personally, I remain of the view that your recommended asset allocation is certainly far from being "by far" the best solution to minimising bomb out risk! Frankly, your personal experience over the last eight years does not provide me with sufficient comfort - not the most robust stress test!

The point of all the US studies that I have seen is that all-in equites is akin to the old adage of generally working very well but not working for "all of the people all of the time". Also, withdrawal rates are a very important part of the equation.

Just to be clear - what I'm talking about is a Japan style melt-down or worse. It may never happen but it could might and then, as Mr. Buffett reminds us - it's only when the tide goes out....

Oh - ar eagla le h-eagla - in the last few paragraphs I've been talking - almost exclusively about granny smiths again!! Nobody can blame me for mentioning this, right?!


----------



## Colm Fagan

What did I do to deserve this?
I now gather that you're taking issue with my statement "...their best hope by far of receiving an adequate income throughout their ...  retirement is to invest the absolute maximum possible in real assets ..".  That's not an opinion; it's a fact.  If we define "an adequate income" as around 4% per annum (real), then an investor has zero chance of achieving that income in retirement if they invest in cash (currently yielding around zero) or bonds (highest Eurozone bond yield less than 1.5% per annum).  Their only chance is to invest in real assets (property, equities, etc.), which have an expected real return north of 4% per annum.  The chances of receiving that income throughout retirement are less than 100%, due to the sequence of return risk and the risk that the expectation of greater than 4% will not be realised.  I never said it was 100%; I just said it was their "best" chance.  Given the opposition from bonds and cash, "best" means anything above zero.   While it's not 100%, I'm sure you'll agree it's above zero.  
Have I now given the answer you've been asking for?
You made a big issue about work completed by the various authors quoted. 


elacsaplau said:


> others like Wade Pfau and M.McClung have produced very detailed research to the exact contrary





elacsaplau said:


> the evidence produced by the gentlemen referenced is both extensive and conclusive





elacsaplau said:


> I believe these comments to be simply incorrect and provided extremely reputable supporting sources.


I put in some effort to understand what they were saying and to set out my disagreements.  Given the reaction, I'm sorry I made the effort.  
As a final comment, I enjoy engaging with contributors on technical questions.  I have no time for contributions that do nothing to advance our understanding of the issues.


----------



## elacsaplau

Two final observations - then I will need to park this for a few days to do other stuff.

1. ARFs were introduced in Ireland in 1999. I haven't done the back-testing since then but I'd be amazed if someone with an 80/20 (equity/bond) mix hasn't done better in financial terms than someone with a 100% equity allocation - if using sensible withdrawal strategies, rebalancing methodologies, etc. as described by say McClung in his excellent book "Living off your Money". [As a by the by, their emotional well-being is likely to be substantially better - all other things being equal - but hey, lets not go or introduce bananas at this stage! Associated with this, they would also be likely to have a substantially reduced risk of making behavioural finance errors like bailing when the waters get choppy!]

2. There is a very practical side to my original question. A couple, at the point of retirement with fund of €1m invested on a 80/20 equity/bond split, go to see their financial adviser.

I think we can all agree that asset allocation is the primary determinant of investment performance - so the couple ask the adviser - what is the optimal asset allocation for us in retirement where our objective is to minimise bomb-out risk but still have a substantial exposure to equities? [This is turn could lead into discussions about effective withdrawal strategies, re-balancing, etc.]

And so the real question becomes........*how would an adviser in Ireland answer this question and what evidence exists to support such advice?* I'd really love to know how the adviser community addresses this question in practice now - if indeed it is addressed at all in such terms!!


----------



## elacsaplau

Colm,

Our posts crossed.

You seem to continue to misunderstand the point I was making. I give up. The points about 100% bonds/cash in your latest post are silly. None of the research is suggesting this and this is just another example of you writing about something I haven't said. The bulk of the research is that high equity allocations is very good. There is a difference between high and 100%! Why do you think Buffett gave a 90/10 instruction for his legacy assets?

We had similar nonsense in another thread which I previously highlighted to you.

Let's not get so defensive - in essence I asked you to produce evidence to support a statement that you made. I have seen none!!


----------



## Colm Fagan

I too give up.  I said "the maximum possible".  That doesn't necessarily mean 100%.  The calculation of "the maximum possible" should take whatever constraints there are into account.
In relation to constraints and the debate about percentages to invest in various assets, I have a real problem with people using the term "equities", as if all "equities" were homogeneous.  As you know, I'm a stock-picker, and every individual stock in my portfolio has its personal attributes, which make it different from other "equities".  For example, one of my holdings is a company that owns a big shopping centre and a range of other office and retail properties.  It's trading at about 75% of net asset value.  That can be considered a property investment.  Another of my holdings gets a regular stream of income from a very secure asset and pays a dividend of around 7% per annum.   That is my "bond" proxy.   Needless to say, Renishaw is a different kettle of fish again.  They are very disparate businesses, with very different prospects in different economic conditions.  I have very little time for theoretical claptrap that considers them as a single entity.


----------



## Colm Fagan

elacsaplau said:


> ARFs were introduced in Ireland in 1999. I haven't done the back-testing since then but I'd be amazed if someone with an 80/20 (equity/bond) mix hasn't done better in financial terms than someone with a 100% equity allocation -


Assertions like this frighten me.  The main reason for the good performance of bonds since 1999 is because yields fell dramatically.  Part of the return came from eating the seed-corn, which is all the more reason why someone investing in bonds now is condemned to a lousy return.  In other words, good past returns on bonds is precisely why they're such bad prospects for the future.


----------



## elacsaplau

Colm Fagan said:


> *AAM readers will know my solution:  invest 100% (or more!) in equities.*  I recognise that others won't share my risk appetite, yet their best hope by far of receiving an adequate income throughout their (hopefully) long years of retirement is to invest the *absolute maximum possible* in real assets - equities, property, and other assets with similar characteristics.



Colm,

This is the relevant post. Sure the maximum possible does not mean a 100% equities. It's kind of implied, though, at least to a considerable extent by the previous line - as bolded above. Nonetheless, in case there was doubt in my understanding of what you were saying, I mentioned a few times "all-in" equities!! To me - "all-in" equities has a very definite meaning. Anyway, I can't allocate any more time to this now and do not wish to engage in any further I said/you said. That would just be silly.

I agree with you that the substantive issue is what is important and regret the turn this thread has taken. I just asked a simple question at the outset. Re-reading the thread, I am happy that my question and attempts at clarification were clear. Let's just leave it at that please!

I need to leave this debate to others for a few days now - else my own retirement will arrive sooner than anticipated! *Hopefully, the adviser community in Ireland will comment on how they address the optimal asset allocation for retirees and what data informs such advice. *For the avoidance of doubt, I understand different retirees will have different risk tolerances so I get that it's not a one size fits all. 

I have just seen your comment on ARFs - I am not going to comment further other than to say that I have mentioned earlier how tricky the optimal asset allocation is in the Irish context given current levels of Euro sovereign yields. I really do need to go now and will not reply further......at least for a few days!!


----------



## Duke of Marmalade

I am not sure how useful this percentage game is.  Of course the best chance of getting more than 4% p.a. is equities.  The best chance of getting more than 20% p.a. is 80% geared emerging markets.  The best chance of getting more than 0% p.a. is cash.

This is really a utility play.  At its very simplest we might be comparing an annuity guaranteeing 20K p.a., a cash dominated ARF guaranteeing 10K p.a. but with flexibility and inheritance potential or an equity dominated ARF with expectation of 20K p.a., same flexibility but chance of bomb out or reduction to peniary at some stage.  

The utility function will be driven by many personal considerations and of course if the fund is 5 times bigger than implied in the above example the same utility calculus will lead to a different strategy.


----------



## Colm Fagan

Hi Duke
Thanks for bringing the discussion back to sanity.  To expand on your post, different people can take wildly differing approaches if available assets are more than sufficient.   At one extreme, someone with a good DB pension and a low risk appetite will invest their additional savings carefully, to ensure there will always be something in reserve.  I'm at the other extreme.  I have a high risk appetite.  For me, any additional savings over and above those required to provide a reasonable income for me and the other half allow me to take a higher risk approach with my entire pool (including the ARF).  OK, if things go belly up, I'll lose the excess, but I still hope to have enough in the ARF, by changing to a more conservative investment strategy.  This explains my personal (very personal) decision to invest more than 100% of my entire funds in equities - and to take some short positions.


----------



## Colm Fagan

Here is my latest diary update, which tells a tale of woe!
*
Diary of a Private Investor  Update #3  8 May 2018*

Stock pickers love regaling us with stories of their coups, of the shares they bought that are now worth many times what they paid for them originally.  They seldom tell us of their clangers, of the shares that have fallen in value since purchase.  I now understand their reticence to admit mistakes.  It is painful to recall one’s failures for posterity.

I bought shares in WPP, the advertising group, in March 2017, at £17 a share.  They seemed good value at the time.  The yearly dividend was 56.6p, so the dividend yield was 3.3%.  Diluted earnings per share were twice that, at 113.2p a share, and had increased by an average of more than 14% a year for the previous seven years.  The company planned to continue paying half its earnings in dividends in future. 

My aim is to get a 7% per annum return on my investments.  A dividend yield of 3.3% meant that earnings only had to grow by 3.7% a year for the return on my WPP investment to exceed my target, assuming I held the shares forever.  I had no intention of holding the shares forever.  The sums get complicated when we allow for sale at some future date, but the basic principle is that I would earn more than 7% a year if the dividend yield at time of sale was less than 3.3% and less than 7% pa if the dividend yield at time of sale was more than 3.3% – all on the assumption that earnings (and dividends) grew by an average 3.3% per annum during the holding period. 

There were a lot of “if’s” in this.  The first was the assumption that earnings would grow by 3.3% pa on average.  Like other advertising agencies, WPP faced challenges on several fronts.  Facebook and Google were grabbing a bigger share of advertisers’ spend, sometimes bypassing the agencies entirely; major advertisers such as Proctor & Gamble (makers of Gillette, Crest, etc.) and Unilever (Ben & Jerry, Dove, etc.) were making big cuts in their advertising budgets, largely at the behest of activist investors.  I was aware of those threats, but the prospects for global growth were good and I believed that the big agencies could keep growing, albeit at a slower pace than previously. 

By June 2017, the share price had fallen to £15.49 a share.  I still believed in my original investment thesis, so I topped up my holding by about 50%.  WPP was now my sixth largest exposure in a highly concentrated portfolio (my two largest holdings each account for well over 20% of my equity exposure).

The price kept falling through the summer and I started to go cold on WPP.  On top of the challenges outlined above, consulting firms such as Accenture and Deloitte were muscling in on areas that were formerly the preserve of the established agencies and were taking business from them.  I sold a small portion of my holding in August at £14.23 a share and resolved to sell the rest on any sign of a rebound in the price. 

There was no rebound.  I kept revising downwards the price at which I was prepared to sell, but the price kept falling faster than my lowered expectations. 

Results for 2017 were released on 1 March 2018.  Growth in Diluted Earnings per share was 6.4%, ahead of my 5% target, as was the dividend increase of 6%, but the management statement accompanying the results was downbeat and the shares fell 8.2%, to £12.60.  Then, on 3 April, came a bolt from the blue.  The Board announced that Sir Martin Sorrell, WPP’s chief executive and guiding light ever since he founded the business 33 years ago, was being investigated for alleged “personal misconduct”, adding that the amounts involved were not material to WPP.  I couldn't believe it.  This was the same man who had been pilloried by shareholders and press a couple of years previously for his exorbitant pay packet of £70 million.  Was he trousering more of the company’s money to top up his pay packet?  Maybe the competitor who famously called him an odious little This post will be deleted if not edited to remove bad language some years ago had the measure of the man known in some quarters as the Napoleon of the ad industry, presumably because of his stature and his ambitions for global domination.  Sorrell resigned shortly afterwards, and the Board dropped its investigation, much to the chagrin of some shareholders, myself included. 

The price dipped briefly below £11 a share.  Like a rabbit caught in headlights, I didn’t know whether to stay or run, eventually doing a bit of both:  I sold about 30% of my holding on Friday 27 April, at £11.48 a share, only to regret it almost immediately:  the share price rebounded strongly to £12.45 on the Monday, when results for the first quarter of 2018 were announced.  My only consolation was that I hadn’t sold the lot at the lower price. 

This morning (8 May), the price had risen further, to £12.82 a share.  The prospective dividend for the current year is 60p, implying a dividend yield of 4.7%.  Despite the attractive yield, I have lost faith in the company.  I sold the rest of my holding at this price, bringing the curtain down on my short but costly relationship with WPP.


----------



## Brendan Burgess

Very interesting Colm.  

You bought at £17 and sold at $12.82 - it's only a 25% fall, reduced by dividends.  So it's hardly a tale of woe. 



Colm Fagan said:


> The yearly dividend was 56.6p, so the dividend yield was 3.3%. Diluted earnings per share were twice that, at 113.2p a share,



I don't understand that.  I don't do fundamental analysis, but I thought that the diluted EPS meant what the EBS would be if more shares were issued through stock options etc.  Should the diluted EPS not be lower than the undiluted EPS? 

Brendan


----------



## Colm Fagan

Brendan
I've only got a minute, so a very quick reply.  I was talking about dividends and earnings, not diluted v undiluted earnings.  You're right about undiluted v diluted EPS.  I hope to come back later with a fuller reply, as there are a few wrinkles in it.
Colm


----------



## ThirstyLizard

Colm Fagan said:


> My aim is to get a 7% per annum return on my investments.



May I ask what your criteria is when deciding to invest while aiming for the 7% return goal? 

Is it a mixture of dividends (what's your min divy return?), capital gain, trading?


----------



## Colm Fagan

Brendan Burgess said:


> You bought at £17 and sold at $12.82 - it's only a 25% fall, reduced by dividends. So it's hardly a tale of woe.


It's bad when you're going through it.   A significant proportion of my investing is on a leveraged basis, so I avoid really high risk shares.  That was my worst experience in a long while. 


Brendan Burgess said:


> but I thought that the diluted EPS meant what the EBS would be if more shares were issued through stock options


Yes, you're right.  They also bring in a concept that they call "headline diluted EPS".  I think the word "headline" is meant to be the "real" figure, which removes as many of the distortions as possible.   I was happy to use it as the headline diluted EPS (120.4p) was lower than the diluted (basic) EPS (142.4p).  Also, as you surmised, the diluted basic EPS (142.4p) was lower than the (undiluted) basic EPS (144p).  All these figures are for 2017.  The figures you quoted for 2016 were the dividend (56.6p) and the diluted headline EPS (113.2p).


ThirstyLizard said:


> May I ask what your criteria is when deciding to invest while aiming for the 7% return goal?
> 
> Is it a mixture of dividends (what's your min divy return?), capital gain, trading?


I don't buy into the "value" versus "growth" school.  I just buy shares that I think will deliver my target rate of return in the long-term. I don't give a damn how that return is obtained, from dividends or capital gains or a combination of the two.  For tax reasons, the high dividend payers are more likely to be in my ARF and the low dividend payers in the non-exempt account.  For example, Ryanair is one of the shares in my portfolio.  They don't (normally) pay a dividend, but they use their spare cash to reduce the number of shares in circulation.  I complete a variation of the WPP type calculation of expected return when I'm analysing companies like Ryanair that rely heavily on share buybacks.
The 7% figure was just pulled out of the air (not where David Drumm pulled his figures from!).  Actually, that's not true.  There is some logic in how I derived it.  I'm a firm believer in the equity risk premium.  I believe it's about 5% a year.  Add 5% to a reasonable long-term risk-free return of 2% and we get 7%.   One corollary of this is that I don't have any bonds in my portfolio, as they can't deliver 7%.  If I included bonds, I'd have to look for more than 7% from some of my other holdings.  Some shares don't deliver, but for every WPP there's another that has delivered more than the 7% over a long period.   I'm not complaining.  Of course, if there's an Armageddon, I'm sunk!
And finally, in answer to your "trading?" question, I am a firm believer in a buy and hold strategy for my long positions.  I plan to do a piece sometime on my turnover rate.  It's miniscule.  Short positions are a different kettle of fish.


----------



## mtk

Colm Fagan said:


> What did I do to deserve this?


you joined askaboutmoney!


----------



## Colm Fagan

I'll survive!!!


----------



## Colm Fagan

*Diary of a Private Investor    Update #4                        11 June 2018
Man overboard but shipwreck averted*


May: what a month!

In brief, excellent results for two of my long-time favourites, Renishaw and Apple, were almost undone by a near disaster on another of my holdings, Samsonite.

Renishaw is my only ten-bagger.  My first investment in the company was 20 years ago, at £4 a share.  The price is now more than ten times that – with the bonus of regular dividend income landing in my bank account every half-year in the intervening period.  Over the 20-year period, I’ve used temporary price dips to increase my holding, to the stage where Renishaw now represents more than 25% of my gross portfolio before borrowings, a significantly higher percentage of the portfolio’s value net of borrowings. 

Every year, in May, the company hosts an Investor Day, at which it showcases its latest inventions.  I enjoy attending these events, which are normally held at the company’s Head Office in rural Gloucestershire, to meet with the Board and management and with other long-term investors.  Unfortunately, other commitments meant that I was unable to attend this year’s event. 

A stockbroker’s report landed on my desk a week before this year's Investor Day, with a “sell” recommendation on Renishaw.  After reading the report, I concluded that the analyst had underestimated the company’s prospects in key growth areas, particularly in additive (3D) manufacturing, so I decided not to act on his recommendation.  My faith in the company was rewarded:  the market liked what it heard on Investor Day and the share price increased by almost 15% in the month, to £53.80 by month end.  Renishaw’s performance alone caused an increase of almost 6% in the value of my total (net) portfolio in the month.

Apple Corporation is another of my long-time favourites.  I took my first bite in December 2012 at $73 a share (the actual share price at the time was $511 but a share split gave me seven times as many shares).  It now represents close to 9% of my gross portfolio.  The share price increased 13% in May, to almost $187 by month end, contributing another 2.3% to overall portfolio performance. 

With Renishaw and Apple performing so well, and others of my top holdings not doing badly either, May was heading to be one of my best months ever, with total growth of more than 9%.  Then disaster struck. 

The first inkling of trouble came before European markets opened on the morning of 24 May, as I was preparing to head off to the US on holidays that day.  I received a notification that Samsonite’s share price had fallen more than 10% in overnight trading in Hong Kong, with the additional bad news that trading had been suspended mid-morning, but that it would reopen the following morning.  I discovered later that a short-seller had accused the Board and management of questionable accounting practices and poor corporate governance and claimed that the company was only worth HK$17.59 a share, almost 50% less than the prevailing valuation.  I had a sizeable long position in Samsonite and a 50% price fall could cause the total value of my portfolio to fall by more than 7%, wiping out most of the gains in the month on my other holdings.  I was worried as I headed through US Immigration Control at Dublin Airport. 

On the other hand, why should I believe a short-seller who was out to make money by causing a sharp fall in the share price? 

I pondered my options as the plane passed over Greenland.  I purchased some in-flight Wi-Fi, looked again at the latest set of accounts, and eventually decided to part with just 11% of my holding, and to hang on to the other 89%, in the hope of eventual recovery.  The partial sale went through the following morning (Hong Kong time) at $27.06 a share.  Then, at the end of the day, trading in Samsonite was suspended again – at HK$26.51 – and remained suspended for the rest of the month.

Days went by with no meaningful response from the company to the short-seller’s allegations.  The longer the delay, the more I regretted not offloading my entire shareholding when I had the chance.  May 31 came and went; still no reply.  At what price should I include the remaining Samsonite shares in my end of month portfolio valuation?  If the company didn’t come up with a satisfactory response, the true value could be considerably less than the HK$26.51 at which they last traded.  Lacking any better information, I decided to include them at this price in my valuation.  This resulted in an overall portfolio gain for the month of 5.2% – a great result in the circumstances, if I managed to avoid a meltdown in the value of my Samsonite holding. 

Finally, the company issued a statement on the morning of June 1, the day before I was due to come home from my vacation in Charlottesville and Washington.  The market decided that the responses to the short-seller’s allegations were satisfactory and the share price jumped more than 10%, but not quite back to its level before the report was issued.  I was relieved that my decision to hang on to the bulk of my holding had been vindicated. 

As far as I can gather, the only serious casualty from the entire affair was the Chief Executive, who had apparently claimed on occasion, or had allowed others to believe, that he had a doctorate when he hadn’t.  He wasn’t the first and definitely won’t be the last senior executive in an organisation to embellish their CV.  He resigned as CEO and from the Board, to be replaced by the Chief Financial Officer. 

For me, the close shave has caused me to reconsider aspects of my approach to investment.  More will be revealed in due course on the outcome from those deliberations.


----------



## Gordon Gekko

Hi Colm,

Does it not illustrate the perils of your concentrated approach?

Gordon


----------



## Colm Fagan

Gordon Gekko said:


> Does it not illustrate the perils of your concentrated approach?


Samsonite illustrate the perils of a concentrated approach; Renishaw and Apple demonstrate the advantages of a concentrated approach.  Long-term return, not reduced volatility of short-term returns, is the objective.  On that measure, I'm well ahead.


----------



## Brendan Burgess

Colm Fagan said:


> Renishaw now represents more than 25% of my gross portfolio before borrowings, a significantly higher percentage of the portfolio’s value net of borrowings.



Hi Colm

So are we saying something like this:

Gross portfolio: 100
Borrowings: 30
Net portfolio: 70
Renishaw: 25
= 36% of net portfolio

Even if Renishaw is a great company and very well managed,  a great company can be overvalued.






Or, even worse, a great company, can be undervalued. A company that has tripled in price in two years can halve fairly easily.  I am not saying that it will or that it should. It's just a risk.

Your portfolio would then be:

Gross portfolio: 100 down to 88
Borrowings: 30
Net portfolio: 70 down to  58

That would be a fall of 17%


There is a reasonably good chance of an overall market correction. No matter how good your shares are, your gross portfolio could fall by 30%, so your net portfolio would suffer even worse.   I really don't think you should be borrowing to buy Renishaw shares, no matter how good it is.

Brendan


----------



## Brendan Burgess

Now let me assume that your net worth is €2m. 

That is plenty for your to live comfortably on for the rest of your life. 

If your portfolio doubles over the next three years, what difference will it make to your life?  Not one whit. You will get some great self-satisfaction from being proven right. 

But if your portfolio halves, then you might have to cut back. 

Of course, if your portfolio is €4m, then it doesn't matter what happens. Even if your portfolio crashes by 50%, you will still have plenty to live on. Unless your gearing is over 30%! 

Whatever way you look at it, borrowing makes no sense at all.  There is no reward and there is a huge downside.

Brendan


----------



## Colm Fagan

Brendan, you've hit the nail on the head.  As another regular AAM contributor, well known to you and me, said:  "it's an obvious utility play", making much the same point as yourself.  I've learned the lesson and am taking steps to reduce my leverage (but not my concentration:  I still believe firmly in the value of a concentrated - but unleveraged - portfolio).


----------



## Colm Fagan

Brendan, I'll qualify my response:  I think a small amount of leverage is OK.  I'm working on how small it should be.


----------



## Gordon Gekko

Colm Fagan said:


> Brendan, I'll qualify my response:  I think a small amount of leverage is OK.  I'm working on how small it should be.



Hi Colm,

For someone like yourself who can handle the volatility, wouldn’t the right amount be whatever you can get that doesn’t mean you’re carried out in a rerun of 1929/2008, provided you were diversified?

Maybe 30% (i.e. 50% fall in equities leaves you down 65%)?

But you seem to run such concentrated positions, I’d be genuinely worried about anything more than (say) 10%.

It’s very interesting to be honest.

Gordon


----------



## cremeegg

I think you are both wrong, in logic, on the matter of leverage.

If you believe you can earn a return greater than the interest expense, then leverage is justified.

If the value of your portfolio falls, leverage magnifies the fall, if the value of your portfolio increases leverage magnifies the rise. This is true but a distraction from the proper question about leverage.

If you expect over time that your portfolio will out perform the interest cost of the borrowing then you should borrow.

Brendan raises a good question, what if your portfolio halves in value. But he then goes on to misaddress the question. The only question to be asked about borrowing (once you are happy that you can justify the cost) is can I meet the cashflow.

If you expect your portfolio to fall, then sell, if you expect it to rise, above the cost of the interest, then keep the leverage.


----------



## cremeegg

First may I say I am loving your contributions, and am only picking at them because you have me engaged.



Colm Fagan said:


> *I don't buy into the "value" versus "growth" school.*  I just buy shares that I think will deliver my target rate of return in the long-term. I don't give a damn how that return is obtained, from dividends or capital gains or a combination of the two.



This is another example of letting an investing nostrum dictate your thinking without really analysing it. There is a lot of that about AAM at the moment.

A value share is one that is worth buying because of the intrinsic strengths of the company. Yes it may well be a high yielder, but that is not the essence of a value share.

A growth share is worth buying because of the superior growth prospects of the business.

In each case if you are going to pick the stock you must believe that the market has mispriced either the quality or the prospects of the company.



Colm Fagan said:


> I don't buy into the "value" versus "growth" school.  *I just buy shares that I think will deliver my target rate of return in the long-term.* I don't give a damn how that return is obtained, from dividends or capital gains or a combination of the two.



I can see why you dont care how the return is obtained, but if you expect the company to deliver a large rate of return you must have some expectation as to  how the company will do that. That comes down mostly to either growth or quality.


----------



## Brendan Burgess

cremeegg said:


> If you believe you can earn a return greater than the interest expense, then leverage is justified.



It's nothing to do with "belief". 

Colm may well believe that he can outperform the interest rate expense, but he may well be wrong. He has no way of knowing whether he can or not.  So the belief is irrelevant. The risk is not worth taking.

Brendan


----------



## moneymakeover

> The only question to be asked about borrowing (once you are happy that you can justify the cost) is can I meet the cashflow.



And repay the loan?

Colm, what kind of interest rates can be hot for buying stocks? Or do you top up mortgage loan?


----------



## Brendan Burgess

moneymakeover said:


> what kind of interest rates



I had just been thinking of this.

I have a small mortgage - less than 10% of my portfolio of stocks.  So, in effect, I too am borrowing to invest in shares.

But it's secured on my home and the rate is ECB + 0.6%.

If the rate were 5%, I would definitely sell shares to pay it off.
If the loan was 50% of my portfolio, I would sell shares and reduce it. 

Brendan


----------



## Gordon Gekko

The rates are typically between 1% and 3%.

Unless you’re spreadbetting or have a tax shelter, it’s hard to see leverage making sense at the higher end of that range.


----------



## Colm Fagan

I'll try - gradually - to get round to answering as many of the questions as possible (the sensible ones), but I don't have the time to deal with them all just now.  I've more important things to do - like complete the Milliman football competition forms, complete my 10,000 steps, plant some flowers, etc.  

I've lived with the issues that have been raised by various people for a long time now, and I've thought of them all (and many more that haven't been raised:  I'll touch on them at some stage if I've the time), so I do have good answers to all the questions.  

Starting with the boss:


Brendan Burgess said:


> Colm may well believe that he can outperform the interest rate expense, but he may well be wrong. He has no way of knowing whether he can or not. So the belief is irrelevant. The risk is not worth taking


Brendan, it's not a matter of *belief*, it's one of *expectation*, in the mathematical sense, i.e. the weighted probability value of different possible outcomes.   The expected return from shares is (say) 4% per annum higher than from bonds (I actually think it's higher).  I can borrow at less than 3% (Gordon Gekko is right; it's done through spread betting, which answers other questions on the interest rate charged - there are no repayment terms, you just go bust if the value of the shares falls below the amount borrowed plus a safety margin).  I expect to get (say) 7% on the shares, so why not borrow?  OK, by borrowing, you increase the volatility of the return significantly, but that's OK if you're adequately prepared for it and have the defences in place to deal with a sharp downturn.  I'll come back to what those defences might be and how effective they are at a later point.


----------



## Brendan Burgess

Colm Fagan said:


> I've lived with the issues that have been raised by various people for a long time now



But Colm, I don't think that you have lived long enough. 

Most of the time, your strategy will be fine. In most years, you will get a return which exceeds the borrowing costs.  

But at some stage, you might hit a perfect storm.  A once in 50 years event that wipes you. 

If I visit you on your death bed, I expect you to say "I told you so...".  But there is a risk that you might be wrong. It's small but, if the consequences would change your lifestyle, then you shouldn't take them.

Brendan


----------



## cremeegg

Colm Fagan said:


> Brendan, it's not a matter of *belief*, it's one of *expectation*, in the mathematical sense, i.e. the weighted probability value of different possible outcomes.   The expected return from shares is (say) 4% per annum higher than from bonds (I actually think it's higher).  I can borrow at less than 3%. I expect to get (say) 7% on the shares, so why not borrow?  OK, by borrowing, you increase the volatility of the return significantly, but that's OK if you're adequately prepared for it and have the defences in place to deal with a sharp downturn.



That seems exactly right to me.

However you must *believe* that the weighting you have attributed to each possible outcome is correct.



Colm Fagan said:


> I can borrow at less than 3% (Gordon Gekko is right; it's done through spread betting, which answers other questions on the interest rate charged - there are no repayment terms, you just go bust if the value of the shares falls below the amount borrowed plus a safety margin).



I am not familiar with this type of borrowing, and now I agree with Brendan, I would absolutely avoid any type of borrowing which under any remotely likely scenario, could result in going bust. I knew a Lloyds investor. 

Personally I have large borrowings, but they cannot be recalled so long as I can meet the modest cashflow requirements. So the value of my assets can fluctuate without risk to my solvency.


----------



## Colm Fagan

Brendan Burgess said:


> But Colm, I don't think that you have lived long enough.


Brendan, I presume you're joking!
I hate to admit it, but I was Assistant Actuary in Irish Life in 1974 (at the tender age of 24, 25 by year end), with responsibility for preparing the actuarial valuations of liabilities for the Irish Department of Industry and Commerce (that was well before any CBI involvement) and the Department of Trade and Industry in the UK (once again, well before the FSA or the PRA; we had to prove our solvency separately in the UK, as it was well before the Single European Market).   At the time, Irish Life offered a leveraged regular premium unitised investment product that carried an extremely generous maturity guarantee.  In the light of that experience, I presented a paper three years later (with wonderful mathematical input from a certain Mr. Woods, who is well known to some people on this site under a nom de plume, and from Tom Collins, who subsequently got a doctorate for his work on the paper) on approaches to mitigating the risks associated with such products.  The paper was well received in international actuarial circles (but only after a number of years!).  As you know, the crash of 1974 was in some ways more severe than that of 1929.  Then, in 2008, I was with-profits actuary for a UK life assurance company which faced the challenge of remaining solvent whilst doing the right thing by policyholders in terms of risk exposure of their with-profits products.
In short, I do think I've lived long enough!
There is just so much more I'd like to write about this topic, but I don't have the time just now.  When and if I do get round to writing about it, AAM readers will be first to know!


----------



## Colm Fagan

cremeegg said:


> This is another example of letting an investing nostrum dictate your thinking without really analysing it. There is a lot of that about AAM at the moment.


My apologies, but I don't understand what you mean by this.  I thought we were on the same wavelength:  I don't believe in a false dichotomy between "growth" and "value".  Are you not saying the same thing?



cremeegg said:


> That comes down mostly to either growth or quality.


Once again, I'm at a loss as to what this means.  Maybe I'm being slow.  Surely good quality businesses have better growth prospects, so it's definitely NOT a case of "growth OR quality", as you state; it's more a case of growth AND quality.


----------



## cremeegg

Colm Fagan said:


> Once again, I'm at a loss as to what this means.  Maybe I'm being slow.  Surely good quality businesses have better growth prospects, so it's definitely NOT a case of "growth OR quality", as you state; it's more a case of growth AND quality.



If you are a stock picker, you must have a view why a company will deliver a return which (more than) justifies the price you pay for its shares.

A business with tangible proven strengths, strong management, a proven product or service, an established market presence, a strong balance sheet and most important to my mind repeat customers, if the shares are well priced is a value opportunity. 

I am a value investor, this is not because I prefer to get my return from dividends or because I believe value companies out perform. It is because I feel that I have some ability to identify, these things

A business with huge unproven potential is a growth opportunity. I am not a growth investor because I have no idea how to value a good idea, and I know something about how difficult it is to translate good ideas into strong businesses.

In fact two of the companies you have referenced in this thread highlight the point. Renishaw is a value investment, you understand as much as anyone can about the business, you are well positioned to make an informed opinion about the value or otherwise of its share price at any given time.

Tesla is the opposite. Obviously it is a brilliant idea with huge potential. That gives me at least no clue how to value the business. No one has any idea if it can overcome the obstacles to delivering on its potential. It may well succeed after more financing leaving the current shareholders to be wiped out along the way. 

I am a value investor because I think I could make a sensible decision about Renishaw, I certainly could not make a sensible decision about a price for Tesla, (I don't think anyone else can either).


----------



## Colm Fagan

cremeegg said:


> If you are a stock picker, you must have a view why a company will deliver a return which (more than) justifies the price you pay for its shares.


Of course.  More specifically, I think that "the market" (i.e. the consensus among analysts) has undervalued some aspect(s) of the company's business.  In Renishaw's case, as I wrote in my "diary", I considered that the analyst who gave the "sell" recommendation prior to the company's Investor Day misjudged the success of its 3D printing business.  Other analysts apparently misjudged it also, given the reaction after the Investor Day. 

For what it's worth, analysts who buy into the "value/growth" approach to investment would classify Renishaw as a "growth" company.  It has a very low dividend yield (less than 1%) and a very high Price/Earnings multiple (42 calculated by reference to last year's earnings).  The reason for the very low dividend and low earnings yield (which is the same as a high P/E multiple, as one is the inverse of the other) is because analysts expect both earnings and dividends to grow strongly in future.

Phoenix Group Holdings, another of my "core" holdings, is at the opposite end of the spectrum in terms of the "value/growth" matrix.  The dividend yield on these shares is 6.4%.  Analysts would classify Phoenix as a "value" investment.  They think the prospects for future dividend growth aren't great, and that they could actually reduce in future, which explains the high dividend yield.  I think they're wrong, which is why I'm hanging on to the shares.


----------



## David Quinn

I really like the idea of just living off the income produced in an ARF portfolio, and avoiding selling the physical asset wherever possible. I attended a Science of Retirement Conference in London in February where this was the international consensus for best practice retirement drawdown. The great Nick Murray effectively said any other strategy is flawed, in his usual entertaining manner.

However, this is unrealistic for the vast majority of Irish ARF investors who are invested in accumulating unit linked funds. It would be an interesting exercise to compare your approach Colm, to the more common approach of a fixed 4% annual withdrawal through a sale of units in a Unit Linked Life Company Equity Fund. 

If I get some time I might try to model the two alongside each other, assuming a 3.5% dividend from a direct stock portfolio, compared with a reasonably high yielding unit linked equity fund. Allowing for costs, they should perform in a similar manner at first glance, although I suspect the reality will be different?


----------



## Colm Fagan

David Quinn said:


> I really like the idea of just living off the income produced in an ARF portfolio, and avoiding selling the physical asset wherever possible. I attended a Science of Retirement Conference in London in February where this was the international consensus for best practice retirement drawdown. The great Nick Murray effectively said any other strategy is flawed, in his usual entertaining manner.


Hi David

With all due respects to the great Nick Murray, his suggestion makes absolutely no sense.  Taking the examples I cited earlier, if someone had a €1 million ARF and invested it in Renishaw, they could only take less than €10,000 in the first year, but hopefully it would increase strongly thereafter, whilst if they put the money in the Phoenix Group instead, they could enjoy an income of €64,000 (in the first year at least). 

It reminds me of something that happened to me many years ago, when inflation was running around 10% per annum and bond yields were in the region of 12% per annum.  A barrister told me that a client of his was entitled to the income from a farm while he was alive, but the farm would revert to someone else on his death.  He wondered if it would be reasonable for the farm to be sold, the money invested in government bonds and for his client to take the 12% per annum income, leaving the reversionary with the bonds on his death, by which time their value would have been ravaged by inflation.  You can guess my answer.


----------



## Brendan Burgess

Colm Fagan said:


> With all due respects to the great Nick Murray, his suggestion makes absolutely no sense.



I don't even understand how anyone could even quote nonsense like this. I hadn't heard of Nick Murray, but it sounds as if he has learnt his financial management from old wives' tales. I wonder did you misquote him David? 

Brendan


----------



## Sarenco

Pardon my ignorance but who is “the great” Nick Murray?  I’ve never heard of him.


----------



## Sunny

Is it this guy?? I am sure he is a nice guy but 'great'???

https://*www.youtube.com*/user/*nickmurray*22


----------



## Brendan Burgess

I think we should all club together to get him over to Ireland. He is very reasonable. Sarenco, would you be able to stay off the drink for a couple of hours? 

http://www.nickmurray.com/

*Fee:* 
$10,000 for one keynote presentation of up to 75 minutes. Where logistically feasible, and only with prior consultation, Nick may accept a second engagement on the same day in consideration of an additional fee of $4500.


*Deposit:* 
$3,000. Due upon signing of an agreement letter. Nick will return the deposit if he has to cancel the engagement at any time for any reason. He will be entitled to retain the deposit if, within 90 days of the meeting, the client:

Cancels the meeting.
Cancels Nick's appearance at the meeting.
Moves the meeting to a date on which Nick is unavailable.
*Expenses:* 

First class airfare on a U.S. carrier. Business class on a Canadian carrier.
Standard hotel accommodation.
Private car ground transportation to and from airports.
Nick provides photocopies of receipts. He retains originals.
*Agreement:* 
In effect when client signs and returns agreement letter with deposit.
*NO-NOs:* 

Nick never speaks after dinner.
Nick never speaks to people who are drinking, or were just drinking, alcohol.
Nick will speak at breakfast or lunch, but only after people finish eating and the waitstaff has stopped moving.
Audio and video taping are not permitted.
He does not fly on commuter aircraft.


----------



## Sarenco

Brendan Burgess said:


> Sarenco, would you be able to stay off the drink for a couple of hours?


Possibly. 

But I suspect Nick Murray would drive me to drink.


----------



## David Quinn

Great in my book anyway, the rest of you are not so easily impressed!

He is a 74 year old US advisor with 50 years experience advising investors. I’m not going to spend much time defending him or justifying his fees. He makes over $1m a year on his newsletter subscription fees alone so doesn’t need my help!!! He is in huge demand so I suspect he puts those rates out there and if anyone is foolish enough to accept his demands, fair enough. I respect him as an influencer within the global financial advice community and force for change within the industry. Very strong views on holding high equity weightings throughout retirement and managing behaviour.

Anyway, back on topic....


----------



## David Quinn

What is nonsense about a decent globally diverse equity portfolio that should be able to generate 3-3.5% income over the long term? Some offering 7% (Vodafone) and some producing 1% (Renishaw in your example).


----------



## Brendan Burgess

David Quinn said:


> What is nonsense about a decent globally diverse equity portfolio that should be able to generate 3-3.5% income over the long term? Some offering 7% (Vodafone) and some producing 1% (Renishaw in your example).



Nothing at all.  



David Quinn said:


> I really like the idea of just living off the income produced in an ARF portfolio, and avoiding selling the physical asset wherever possible.



This is the bit which makes no sense. 

There should be no distinction between capital gain and dividend income. 

For example, which would you prefer shares in company A which pays 5% dividend a year but does not rise in value or shares in Company B which pays no dividend but rises by 10% a year? 

For most people with shares , capital gain is taxed at a lower rate than dividend income. 

Brendan


----------



## Colm Fagan

*Lord, make me pure - but not just yet
Diary of a Private Investor    Update #5                        12 July 2018*

June was a great month for sunshine but a bad month for my portfolio.  Its value fell by more than 4%, wiping out most of May’s 5.2% gain.  The prices of my top four stocks all fell, while the opposite happened to Tesla, in which I have a significant short position.  Its share price rose by more than 20% in the month, contributing a negative 1.1% to June’s overall negative 4.3%. 

The good news is that I was spared an even worse outcome by acting on readers’ advice, as I’ll explain. 

Following last month’s revelation that some of my share purchases are funded by borrowings, I was roundly criticised by readers of the diary on www.askaboutmoney.com .  They castigated me for taking excessive risks.  I heeded their advice and sold enough shares, spread across the portfolio, to reduce the gearing level by more than 10%. The sales were completed over a few days immediately following the publication of the diary update on 11 June.   I decided not to deleverage completely however, as I expect to earn an average return of at least 6% per annum on shares, compared with borrowing costs of only 3% per annum.  

I recognise that the expected additional return from investing in shares is not a free lunch.  Far from it.  The market value of the shares could fall significantly – and suddenly.  A sharp fall in share prices could result in borrowings being called in at short notice, and at exactly the wrong time, when values are depressed.   I’m satisfied that I can manage the risks - provided the leverage is low enough. 

I was fortunate in the timing of the share sales.  All but one of the shares were sold at prices higher than those ruling at the end of May, and substantially higher than those ruling at the end of June.  The loss in the month would have been much greater if I hadn’t deleveraged or had waited until later in the month to do so.  Thank you, readers, for the advice. 

I made a firm resolution to be good in future, not to allow borrowing levels to increase again, and to continue selling shares as market conditions allowed, using the proceeds to repay borrowings.  Sadly, my good intentions did not last long.  An invitation from an old flame seduced me into putting my good intentions on hold – for the time being at least.   

The old flame, risen from the ashes as it were, was Phoenix Group Holdings, a UK life assurance group headed by Clive Bannister, son of the late great Sir Roger Bannister, the first sub-four-minute miler.  

I bought my first shares in Phoenix Group Holdings in May 2014.  The main attraction was the dividend yield of 7.9%.  After doing some advance homework, I concluded that the dividend could be maintained indefinitely, so the long-term return should be considerably above my minimum target return of 6% per annum.  That was enough for me. 

Thus far, my faith has been rewarded.  The dividend was maintained at its 2014 level in 2015; then it increased by 2.6% in 2016, by 10.5% in 2017, and is expected to increase a further 4.3% in 2018.  

Capital values haven’t followed a similarly smooth trajectory.  Within a month of my initial purchase, the share price fell 7%.  Most would see this as bad news, but it meant that the dividend yield on new purchases was an even more attractive 8.5%.  I took the opportunity of the lower price to double my holding.   Since then, I have exploited temporary price weaknesses to continue adding more Phoenix Group shares to my portfolio, to the point where it is now my second biggest holding (after Renishaw, which I’ve written about elsewhere).   

Allowing for rights issues (of which more anon), the Phoenix Group share price is now more than 30% above where it was when I made my first investment in the company in May 2014.    Sterling has weakened considerably against the Euro in the meantime, which limits the gains, but I hedged my currency exposure to Phoenix Group and other UK-focused shares from mid-2015, so was spared the worst effects of sterling’s devaluation following the Brexit referendum in 2016. 

Just over a month ago, at the end of May, Phoenix Group announced a rights issue to help pay for the cost of buying Standard Life Assurance Company, which it agreed to purchase in February last.  Existing shareholders were given the option of buying another 7 shares for every 15 already held, at the knock-down price of £5.18 a share, compared with £7.72 share when the rights issue was announced.  The theoretical ex-rights share price was thus 691p. 

I felt the shares were good value, even though the prospective dividend yield was now less than 7%, compared with almost 8% when I bought my first shares in the company in 2014.  I couldn’t resist the temptation to take up as much of the rights issue as possible, even though it meant straying from the path of righteousness I had vowed to follow only a short time previously.  I used some of the liquidity in my portfolio, and increased my borrowing again, to buy as many of the rights issue shares as I could afford. 

I now feel like the financial equivalent of St. Augustine, aspiring to the purity of a debt-free portfolio – but not just yet.


----------



## Brendan Burgess

Hi Colm

I am delighted that, so far, Askaboutmoney has helped you. You may well be cursing us in a couple of years though. It doesn't matter, deleveraging was right.



Colm Fagan said:


> I couldn’t resist the temptation to take up as much of the rights issue as possible, even though it meant straying from the path of righteousness



In  fact, I would say that the earlier deleveraging made this borrowing to buy Phoenix correct.  I don't know the details of the Rights Issue, but I think it's usually a good idea to avail of it instead of selling the rights?  I had to avail of a rights issue recently where it was not possible to sell the rights. So I sold some Renishaw to get the money.  It also helped to rebalance my portfolio a little. 

Brendan


----------



## Colm Fagan

Brendan Burgess said:


> I think it's usually a good idea to avail of it instead of selling the rights


Brendan.  I feel the same, even for the simple reason that I didn't have to pay stamp duty or broker's commission on exercising the rights.


----------



## Monksfield

I don't buy the distinction between the return from dividend and capital. If a company can reinvest free cash flow at a good enough rate of return I would not want them diverting it into dividends or buy-backs. I do have a general preference for companies which pay a reasonable dividend if for no other reason than it operates as a discipline on management.


----------



## Colm Fagan

Monksfield said:


> I don't buy the distinction between the return from dividend and capital. If a company can reinvest free cash flow at a good enough rate of return I would not want them diverting it into dividends or buy-backs. I do have a general preference for companies which pay a reasonable dividend if for no other reason than it operates as a discipline on management.


I agree!   Here's what I wrote earlier in this thread (#229):


Colm Fagan said:


> I don't buy into the "value" versus "growth" school. I just buy shares that I think will deliver my target rate of return in the long-term. I don't give a damn how that return is obtained, from dividends or capital gains or a combination of the two.


What I'm saying in this diary entry is that I was happy that I would get more than my target rate of return from dividends alone on this particular investment, and I was confident that they could keep doing deals so that the dividend would be safe for years and years to come.  Mind you, the ability to keep paying dividends many years into the future is an important consideration here, as Phoenix's main modus operandi (at least before the Standard Life deal) was to buy life assurance companies that were closed to new business and that would eventually die of old age, so in theory at least, the capital value would eventually fall to zero.  In relation to the rest of your post, I have challenged management at a shareholder presentation on the preoccupation with increasing the dividend on a regular basis.  If they paid a lower dividend, they would be able to afford more deals without having to look for so much from external finance, either from existing shareholders or by issuing bonds, thereby saving at least a proportion of the high fees that go to investment banks at present.  Unfortunately for me, the so-called "professional" investors have put Phoenix Group into the "high dividend payers" bucket and demand regular increases in dividends.


----------



## moneymakeover

@Colm Fagan 

What do you think of the announcement to take Tesla private at $420


----------



## Itchy

I think the SEC investigation will be of some comfort!


----------



## Bronte

Brendan Burgess said:


> Hi Colm
> 
> That is a very interesting analysis.
> 
> When it comes to stock picking it's important. Professional active investment managers keep switching from chocolate bars to coffee mugs and back again. They run up stamp duty and transaction costs in the meantime which wipe out their gains.
> 
> So a passive fund is more likely to outperform by buying a few coffee mugs and a few chocolate bars and sticking with them.
> 
> Brendan


If that’s the case then one should stay away from investment managers.


----------



## Bronte

Colm Fagan said:


> _, but I had shielded my Phoenix exposure from movements in the exchange rate movements in two ways: (1) by borrowing in sterling to invest in a portion of my shareholding - borrowing at (say) 3% to invest in something yielding 7% seemed smart – and (2) by taking out a sterling hedge for the balance of my exposure to Phoenix.  _
> 
> _I still like those three shares and plan to hold onto them for the foreseeable future.  I recognise however that it will be difficult if not impossible to do as well on them in future - Apple and Renishaw in particular - as I have done over the last couple of years.
> 
> I added Samsonite, the luggage compa  It's worth adding that the share purchases were made by borrowing in Hong Kong dollars.  This reduces the exposure to currency risk but, .”_


Phoenix
I don't understand how you borrowed to invest in shares. I thought that was an absolute no no?

And you did the same with Samsonite. In another currency.

With Apple and Renishaw are you not doing the emotional bias thing you mentioned earlier. Holding onto them despite recognising that the future doesn't look good for them.


----------



## Brendan Burgess

Bronte said:


> I don't understand how you borrowed to invest in shares. I thought that was an absolute no no?



Hi Bronte

I think that Colm may be on holidays, so I will try to answer for him. 

He hasn't borrowed in the conventional sense by going to a bank and borrowing, say, HK$10,000.

He has placed a leveraged spread bet with the borrowing equivalent of HK$10,000. 

It is very risky but Colm is aware of the risks.

Brendan


----------



## Bronte

I'm at about page five and this thread is scaring the living day lights out of me. I'd like to know how much money he had in 2016, how much he has now and what incomes he got from shares in the meantime.

What is very risky? Sounds absolutely crazy and as good as going into Paddy Power. I'd have had 5 heart attacks at page 5 and be dead by page 14!


----------



## Brendan Burgess

Hi Bronte

I would not recommend it, but ... 

If the risk is controlled, then it's fair enough. 

I sold Bitcoin short which most people regarded as reckless, but I allocated only a very small part of my portfolio and put in an automatic stop to limit my losses. 

Brendan


----------



## Bronte

Colm Fagan said:


> .  If the results go my way, I may finally pluck up the courage to come clean on the disasters!



Sounds very like guys I've seen in the bookies. The one's in there all day every day.


----------



## Colm Fagan

Sorry for the delay in getting back to everyone, but I was busy writing my next instalment of the diary.  Unfortunately, I can't share it with you now, as I've promised first dibs to the Sunday Times, who are going to publish it next Sunday (19 August).  If enough people buy the paper, they might even give me a more regular slot!, so make sure to save up your shekels to buy the paper next Sunday!!!

I'll now try to answer your questions:


moneymakeover said:


> What do you think of the announcement to take Tesla private at $420


Lots of people have asked me about my short on Tesla (mentioned in update 2 of April 1 (what a day to choose!) post #163 on page 9 of this thread.  The quick answer is that I'm still in there.  Actually, I increased the short since then.  Needless to say, I'm now sorry that I didn't cash my chips when the price was down at $266 (compared to the current $356 to close my position), but I'm still confident that I'll end up making money on it.  As itchy says, there's a little matter of an SEC investigation following Elon's claim that he had the funding in place to take it private, a claim that was specifically denied by his fellow directors.  I'm also encouraged by lots of other factors, most of which have been recounted in the media.  One particular factor that hasn't received too much attention so far is that Elon has borrowed quite a lot on the security of his Tesla shares.  If the company ceases to be publicly quoted, his lenders will look for a lot more security on his borrowings.  It's surely the subject of another diary entry.



Bronte said:


> I don't understand how you borrowed to invest in shares. I thought that was an absolute no no?


Brendan is right.  I did it through spread bets.  Needless to say, that's not possible with my "pure" pension money, only with my retirement savings that are held outside the pension fund.  

I've to go now.  I'll come back to Bronte's other questions later, hopefully later tonight.


----------



## Colm Fagan

Bronte said:


> With Apple and Renishaw are you not doing the emotional bias thing you mentioned earlier. Holding onto them despite recognising that the future doesn't look good for them.


I don't recall ever saying that I thought the future looked bad for either Renishaw or Apple.  I said I didn't think they could perform as well in the future as they have in the past.  That was no more than a statement of the obvious, since both have performed truly remarkably since I first mentioned them in the diary.  I still think both will deliver excellent returns over the medium to long term future and I'm happy to hang on to them.  I did offload a small proportion of my Renishaw shares following the recent results announcement (at £56.85 a share) but that was just because even I recognise that Renishaw represents too high a proportion of my total portfolio.  After the sale, it is still my biggest holding by some distance.  


Bronte said:


> I'd like to know how much money he had in 2016, how much he has now and what incomes he got from shares in the meantime.


The quick answer to the first question is that I have more now than I had in 2016, but there are a number of important clarifications/ qualifications:
(1)  I am loath to quote performance over a short time frame.  I'm interested in performance over 5,  10, 20 years, definitely not over a few months or even a couple of years.  
(2)  I've been very lucky with the performance of Renishaw and Apple, the two shares mentioned above by Bronte.  I don't expect to be so lucky in future.  Renishaw is my biggest holding.  It has delivered excellent returns, not only over the last couple of years but over the 20 years since I first bought into it.  It has trebled in value since 2015 (in sterling terms) and is now worth well more than ten times what I paid for my first shares 20 years ago.  Apple, another of my major holdings, has also done very well both since I first bought it and over the last couple of years.  I am not banking on similar results in future.  On the contrary, the concentrated nature of my portfolio means that I'm quite likely to take a bath on one of my big investments sometime.  I'm braced for that eventuality.  
(3)  I have only calculated detailed returns for my total portfolio (ARF, AMRF and other investments) since the start of 2014.  Since then, the overall return has been significantly better than professionally managed funds.  According to Rubicon Investment Consulting (rubiconic.ie), the top performing active managed fund delivered an average return of 10.6% per annum over the 5 years to end July 2018.  The average return on my portfolio over the 4 years, 7 months from the start of 2014 was significantly more than this.  That's the good news.  The bad news is that the volatility of my returns has been much higher than that of the quoted pension funds.  In one month (June 2016), the value fell by more than 12%.  We also have to factor in the luck element in the form of the excellent results for Renishaw, Apple, Phoenix and a few others, balanced by a few clangers - which include Tesla as at 31 July 2018!!!
(4)  It's fairly straightforward to calculate how well my ARF has done.  Revenue rules have required me to take a (gross of tax) "income" of 6% of the fund every year since I took it out at the end of 2010.  After the mandatory withdrawals, the ARF is now worth considerably more than when I took it out originally, even after adjusting for the transfers in of two relatively small paid-up policies from insurance companies, one in 2016 and one in 2017.   I hope this also answers the question of what income I've got from the shares in the meantime.  


Bronte said:


> What is very risky? Sounds absolutely crazy and as good as going into Paddy Power. I'd have had 5 heart attacks at page 5 and be dead by page 14!


I honestly don't think I'm taking major long-term risks.  Nearly all my purchases are good quality companies, with strong balance sheets.  I am confident that they will deliver good quality results over the longer term.  Yes, there are short-term risks in that the market can be ridiculously volatile in the short-term, but I see volatility as my friend, in that it occasionally creates wonderful buying opportunities when the price gets out of kilter with the fundamentals of the business.  I'm still relatively new at shorting, and the jury is still out, but I'm hopeful that the same formula will work in reverse:  bet that reality will eventually catch up with highly leveraged companies whose shares trade on false hopes of how they'll be able to trade out of their difficulties, or find a white knight somewhere who'll bail them out.   Here we go on Tesla again!!
And once again, be sure to buy next Sunday's Sunday Times!!


----------



## Bronte

If you want to take the long term view of 5 + years, it's 5 years since 2014. Anyway you've confirmed you've more money now then when you've started plus you've taken out more than 10% annually.  Be that selling shares or dividends.

I think you're very coy about your losses, and I wonder why. Why if you're doing a diary not be honest.

I'm amazed at your being able to do better than the leading managed fund.

If you dnt think R and A will go any further are you keeping them for the dividends?

I don't understand the revenue rules. What business is it of theirs what you do with your money?
I've been buying the ST for decades.


----------



## Bronte

Elon Musk is something of a maverick. What did he do with the money he borrowed based on the share price?


----------



## Colm Fagan

@Bronte.  More answers to your questions:


Bronte said:


> you've confirmed you've more money now then when you've started plus you've taken out more than 10% annually. Be that selling shares or dividends.


I probably didn't make myself sufficiently clear.  I didn't say that I'd taken out more than 10% annually.  I said that the average return on the portfolio since the start of 2014 was well north of 10.6% a year.  That calculation allows for changes in market values and cash outflows (and a few small inflows).  Most of the return over the period came from unrealised capital gains. I wasn't forced to sell shares to get the return.  


Bronte said:


> I think you're very coy about your losses, and I wonder why. Why if you're doing a diary not be honest.


That's not true.  I've been very honest about my losses.  The very first diary entry (ST of 6 September 2015) told of a share (Carclo) that had fallen to less than a quarter of what I paid by the time I sold.  More recently, I told about WPP ( Update 3 of 8 May), which lost me a lot of money, and Samsonite (update 4 of 11 June), which is a loser at present, but which I haven't given up on.  I've also recounted my adventures with Tesla (update 2 of 1 April), on which I'm losing money at the moment but which is still in mid-race as far as I'm concerned, so I'm not tearing up my slip.  Of course there are other losers, but there are lots of other winners too that I haven't mentioned.  The overall performance confirms that there have been far more winners (in value terms at least) than losers to date. 


Bronte said:


> I'm amazed at your being able to do better than the leading managed fund.


Be amazed.  In fairness, we're not comparing like with like.  I'm comparing the performance of my portfolio with managed funds, which invest in a combination of equities and bonds, presumably with a dash of property thrown into the mix.  My portfolio is almost completely in equities, which have had a very good run over the last few years.  If the worm turns, then my relative performance will suffer.  My column in next week's Sunday Times goes into more detail on what is an appropriate investment strategy.  


Bronte said:


> If you dnt think R and A will go any further are you keeping them for the dividends?


Once again, I mustn't have made myself sufficiently clear.  I DO think that R(enishaw) and A(pple) will go further.  In fact, I'm quite confident that, over the next five years or so, both stocks will deliver returns in excess of my target of 6% plus per annum (income and capital gains combined).  I just don't think they'll repeat the phenomenal performance of the last five years.  


Bronte said:


> I don't understand the revenue rules. What business is it of theirs what you do with your money?


It's very much their business what I do with my money.  They gave me very good tax relief when I was putting the money into my pension fund.  They're entitled to get their pound of flesh when I'm taking the money out.  One way they make sure they get their pound of flesh is by insisting that I take a minimum (taxable) income from the ARF every year. 


Bronte said:


> Elon Musk is something of a maverick. What did he do with the money he borrowed based on the share price?


From what I read in the financial media, he used the borrowed money "to fund his extravagant lifestyle".   You will probably have to read the tabloids to discover what his extravagant lifestyle involves.


----------



## Bronte

Borrowing money with shares as security to fund an extravagant lifestyle doesn't seem wise.

If you had purchased an annuity or left your money to pay out as a pension would you be much worse off.


----------



## Colm Fagan

Bronte said:


> If you had purchased an annuity or left your money to pay out as a pension would you be much worse off.


Yes!  I've just visited the website pensionchoice.ie, which tells me that, at the present time, I would receive a pension for life of just €22,055 a year in return for a lump sum investment of €500,000.   If instead I were to invest the €500,000 to earn interest of 0.8% a year, I would be able to withdraw that amount (i.e. €22,055) each year for 25 years before the account would run out, by which time I'd be 93.  If I were to die before then (which I sincerely hope will be the case:  I don't want to be hanging around too long - nor would you, I reckon), the balance in the account will be available to my estate.  According to my calculations, the remaining balance would be over €311,000 after 10 years and over €108,000 after 20 years.  By contrast, there's nothing - zilch- payable if I die more than 5 years after taking out the annuity.  I expect to earn a hell of a lot more than 0.8% a year from equities.  As far as I'm concerned, it's a no-brainer.   More on this topic in my column on Sunday next.


----------



## Bronte

You could also look at it a different way. If you had 500K and estimated you needed money for about 25 years you'd be better off taking out 20K every year until you were 93.  That's if you were allowed to do this.  Which I'd far prefer to do and indeed might end up doing myself if I get sick of being a landlord and want to swan off into the sunset.  Like you I reckon getting to 80 would be enough. And from my experience of relations after 70 most of them don't want to be moving around a lot as regards travel and costs so you might prefer to take out 30K in the first 10 years and 15 in the later years.  etc.


----------



## Duke of Marmalade

Well of course I had to buy the _Sunday Times_ to read Colm's piece.  Entertaining as usual and who could argue with the main message that investing in bonds at 1% p.a. seems particularly dumb.  Who would actually do this?  And yet managed funds, the mainstay of the retail investment sector, are still substantially invested in bonds.
Colm cites the past good performance of bonds being mainly driven by capital gains from a revaluation of the sector. Mathematically this is all very obvious, bonds valued at 3% are much cheaper than bonds valued at 1%.  But the same phenomenon is present in equity valuations.  Over the last 10 years the S&P dividend yield has fallen from 3.25% to 1.79%. All else equal, this translates to a 80% capital gain.  These capital gains are driven by revaluation metrics rather than economic fundamentals.  And of course the main driver is QE.
Mathematically it is not possible for bond returns from this point to reproduce recent gains.  But I wouldn't be as confident as Colm is that equities will return 6% p.a. over the next 20 years.  There is no room left in the revaluation metric, such growth has to come from economic fundamentals alone (or inflation).  Indeed as QE eventually unwinds the revaluation metric should act as a brake on performance.


----------



## Sarenco

Duke of Marmalade said:


> Who would actually do this?


Well, I do!

The idea that the capital markets are dramatically mispricing bonds relative to equities seems bizarre to me.  Equities are now richly valued by any metric and that will inevitably impact future returns.

Of course I expect equities to out-perform bonds over the next 15 years.  But I still allocate a portion of my pension to bonds.  Why?  To moderate the risk profile of my portfolio.

I'm not investing to maximise my wealth - I'm trying to achieve my financial goals while taking the least amount of risk possible.  Bonds are important tool in this regard.


----------



## Duke of Marmalade

Sarenco said:


> Well, I do!
> 
> The idea that the capital markets are dramatically mispricing bonds relative to equities seems bizarre to me.  Equities are now richly valued by any metric and that will inevitably impact future returns.


The bond markets are dysfunctional.  Short term yields are negative.  Better under the mattress.  But the monetary authorities are playing on the fact that banks don't have mattresses big enough.  Long term yields are also silly, so much so that life companies are told to ignore long term market yields and use a considerably higher yield to value their liabilities.

I agree that there is significant transmission from bond pricing to equity pricing but I doubt it is to the same level of dysfunctionality.


----------



## Sarenco

Well, the cyclically adjusted price earnings ratio of the S&P500 is now at roughly twice its long term average - on that basis we're now at 1929 valuation levels.

Maybe that's justified but I still want to have some (admittedly very expensive) bonds in my portfolio.  I will be glad of them if we see another stock market crash.


----------



## Colm Fagan

Duke of Marmalade said:


> But I wouldn't be as confident as Colm is that equities will return 6% p.a. over the next 20 years. There is no room left in the revaluation metric, such growth has to come from economic fundamentals alone (or inflation). Indeed as QE eventually unwinds the revaluation metric should act as a brake on performance.


Duke, I don't have a major problem with your analysis but I'm reminded of the traders' adage:  "Bears make sense, bulls make money." Markets are always a source of worry.  That's why they deliver so well in the long term - to reward people like me for taking the risk.  And I wouldn't be as pessimistic as you on current prospects for equities.  At present, the dividend yield on the FTSE All-Share Index is 3.73% (I can't shake off my colonial trait of using the UK market as my reference point); ten years ago to the day it was 4.24%.  Dividends are expected to increase from their current levels, so I hope to get considerably more than 3.73% in the long-term. I'm happy to project 6%.  The current Earnings Yield is 7.6%; ten years ago it was 8.6%.  That doesn't smell too much of irrational exuberance to me.  


Sarenco said:


> Of course I expect equities to out-perform bonds over the next 15 years. But I still allocate a portion of my pension to bonds. Why? To moderate the risk profile of my portfolio.
> 
> I'm not investing to maximise my wealth - I'm trying to achieve my financial goals while taking the least amount of risk possible. Bonds are important tool in this regard.


This is where I get lost.  You ARE trying to protect your wealth.  I'm NOT trying to maximise mine.  Quite frankly, I don't care what my "wealth" is at any point in time.  I DO want to maximise the earning potential of my portfolio.  That means avoiding anything that will not deliver the expected return.  That definitely includes bonds, which I know are a disaster from an income perspective.  Why should I want to "moderate the risk profile of my portfolio" in the short-term, if it destroys its long-term earnings potential?  It makes no sense.  
In a presentation to the Society of Actuaries last February, I used the expression "It's a pension, not a piggy-bank".  For someone like me, reliant completely on my savings for future income needs, for however long my wife or I are alive, that thought must always be at the forefront of my mind.  Others in the same boat, and their advisers, should also try to eliminate the piggy-back mentality from their thoughts and keep the income imperative front and centre.


----------



## Gordon Gekko

Hi Sarenco,

Why not hold cash rather than bonds?

I’m 100% invested in equities, but if I wanted to dial down the risk, I think I’d hold 60% equities and 40% cash.

I just don’t see how one can hold decent bonds and not lose money.

Gordon


----------



## Sarenco

@Gordon Gekko

In this context, I'm using the word "bonds" as shorthand for all fixed-income instruments, including bank deposits. 

The fixed-income side of my portfolio has an effective duration of around 5 years, which I regard as a reasonable point on the yield curve in terms of its risk/reward profile.  However, there are certainly arguments for shortening duration in the current environment.  Or simply paying down debt (which is effectively a "negative bond"), if liquidity is not a concern.

@Colm Fagan

You are obviously free to invest as you see fit but I take a fundamentally different approach.  I am not trying to maximise the earning potential of my portfolio - if that was my objective I would just load up on debt and invest the lot in small cap emerging market equities.

I am trying to maximise the probability that I will meet my financial objectives and I will seek to do that while taking the least amount of investment risk possible.  As such, I diversify broadly accross and within asset classes - never taking too much or too little risk to meet my personal objectives.

Incidentally, the FTSE100 only represents around 5% of the global equity market and it's very unrepresentative of the broader market in terms of its sectoral composition.  Personally, I think income investing is irrational but I'm conscious that is a controversial view around here.


----------



## joe sod

Sarenco said:


> Well, I do!
> 
> The idea that the capital markets are dramatically mispricing bonds relative to equities seems bizarre to me.  Equities are now richly valued by any metric and that will inevitably impact future returns.
> 
> Of course I expect equities to out-perform bonds over the next 15 years.  But I still allocate a portion of my pension to bonds.  Why?  To moderate the risk profile of my portfolio.
> 
> I'm not investing to maximise my wealth - I'm trying to achieve my financial goals while taking the least amount of risk possible.  Bonds are important tool in this regard.



Warren Buffett made a point about bonds in his recent letter, he said he is not an investor and won't be at today's low returns. The only time that he should have been a bond investor was 1982 at the historical high interest rates then. Also there has been much talk over the last few years about the bursting of the bond bubble, the amount of money invested in world bond markets has grown exponentially since the 1982, yet the amount of money invested in world stock markets has remained virtually static since 1990s. Nobody seems to pay much attention to this


----------



## Colm Fagan

Today's column in the Sunday Times counts as update number 6 in my "Diary of a Private Investor".  For those who didn't see today's paper, here it is, as I submitted it.  They made some editorial changes before publishing it (including changing the title, which I was particularly proud of, but that's life!).

*Refusing to act my age                                                             19 August 2018
Update #6 of "Diary of a Private Investor"*

A November baby, I have always envied friends who could celebrate landmark birthdays in the sun.  Then, in early 2016, I had a brainwave.  I calculated that I would be exactly two-thirds of a century old on 25th July 2016, right slap bang in the middle of summer.  Here at last was the opportunity to celebrate a landmark date in the garden with friends, sharing a few glasses of beer or wine over a summer barbecue.  I gave lots of subtle and not-so-subtle hints to various members of the family, but all to no avail.  On the appointed day, I found myself, on my own in the garden, raising an imaginary toast with imaginary friends on the imaginary occasion.

Some financial planners and pension consultants share my obsession with measuring progress towards centenarian status.  They have a golden rule that we should invest our age in bonds.  By their reckoning, at some point during my imaginary barbecue on 25 July 2016 (at 3 PM to be precise, or so my mother told me), I should have crossed the threshold of having exactly two-thirds of my retirement savings in bonds.  The proportion in bonds should now be close to 69%.  Instead, it is precisely zero.  (I make an exception for the tuppence-halfpenny that went into the post office on my confirmation, that I still haven't managed to track down.)

My reason for going against conventional wisdom is simply that an investment strategy that included bonds would not keep me and my other half in the manner to which we’re accustomed.  My retirement plan is constructed on the basis that I will earn close to 6% per annum on my savings for the rest of my days.  I believe that I can earn that, or more, from equities.

Irish government bonds currently yield less than 1% a year.  If I were to invest half my retirement savings in bonds, considerably less than the 68% recommended by some pension consultants for my current age, I would have to earn 11% a year on my other investments to earn the target 6% on the total portfolio.  That's impossible.  Something would have to give.

The problem is compounded by some consultants' practice of quoting past returns on bonds to bolster their argument that, as we get older, we should commit a significant proportion of our savings to this asset class.  Yes, bonds have delivered strong returns over the last ten or twenty years but the reason for those good returns is precisely why I think we should now avoid them like the plague. Ten years ago, investors could demand a yield of more than 3% on bonds.  Their present-day successors are happy with less than one-third of that, which means that anyone holding a bond originally priced to earn 3% to maturity can now pocket a significant capital gain on top of their income yield.  This boosts the historic return to considerably more than 3%.  The opposite could be true ten years from now.  If new investors at that time are demanding more than 1%, current investors will earn considerably less than 1% a year on their investment and may even suffer a capital loss.

My confidence that I will earn 6% or more from equities is based partly on history - they have delivered significantly more than this on average over the last 100 years - and partly on hard-headed analysis of likely future returns, based on projections for future growth in profits and dividends.  I haven't been disappointed over the last twenty years of managing my own pension fund.  I am confident that I won't be disappointed over the next twenty years - if I last that long.

This is where the high priests of financial planning chant in unison: "But what about sequence of return risk?"  This incantation frightens off most of my fellow senior citizens from sticking with equities.  It refers to the risk that, while equities may deliver 6% on average, you could be unlucky and have a sequence of bad results in the early years, when the fund is at its highest, with the good returns coming later, when there is less money in the pot.

I have several answers to this.  One is that good past returns have enabled me to create a cushion that will help soften the blow of any short-term turbulence.  A second is that a significant portion of my "income" comes from dividends, which are generally unaffected by temporary market downturns.  This reduces the need to redeem investments, possibly at the wrong time.  Thirdly, I always keep a small cash balance in the fund to allow for such eventualities and fourthly, if the worst comes to the worst, we can always economise, as we had to do on occasion during my time in business.

Now, if you’ll excuse me, I must get back to planning my move to Australia in time to celebrate my three-quarters of a century with a summer barbecue.


----------



## RedOnion

joe sod said:


> Warren Buffett made a point about bonds in his recent letter, he said he is not an investor and won't be at today's low returns.


I think if you reread his comments, it was in relation to the long term investment. He consistently points to the 30 year treasury bond yields, and that over that timeframe equities will always outperform bonds.

In the shorter term, his actions tell more. He has no choice but to invest in bonds (or the money markets). Berkshire Hathaway is sitting on in excess of $110bn in cash equivalents, of which over 45bn is in short dated treasury bonds. So he is in fact a large investor in bonds, whatever he says!



joe sod said:


> yet the amount of money invested in world stock markets has remained virtually static since 1990s.


Sorry I don't understand this? Are you saying there has been no additional funds added to global stock markets since the 90's?


----------



## Gordon Gekko

But that’s the whole point; Buffett highlights that private investors have the time-horizon to invest in equities.

Whatever he/Berkshire does with its regulatory cash/capital over the short-term is a separate issue.


----------



## joe sod

@RedOnion yes in relation to the total money invested in all global assets, the total funds invested in the global stock markets has remained virtually static since the late 90s, the big explosion in invested money has been in the global debt markets, that market has almost tripled. It is probably the case that the big central banks are responsible for a lot of this new debt. There was an interesting graphic showing all this with the global debt market dwarfing every other asset class even land and real estate.


----------



## Sarenco

Mr Buffett's views on bonds are actually quite nuanced.

Here's an extract from his 2018 shareholder letter –

_"I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates."_

I wouldn't disagree with any of that but it does beg the question – what is a sensible multiple of earnings relative to the then-prevailing interest rates?  The cyclically adjusted price ratio of the S&P500 is currently twice its long term average and reflects 1929 valuations.  Is that a sensible multiple of earnings relative to prevailing interest rates today?  Frankly, I don't know so I'll hedge my bets somewhat.

I would also note that earlier in the same letter , Mr Buffett made the following remark - 

_"During the 2008-2009 crisis, we liked having Treasury Bills – loads of Treasury Bills…"_


----------



## moneymakeover

Currently 24

http://www.multpl.com

In 1929
http://www.crossingwallstreet.com/archives/2013/02/how-overpriced-were-stocks-in-1929.html


----------



## letitroll

Sarenco said:


> Mr Buffett's views on bonds are actually quite nuanced.
> 
> Here's an extract from his 2018 shareholder letter –
> 
> _"I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates."_
> 
> I wouldn't disagree with any of that but it does beg the question – what is a sensible multiple of earnings relative to the then-prevailing interest rates?  The cyclically adjusted price ratio of the S&P500 is currently twice its long term average and reflects 1929 valuations.  Is that a sensible multiple of earnings relative to prevailing interest rates today?  Frankly, I don't know so I'll hedge my bets somewhat.
> 
> I would also note that earlier in the same letter , Mr Buffett made the following remark -
> 
> _"During the 2008-2009 crisis, we liked having Treasury Bills – loads of Treasury Bills…"_



The difference being that in 1929 prior to the crash T bills were yielding a descent coupon so while P/E's may be at 1929 levels one must consider the contemporaneous returns available from alternative or risk free assets which today stand at multi-century lows. 

In this context PE's at 1929 levels can actually reflect reasonable valuations when all alternatives are considered.

In short paying 24 times earnings (implied 4% return) in 1929 when bonds yielded a lot more was folly. Paying 24 times earnings when 10yr German bunds are yielding 0.30% (implied P/E ratio of 333) is potentially a reasonable return for the risk premia.


----------



## EmmDee

RedOnion said:


> In the shorter term, his actions tell more. He has no choice but to invest in bonds (or the money markets). Berkshire Hathaway is sitting on in excess of $110bn in cash equivalents, of which over 45bn is in short dated treasury bonds. So he is in fact a large investor in bonds, whatever he says!



There is a technical element to this. Pure USD deposits in a bank cost the bank a capital charge under Fed regulations. That charge increases for large amounts and for investment funds (or other financial institutions).With the rates so low it would have meant charging BH to accept deposits. While he maintains some USD in deposits, he was probably asked to remove a large chunk of it and the main short term highly liquid USD market is US T Bills. So probably not an investment decision but rather a liquidity management one


----------



## Sarenco

letitroll said:


> The difference being that in 1929 prior to the crash T bills were yielding a descent coupon so while P/E's may be at 1929 levels one must consider the contemporaneous returns available from alternative or risk free assets which today stand at multi-century lows


The cyclically adjusted price-earnings ratio of the S&P500 currently stands at *32.8* and 10-year US Treasuries are currently yielding *2.8%*.

Immediately before the stock market crash in October 1929, the S&P 500’s cyclically adjusted PE ratio had just hit *30* and 10-year US Treasuries were yielding *3.3%*.

To be clear, I am not saying that the current valuation of the S&P500 does not represent a sensible multiple of earnings relative to prevailing interest rates.  I'm simply saying that it's not immediately obvious to me that it does - so I'm hedging my bets somewhat.


----------



## moneymakeover

Can you provide links to where you're getting figures


----------



## moneymakeover

Can you provide links to where you obtain your numbers

According to
http://www.multpl.com/table

The pe is 24


----------



## Sarenco

I clearly referred to the cyclically adjusted price-to-earnings ratio (CAPE) in my posts.


----------



## moneymakeover

And where is your link

I clearly asked you to provide


----------



## moneymakeover

http://www.multpl.com/shiller-pe/table


----------



## moneymakeover

https://www.google.ie/amp/s/seekingalpha.com/amp/article/4085454-shiller-cape-ratio-misleading-righ


----------



## moneymakeover

@Brendan Burgess

I asked this before:
Why is edit option missing


----------



## Sarenco

moneymakeover said:


> http://www.multpl.com/shiller-pe/table


Sorry to put you to so much trouble...

The edit function is working fine for me.


----------



## letitroll

Sarenco said:


> The cyclically adjusted price-earnings ratio of the S&P500 currently stands at *32.8* and 10-year US Treasuries are currently yielding *2.8%*.
> 
> Immediately before the stock market crash in October 1929, the S&P 500’s cyclically adjusted PE ratio had just hit *30* and 10-year US Treasuries were yielding *3.3%*.
> 
> To be clear, I am not saying that the current valuation of the S&P500 does not represent a sensible multiple of earnings relative to prevailing interest rates.  I'm simply saying that it's not immediately obvious to me that it does - so I'm hedging my bets somewhat.



The difference this time is the capital markets are now truly global and while US treasuries provide a level of yield just above inflation & the federal funds rate is 2% don't forget the rest of the world is still running hugely accommodative monetary policies still and those investors in say Germany or Japan are hunting for returns too therefore bidding up the price (& in turn reducing the returns) of all risk assets...................The US stock market by some margin is the largest in the world and attracts huge capital in flows from the rest of the world - a world in which investors have been moved out the risk curve by global central banks.


----------



## Sarenco

letitroll said:


> The difference this time


You might be right but I shiver whenever I hear anybody begin an argument with "this time, it's different..."

Also, bear in mind that non-US investors are also large buyers of US treasuries - they are not just bidding up the price of risk assets.

Again, I'm not saying that US equities are over-valued.  I'm saying I don't know whether they are or not.  That's why I'm hedging my bets.


----------



## moneymakeover

From link i quoted above

July 2017



> *Summary*
> 
> Robert Shiller's Cyclically Adjusted Price to Earnings (CAPE) ratio is now around the level of 1929, and it was only higher in the late 90s dot-com bubble.
> Many commentators have pointed to this indicator recently as a danger sign for the stock market.
> However, this is misleading right now because the CAPE ratio's 10-year back period begins with the Great Recession in 2007.
> So the 10-year earnings are abnormally low, due to the effect of 2007-2009 on the 10-year average.
> As the recession years "roll off" the 10-year back period, the 10-year average earnings will increase, and stock prices can rise without making the Shiller CAPE ratio rise excessively.


----------



## Sarenco

Ok, so you have a difficulty with my using CAPE as a valuation metric.

The (unadjusted) PE ratio of the S&P500 at the start of October 1929 was 17.81; versus a PE ratio of 24.75 at the start of this month.

That makes today's valuations look even more extreme.

To be honest, I don't have much confidence in any single valuation ratio.  But it's hard to argue that current US stock valuations are not elevated - whatever metric you choose.

Again, I'm not saying the S&P500 is necessarily over-valued relative to prevailing interest rates.  But it might be, so I'm hedging my bets.


----------



## letitroll

Sarenco said:


> You might be right but I shiver whenever I hear anybody begin an argument with "this time, it's different..."
> 
> Also, bear in mind that non-US investors are also large buyers of US treasuries - they are not just bidding up the price of risk assets.
> 
> Again, I'm not saying that US equities are over-valued.  I'm saying I don't know whether they are or not.  That's why I'm hedging my bets.



For sure different this time is scary phrase shame on me....but as said there simply aren't enough assets in the world to invest in when the best you can get on the 10yr US is below 3% & Bunds 0.03%. Remember the biggest pension funds in the world 'need' 7,8,9% to make the numbers work they are therefore are forced out the risk curve (exactly what the central Banks wanted by the way) hence inflated prices as investors bid up the price of those assets in turn reducing their return. Agree things are fully valued maybe even slightly overly so but equities undoubtedly provide a superior return profile if your time horizon is more than say 7 - 8yrs.


----------



## Sarenco

letitroll said:


> ... equities undoubtedly provide a superior return profile if your time horizon is more than say 7 - 8yrs.


Undoubtedly?  Every industrialised country on the planet (including the U.S.) has had 7, 10, even 30 year periods during the past century where domestic long-term government bonds outperformed domestic equities.

History suggests that there is a ~70% probability that US stocks will beat 5-year treasuries over any 7.5 year holding period.  I wouldn't describe that as "undoubtedly" and, of course, nobody knows what the future holds.


----------



## Gordon Gekko

The counter argument to that, though, is that equities have only had those periods after valuations were toppy.

Also, the US is not the world.


----------



## Sarenco

Gordon Gekko said:


> The counter argument to that, though, is that equities have only had those periods after valuations were toppy.


Counter argument to what exactly?  That history suggests there's a ~70% probability that US stocks will beat 5-year treasuries over any 7.5 year period?  That's not an argument, it's just a factual description of what has happened in the past.

FWIW, S&P500 CAPE has only been higher than its current level once in history - at the height of the dot.com bubble in 1999.

Again, at the risk of repeating myself, I'm not arguing that US stocks are necessarily over-valued relative to prevailing interest rates.  But they might be.  So I'll hedge my position.


----------



## Gordon Gekko

And the 12 month forward P/E for Global Equities is 15.3, which is actually 2% lower than its median.

Citing stats around periods of underperformance is like saying “10% of the time it rains” in circumstances where there are blue skies.

The only thing that is relevant is valuation, and choosing a particular valuation methodology to suit your bearish view of the world is dangerous; you are entitled to your view, but my biggest concern is that you will spook others which will scare them off investing and ultimately prevent them from achieving their life goals. I suspect that you have the financial capacity to be underinvested; most others do not and they certainly don’t need to be spooked further in a world where the media’s mission seems to be to stop people investing.

Of course the counterargument is that being overinvested will cause people to be shaken out once volatility hits.


----------



## letitroll

Gordon Gekko said:


> And the 12 month forward P/E for Global Equities is 15.3, which is actually 2% lower than its median.
> 
> Citing stats around periods of underperformance is like saying “10% of the time it rains” in circumstances where there are blue skies.
> 
> The only thing that is relevant is valuation, and choosing a particular valuation methodology to suit your bearish view of the world is dangerous; you are entitled to your view, but my biggest concern is that you will spook others which will scare them off investing and ultimately prevent them from achieving their life goals. I suspect that you have the financial capacity to be underinvested; most others do not and they certainly don’t need to be spooked further in a world where the media’s mission seems to be to stop people investing.
> 
> Of course the counterargument is that being overinvested will cause people to be shaken out once volatility hits.



Completely agree - reminds me of these wise words:

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch


----------



## Sarenco

Gordon Gekko said:


> And the 12 month forward P/E for Global Equities is 15.3, which is actually 2% lower than its median.


The forward P/E of a stock relates to predicted earnings - frankly, it's crystal ball gazing.

I've no idea why you think I've a bearish view of the world; you are clearly not reading my posts very carefully.  I'm certainly not recommending that anybody should avoid having an allocation to equities in their portfolio that is appropriate to their need, willingness and ability to take risk.

I've already stated that I don't have much confidence in any single valuation metric so I don't see how I could be accused of cherry picking.  I've also stated (repeatedly) that I don't know whether or not US equities are over-valued relative to prevailing interest rates.

However, I do think that people should be modest about their ability to predict the future.  There may well be blue skies today but that tells us nothing about the weather tomorrow.  All we can say with certainty is what has happened in the past. 

As aside, I've never understood why some people boast about being 100% in equities.  Why not 80% or 120%?  What's so magical about 100%?


----------



## Gordon Gekko

But Sarenco, on the one hand you’re critical of people using the past to make assumptions around the future. Then on the other, you cite Shiller and CAPE, which is built on the idea of mean reversion. Which is it?

I didn’t reference US equities, I referenced Global Equities which are most relevant.

Then you throw in a little dig about people “boasting” about being 100% in equities; “What’s so magical about 100%?” Equities deliver to best returns over time. Why not 120%? Because leverage can get you carried out.


----------



## Sarenco

Gordon Gekko said:


> But Sarenco, on the one hand you’re critical of people using the past to make assumptions around the future.


No, I think it is entirely reasonable to refer to the past (and current valuations) when determining your current expectations.  I'm just cautioning people not to be over-confident in their predictions about the future - the market has no obligation to meet anybody's expectations.

CAPE is just a valuation metric, it's not built on the idea of reversion to mean.

I'm not sure I understand what you mean by "carried out".  If you are absolutely certain that equities will outperform bonds over your holding period then it seems logical to leverage your position.


----------



## Gordon Gekko

Sarenco said:


> If you are entirely confident that equities will perform bonds over your holding period then it seems logical to leverage your position.



No.

I am entirely confident that equities will outperform bonds over my holding period.

However, that’s not to say that there won’t be major speedbumps along the way. Equity investors have to be willing to tolerate massive falls periodically. The presence of leverage can be problematic in such circumstances; the provider of the borrowings may withdraw the facility for example. Plus a big part of investing is behavioural; it’s one thing to say that I’d hang tough if my portfolio was down 60% or more; it’s another thing to do it.

You are incorrect regarding CAPE; it is a valuation metric which looks at the position relative to long-term averages; i.e. it’s based on the idea of mean reversion. You can’t cite established valuation methodologies and then guffaw at people using past performance to make assumptions. It’s running with the hare and hunting with the hounds. If the future is not similar to the past, then everything (e.g. CAPE) is claptrap.


----------



## Sarenco

Where did I guffaw at anybody?!

Again, I think it's entirely reasonable to refer to the past when determining your current expectations.  

CAPE is simply the price of a stock divided by the average of 10-years previous earnings of that company, adjusted for inflation.  It has nothing to do with reversion to mean.

I absolutely agree with you on one point though - a large part of investing is behavioural.  

A lot of people invest in equities through their pensions while carrying a mortgage.  That's leveraged investing but most people don't see it that way for some reason.


----------



## Gordon Gekko

Sarenco said:


> CAPE is simply the price of a stock divided by the average of 10-years previous earnings of that company, adjusted for inflation.  It has nothing to do with reversion to mean.
> 
> A lot of people invest in equities through their pensions while carrying a mortgage.  That's leveraged investing but most people don't see it that way for some reason.



Incorrect; it has everything to do with reversion to mean. The ratio is useless unless compared to something. We can’t say whether it’s high or low without assuming mean reversion. Surely you get that?

It is also oversimplistic to look at the mortgage/pension piece in that manner. It’s clouded by the fact that an individual’s pension contributions operate within a “use it or lose it” framework. If I don’t contribute for 2017 before 31 October 2018, I never can.


----------



## Duke of Marmalade

letitroll said:


> Remember the biggest pension funds in the world 'need' 7,8,9% to make the numbers work they are therefore are forced out the risk curve (exactly what the central Banks wanted by the way) hence inflated prices as investors bid up the price of those assets in turn reducing their return.





Colm Fagan said:


> My reason for going against conventional wisdom is simply that an investment strategy that included bonds would not keep me and my other half in the manner to which we’re accustomed.  My retirement plan is constructed on the basis that I will earn close to 6% per annum on my savings for the rest of my days.


I know Colm's post is partly tongue in cheek, but just because you "need" 6,7,8,9%, does not mean equities will fulfill your needs.  With bonds yielding 1% and many people "needing" far more than that, I have to strongly suspect that equities (like bonds) are currently over priced and in the end of the day, for someone investing their ARF now, the return they will get is decided by the price that they pay for their equities  in the second hand market.


----------



## Colm Fagan

Duke of Marmalade said:


> I know Colm's post is partly tongue in cheek,


Not really, Duke.  My long-term financial plan is based on that assumption.  It's worth adding the later sentence from the article, however:  


Colm Fagan said:


> My confidence that I will earn 6% or more from equities is based partly on history - they have delivered significantly more than this on average over the last 100 years - and partly on hard-headed analysis of likely future returns, based on projections for future growth in profits and dividends.


I rely particularly on the latter.  My investment philosophy is to only invest (and only to stay invested) in shares/bonds (I have bought one particular bond in the past that qualified under these criteria - I may write about it sometime) that I believe will deliver that return over the next 5, 10, 20 years.  I am confident that all the stocks in my portfolio, a large proportion of which have been mentioned in the diary by now, will deliver the required 6% a year (I do have a small margin of safety in that I'm budgeting on getting slightly less than 6%).


----------



## Duke of Marmalade

Okay, Colm,  your dividend argument in respect to FTSE at least is persuasive.  As to history being a precedent, we have never before seen negative yields or indeed yields of 1% on long term bonds, so we have no reliable historical guide as to where these astronomical asset prices will go from here.


Gordon Gekko said:


> Incorrect; it has everything to do with reversion to mean.


I love these semantic debates.  In this case I must adjudicate in favour of _Sarenco_.  As I understand it, CAPE tries to measure current market prices by reference to an average of recent earnings over a period of years.  This seems entirely valid and closer to reality than using the average earnings over the last 12 months. For example, if a company reports a loss in a year, its price doesn't go to zero, instead investors give credit for past earnings.  Maybe GG is arguing that this shows that investors demonstrate a certain reversion to mean in their valuations but if so that does not invalidate the metric.


----------



## Gordon Gekko

Duke, perhaps you both had a late night, but for the avoidance of doubt, virtually ALL measurements like this assume mean reversion!

Otherwise they’re meaningless numbers (e.g. 32). What is 32? Oh, it’s high is it? Based on what? Oh, I see, mean reversion!


----------



## Duke of Marmalade

Gordon Gekko said:


> Duke, perhaps you both had a late night, but for the avoidance of doubt, virtually ALL measurements like this assume mean reversion!
> 
> Otherwise they’re meaningless numbers (e.g. 32). What is 32? Oh, it’s high is it? Based on what? Oh, I see, mean reversion!


Ahh Gordon are you sure you haven't had a wee dram after breakfast
CAPE is a measurement.  It makes no assumptions at all.  It is motivated by the plausible premise that market participants give some weight to recent past years' earnings rather than dismissing all statistics other than those pertaining to the last twelve months or indeed their forecast of the next twelve months.  I thought the example of the company which made losses in the last year but still has a market valuation would convince, but possibly that dram wasn't so wee after all.


----------



## Gordon Gekko

It’s a measurement that produces a number (e.g. 32).

The number, e.g. 32, is only relevant if it can be compared to something else.

Otherwise, it’s about as useful as a chocolate teapot.

The number, e.g. 32, is useless unless we make certain assumptions around mean reversion.


----------



## Duke of Marmalade

So you would have had the same objection if he had used straight P/E rather than CAPE?
I thought your objection was to the averaging process involved in CAPE.  Misunderstanding then, the pitfalls of blogging.
You would then level the mean reversion criticism against anyone who says that a current figure is historically high or historically low.  It's a fairly tautological criticism which gave first impressions of having scientific substance.


----------



## Gordon Gekko

Not really; I’m merely pointing out the inconsistency of highlighting measurements such as CAPE whilst frequently being critical of anyone who assesses future market performance based on its past performance.

It’s a little like trying to have one’s cake and eat it.


----------



## Colm Fagan

As I understand it, CAPE measures the P/E ratio, adjusting the "E" for cyclicality.  On this measure, the US stock market is very expensive compared to the average cyclically adjusted P/E ratio in the past.  Isn't this what Duke is saying?   I've no problems with this.  I don't invest in the market. I invest in particular stocks that I think are not overvalued.


----------



## Colm Fagan

I could add that I make "negative" investments in stocks that I think are overvalued, e.g. Tesla (still!)


----------



## Sarenco

@Gordon Gekko

Is your argument that a statement to the effect that a particular price earnings ratio is above (or below) its long-run average necessarily reflects an implicit assumption that the ratio will inevitably revert to that long-run average?  My apologies but I thought you were talking about the CAPE methodology itself (the phrase "built on" threw me). 

If that is your point (and please do correct me if I have misrepresented your argument), I don't think it's correct - there could be very good reasons for a secular shift in the ratio, it doesn't necessarily have to revert to mean.

Again, I think it is entirely reasonable to refer to history when framing your expectations regarding future asset returns and I have said so repeatedly.  I'm really not sure why you think otherwise.

But valuations matter.  Higher valuations imply lower expected returns and lower valuations imply higher expected returns.  I would have thought that was obvious but perhaps not.


----------



## Duke of Marmalade

Gordon Gekko said:


> You are incorrect regarding CAPE; it is a valuation metric which looks at the position relative to long-term averages; i.e. it’s based on the idea of mean reversion.


I had to review the "angels dancing on pins" debate.  This is where it began.  This is quite clearly a criticism of the CAPE methodology _per se_ on the grounds that it is based on the "idea of mean reversion".  That is blatantly incorrect.  GG has subsequently generalised his criticism against any statement that a current ratio is historically high or low.  That is not what he meant in the first place.  Let's move on.


----------



## Gordon Gekko

Duke of Marmalade said:


> I had to review the "angels dancing on pins" debate.  This is where it began.  This is quite clearly a criticism of the CAPE methodology _per se_ on the grounds that it is based on the "idea of mean reversion".  That is blatantly incorrect.  GG has subsequently generalised his criticism against any statement that a current ratio is historically high or low.  That is not what he meant in the first place.  Let's move on.



Duke, I’m not sure why both you and Sarenco have a fascination with telling people what they mean.

My point remains as follows:

It is silly to dismiss mean reversion and the historical performance of markets on the one hand and to then go on about CAPE. CAPE is just a number that has to be compared with something. If one ignores the concept that the future will mirror the past, all metrics and analysis becomes clouded.


----------



## Gordon Gekko

Throwing out numbers like CAPE or P/E is completely meaningless unless you’re comparing them to something; and what do we compare them to? Long-term averages. “Valuations are high” “Valuations are low”. All nonsense unless one buys into the notion that over the long-term markets will do similar things. And why it’s inconsistent to talk about CAPE on the one hand and the uncertainty around future market performance on the other.


----------



## Duke of Marmalade

Gordon Gekko said:


> (CAPE) is a valuation metric which looks at the position relative to long-term averages; i.e. it’s based on the idea of mean reversion.





Gordon Gekko said:


> Duke, I’m not sure why both you and Sarenco have a fascination with telling people what they mean.


The first of the above statements requires no guesswork as to what the author meant.  It is an incorrect statement, end of.  It subsequently transpires that what you really meant was something quite different.


----------



## Sarenco

@Gordon Gekko

With respect, I really can't figure out what you mean - that's why I asked for clarification.

I don't think that CAPE is predictive of the future direction of the stock market if that's the implication.  I brought it up in the context of a discussion on the relationship between bond and equity pricing.

Again, I think it's perfectly legitimate to refer to historic asset returns when framing your expectations about future returns.  That doesn't mean I think the future will mirror the past!


----------



## Gordon Gekko

Duke of Marmalade said:


> The first of the above statements requires no guesswork as to what the author meant.  It is an incorrect statement, end of.  It subsequently transpires that what you really meant was something quite different.



How is it incorrect? It’s a ratio. What are ratios? Means of comparison.


----------



## Duke of Marmalade

Gordon Gekko said:


> How is it incorrect? It’s a ratio. What are ratios? Means of comparison.



In another thread you will read that Ireland has a ratio of English speakers of 93%.  By comparison the US has 79%.  Who is arguing that such ratios do not make for good comparisons?  But I presume that in this case you will accept that it has nothing to do with reversion to mean.

A.  Mean reversion means the tendency to revert to "long term averages".
B.  CAPE is a ratio calculated using "long term averages".

You stated that the use of B implies a belief in A because they both are linked to "long term averages". That is incorrect.

Look, even economics professors can have a "deposit selling" moment. 'Fess up and move on.


----------



## Gordon Gekko

Far worse to be the guy hurling the accusation of Lucy-ism when in fact you don’t get the point being made.


----------



## Sarenco

Gordon Gekko said:


> Far worse to be the guy hurling the accusation of Lucy-ism when in fact you don’t get the point being made.


Well, I'm happy to admit that I don't understand your point.  Could you have another go at explaining it for us?


----------



## Duke of Marmalade

Gordon Gekko said:


> Far worse to be the guy hurling the accusation of Lucy-ism when in fact you don’t get the point being made.


I don't think Lucy ever admitted to his clanger.

_"(CAPE) is a valuation metric which looks at the position relative to long-term averages; i.e. it’s based on the idea of mean reversion." _ Let me parse and analyse this statement.  The key link is the "i.e."  which is Latin for "that is".  I can see no other interpretation for this whatsoever than it is saying *"CAPE is based on the idea of mean reversion because it looks at the position relative to long-term averages."*

You seem to be saying that this is not at all what you meant.  So can I suggest that to resolve this semantic debate that you will accept that the statement in bold is entirely incorrect (but is not a reflection of what you meant)?


----------



## Gordon Gekko

Duke of Marmalade said:


> I don't think Lucy ever admitted to his clanger.
> 
> _"(CAPE) is a valuation metric which looks at the position relative to long-term averages; i.e. it’s based on the idea of mean reversion." _ Let me parse and analyse this statement.  The key link is the "i.e."  which is Latin for "that is".  I can see no other interpretation for this whatsoever than it is saying *"CAPE is based on the idea of mean reversion because it looks at the position relative to long-term averages."*
> 
> You seem to be saying that this is not at all what you meant.  So can I suggest that to resolve this semantic debate that you will accept that the statement in bold is entirely incorrect (but is not a reflection of what you meant)?



I will not accept that it is “entirely incorrect”.

You same incapable of understanding that something like CAPE is a nonsense without something to compare it to.

It’s the “so what” / “relative to what” aspect.

It is a nonsense for people to go on about ratios and valuations being high or low whilst simultaneously dismissing the idea that what’s coming down the tracks will mirror what’s gone before.

The kernel of my position is that CAPE are irrelevant unless the proponent embraces the idea that markets are inherently predictable over the long-term.


----------



## moneymakeover

https://www.investopedia.com/terms/m/meanreversion.asp


Seems like gecko had a point


----------



## Sarenco

But CAPE isn't based on the idea of mean reversion Gordon.  It's just a valuation metric.

If I said Wayne Rooney scored more goals per game this season relative to last season, that doesn't imply that I think he is going to score less goals per game next season.

Again, I raised the CAPE of the S&P500 in the context of a discussion about the current pricing of equities relative to bonds.  Nothing to do with future price movements of either asset class.


Gordon Gekko said:


> The kernel of my position is that CAPE are irrelevant unless the proponent embraces the idea that markets are inherently predictable over the long-term.


Sorry Gordon but I have absolutely no idea what that is supposed to mean.


----------



## Gordon Gekko

Valuation relative to what?!

The comparison with Rooney’s goals is ridiculous. A more apt comparison would be “Rooney scored 25 goals but I’m not going to tell you how many games that was over or how anyone else did”.

CAPE etc are only relevant when you’ve something to compare them to.

“The CAPE comes out at circa 32”

So what? Is that high or low or middling?


----------



## Duke of Marmalade

Gordon Gekko said:


> I will not accept that it is “entirely incorrect”.


So this is what you think has some validity:
_"CAPE is based on the idea of mean reversion because it looks at the position relative to long-term averages."_
Please don't take offence, none intended, but this statement has no validity.  CAPE is no more an offspring of mean reversion theories than P/E, Dividend yield, 10 year bond yields, S&P index etc. etc.  It uses long term averages of earnings in its definition but does not in anyway imply a reversion to such averages for prices.


moneymakeover said:


> https://www.investopedia.com/terms/m/meanreversion.asp
> 
> 
> Seems like gecko had a point


What point is that?  That there are mean reversion theories?  No one is denying their existence, but really quite irrelevant to the semantic debate.


----------



## Gordon Gekko

Duke, what you and Sarenco seem incapable of grasping is the idea that CAPE, dividend yield, P/E, etc are all USELESS unless they are viewed through the prism of mean reversion.

Because, without the idea of mean reversion, who’s to say whether 32 is high, low, or middle of the road.

To take Sarenco’s analogy further, it’s as if we’re trying to ascertain where Wayne Rooney stands relative to other strikers and you guys are claiming that data in relation to anyone other than Rooney is off limits!


----------



## Sarenco

Gordon Gekko said:


> Valuation relative to what?!


Valuation relative to valuations in the past; valuation relative to other stocks; valuation relative to prevailing interest rates, etc.

Absolutely nothing to do with mean reversion.

There is simply no validity to the statement that CAPE (or any other valuation metric for that matter) is based on mean reversion.  None whatsoever.  It just isn't true.

Why you can't simply acknowledge that and move on is beyond me.


----------



## Gordon Gekko

Sarenco said:


> Valuation relative to valuations in the past; valuation relative to other stocks; valuation relative to prevailing interest rates, etc.
> 
> Absolutely nothing to do with mean reversion.
> 
> There is simply no validity to the statement that CAPE (or any other valuation metric for that matter) is based on mean reversion.  None whatsoever.  It just isn't true.
> 
> Why you can't simply acknowledge that and move on is beyond me.



Rubbish.

In order to opine whether valuations are high or low, one must compare them to something.

If one concludes that valuations are high, for example, it’s on the basis that the past will be replicated in the form of a reversion to the norm or average.


----------



## Sarenco

Gordon Gekko said:


> In order to opine whether valuations are high or low, one must compare them to something.


Of course.

But that has absolutely nothing whatsoever to do with any theory of mean reversion.

I can say that the valuation of a particular stock is high or low relative to its average historic valuation over the last 10 years.  That doesn't imply or suggest that I necessarily believe or assume that the stock price is ever going to fall back in line with its historic valuation.  

I actually suspect you know that is the case but you can't bring yourself to admit that you made a mistake.  It would be nice to move on...


----------



## Gordon Gekko

Sarenco said:


> Of course.
> 
> But that has absolutely nothing whatsoever to do with any theory of mean reversion.
> 
> I can say that the valuation of a particular stock is high or low relative to its average historic valuation over the last 10 years.  That doesn't imply or suggest that I necessarily believe or assume that the stock price is ever going to fall back in line with its historic valuation.
> 
> I actually suspect you know that is the case but you can't bring yourself to admit that you made a mistake.  It would be nice to move on...



No Sarenco. Now I’m convinced that neither you nor Duke is capable of getting the subtlety of the point. I have not “made a mistake” and your arrogance is breathtaking to be blunt.

I will give it one more go; a market is only high or low if one accepts that what’s constituted “high” or “low” in the past continues to do so. For example, a market might appear expensive, largely due to FAANG stocks for example, but that is when it’s viewed through a prism of historic valuations and mean reversion. Unless one accepts the principle of mean reversion, it is impossible to say whether valuations are high or low. The salient question is “relative to what”. For example, “but the CAPE ratio is X, run for the hills” only makes sense if one accepts that X is high relative to what has gone before and that markets should “revert to the mean”. That is the last that you will hear from me on this as I too am getting sick of the back and forth.


----------



## Sarenco

No Gordon.

I can say that stock valuations are high relative to their long-term average without accepting that they will inevitably revert to that long-term average.

There can be all sorts of reasons why stock valuations may be high relative to their long-term average.  Historically low interest rates, for example.

I don't have to accept any theory of mean reversion to assert that a stock's valuation is high (or low) relative to something else.

Apparently my suspicion that you already understood this was incorrect.  My apologies.

Let's move on.


----------



## Duke of Marmalade

Gordon Gekko said:


> ”. That is the last that you will hear from me on this as I too am getting sick of the back and forth.


I am glad that you are conceding the last word on this.  You singled out CAPE as relying on mean reversion *because *it uses long term averages.  The term "long term averages" rang a mean reversion bell with you but as I have explained ad nauseam, the use of long term averages in the CAPE has nothing whatsoever to do with mean reversion.  

Of course CAPE like any of the other indicators is relevant to the mean reversion debate, nothing at all subtle there that I have missed.

Okay, not a deposit selling moment but a mistake nonetheless.


----------



## Sunny

All we need is the Big Short to join this discussion and then we have a party....

Duke, a bit harsh comparing it to the deposit selling moment!! Ah, they were the good old days.....


----------



## Gordon Gekko

Sarenco said:


> No Gordon.
> 
> I can say that stock valuations are high relative to their long-term average without accepting that they will inevitably revert to that long-term average.
> 
> There can be all sorts of reasons why stock valuations may be high relative to their long-term average.  Historically low interest rates, for example.
> 
> I don't have to accept any theory of mean reversion to assert that a stock's valuation is high (or low) relative to something else.
> 
> Apparently my suspicion that you already understood this was incorrect.  My apologies.
> 
> Let's move on.



Except I didn’t say that. Nice add of “relative to their long-term averages”. But then you and Duke love contending that people are wrong even when they’re right. You both love telling people “what they’re trying to say” like all golf club bores. The discussion is over, we agree on that; it is annoying to nit-pick, but it is even more annoying when you are wrong, as you both are. Duke, I find your comparison with Lucey offensive, but I’ll put it down to there possibly being drink involved on your side and give you the benefit of the doubt. Good luck with things fellas; maybe tone down the riding in like the horsemen of the apocalypse to tell people what they’re saying when you have no idea what you’re talking about.


----------



## Duke of Marmalade

Sunny said:


> All we need is the Big Short to join this discussion and then we have a party....
> 
> Duke, a bit harsh comparing it to the deposit selling moment!! Ah, they were the good old days.....


Surely, you would invite Purple
Okay, not really a mistake, more a misinterpretation.  I honestly intervened in what seemed a semantic debate with a view to settling the matter quickly.  I suppose it is testament to my poor powers of explanation that it pushed GG even further along the curve.


----------



## Duke of Marmalade

Gordon Gekko said:


> ... but I’ll put it down to there possibly being drink involved on your side ...


Your obstinacy certainly was in danger of driving me to drink


----------



## Sarenco

Gordon Gekko said:


> 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

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

@Fella. I presume that comments like


Fella said:


> t's like people want to make it more complicated picking individual shares or timing the market


and 


Fella said:


> 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

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

Sarenco said:


> 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.  


Sarenco said:


> 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

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

Sarenco said:


> 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

@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

Fella said:


> 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

Fella said:


> 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.


----------



## Gordon Gekko

He was insane. Just because it worked out, it doesn’t mean he was right to do it.


----------



## spanners

Gordon Gekko said:


> 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

spanners said:


> 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.


----------



## spanners

I think the size of the position was crazy because it was 100% of his wealth, rather than the value.


----------



## Gordon Gekko

spanners said:


> I think the size of the position was crazy because it was 100% of his wealth, rather than the value.



Which is why I said “the whole €2.5m”.

€2.5m for someone with €50m might be fine.


----------



## Colm Fagan

spanners said:


> 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:


Fella said:


> 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

@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

@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

Colm Fagan said:


> @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


----------



## Colm Fagan

@Fella.  We're not really that far apart.  You just misunderstand what I'm saying.  I never said that I thought I had an edge over the market.  I feel like a broken record in saying that my ambition with every purchase is to earn a long-term return of around 6% to 7% a year.  If I think one of my holdings will earn less than that in future, I sell, irrespective of how it's done in the past.  Of course, I sometimes get it wrong, as I've readily admitted.  
I don't care if the return from the overall portfolio is more or less than the market.  It so happens that I've done better than the market over the last few years but that's beside the point. 
Let's leave shorts out of it for the moment; in any event, I have a relatively small exposure to short positions.  I'll articulate my logic with shorts some other time.  I'll just concentrate on the long positions.
Take Apple, which you mentioned in your last post.  If you read my original posting on Apple of 6 December 2015, when the share price was $92, I said why I thought its earnings would keep growing and that it was priced as if it was "a staid company in a mature industry", instead of being "arguably the leading technology companies of our age."  I reckoned that it would deliver my target return - and it has.  
I'll now have to re-do my sums to check if I think it will continue to deliver 6% pa in future from its current price.  If I conclude that it will, I'll hold on. I won't sell even if I think something else will do better, which is what I'd do if I was trying to beat the market.   I'm happy to hold on to shares that I think will deliver the required return in future.  Full stop. 
If you look at any of my analyses as published in this column, you should find with all of them that the question I'm trying to answer is the simple:  "Do I think it will deliver the target 6%/7% pa?" not "How can I beat the market?"


----------



## Colm Fagan

Sorry!  I quoted the wrong price above for Apple at the time I wrote my first column on it.  The price at the time was $117, not $92.  The conclusion is the same, even before allowing for the dividends received in the meantime.


----------



## dishwasher

Colm- My late father would have agreed with you 100% about researching companies, holding for the long term and only investing in a few. To be fair,  I'm unsure as to how much is luck vs research but he did very well indeed over the long term - bought shares in the early 90s, died in 2015.  Unlike you he was pretty secretive about his affairs so there was a lot involved in sorting out his affairs after he died.  The craziest of all is the need for a Medallion Guarantee Stamp to transfer ownership of his US stocks into my mother's name to complete the probate.   The shares are worth very significant $$ so have to be sent to a special section of the IRS in Batimore as the value is too high for the medallion guarantee service providers to deal with.  Its been with the IRS for a year (backlog apparently and paper based service) and all the while his estate has been bearing the investment risk, which is not for the faint hearted given the amounts involved.    

You said above that you would transfer your holdings to index tracking if it came to it - we did try this with my dad but he didn't want waste money paying the CGT as once he died there would be no CGT only IHT.   He was UK based but presumably the same here.


----------



## Colm Fagan

dishwasher said:


> there was a lot involved in sorting out his affairs after he died


Thanks for the tip!!  @Sarenco made a similar point a few days ago.  I think there's a big difference between my situation and that of your late father (and possibly also Sarenco's former client).  My wife and I are almost completely dependent on the returns from our shares for our future income, for however long we may live.  We don't have any other pension entitlement (except for one single person's OAP, which wouldn't go far in our house!) so I have to monitor their performance carefully.  I suspect that wasn't the case for your dad, that he probably had another source of income, be it from property or whatever.  Forgive me if I'm wrong.  
The fact that our shares are held in nominee accounts eliminates the US problem you referred to (at least I think so).  
I'm also aware of the CGT on death issue (it is the same in Ireland, to the best of my knowledge) but that only affects shares held outside the ARF/AMRF structures.


----------



## Colm Fagan

*Fasten Your Seat Belts *

*Update 7 of “Diary of a Private Investor”         Colm Fagan             10 September 2018*

"We are experiencing some turbulence.  Please stay in your seats and fasten your seat belts."  We are familiar with such in-flight announcements, and they don’t worry us.  It never occurred to me that the financial turbulence of owning shares in an airline company could be more worrying than the physical turbulence of flying in their planes.

My financial turbulence started shortly after I bought Ryanair shares in March 2016.  I continued loading up over the next couple of months, at an average of €13.47 a share.  By the start of June, Ryanair was my second-biggest holding, accounting for 18% of my portfolio, up from zero three months previously.  Little did I know the turbulence that lay ahead.

My decision to buy heavily into Ryanair was based on a (personal) assessment that its shares could be worth €24 by 2024.  Ryanair doesn't normally pay dividends, so the projection was based solely on projected growth in share price.  Growth from €13.47 to €24 over an eight-year period would equate to a compound annual return of 7.5%, comfortably ahead of my target return of 6% to 7% a year.  The core assumption underlying the projection was a belief that Ryanair’s management could deliver on its target of 180 million passengers by 2024, up from 106 million in Financial Year 2016, without sacrificing margin.

I was able to grow my holding quickly between March and June 2016 by employing something I had discovered only a short time previously:  financial spread bets.  With spread bets, I only had to pay 10% of the cost up front.  Effectively, the spread betting firm would lend me the full cost of the shares, on the security of a 10% deposit.  For larger companies, such as Apple, the deposit requirement was only 5%.  For Ryanair, the margin increased to 20% above a certain level. 

I was like a child with a new toy, fascinated by what it could do but oblivious to its dangers.  I realised of course that a fall in the share price would result in a margin call, and I took the precaution of bolstering my deposit account, so that I would have ready access to funds in such an eventuality.  I thought I had my risks covered. How naïve of me.

Then came the Brexit vote on Thursday, June 23.  I stayed up well into the night, horrified as the results came in.  I also had to do some last-minute packing for going on holidays the next day.  At 7:30 on Friday morning, when I should have been winding down for the holiday, I got a call from the spread betting firm, demanding funds immediately or my position would be closed.  He said that he expected Ryanair to be down about 15% from Thursday's closing price of €13.69 when the markets opened in half an hour.  This was more than I had feared, even in my worst nightmares.  To avoid having my holding liquidated, I would have to come up with more funds than I could withdraw in a single day without visiting my bank, which I had no intention of doing on the day I was going on holidays.  I transferred enough to avoid immediate closure of my positions, but eventually bowed to the inevitable.  In mid-morning, my entire Ryanair position was closed at €11.90 a share.  The price was higher than I would have got first thing in the morning, so I was grateful for small mercies.  Nevertheless, I had to swallow a major loss.

When the dust settled, I decided that Ryanair's prospects had not been that badly dented, so I started rebuilding my position.  By the end of August 2016, I was back to where I was just before the Brexit vote and by September my Ryanair holding exceeded the previous peak.  There were two big differences from before, though.  Firstly, I was able to buy back at much cheaper prices:  the average price for purchases between June and September was just €11.52 a share.  Secondly, I made certain to over-fund the spread bet account by a significant margin, to avoid ever being caught the same way again.  To date, my strategy has been successful, but I know there are greater tests to come.

It is hard to make sense of my purchases and sales of Ryanair since then.  I have finally rationalised them by concluding that I have the same schizophrenic attitude to investing in Ryanair as I have to flying with it:  I don't like it, but it's cheap (most of the time) and I end up buying, even though I don't really want to.  I think it represents particularly good value at the current price (€13.20 at time of writing), so it’s now my third largest holding (after Renishaw and Phoenix).

Part of Ryanair’s attraction is the thermal uplift of share buybacks.  To illustrate their impact, profits for FY2018 were up 10% on last year, but earnings per share were up 15%.  The difference is because Ryanair generates lots of cash, but instead of paying dividends, it uses the spare cash to buy back shares from investors and then cancels them.   The net result is that profits are being distributed to a smaller group of people, so we all get more.     It gives a nice lift to earnings each year. 

Profits are expected to fall by around 10% in 2019, but the thermal uplift of share buybacks means that earnings per share are likely to fall by less than 7%.  (This forecast excludes losses on recently acquired Laudamotion, which I’ve excluded on the grounds that Ryanair bought the company in the belief that it will eventually add value.  I’ve assumed – cautiously I hope - that the purchase will neither add to nor detract from Ryanair’s value).  Even at the lower profits, I can expect an earnings yield of 8.5% from the current price.  I believe that this represents excellent value  ………

Unless there’s a hard Brexit, in which case I’d better fasten my seat belt for further turbulence.


----------



## cremeegg

Sarenco said:


> As aside, I've never understood why some people boast about being 100% in equities.  Why not 80% or 120%?  What's so magical about 100%?





Gordon Gekko said:


> Why not 120%? Because leverage can get you carried out.



And I have just spotted this.



Colm Fagan said:


> I got a call from the spread betting firm, demanding funds immediately or my position would be closed.



Many years ago I looked at a case study of a company which ran into trouble because it had mismatched the timescales on its assets and liabilities. It had borrowed on an overdraft to purchase assets intended to be used in the business over many years.

This sparked me to wonder could the opposite approach make me a fortune. The simple answer was yes. (A modest fortune admittedly )

As a young man I borrowed as much money as I knew I could easily repay from my salary. I borrowed it on a fixed term with known monthly repayments.

I then invested the borrowed money.

My ability to repay the borrowings was never dependant on the performance of the investment. 

My investment strategy was never dictated by the need to meet repayments on the borrowings or (shudder) margin calls.


----------



## cremeegg

Fella said:


> @Colm Fagan buying Apple or short Telsa in the opinion you know more than the market imo is crazy ,  you have no advantage over the market.



The market is overly swayed by short term news, and simple fashion. Anyone with a little maturity has an edge.


----------



## Colm Fagan

cremeegg said:


> The market is overly swayed by short term news, and simple fashion. Anyone with a little maturity has an edge.


We've been over this ground many times before, but it's worth revisiting earlier discussions, as it is an important issue.  

I don't necessarily think that I have an advantage over the market.  For me, the big advantage of investing in a small number of individual stocks that I'm familiar with is that it makes me comfortable having a higher proportion of my net worth in the market.  As readers of this column should know by now, I have more than 100% of my portfolio invested in the market.  This strategy is sure to pay off in the long-term, *provided that* I can stay the course through bad times and good.  Fear of short-term loss prevents the vast majority of us from following this winning strategy consistently.  That fear can be mitigated, if not quite overcome, by investing in a small number of real life companies rather than funds.

In relation to your comment that I have no advantage over the market, I don't know if you're addressing that at me personally or at stock-pickers in general. I've already said in another post that I have beaten the market over the last number of years, but I accept that there may be an element of luck in this (in that my largest single investment for many years past has done extremely well), so I'm not going to disagree with you as far as my own personal performance is concerned.  But if you're referring to stock-pickers in general, then you're wrong.  

It's worth reading an article in today's FT entitled "How to pick a successful stockpicker".  The author says that a consultant found that four in ten of a particular group of stockpickers out-perform their benchmark by 400 basis points or more a year, net of fees.   The consultant also says:  "I am strongly of the opinion that skill does exist in active management."  Read it.


----------



## Colm Fagan

@cremeegg   I don't know how you were attributed with the quote given at the top of my post ("The market is overly swayed ....").  I meant to post the quote:
"buying Apple or shorting Tesla, etc.   "


----------



## Colm Fagan

cremeegg said:


> The market is overly swayed by short term news, and simple fashion. Anyone with a little maturity has an edge.


Hi Cremeegg.  Thanks!  Sorry for misunderstanding your earlier post.  Maybe you posted by accident before you'd finished.  The one I saw initially only had the quote from @Fella,  not your reaction to it.  
I gather that we're on the same side!


----------



## spanners

@Colm Fagan when you say you have more than 100% of your portfolio in equities, is that taking account of the leveraged spread bets or do you also have other borrowings to invest like cremeegg?


----------



## Colm Fagan

spanners said:


> when you say you have more than 100% of your portfolio in equities, is that taking account of the leveraged spread bets or do you also have other borrowings to invest like cremeegg?


No, it's just the spread bets.  It's probably worth adding that, when I started with spread bets, I looked on them as "bets", which is how the spread bet companies present them, e.g. I made a "bet" of €10 a point (or whatever) on the Ryanair (or whoever) share price increasing.  To some extent, that led to my downfall with Ryanair, as described in the diary.  Then I changed how I looked at them and set up a spreadsheet, which recorded that I bought (say) €30,000 worth of Ryanair at the prevailing price, and I borrowed €30,000 to fund that purchase, so the €30,000 appeared on both sides of my "balance sheet", with a zero value on day 1 (actually, it had to be negative at the start because of the bid-offer spread).  Of course, it then started varying because the loan remained the same but the asset value changed as the share price fluctuated.  The alternate presentation has helped to reduce the risk of a repeat of what happened on Brexit night (In saying that, however, I recognise that we haven't had a similar seminal event since then; I thought we'd have one on the night Trump was elected but the major surprise is that nothing happened that night).


----------



## spanners

@Colm Fagan Interesting. I looked at spread betting and thought that if psychologically you can get past the 'bet' element, essentially it is a platform that offers to lend you money at approx 3-3.5% per annum to invest, with all capital gains and income being tax free.

If I was an experienced investor that would be a very attractive proposition.


----------



## Colm Fagan

*Punched in the Mouth*

*Update 8 of “Diary of a Private Investor”             14 October 2018*


Mike Tyson, the former world heavyweight boxing champion, famously said that everyone had a plan till they got punched in the mouth.  I had a plan and yes, I got punched in the mouth.  Actually, a barrage of punches. 

As regular readers know, the core of my plan is to eschew so-called “safe” investments:  I have no bonds and just enough cash to meet short-term liquidity needs.  Everything – actually, by utilising leverage, more than everything – is in equities.  The reasoning is simple:  I expect to earn 6% a year on average from equities, compared with 2% (or less) from bonds and cash.  I hope to be around for a while yet, possibly 15 years or more.  Over that timeframe, an extra 4% a year will add more than 100% of its current value to the portfolio.  Not to be sneezed at.  

Share prices can fluctuate wildly. To prevent me from getting too excited when market values rise or too depressed when they fall – to “treat those two impostors just the same” - I have devised a smoothing approach that helps me to cope with fluctuations in the value of the portfolio.  My long-term spending plans are based on smoothed values rather than market values.  Of course, any sales to meet cash outflows – and sales are a regular occurrence now that I’m firmly in draw-down mode – must be at prevailing market prices.   Over the last few years, the ratio of smoothed to market value has ranged from a high of 120% just after the Brexit referendum in Summer 2016, when market values collapsed, to a low of 75% in January this year, when the market was euphoric over the impact of Trump’s tax cuts.  As recently as early June, the smoothed value was 85% of market value.  Everything in the garden seemed rosy. 

Then came a hefty punch in the mouth.  The word “Renishaw” was emblazoned in big red letters on the glove.

Renishaw, a specialist engineering company with its headquarters in Gloucestershire, is my longest-standing and largest single holding.  I bought my first shares in the company in 1998, at £4.05 a share.  It’s my one and only “ten-bagger”, defined as a share worth ten times what was paid for it originally.  It now accounts for more than 25% of my total portfolio. 

Results for the year to 30 June were published on 26 July.  The market liked what it heard and the share price, which had been rising steadily for weeks, reached a closing high of £56.60 the following day.  I took advantage of the price rise and sold just over 10% of my holding at an average of £56.20 a share. 

Then the price started falling.  I wasn’t worried as I still considered it a sound investment.  In fact, when the price fell, I couldn’t resist the temptation and bought back around a third of what I’d sold, at an average price of £51.13 a share. 

Then, for no apparent reason, the price kept falling.  It was down to £47.40 by the end of September and there was no respite as we moved into October.  By 5th October it was at £45.56 and by Thursday last (11th) it had dipped below £40 a share - a fall of almost 30% from the July high.  No wonder I was left reeling.  On its own, the fall in Renishaw’s share price caused a 7.5% fall in the value of my total portfolio in just two months. 

More worrying in some ways is that there is no apparent reason for the fall, other than general market malaise.   The company has said nothing.  The latest we have is the chairman’s July statement that the directors remain confident in the company’s long-term prospects.   

I’ll find out soon if there’s bad news that no-one’s telling me.  The AGM is on Thursday next (18th October) in the beautifully named Wotton-under-Edge, in the heart of rural Gloucestershire.  I’ve booked my flights and plan to be there to hear the news:  good, bad or indifferent.  I also plan to speak at the AGM; the subject of my planned contribution may get a mention in a future diary update, but not now. 

There was more bad news as I clung to the ropes, groggy from the Renishaw punch.  Ryanair, which accounts for over 12.5% of my portfolio, is down 17% from the price at which I increased my holding only a few short weeks ago.  In Ryanair’s case, I feel the pain more to my pride than my wallet:  my diary update in September told why I thought it was a good buy at €13.79; it’s now down to €11.46. 

I have managed to land the occasional counter-punch on Mr Market.  My short position in Tesla, mentioned first in Diary Update Number 2 of April 1st, is looking good.   I’ve cashed some of my Tesla profits but I’m hanging on to the bulk of my short position in the stock, in the hope of further price falls. 

Last week, the market mayhem extended to most of my other holdings.  It was particularly bad on Wednesday and Thursday last, when global markets fell sharply.  I limped back to my corner at Friday’s closing bell, mauled but still standing. 

I have used the weekend to take stock of where things stand now, and where I go from here, if the carnage continues into next week.  The fall in market values means that the smoothed value of the portfolio is now back above 100% of market value, but the ratio has been higher in the past, and on each occasion it’s come back to break-even relatively quickly.  I’m hoping for a similar result this time.

I believe that all my holdings represent good long-term value at their current prices, so I’m not too worried.   I have a hefty tax bill coming up shortly, though, and will need to sell some of my shares.  I’m also conscious that the Brexit negotiations are entering a crucial stage (again!) and there is a risk of things turning nasty if the talks go off the rails.  I hate selling when prices are down, but it must be done and it’s probably best to take the hit sooner rather than wait and hope that they’ll have recovered by the time I need the money.  I plan to keep sales to the minimum, however, and to hunker down until the storm blows over.


----------



## Fella

@Colm Fagan i admire you for posting up your share picks , I worry about the amount of behavioural bias you are showing. Anyway good luck i suppose at least a private investor can read the article and see what not to do in investing .


----------



## opexlong

Interesting article.

This report says that Renishaw was trading at a trailing P/E of 29.5x. Too much helium.


> My short position in Tesla



In the end, Apple and Tesla and your other picks could suffer severe price declines on the same day. If that happens your Tesla short position could act as an inadvertent hedge against portfolio losses.


----------



## Sarenco

Colm Fagan said:


> I have devised a smoothing approach that helps me to cope with fluctuations in the value of the portfolio.  My long-term spending plans are based on smoothed values rather than market values.


Hi Colm

I wonder could you give us a little more detail on your value smoothing approach?  It sounds like an interesting idea, at least from a psychological perspective.


----------



## Colm Fagan

Hi Sarenco.  The smoothing formula I use for my own portfolio is quite similar to the formula in Appendix 2 of the attached (draft) submission to the DEASP on auto-enrollment.  I plan just a few relatively minor changes for the final submission.  While my "personal" smoothing formula only has a psychological value (as you state), I'm proposing that, for the national auto-enrollment scheme, the smoothed values will be the values at which contributors will interact with the scheme.  It means that contributors will be protected from the volatility of the stock market.  As I write in the submission (paragraph 17), the proposed approach will remove the joy of sharp upward movements in stock markets and the pain of sharp downward movements while retaining the equity risk premium.   The best of all worlds?


----------



## Colm Fagan

Sorry, I can't seem to attach the document.  Can anyone help me?


----------



## Sarenco

Colm Fagan said:


> Sorry, I can't seem to attach the document.


That's a shame.

Is it similar to the formula you gave in your presentation to the Society of Actuaries back in February 2017 (i.e. a weighting of 1.5% to the current month’s market value and a 98.5% weighting to last month’s smoothed value, increased by one month’s interest)?


----------



## Colm Fagan

Yes.  The main difference is that I smooth weekly rather than monthly. The parameters are slightly different too.  
By the way, I’m now on the plane, on my way to tomorrow’s Renishaw AGM!


----------



## Sarenco

Thanks Colm.

I wonder would your smoothing formula produce sensible results in the context of a prolonged bear market in equities?

Also, would having a modest fixed-income allocation not be expected to have a broadly similar smoothing effect on a portfolio?


----------



## Colm Fagan

For my February paper, I tested it for the US and UK markets for the 32 years from 1986 to 2017 inclusive (that was the longest I had monthly data for). There were only two months with negative returns and both of those were less than 0.1%. 
Having a modest fixed income element would make it even smoother, but at a cost of lower return, as set out in my August diary update.  It’s just not worth it if the smoothing works well.  Smoothing is even better for auto enrollment: works from cradle to grave.


----------



## Sarenco

Colm Fagan said:


> For my February paper, I tested it for the US and UK markets for the 32 years from 1986 to 2017 inclusive (that was the longest I had monthly data for).


I was really thinking of a bear market that lasted a decade or more (US post-1929; Japan post-1990, etc.).


Colm Fagan said:


> Having a modest fixed income element would make it even smoother,* but at a cost of lower return...*


You would certainly expect the fixed-income element to be a drag on performance over the long-term.  However, there have been periods of 30 years or more in all developed economies where domestic long-term bonds outperformed domestic stocks.

I think it's interesting that the Norwegian and New Zealand sovereign wealth funds (which essentially have an infinite time horizon for their investments) both have a fixed-income allocation within their portfolios.  The same is true of the big university endowments in the US.


----------



## Colm Fagan

Yes. I looked at Japan from 1989 to 2005 for the February presentation  - ropey!  
I argued that (a) Japan in that period was quite unique for all sorts of reasons (as set out on a couple of slides); (b) the world learned a lesson from the Japanese experience that was applied to get the Western World out of the 2007-09 crisis; (c) there should be an extra overlay onto the investment strategy to avoid excessive exposure to any specific geography, industry sector, technology, investment theme or economic outlook. Also, because of the low weighting given to current market value and the extremely long investment horizon, I reckon that up to 20% could be in unquoted assets such as real estate, forestry, infrastructure, etc. 
My bottom line was that every single investment- without exception- should be expected to deliver the target return of risk free plus (say) 3% to 6% over the chosen investment horizon.   In theory therefore there is no room for bonds.   Obviously there has to be room for bonds or cash for tactical reasons. The problem with that is that one can always argue that a major recession is round the corner so we must hold on to our shekels.  “Time in the market is more important than timing the market”.


----------



## Colm Fagan

By coincidence I’ve just read an interesting article on this topic - of whether equity risk reduces for longer holding periods - in this week’s Economist.  It reruns an argument that Brian Woods (whom some in this parish will know) and I explored in a paper presented over 40 years ago.  That paper was dismissed at the time but belatedly recognized as “ground breaking” nearly 20 years later!  Based on that precedent,  I probably I won’t be around when the latest proposals are recognized!


----------



## joe sod

Colm Fagan said:


> Renishaw, a specialist engineering company with its headquarters in Gloucestershire, is my longest-standing and largest single holding. I bought my first shares in the company in 1998, at £4.05 a share. It’s my one and only “ten-bagger”, defined as a share worth ten times what was paid for it originally. It now accounts for more than 25% of my total portfolio.
> 
> Results for the year to 30 June were published on 26 July. The market liked what it heard and the share price, which had been rising steadily for weeks, reached a closing high of £56.60 the following day. I took advantage of the price rise and sold just over 10% of my holding at an average of £56.20 a share.
> 
> Then the price started falling. I wasn’t worried as I still considered it a sound investment. In fact, when the price fell, I couldn’t resist the temptation and bought back around a third of what I’d sold, at an average price of £51.13 a share.
> 
> Then, for no apparent reason, the price kept falling. It was down to £47.40 by the end of September and there was no respite as we moved into October. By 5th October it was at £45.56 and by Thursday last (11th) it had dipped below £40 a share - a fall of almost 30% from the July high. No wonder I was left reeling. On its own, the fall in Renishaw’s share price caused a 7.5% fall in the value of my total portfolio in just two months.



I dont want to rub salt in the wounds but I saw Renishaw had another big fall today, i dont know what the reason is but I was interested in your post and your honesty in talking about your investments. On a positive note you have been investing in this share since 1998 and should still be in substantial profits. Maybe the reason why you have not sold much of your holding is that you would crystallize a large capital gain and have to pay alot of capital gains tax. You have not really discussed this aspect of the investment. Maybe if you were resident in the UK where they have a very generous capital gains tax allowance of around £11,000 you might have been selling off more of your investment and re investing somewhere else. Maybe i am not correct in my assumption but I think the onerous capital gains tax situation in Ireland has stopped people from selling off investments with big capital gains, this partly explained why many irish investors did not sell their bank shares in 2008 when trouble hit. I know you are far more sophisticated than most people investing in ireland


----------



## cremeegg

I just did some basic research on Renishaw. It is a fine company with an enviable record. However that was fully recognized by the market from early 2016. 

Like so many investments which are successful over a period based on sound fundamental reasons, success becomes the reason for further success. 

Momentum, even fashion, takes over driving the price above any real value. People buying not because it’s a good company at a reasonable price but because all the previous buyers made money. 

We all know how long the market can stay irrational. 

The next phase may be the market over compensating on the other side. 

The interesting thing to me is why you didn’t realize your gains when there was a step change upward in the price. 

A belief that you can’t time the market ?

CGT issues ?

Delight that the market had finally seen the value in Renishaw which you had spotted earlier. And an emotional attachment to your perspicacity that you couldn’t walk away from. A case of loving your shares. 

Renishaw is simply not worth €3bn.


----------



## Jim2007

I don’t follow Renishaw, but a few quick ‘back of a cigarette pack’ calculations suggest you’re right.  How if I held the stock, I’d say it is not so over valued as to warrant a disposal just yet.


----------



## Colm Fagan

@joe sod @cremeegg @Jim2007
Thank you  for your comments.  I don't have any major disagreements with what you've written, just modifications/ amplifications.

I don't take a conventional approach to valuing companies. My main criterion is whether I think it will deliver my target return of (say) 6% to 7% a year over the next n years.  Like Warren Buffett, my ideal holding period is forever, i.e. n approaches infinity.  I recognise that I've erred in not giving enough consideration to the reality of having to sell at some future date, and the uncertainties around what price I'll be able to sell at.  I'll come back to this point later.

Looking at Renishaw as a stock to be held forever, the analysis is straightforward.  Over  long periods, it has consistently delivered double digit growth in earnings and a slightly lower rate of growth in dividends (the lower rate of growth in dividends means that it's now reinvesting a higher proportion of profits back into the business). I only have records for the last 13 years.  Over that period, EPS has grown by 13.7% a year on average and dividend per share by an average 8.9%.  The period over which that 13.7% average growth rate was achieved spans 2009, when EPS fell 79%, to just 21% of the 2008 figure, but it bounced back the following year and hasn't looked back since.

Unlike most fast-growing companies, growth is almost entirely organic rather than by acquisition.  Total share capital now is exactly the same as when I bought my first shares in 1998:  no new shares were issued in the meantime, and none bought back.  The company has no borrowings; it owns a high proportion of the properties it occupies all over the world, and has over £100 million cash in the bank, so growth wasn't achieved by leveraging up the balance sheet and taking on extra risk - another common, and risky, formula for fast growth.

The formula for growth is, and always has been, to invest around 15% of revenues in R&D each year.  The vast bulk of this "investment" is expensed through the P&L account.  Thus, a massive asset is being created (in the form of patents, know-how, new products in the pipeline) that is almost completely unrecognised in the balance sheet.  Companies sometimes acquire such know-how by buying other companies.  They can then recognise the value of acquired R&D in the balance sheet.  It's a peculiar quirk of accounting.  Renishaw keeps it all hidden away - and is happy to keep it that way.

Because of the durability of the growth formula, I am confident that EPS will continue to grow in future (providing they keep investing 15% of revenue in R&D).  I've factored a 9% average EPS growth rate into my calculations.  Assuming dividends stay at a constant percentage of profits, I can also expect dividends to grow by 9% a year on average.  My desired return is "only" 7% a year, so I'm prepared to pay a good price for that sort of payback.

Of course, the share price will gyrate all over the place, but those gyrations don't affect the above reality.  The share price is only relevant if I want to sell (or buy, but I'm now very much a seller).  The plan is to sell my shares gradually over the years, taking advantage of elevated share prices to sell, and holding on when it's depressed.  I did sell some shares when the price was at £56, but I admit that, while I thought £56 was a bit rich, I didn't think it was mad, so I only sold a small proportion of my holding.  Also, as I wrote in my last diary update, I bought back around a third of what I sold when the price dipped below £52.  Now that the price is down to £37.82, I'm sorry that I didn't sell more at the higher price, but I'm not going to die of depression over it:  I'm still convinced that the growth formula is intact for the longer term.  Yes, it will be squeaky bum time if we get a repeat of 2009, because of the problems in China (a major market for Renishaw) but Renishaw is better placed to ride out a severe recession than most other companies (the cash position was boosted by another £15 million since 30 June, to £115 million by the end of September).  I hope that I too will be able to ride out a recession - if one comes.  Nevertheless, I recognise that, as I get older, I should be giving more consideration than I've given hitherto to the price at which I may have to offload stock.  One lesson learned - painfully.

@joe sod:  you're right about CGT being a constraint on selling.  I'm not going to rail against it; I accept tax as a fact of life, just like the weather.  The government would probably get more revenue from this tax if they reduced it:  people would buy and sell more, and it would also be better for the economy.  Anyway, I'll try not stray into politics.  Some of my shares are in the ARF/ AMRF, so I don't have to worry about CGT on those; I also hold some in the spread bet account, which is exempt from CGT, but I repeat what my spread bet providers are obliged to tell me every time they write to me:  78% of their retail clients (79% for another provider) lose money on spread bets, so be warned!!!


----------



## Colm Fagan

The great thing about writing the "Diary of a Private Investor" column is that I keep learning from others!

Following up on what I wrote yesterday (#410 above) in response to comments/ questions from @joe sod, @cremeegg , and @Jim2007, I did a few "back of a fag packet" calculations to work out what the sale price would have to be for different holding periods to earn my target return of 7% (or 6%) a year, on the (woefully artificial) assumption that earnings grow steadily at 9% pa.  In practice, of course, earnings growth will be volatile around the long-term average, as will the PE ratio, but I can only deal with one uncertainty at a time!

Let's take the simplest situation first:  if the PE multiple at exit is the same as at time of purchase, the annual return will be 9% plus the dividend yield, irrespective of whether the P/E multiple at both dates is 10 or 50.  All that varies is the return from dividends, expressed as a percentage of the original investment.

We therefore know that the exit P/E multiple has to be less than the starting multiple to earn my target return of 7% (or 6%) a year, but how much less?

Take starting figures as follows:  Price: £37.82 (as at Friday's close); Earnings per share (EPS): £1.705 for 2018; Dividend per share:  £0.60.
Thus, the starting P/E ratio is 22.2.

If I sell the stock after 10 years, I'll earn a 7% return if the P/E ratio has fallen to 15.5 by then (from 22.2 now); I'll earn 6% a year between now and then if the exit P/E ratio has fallen to 13.9.  If I sell after 20 years, I'll earn 7% a year if the exit P/E ratio is 9.9; 6% if it's 7.7.

On a twenty-year investment horizon, there's no way (IMHO!) that the P/E ratio will have fallen below 10; therefore, I'm confident that I'll earn more than my target return over that time horizon.

As I get older, however, my investment horizon is getting shorter, so I do have to give more thought to what the exit P/E ratio might be.  Remembering too that earnings are volatile, and may now be close to a cyclical high (for a company in a very cyclical industry),  I'm starting to agree with the critics that I have too much tied up in this particular stock.  (A bit late, I hear you say!).  The only reason I agree with them however is because my investment horizon is short; if I were younger, and had a longer investment horizon, I wouldn't be concerned.


----------



## cremeegg

Colm Fagan said:


> the (woefully artificial) assumption that earnings grow steadily at 9% pa.  In practice, of course, earnings growth will be volatile around the long-term average, as will the PE ratio, but I can only deal with one uncertainty at a time!



Small engineering companies are ten a penny, often badly managed, everything with them is price, the competition is fierce.

Huge engineering companies Siemens, GE, ABB and a few others are formidable operators with enormous advantages over any new competitor.

It is very possible that Renishaw are in a sweet spot, and have been for many years. They may be better managed than the tiddlers and so were able to grow out of that group, they may be able to continue as they are for many years, but growing to the next level may be beyond them. 

Past performance at growing by 9% may not be a guide to future performance. Indeed the very things that made them successful in the past may work against them in the future. For example, is their management very concentrated ?

For a company in a mature industry to outgrow the economy is difficult, to continue to do so requires it to change its DNA regularly.


----------



## Colm Fagan

@cremeegg Thanks for your comments. 

I'm always conscious of Brendan's (the boss's!!) request to avoid detailed discussion of individual shares.  He's happy to give me space on this forum to explain what I've bought/sold and my reasoning for my decisions.  I've tried to adhere to his instructions, so I don't plan to respond to your detailed comments, other than make the general point that a winning formula for consistent long-term growth is hard to find.  Some work for limited periods, e.g. consolidators (funeral homes is an example that comes to mind), increased borrowing, going on the acquisition trail, but many of these so-called winning formulae can come to sticky ends. 

When I was lucky enough to own a significant portion of a business, and to have a major say in its direction, I liked to think that one of the reasons for our success was because we always tried to learn new things and to be at the forefront of new thinking, rather than just turning the handle on something that had made money for us in the past.  I like to invest in companies with similar mindsets.



cremeegg said:


> Small engineering companies are ten a penny


Small engineering companies may indeed be ten a penny, but companies (in any sector) with the mindset I've described are extremely rare and should be cherished.  If you know of any others that meet the criteria I've described, I would be delighted to hear from you (you can send me a private message on AAM).


----------



## Colm Fagan

*Just as it Says on the Tin*

*Update 9 of “Diary of a Private Investor”         3 December 2018*


It’s been a traumatic few months for my portfolio.  Its value fell by 15.8% in October, making it the worst monthly result ever, or at least the worst since I started keeping detailed monthly records from the start of 2013.  October’s fall came on the back of an 8% fall in September and was followed by a further 2% fall in November.  Do the math.  I’m a lot poorer now than I was a few short months ago.

Renishaw, which regular readers will be familiar with, was the main culprit.  It fell from a high of £56.60 in mid-July to a low of £36.70 on 23 October, down 35%.  It has made a partial recovery since, to last Friday’s £42.82.

Renishaw wasn’t my only faller, not by a long shot. Samsonite, the luggage company (see Update 4 of 11 June), was another major casualty.  It fell 25% between end August and end November.

Those two stocks are at opposite ends of the world – Renishaw in the UK, Samsonite in Hong Kong – and operate in very different markets– Renishaw in precision engineering and Samsonite in luxury travel goods – but they have one thing in common: China is a major market for both.  Stocks with significant exposure to China are suffering at present due to the country’s economic problems.  I fear that there’s more bad news to come from China, so I’ve reduced my exposure to both stocks.  Even after the sales, Renishaw is still my largest single holding.

The overall result could have been even worse, except for two recent decisions that worked out well – more by accident than design.

Apple is one of my longest standing and best-performing stocks (first discussed in my Sunday Times column of 6 December 2015:  https://www.askaboutmoney.com/threads/colm-fagans-diary-of-a-private-investor.207496/ ).   In June 2017, I increased my holding by 50%, buying at $144.26 a share.  I bought more again in January 2018 at $169.85 a share.  Feelings of vertigo started in May, and I sold a small portion of my holding at $187.43.   I sold further tranches at $191.95 in June, at $218.18 in August, and at $220.69 in October, ending up with slightly more than I had before the May 2017 purchases.  Each sale at a higher price than the last one made me feel annoyed with myself for selling too soon.  No longer.  At the current price of $178.60, my decision to offload a significant portion of my holding is looking good.

I had a similar lucky escape with Tesla.  As discussed in Update 2 (1 April), I opened a short position in Tesla earlier in the year, i.e. I gambled on the share price falling.   At the end of September, I was sitting on a nice profit and in early October I closed 60% of my position at $266.08 a share, at an average profit of $36.44 a share.  Then came a bolt from the blue.  The results for Quarter 3, which were published after the markets closed on 24 October, were well ahead of forecasts, and the price was expected to jump when US markets reopened.  I decided that discretion was the better part of valour and closed out most of my remaining position at $320 a share, before the market officially opened on the following day.   At the current $350 a share, that decision is looking good.

I still find it hard to believe Tesla’s excellent result for the third quarter.  My suspicions are heightened by the fact that the chief accounting officer resigned shortly before quarter end, having been with the company for less than a month.  That doesn’t sound good.  If the rest of my portfolio were doing well, I would back my belief with money, but my current more cautious self is not prepared to make the call.  I’ve decided not to close out my remaining short position in the stock for the time being, though.

Now that the dust of battle on the stock market has settled – for the time being at least – it’s time to take stock.  The heavy losses I suffered over the last few months caused me briefly to consider giving up on my strategy of investing 100% (or more) in growth stocks, and of pursuing a more conventional strategy, as recommended by the experts for someone of my advancing years.  Then I did some sums and discovered that my strategy is delivering exactly what it says on the tin:  significantly higher volatility but much higher returns than a more conventional mixed portfolio.  Even after the recent falls, the average return on my portfolio from the start of 2013 (the date from which I have kept detailed records of cash inflows and – increasingly – outflows) has been more than 10% a year, which is probably 8% a year more than I would have earned on a bond-based portfolio.  The bad news is that the portfolio could fall in value by another 24% before breaching my long-term target of a 7% annual return.  A messy Brexit –even more messy than the one we’re already almost guaranteed – could leave me close to those levels.  Not a happy thought.


----------



## joe sod

Colm Fagan said:


> It’s been a traumatic few months for my portfolio. Its value fell by 15.8% in October, making it the worst monthly result ever, or at least the worst since I started keeping detailed monthly records from the start of 2013. October’s fall came on the back of an 8% fall in September and was followed by a further 2% fall in November. Do the math. I’m a lot poorer now than I was a few short months ago.



Sorry for your troubles colm, you never get used to losses no matter how much experience you have. I think most people are down significantly in the last few months anyway. For what its worth my worst period was late 2015, early 2016 due to the investments I had then but it recovered fairly quickly in 2016. I actually did not get hit too badly in 2008, but 2015/16 was my worst period in investing. Although if Brexit goes badly I could be hit fairly hard again but then that is the time to continue to load up on UK stocks which are the best value they have been in a long time.


----------



## opexlong

Mr. Fagan,


> The heavy losses I suffered over the last few months caused me briefly to consider giving up on my strategy of investing 100% (or more) in growth stocks, and of pursuing a more conventional strategy, as recommended by the experts for someone of my advancing years. Then I did some sums and discovered that my strategy is delivering exactly what it says on the tin: significantly higher volatility but much higher returns than a more conventional mixed portfolio.



The sums don't tell the full story though. Here's a hypothetical scenario: suppose your portfolio returns for the next five years are -20% in 2019, -25% in 2020, -10% in 2021, -3% in 2022, +1% in 2023 and +0.8% in 2024.

Now what's your average gain for the period 2013 to 2024? Do those sums.

Your basket of correlated stocks will outperform a mixed portfolio in a bull market and underperform it in a bear market. So your strategy will do well and deliver exactly what it's supposed to until it doesn't.


----------



## opexlong

> I had a similar lucky escape with Tesla. As discussed in Update 2 (1 April), I opened a short position in Tesla earlier in the year, i.e. I gambled on the share price falling [..] Then came a bolt from the blue.



How can you call it a bolt from the blue though? That's the ninth time this year that this stock has spiked after a large drop. In fact that's been its consistent pattern for the last five years.


----------



## Colm Fagan

joe sod said:


> you never get used to losses no matter how much experience you have.


Hi Joe.  I agree, but the message I would like to get across is that high volatility, including the occasional experience such as I've had over the last few months, is a small price to pay for significantly higher long-term returns than can be earned from bonds or cash.  Even after my recent disasters, I've still earned over 10% a year for the last six years compared to around 2% or so if I'd been in so-called "safe" investments.  I am reasonably confident that the same will be true in future - and I hope to be around for another decade or two.


----------



## Colm Fagan

opexlong said:


> The sums don't tell the full story though. Here's a hypothetical scenario:


I'm not sure what your point is.  I'm dealing with real scenarios, not hypothetical ones.


----------



## Colm Fagan

opexlong said:


> How can you call it a bolt from the blue though?


The bolt from the blue was the unexpected profit, not the price hike. To quote from the FT of the following day (recognising the FT's copyright, etc.):
"In a quarter when most analysts still expected red ink, the electric car maker came up with a $312m net profit, its first since the heavy spending began two years ago to launch and ramp up production of the all-important Model 3"
I agree that there have been lots of price hikes - and price falls.  They are "normal" for Tesla.  Making a profit is definitely not "normal".


----------



## DeeKie

I love reading your posts Colm. I’m curious as to whether you got to ask the questions that you wanted answered at the Reinshaw AGM? Did they impress in person?


----------



## WhiteCoat

Hi Colm,

I was very struck by David Attenborough's speech in Poland yesterday. I'm just wondering to what extent ethical considerations inform your investment considerations. Personally, in view of climate change challenges and especially given your very concentrated portfolio, I would not be comfortable shorting Tesla or holding Ryanair.


----------



## Colm Fagan

DeeKie said:


> I love reading your posts Colm.


Thank you, DeeKie.  I enjoy writing them, even the painful ones.


DeeKie said:


> I’m curious as to whether you got to ask the questions that you wanted answered at the Reinshaw AGM?


Yes, I did attend the AGM and I did ask my question.  To be honest, it was more a statement than a question.  I wrote down what I planned to say in advance, and here it is:
_"Sir David.  I’ve been an admirer of Renishaw ever since I bought my first shares in the company 20 years ago for the princely sum of £4.05 a share.  The annual dividend yield on the original investment is now almost 15%.  That has helped fuel my admiration!  

I have particularly admired the Board’s and management’s determination to do what’s right for the business in the long-term, and not getting too concerned about the short-term impact on the Profit & Loss account or the share price.  This year’s Annual Report makes me wonder however if you’re paying too much attention to short-term results and showing far too much respect to what Warren Buffett disparagingly calls “Mr Market”.  

For example, the opening paragraph of your chairman’s statement refers glowingly to the Total Shareholder Return of 48% in the year.  Total Shareholder Return is calculated by taking the change in the share price over the year, adding dividends, and expressing the result as a percentage of the share price at the start of the year.  The same calculation for the period from 30 June last to 15 October shows a Total Shareholder Return of minus 23%[1] for the period, and that includes the dividend of 46p a share coming into our bank accounts next week.   I’m sure you’ll agree that neither the plus 48% for 2018 nor the minus 23% for the first three-and-a-half months of 2019 has any relevance to the real long-term value of the business or your stewardship of it.  Yet, the very fact that you give the figure such prominence in your chairman’s statement makes me fear that even you are being seduced by short-termism. 

On the same lines, but more worrying in some ways, is the sharp cut in R&D expenditure in the healthcare division in FY 2018.  As people in this room know, some analysts have criticised Renishaw over the years for the continuing losses in its healthcare Division.  Long-standing shareholders didn’t agree with the criticisms.  We were prepared to be patient:  we recognised that healthcare requires considerable up-front investment in developing new products.  We also recognised that there are long lead times in getting regulatory approvals in various jurisdictions, etc.   Patience is required.  It is reasonable to expect losses for a number of years before investments start to pay off.  

When I looked at this year’s accounts, I was pleased initially to see that the healthcare division had turned the corner and had made a profit, albeit a small one, in 2018.  Then I looked again and saw that R&D Expenditure in the Division had been cut by more than 20% (and that’s after excluding the restructuring costs from last year’s figure.  The cut was closer to 30% based on the figures in the accounts.)  If R&D expenditure hadn’t been cut, healthcare would have produced a loss in 2018 also. 

I was left wondering if R&D expenditure had been cut specially to appease “the market” and to show a profit for the year.  I asked the question at the results presentation in July.  Will assured me that I was wrong, that it was more a case of focusing R&D in areas of healthcare where you believe that Renishaw can succeed in the long-term.  I believe him, and I agree that it would be wrong to continue investing in areas that are unlikely to generate a long-term return.  At this time of transition, however, with Will taking over as Managing Director, I would ask the Board and management to keep its focus firmly on the long-term and not be seduced by short-term considerations.  

Finally, I presume there will be no reference to Total Shareholder Return in next year’s Chairman’s statement!"
_
I don't recall the chairman's exact reply, but I know he shares my views.  I suspect that it was an over-eager junior accountant who put the bit about Total Shareholder Return into the Chairman's Statement.  I am confident that it won't appear in next year's Chairman's statement, irrespective of what the price does between now and year end.  In answer to my question on healthcare, the MD (Will Lee) reiterated what he told me at the time of the results announcement.   He amplified it by saying that, at later stages of the product development cycle, the focus of "development" cost moves more to distribution, which doesn't count as R&D (At least, I think that that's what he said; I'm not familiar with that type of business, so the reply was over my head to some extent).

In answer to your final question as to whether they impressed me in person, the quick answer is yes.  I've got to know quite a number of the senior team at this stage and they're 100% committed to doing the right thing for the long-term prosperity of the business.  I want to keep it that way!!


[1] Price 29/6 £52.80; Price 15/10 £40.06, Div. £0.46.  TSR:  23.25%.  FY 2018: (52.80 + 0.60)/36.20 = 47.51%


----------



## Colm Fagan

WhiteCoat said:


> I'm just wondering to what extent ethical considerations inform your investment considerations. Personally, in view of climate change challenges and especially given your very concentrated portfolio, I would not be comfortable shorting Tesla or holding Ryanair.


You raise an interesting question.  I'll deal first with the specifics of Ryanair and Tesla. 

As far as Ryanair is concerned, I recall saying in the article that I didn't particularly like investing in them, no more than I like flying with them, but at times they offer such compelling value that it's hard to ignore them. (Given the recent trajectory of the Ryanair share price, you know what to think of that opinion).  My dislike of Ryanair stems more from their attitude to their workers rather than for being environmentally unfriendly.  I don't think they're significantly worse than other airlines in terms of their environmental record, but I could be wrong.

My decision to short Tesla was similarly not based on a dislike of their cars.  I just thought they were massively overvalued.  I also have major doubts about Elon Musk's ability to lead a major company.  He loses top executives by the new time. 

I do try to have an ethical approach to investing.  For example, I would find it hard to invest in Paddy Power Betfair.  I don't like the thought of profiting from compulsive gamblers (although some might claim that I'm a compulsive gambler on the stock market!).  Neither do I have any drink or tobacco stocks in my portfolio.  Having said that, I can't say that I would never invest in them.   My decision on whether or not to invest in such companies is not going to change the world.


----------



## Sarenco

I must say I continue to admire Colm's fortitude.  A 26% drawdown over a three-month period would be tough for the most stoic of investors.

I appreciate that index investing is anathema to Colm but I think it's worth noting that, in Euro terms, the MSCI World index was only down around 3.5% over the same three-month period and produced an annualised total return of around 10% over the last five years.


----------



## joe sod

WhiteCoat said:


> Hi Colm,
> 
> I was very struck by David Attenborough's speech in Poland yesterday. I'm just wondering to what extent ethical considerations inform your investment considerations. Personally, in view of climate change challenges and especially given your very concentrated portfolio, I would not be comfortable shorting Tesla or holding Ryanair.



I dont think "ethical investing" will make one jot of difference, because if you dont invest in ryanair someone else will and its not really investors that are driving ryanair, its demand by consumers and whether they worry about global warming or not they are still going to fly on budget airlines. In actual fact I think "ethical investing" is really about reducing your guilt and trying to gain the high moral ground without making any massive changes in your lifestyle. You can sort of wear it like a badge of honour well I can still fly to spain on my holidays because I have some ethical investments and have paid for a few trees to be planted somewhere to allow me to continue with my current lifestyle.


----------



## WhiteCoat

Thanks Colm and Joe,

I understand much of what you are saying. I will try to respond properly when time permits.


----------



## Colm Fagan

Sarenco said:


> I think it's worth noting that, in Euro terms, the MSCI World index was only down around 3.5% over the same three-month period and produced an annualised total return of around 10% over the last five years


Hi Sarenco.  I'll come back to you in due course on the performance of my portfolio versus the MSCI World Index, but it's important not to lose sight of the wood for the trees.  The most important point by far is that I'm now "retired" for eight years and I am 100% (plus, but forget about the plus!) invested in equities.  A significant proportion (the vast majority?) of financial advisers would regard that as anathema for someone my age.  They would have me invested primarily or exclusively in bonds and cash for the entire period since my retirement (and probably for a number of years previously, through so-called "lifesyling"), either directly or through an annuity (which is invested completely in bonds).  If I had followed their advice, I would be lucky to have earned 2% a year - before charges - on my money.  The difference between 2% and 10% a year for the last 8 years equates to 97% of my starting capital.  In other words, I have almost twice as much money now (ignoring what I've drawn down in the meantime) as I would have if I had followed standard financial advice for people in my position.

And that's only the start of it.  They would also have me in bonds/cash for the rest of my days, however long I may last.  I hope to be around for the next decade, possibly two.  That's a hell of a lot of money down the drain.  OK, I know that I (and stock markets generally) have done well over the last number of years, despite the recent glitch, and we're unlikely to do as well in future, but it's almost certain that, over a ten or twenty year investment horizon, which is what I'm still looking at, equities will outperform bonds by an average of 3% to 5% a year.

The argument is trotted out that it's different for investors in drawdown, who have to withdraw money regularly.  The argument is that they are less able to ride out a downturn.  Yes it is different when you're in drawdown, and I have suffered by having to make withdrawals over the last few months, but they were not significant in the overall scheme of things.  I hope to enjoy a reasonably comfortable lifestyle by drawing down 6% to 8% of my savings each year - 1.5% to 2% a quarter.  Even if we hit a bad quarter, such as the one I've just gone through, it's not the end of the world to have to cash out when I'm down 20% (say) on that 1.5% to 2%.

I do realise however that the vast majority of people are not prepared to take the psychological pain of the occasional market setback such as the one I've just experienced.  As I said in my latest update, such setbacks are an integral part of an equity-based investment strategy, despite what people flogging absolute return funds may try to tell us.  The good news is that I have a solution to the problem, which I submitted to the Department of Employment Affairs and Social Protection a few weeks ago under its consultation process for the national auto-enrolment pension scheme.  I'm pleased to attach a copy of my submission.  I will be more than happy to take comments and questions on the submission.  I really do believe that what I've proposed will allow people who don't have any knowledge of financial markets to earn the sort of extra returns that I have earned in the past and hope to continue to earn in future.


----------



## opexlong

There is a massive recency bias in this paper. A snapshot of the period 1986-2017 cannot stand as representative of historical stock market data and it is a mistake to even use the phrase "longer term" in this context.

Not every 32-year period is going to encompass equivalents to the bull markets of the '80s and '90s followed by the quantitative easing of the last two decades.




> From a historical perspective, the 1966 through 1982 Secular Bear Market was the third one we have had since 1900 and was not overwhelming in terms of loss, it simply meandered sideways virtually going nowhere for 16.5 years.
> 
> The Dow Jones Industrial Average lost 1.18% per year over the course of this secular bear market



You mention back-testing the last 118 years for the UK stock market and over the last 92 years for US stock market, but where is that data? How would a person 100% invested in equities who retired on the eve of a lengthy bear market in 1929 or 1966 have fared using your approach?


----------



## opexlong

> The bolt from the blue was the unexpected profit, not the price hike.



Ah. Fair enough.


----------



## Colm Fagan

opexlong said:


> There is a massive recency bias in this paper


I quote from paragraph 8 of the submission:
*"1986 is the earliest year for which monthly figures were available.  Approximate calculations for earlier years (based on yearly changes in market values and adjusting the smoothing formula for yearly rather than monthly data) indicate that smoothed returns would have been positive in every year bar one since 1900, a period that covered two world wars and the great depression of the 1930’s.   In 1974, the sole exception to the record of positive returns, the yearly smoothed return would have been only marginally negative."*

I also refer you to the concluding paragraph:
*"Approximate back-testing results against the returns from 1870 for a diversified portfolio, including real estate, as published in the paper “The Rate of Return on Everything 1970-2015”[1] support this conclusion."*

How much further back than 1870 do you want me to go?

If anyone can provide me with monthly results going back this far, I'll be more than happy to test the approach against them.

I don't disagree though that a prolonged bear market - or one that does very little over a long period - would cause problems.  For a previous paper, presented in February last, I concluded that a repeat of Japan's experience between 1990 and 2010 would have caused major problems for my proposed approach.  I overcame that problem by noting the peculiarities of the Japanese market both before and during that period, and asserted that the world has learned lessons since then.  I also said that the fund would not be over-reliant on a single market, asset type, etc.  A final note is that the February paper looked specifically at Group ARF's, i.e. people only joined the fund at retirement.  The AE model is more robust.  Preliminary calculations indicate that the proposed approach to AE would survive a repeat of the Japanese experience of 1990 - 2010 (The conclusion is complicated by the fact that much depends on other assumptions, particularly contributor behaviour).  I plan to explore that issue in more detail and will publish my conclusions in due course.



[1] “The Rate of Return on Everything, 1870 -2015”, Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick and Alam M. Taylor.  National Bureau of Economic Research, Cambridge MA, December 2017


----------



## opexlong

I see. Very interesting. Thanks for responding to my questions.


----------



## Colm Fagan

opexlong said:


> Thanks for responding to my questions.


No problem, and thank you for being so gracious.


----------



## Colm Fagan

Sarenco said:


> I appreciate that index investing is anathema to Colm but I think it's worth noting that, in Euro terms, the MSCI World index was only down around 3.5% over the same three-month period and produced an annualised total return of around 10% over the last five years.


Hi Sarenco.  As I said earlier, how I get my equity exposure is secondary to the main issue of getting such exposure (or  exposure to other real assets), but we've already discussed that in #428 above.

The exact figure for my "over 10%" is 11.1%.  That's the average return on my portfolio, starting with its market value on 1 January 2013 and ending with its market value on 30 November 2018, allowing for monthly cash flows in the intervening period. 

I should also emphasise that the 11.1% return is net of all provider charges (for administering the ARF and AMRF), custody charges, commission on purchases and sales, stamp duty on purchases, bid/offer spreads on the underlying securities, currency conversion costs, bank charges.  It is also net of withholding taxes for dividends on non-UK or Irish stocks (for example, there's a non-recoverable withholding tax of 15% on US dividends). There is also a withholding tax on a UK REIT that I can't recover.   Of course it doesn't allow for tax I have to pay in Ireland on dividends and capital gains on monies held outside the ARF/AMRF, nor for the PAYE tax on withdrawals from the ARF. 

The conclusion from that is that I have done significantly better over the period than if I'd invested in the MSCI World Index.  As I think I've stated a number of times however, that does not mean I'm a brilliant investor.  I've just been lucky that Renishaw, my largest holding, has done extremely well over the period, despite the recent glitch.  I may not be that lucky in future.


----------



## Duke of Marmalade

Ethical investors are deluding themselves.  If I buy shares in BadCo my money does not go to BadCo.  On the other hand if I buy shares in GoodCo for all I know the person at the other end of the trade is a very bad hombre indeed who will use the funds supplied by me for very wicked ends.  A truly ethical investor should never transact on an anonymous market


----------



## Colm Fagan

Duke.  I normally agree with you, but not this time.  If I buy shares in a company, I want it to succeed.  I don't want BadCo to succeed, so I don't buy shares in it.  At an individual level, you can say that my decision doesn't matter a whit, but at a macro level, it does.  If there are enough people like me, BadCo will trade at a discount to its "fair" value, as determined by reference to P/E, etc.  Its cost of capital will be higher, and thus it will (hopefully) be less successful in the long-term.  I know there are a lot of links in this particular chain, but I believe that my decision to shun such companies does have an impact, albeit very small.


----------



## Duke of Marmalade

Colm, I was being a bit tongue in cheek but you rightly pulled me up on it.


----------



## WhiteCoat

Colm Fagan said:


> Duke.  I normally agree with you, but not this time.  If I buy shares in a company, I want it to succeed.  I don't want BadCo to succeed, so I don't buy shares in it.  At an individual level, you can say that my decision doesn't matter a whit, but at a macro level, it does....



Colm,

That's really well said - thank you.

I understand and share your reluctance of investing in alcohol, tobacco and betting companies. My moniker here signals my profession and I have seen at first hand the destruction these products have caused.

In terms of having one's aspirations aligned with one's investments, I am concerned with climate change. Personally, I believe that mankind will not make the required adjustments in time. In my opinion, there is simply not sufficient urgency, action or cohesion in relation to this danger in spite of all the irrefutable evidence. We see what's happening right now in the city of the last big climate accord. Of course, I hope that I am wrong. At a personal level, I believe we can make a very small impact and hope that this somehow develops and over time becomes part of the zeitgeist - in time.

If disaster is to be avoided then clean technology will have to be at the forefront. For this reason (and the reason I posed my question in the first place), I hope that the pioneering technology that Tesla is part of succeeds and would not wish to financially gain from its decline (which incidentally could very well happen as I believe the CEO is behaving very, very strangely and I am unable to dispute any of your financial analysis.) Similarly, regular air traffic is a significant polluter and air traffic is already expected to grow significantly in the coming years. So I don't wish to add fuel to the climate change fire by hoping that Ryanair becomes even more successful that it already is and anticipated to become and that is why I wouldn't personally invest in them. It's not even anything to do with its CEO!

Also, it is not a question of Ryanair's relative environmental record - no more than if we were having this conversation in the past and someone had written "I wasn't aware of Philip Morris producing cigarettes that are more cancerous that other manufacturers". Ryanair is part of an industry which as a collective, under current technology, is a disproportionate polluter in terms of what individuals, at a personal level, have some control over.


----------



## Colm Fagan

@WhiteCoat   Well said yourself.  The question for this forum though is whether we as investors can affect outcomes by deciding not to buy the shares of BadCo's.  @Duke of Marmalade was too quick to accept my argument that we can help make the world a better place by not buying the shares of such companies.  It occurred to me - in the middle of the night! - that the opposite is true for Ryanair.  We actually help to INCREASE its earnings per share by shunning it.  This paradoxical result stems from the fact that Ryanair is a cash machine.  Instead of giving the cash back to shareholders as dividends, it repurchases shares in the market and extinguishes them.  Thus, the lower the share price, the more shares it can buy back and extinguish with a given amount of money, and so the higher the earnings per share for continuing shareholders.  It seems therefore that the best way to affect outcomes (as an investor) is to buy the shares and attend the AGM to argue our case.


----------



## WhiteCoat

Hi Colm,

I feel like an undergrad again....pls bear with me! I'm not trying to be obstinate just a little better informed.  Thanks for your engagement in all this.

Firstly, I don't understand the relevance of the earnings per share metric. For example, if a company did a share split (2 to 1), an investor's earnings per share is immediately halved. What's the problem with this? Has the overall return prospects of an investor in such a company been damaged by such an action and if so why would a company engage in such activity?

By extension, do similar points not apply (in a kind of reversal) to share buy backs?  Otherwise, wouldn't all companies be at it? Surely, ir can't be some sort of secret returns weapon that only some companies have worked out?

Secondly, if you believe your conclusions, shouldn't you actually invest in tobacco, gambling and other bad boys (especially those with similar buy back practices?)

Thirdly, again based on your conclusions, why would ethical / socially responsible funds exist at all?

This world of ours is somewhat complex!


----------



## joe sod

WhiteCoat said:


> Similarly, regular air traffic is a significant polluter and air traffic is already expected to grow significantly in the coming years. So I don't wish to add fuel to the climate change fire by hoping that Ryanair becomes even more successful that it already is and anticipated to become and that is why I wouldn't personally invest in them.



is this not the crucial issue, air traffic is going to increase despite all the talk about climate change, and is "ethical investing" really just a cover to allow people to continue with the lifestyle that they dont want to give up. Its easy to beat up on the big bad "ryanairs" of this world, but people are selfish and only care about their own personal circumstances so they will continue to fly unless it is heavily taxed. Flying is also crucial to the global economy, with many people flying to the other side of the planet as part of their job, so paradoxically are you in favour of renationalisation of the global economy with the centre shifting back to the nation state and more products produced locally, like the much derided  de Valera vision of ireland . 
As regards tobacco stocks, the only reason why smoking and the consumption of cigarettes has fallen off a cliff is because of peoples concerns about their own personal health. If it was simply the case that smoking cigarettes was very bad for the environment but had no health issues then smoking would be higher today than ever just like flying.


----------



## cremeegg

All this talk of ethical investing has a touch of the sanctimonious about it, or virtue signalling, as I believe the modern phrase has it.



WhiteCoat said:


> I understand and share your reluctance of investing in alcohol, tobacco and betting companies. My moniker here signals my profession and I have seen at first hand the destruction these products have caused.



Smokers, drinkers and gamblers are adults and wether you invest in Best Dry Gin or not has nothing to do with their lives. You are not responsible, in either sense. If it's legal to sell, it's legal to invest.

Personally I believe that all forms of recreational drug taking should be legalised and taxed. Not for the benefit of drug users but to suppress the organised crime that has destroyed so much of Latin America, and has made murder a regular event in Dublin.

I wouldn't personally like to invest in tobacco, but if people want to smoke then there should be somebody to sell tobacco. Of course misleading advertising should be banned and the adverse effects of tobacco should be highlighted as public health information.

EDIT: If a person wishes to reduce their carbon footprint, they are free to stop flying, or to campaign for taxes on aviation fuels, but equating Ryanair with "Badco" is not a grown up response to the issue.

Perhaps the Mods should split this talk of ethical investing into a separate thread as it is hardly central the the main discussion.


----------



## Colm Fagan

@WhiteCoat   Sorry for the delay in getting back to you, but I was at a family event - wife's family event - in Limerick, and only got back this evening.

You've raised a number of technical and moral issues.  If you don't mind, I'll stick to the technical issues, where I'm more at home.  I'm still unsure where I stand on some of the moral issues.



WhiteCoat said:


> I feel like an undergrad again....pls bear with me!


Please don't consider me as a lecturer or a professor.  I'm an amateur investor.  I've never worked in an investment department and my only investment "qualification" is what I learned in the investment module of the actuarial exams more than 45 years ago.  I do have a lot of practical experience however, gained over the last 22 years from managing my own pension assets.



WhiteCoat said:


> Firstly, I don't understand the relevance of the earnings per share metric. For example, if a company did a share split (2 to 1), an investor's earnings per share is immediately halved. What's the problem with this? Has the overall return prospects of an investor in such a company been damaged by such an action and if so why would a company engage in such activity?



What I'm talking about has nothing to do with share splits.  Share splits achieve nothing:  a 2 for 1 share split means that I've got twice as many shares, at half the price, so forget about them.  They're not relevant to our discussion.

Looking at share buybacks, Say Ryanair has earnings of €100m and there are 100 million shares in issue.  Earnings per share are €1.  Ryanair also has oodles of cash on its balance sheet, generating damn all interest.  Say it has €50 million spare cash on its balance sheet and assume also that the share price is €10.  It can use its cash to buy back and extinguish 5 million shares.  Now the earnings of €100 million are being allocated to just 95 million shares, resulting in earnings per share of just over €1.05 (100/95), compared with €1 before.  The cake is being divided among a smaller number of mouths.  If the share price falls below €10, then the €50 million will buy back more than 5 million shares, so earnings per share increase still further.  That's the point I was trying to make.



WhiteCoat said:


> Secondly, if you believe your conclusions, shouldn't you actually invest in tobacco, gambling and other bad boys (especially those with similar buy back practices?)



First of all, not all companies can do share buy-backs.  They must have the readies to buy them.  My initial response to the Duke is the right one (I think) if the company is not buying back shares.  For the companies that do share buy-backs, it would seem to be a crazy strategy to buy as many as possible of the shares at an inflated price, just so that they could buy back less shares!  In effect, you would be ensuring a higher exit price for people who had offered their shares in the buyback.



WhiteCoat said:


> By extension, do similar points not apply (in a kind of reversal) to share buy backs? Otherwise, wouldn't all companies be at it? Surely, ir can't be some sort of secret returns weapon that only some companies have worked out?


I think the above response addresses this point also.
PS:  I don't know how the graph appeared as an attachment.  That's something else I was working on, and it appeared here by accident.  Now I can't remove it!!!!  Please ignore.


----------



## Duke of Marmalade

Colm Fagan said:


> @WhiteCoat   We actually help to INCREASE its earnings per share by shunning it.  This paradoxical result stems from the fact that Ryanair is a cash machine.  Instead of giving the cash back to shareholders as dividends, it repurchases shares in the market and extinguishes them.


Colm,  I'm struggling with this point.  Leaving tax considerations aside and assuming markets are rational (uhh) whether you get your cash in dividends or in share buybacks adds no economic value and should be irrelevant.  Under the latter you finish up with less shares on a higher yield, but same earnings in total.  Of course if markets irrationally attach the same P/E ratio ex dididend as they do cum dividend then you are effectively getting a share type P/E being attached to the lost interest on the dividends.

But getting back to the main point, let's say ethical investors result in BadCo's shares being constantly valued at a 50% discount to their true economic value.  Does this help BadCo to carry out its mission statement which is "to spread wickedness wheresoever it can"?  The only time the share price can affect BadCo's strategy is when it wants to raise money on the stock exchange and I don't see how a 50% discount helps it do that and a I don't see how share buy backs affect that argument.


----------



## Colm Fagan

Duke.  My latest post explains how I arrived at that paradoxical conclusion.  I have equated "shunning" to lowering the price.  Cancelling shares by buying them back at a lower price and then extinguishing them results in a higher EPS.



Duke of Marmalade said:


> whether you get your cash in dividends or in share buybacks adds no economic value and should be irrelevant


Except that it's two different groups of shareholders.  If it's dividends, then all the shareholders are treated the same.  If it's a buy-back (at a cheap price), one group of shareholders has managed to get rid of another group by paying them off cheaply.  OK, the remaining shareholders have to pay cash to buy them off, but the cash was rotting in the bank account anyway.  It would be different if the cash had to be borrowed to pay them off.  Of course, the balance sheet is also weaker after the payment.


----------



## Duke of Marmalade

Ok, I see the different groups of shareholders argument.  But where does an undervalued share price help BadCo to carry out its wicked mission?

There is still something illusory about this buyback thing.  Say the company decides instead of paying a dividend to buy back shares.  For sure some will sell and some will not thus having the effect that the sellers will have sold more of their value in the company than if they had simply received a dividend and vice versa the others will have bought shares with the foregone dividend and more.  Okay, so one group has consciously increased its weighting and the other has reduced its.  But they could have achieved the exact same result in the secondary market if they had received a dividend.  I don't see what the share buyback achieves per se.


----------



## Colm Fagan

Duke, I started this particular hare running by talking about relativities.  I want to keep to the relativity issue for now.

Let's say I agree with you (and I probably do) that, in normal times, a share buyback achieves nothing.  The shares are bought back at a "fair" price and everyone is equally happy/ unhappy.  Now we introduce a few "do-gooders" who decide to sell/ short BadCo's shares and bring the price down to P-delta, the delta having no rational economic justification, its only justification being the discount for "badness" caused by shorting "do-gooders". 

Now BadCo starts buying back shares at P-delta.  It buys back more shares from departing shareholders than it would have bought if  the do-gooders hadn't intervened.  The universe hasn't changed, so the total value in the system is unchanged, but the departing shareholders have lost and the continuing shareholders have gained.  Remember too that there are now more departing shareholders than there would have been if the buyback was completed at price P.


----------



## Colm Fagan

Sorry, Duke.  I didn't answer your question.  Shows why I took so long to pass the exams!  I didn't claim that it helped BadCo to carry out its evil mission, just that it would improve the earnings per share, which presumably makes it more attractive as an investment.


----------



## Duke of Marmalade

Colm Fagan said:


> Duke, I started this particular hare running by talking about relativities.  I want to keep to the relativity issue for now.
> 
> Let's say I agree with you (and I probably do) that, in normal times, a share buyback achieves nothing.  The shares are bought back at a "fair" price and everyone is equally happy/ unhappy.  Now we introduce a few "do-gooders" who decide to sell/ short BadCo's shares and bring the price down to P-delta, the delta having no rational economic justification, its only justification being the discount for "badness" caused by the shorting by "do-gooders".
> 
> Now BadCo starts buying back shares at P-delta.  It buys back more shares from departing shareholders than it would have bought if  the do-gooders hadn't intervened.  The universe hasn't changed, so the total value in the system is unchanged, but the departing shareholders have lost and the continuing shareholders have gained.  Remember too that there are now more departing shareholders than there would have been if the buyback was completed at price P.


Agree with all that.


----------



## WhiteCoat

Thanks for the response, Colm

I didn't get a chance to reply before now.

Let's see have I got this right! It seems that under certain conditions there are advantages in share buy backs, particular where the shared price is below what is deemed its “true” value. It also seems that it's quite marginal because the enterprise no longer has the capital that it has used up in doing the share re-purchase. So the investor's greater proportion of future earnings post the buy back needs to be compared with what would otherwise have been a marginally lower % holding in a bigger enterprise. The enterprise would be bigger (where buy back doesn't occur) because capital is retained in the enterprise and presumably set to work, i.e. it won't languish in cash for ever. So the investor's share in the non buy back environment includes a percentage of the capital that would otherwise have been used in the buy back together with the additional/marginal directly associated earnings. Is this fair?


If yes are we not back to the much simpler "if I buy shares in a company, I want it to succeed, I don't want BadCo to succeed?" From an eco-ethical investment perspective or at least “what I would like to see happen perspective”, I would actually want Ryanair to continuously engage in buy backing because Ryanair would then grow at a slower rate. The alternative is that the Cash Reserves would simply serve as a war-chest and be used to buy even more planes, set up even more routes and cause even more trumpeting of on-time arrivals.


----------



## WhiteCoat

Colm,

On a separate point, I have read with great interest your Auto-enrolment submission. It seems to address very many of the key risks. I will re-read and make some comments. In the meantime, how big could the overall fund become when fully mature and who underwrites it / what happens if something really, really bad happens in markets when the fund is mature?


----------



## Duke of Marmalade

WhiteCoat said:


> If yes are we not back to the much simpler "if I buy shares in a company, I want it to succeed, I don't want BadCo to succeed?"


Yes you might have a conflict of interest.  That doesn't necessarily mean you are behaving unethically even by your own compass.  For example, I might have backed Donald Trump to win the presidential race because the odds looked good.  I could still be in the position that I did not want him to win; even thought it would be unethical to help him in any way.  Now if instead of betting on him I had contributed to his election fund then I truly would be affronting my principles.
By analogy, and ignoring tenuous secondary effects, if I buy shares in BadCo I am not contributing to BadCo.  I might simply be availing of a second hand bargain because the ethical brigade are causing a false market.


----------



## Duke of Marmalade

WhiteCoat said:


> Colm,
> 
> On a separate point, I have read with great interest your Auto-enrolment submission. It seems to address very many of the key risks. I will re-read and make some comments. In the meantime, how big could the overall fund become when fully mature and who underwrites it / what happens if something really, really bad happens in markets when the fund is mature?


I thought you said your profession was eponymous.  This question shows that you have acumen beyond the medical sphere.  It is a question which I have asked myself.  One possible response (though I would be interested to hear from the man himself) is that such a scenario would be so dire that much else would be going wrong - food shortages, mass unemployment etc.  so that desperate measures like reducing the AE pension probably along with the basic pension would not be a complete shock.  After all, in the last financial crisis, the government putting the boot into public servants is a totally unprecedented way.


----------



## WhiteCoat

Interesting comments Duke of Marmalade. It was remiss of me not to acknowledge your posts in helping me get my head around earnings per share, etc.



Duke of Marmalade said:


> This question shows that you have acumen beyond the medical sphere.



I don't know if I'd go that far! But it is true that I have a certain level of interest in finance. The day job necessitates that keen attention is paid to the risks. Have you looked at, for example, the information leaflets accompanying prescribed medications? X% deals with efficacy, etc., multiples of X deal with risks, side effects, contraindicators, etc.


----------



## Colm Fagan

@WhiteCoat @Duke of Marmalade
Thank you both for your contributions and apologies for the delay in replying.  I've a few other things on my plate, including preparing for a date with destiny on Monday, at which my Auto-Enrolment proposals will be subjected to careful scrutiny by my peers.  I haven't had the time to read recent AAM comments.

On the BadCo question, I don't have much to add to your insightful comments.  I particularly like the comment that buying back shares reduces Ryanair's ability to expand its business.

Now onto my auto-enrolment proposals:


WhiteCoat said:


> how big could the overall fund become when fully mature


I haven't done the sums, but I reckon it could become quite large in an Irish context while still being a minnow in global terms, in comparison to the big sovereign wealth funds, etc.  Remember too that the fund will be invested globally, so its size in relation to the Irish economy will be irrelevant.


WhiteCoat said:


> who underwrites it / what happens if something really, really bad happens in markets when the fund is mature?


No-one will underwrite the fund.   As I write in paragraph 16, the smoothed return in any month will be calculated using a mechanical formula. Continuing to quote from that paragraph:  "No "expert" judgement will be required - nor will it be allowed.  The integrity of the smoothing formula and its independence from outside influence are essential.  *Maintaining the integrity of the smoothing formula also ensures that auto-enrolment will operate on a mutual basis, with no need for financial underwriting or support from the state or an external financial institution.*"

That's a bold statement, which is sure to be challenged.   It stems from the simple truth (paragraph 11) that "market values are only relevant if assets must be sold".  In order to understand the fundamental importance of this simple observation, consider a hypothetical situation of a market collapse when the fund is mature.  Let's suppose that, at that time, 80% of the fund's assets are for people who haven't retired and 20% for retired contributors.  (I haven't modelled the fund's long-term development, but my gut feeling is that the ratio of funds for retired contributors won't exceed 10% for another 30 years or more, so the 20% estimate errs very much on the cautious side).  Assume also that the 20% retired are withdrawing (say) 5% of their fund each year on average.  Therefore, the amount being withdrawn in any year is 5% of 20% of the fund, or 1%.  Thus, even if active contributors completely stop contributing, only 1% of the fund is being cashed in any year and 99% remains untouched.  Of course, the vast majority of active contributors will keep contributing through good times and bad, so the reality is that, even in this Armageddon situation, the fund will still be cash flow positive (and that's before allowing for dividends on existing investments).

The 1% of money exiting the fund in a year will be paid out at smoothed value, which will exceed market value at that time by a considerable margin, but the pain of paying the excess over market value will be shared among the 99% remaining.  Market value is irrelevant for that 99%.
I hope that this helps to answer your question.


Duke of Marmalade said:


> This question shows that you have acumen beyond the medical sphere.


Hear, hear!


----------



## Colm Fagan

Duke of Marmalade said:


> such a scenario would be so dire that much else would be going wrong - food shortages, mass unemployment etc. so that desperate measures like reducing the AE pension probably along with the basic pension would not be a complete shock. After all, in the last financial crisis, the government putting the boot into public servants is a totally unprecedented way.


The governance structures must eliminate (if at all possible) the risk of a government raid on the fund.  It should be set up under Trust, with independent trustees who will be accountable to the members.  I'm not a lawyer; I leave it to them to set out how that independence should be safeguarded.  It's important to recall, though, that, in the last crisis, the government raided private sector pension funds.  The existence of independent trustees didn't protect them.


----------



## Colm Fagan

WhiteCoat said:


> So the investor's share in the non buy back environment includes a percentage of the capital that would otherwise have been used in the buy back together with the additional/marginal directly associated earnings. Is this fair?


I wouldn't dismiss the impact of share buybacks as "marginal".  The attached spreadsheet, which I've been updating for my Apple investment for the last few years, shows that earnings per share have grown by an average 16% per annum for the last 5 years, while net income has "only" grown by 10% a year.  The difference is due to the share buybacks (net of share awards/ options to employees).  Not to be sneezed at.


----------



## WhiteCoat

Hi Colm,

Best wishes in your AE discussions tomorrow. I really hope that it goes well. There are other threads at the moment which illustrate the sub-optimal nature of the existing approach to pensions. This post will be rough and rushed as opposed to than rough and ready.

The reasons I think the fund could become very large are because:

1. It will offer clear blue daylight between existing options so that not alone should it attract the bulk of future pension money but it should equally be attractive to a lot of existing pension money. Existing pension money could come from all over and include, not just private pensions and ARFs, but company DC plans as well as private DB plans (when they wind up given that presumably their days are numbered?) Put another way, who or what could realistically compete with your scheme if it can genuinely deliver what you have set out?

2. I was in Oz in the early 90s. There was a lot of talk about _SUPAs. _It seemed to be really getting going in earnest around then (sorry I don't have time to check more details of its growth trajectory). What I did check is its current size - something like 2.7 TRILLION! Presumably, these are Oz dollars but even still. I presume that the Oz fund hasn't itself reached maturity? When you adjust this for population size, currency and other factors, you would still end up with a very big number, even if the Irish equivalent became only proportionately as successful.

The reason I think that size matters is because if the fund did become very large, it would have political/structural significance. In the event of a deep and sustained decline in world markets, I could imagine that this would be problematic because a deficit would emerge and this deficit could be very large. For example, would cashflow continue, would there be a run on the fund (with those over the allowable retirement age withdrawing their 25% lump sum), would those under retirement age require guarantees, etc.? Presumably, there would be other factors to address also? If I were the minister in charge, this is the key area in which I would be seeking comfort because a scheme of this nature would invariably be seen as having the state's imprimatur.

If it can be demonstrated that these concerns are not valid or that sufficient safeguards/controls can be introduced to minimise issues associated with really bad stuff happening in the markets, then this really could be a game changer for Ireland.

Please don't feel any obligation to reply before your meeting and best wishes. Thanks also for your post re EPS.....let's leave that one for another day!


----------



## Colm Fagan

@WhiteCoat
I know my first port of call if I ever have a serious medical problem (maybe I should say "another one").  Very insightful indeed. 

You'll be relieved to hear that I think I have answers to all your challenges.  I don't have time to answer them all now.  I hope to give a comprehensive answer after tomorrow (and the answers may depend on feedback tomorrow). 


WhiteCoat said:


> would there be a run on the fund (with those over the allowable retirement age withdrawing their 25% lump sum),



I am proposing that people MUST take their 25% cash at retirement; they won't be able to leave it in the fund and then decide to take it later, precisely for the reason you outline. Neither will they have an option NOT to take the 25% cash on retirement.   Also, because the scheme will be restricted (initially at least) to employed workers, with self-employed excluded, there will be limited opportunity for them to time their "retirement" to cause problems for the fund. 

I hope to get back to you tomorrow, and thanks again.


----------



## Colm Fagan

First of all, apologies to @WhiteCoat for not coming back to you as promised following Monday's seminar.  No, I wasn't silenced by the weight of opinion against me.  On the contrary, there was a lot of support for the proposed approach, but also lots of questions, which I hope to set out (and hopefully answer) here and elsewhere.  In the meantime, though, my other half thinks that putting up Christmas trees and traipsing round Dundrum Shopping Centre after her are more important than saving the world, so the world will have to wait    Of course, if anyone else who was at Monday's meeting would like to add their tuppence worth to the discussion, feel free.
@MikeM   My main reading on investments is the online edition of the FT.  I don't read much otherwise on investing (but I do read a bit about people and institutions involved in business/ finance) so I'm not in a great position to advise you on reading material.  I suggest you open a separate thread, which I'm sure many people will be happy to respond to.  For what it's worth, I'm now (while waiting outside shops in Dundrum) reading the book "Bad Blood" about a woman called Elizabeth Holmes and the company she formed, Theranos.  One of my favourite reads about the investment world was "Other Peoples Money" by John Kay.  I think there's a new version on sale now, with more up-to-date material.


----------



## WhiteCoat

Colm,

Usual caveats about diagnosing remotely aside, it does seem probable that you have pretty advanced HFFWRM syndrome. Regrettably, various clinical studies involving strategies to cope with this condition have not been conclusive and indeed aggressive approaches have led to severe side effects!! Bringing a book, I'm afraid, just provides short-term alleviation of the symptoms but frankly, does not address the underlying issue . It's a tricky one. (Hubby forlornly following wife round mall!)

Joking aside, very pleased to hear that your meeting went well.


----------



## Colm Fagan

@WhiteCoat @Duke of Marmalade:   You've both missed your calling as stand-up comics! 

Anyway, in more serious mode, I've posted an initial update on Monday's seminar (specifically, what I took from it) under the "Proposed New Approach to DC Drawdown" thread, which seems a more logical home for this discussion.


----------



## Sarenco

Colm Fagan said:


> Apple is one of my longest standing and best-performing stocks (first discussed in my Sunday Times column of 6 December 2015: https://www.askaboutmoney.com/threads/colm-fagans-diary-of-a-private-investor.207496/ ). In June 2017, I increased my holding by 50%, buying at $144.26 a share. I bought more again in January 2018 at $169.85 a share. Feelings of vertigo started in May, and I sold a small portion of my holding at $187.43. I sold further tranches at $191.95 in June, at $218.18 in August, and at $220.69 in October, ending up with slightly more than I had before the May 2017 purchases. Each sale at a higher price than the last one made me feel annoyed with myself for selling too soon. No longer. At the current price of $178.60, my decision to offload a significant portion of my holding is looking good.


Colm's decision to start reducing his position in Apple last summer in starting to look particularly smart with the benefit of hindsight - the stock price has fallen by almost 40% since early October 2018.  Ouch!


----------



## Colm Fagan

Sarenco said:


> Colm's decision to start reducing his position in Apple last summer in starting to look particularly smart with the benefit of hindsight


Thanks Sarenco, but I wasn't that smart:  I only offloaded shares bought since June 2017;  I held on to the ones bought before then.  Needless to say, I'm now sorry I didn't get rid of the lot in October last. 

Despite the recent bad news, I'm not inclined to sell at the current price ($148.25).


----------



## Gordon Gekko

Colm Fagan said:


> I only offloaded shares bought since June 2017; I held on to the ones bought before then



Hi Colm,

I don’t understand; how did you manage that in the context of the FIFO rules?

Or do you have different pots which each held Apple shares (e.g. pension, corporate, personal)?


----------



## Colm Fagan

Gordon Gekko said:


> Or do you have different pots which each held Apple shares


Yes, Gordon, they're in different accounts. 
Actually, following last night's post, I've been thinking about why I didn't sell the lot when prices were high.  In retrospect, it was probably because I would have incurred a significant CGT liability if I had sold the rest (the account from which I sold isn't liable to CGT).  There are two lessons from that:  one is that we shouldn't let tax prevent us from doing the right thing; the second lesson is that, if the CGT rate were lower, the state would probably make more money from the tax, as people like me would realise gains more frequently.


----------



## Gordon Gekko

Sadly the State often has to ignore logic so it can pander to populism.

It’s been proven that cutting the rate would stimulate activity and generate greater tax revenues.

But the morons who moan and march about these things choose not to recognise such logic.


----------



## joe sod

Colm Fagan said:


> Actually, following last night's post, I've been thinking about why I didn't sell the lot when prices were high. In retrospect, it was probably because I would have incurred a significant CGT liability if I had sold the rest



You are not alone anyway, warren buffet has a significant stake in apple, i think its one of his biggest. With regard to CGT liability the big sell off recently would have allowed you to sell other stocks at a loss, (you could still have increased your holding in other loss making positions and reposition later). Thats more or less what I did, I had a CGT liability but I wiped it out using the recent sell off to my advantage.


----------



## Itchy

Colm Fagan said:


> Needless to say, *I'm now sorry* I didn't get rid of the lot in October last. Despite the recent bad news, I'm not inclined to sell at the current price ($148.25).





Colm Fagan said:


> Actually, following last night's post, I've been thinking about why I didn't sell the lot when prices were high.  In retrospect, it was probably because I would have incurred a significant CGT liability if I had sold the rest (the account from which I sold isn't liable to CGT).  There are two lessons from that:  one is that we shouldn't let tax *prevent us from doing the right thing*; the second lesson is that, if the CGT rate were lower, the state would probably make more money from the tax, as people like me would realise gains more frequently.



Colm,

I think your comments are very interesting (all of them as opposed to just the ones I quoted!). Your use of language indicates to me the emotional element of your decision making. Your decision to sell Apple left you feeling "annoyed" with yourself followed by relief when the price fell. And then the CGT barrier as you mentioned. Do you 'think' about the emotional aspect of your decision making and how do you manage it? Is there a different approach taken when operating in each of your Pension/Taxable Account/Spread Bet account? 

In relation to CGT for example, I think about it in the context of my account and identify which holdings are subject to it but I consciously don't work out the unrealised CGT (as an example) for the holding and if I need to sell, I sell. I think about CGT (largely) separately from my selling decision, if that makes sense?! I feel like its not a barrier to my decision making. Now my liability would not be significant so maybe that's why my system works for me!

It's not a criticism, your experience is obviously significant, but (IMO) the emotional element seems to echo the views in another thread where a poster (criticised for being amateur) said that he had bought throughout H1 2018, the market fell in December, followed by thoughts of selling/holding off before jumping back in in 12 months time. They are both kind of 'feelings' as opposed to logical analysis; these are the reasons for buying, has my reasoning been reflected by performance relative to the operating market, is the valuation under/over my expected value etc.


----------



## Colm Fagan

@Itchy  Very interesting comments.  To be honest, I'm not certain why I only sold a portion of my holding.  It used to be different (before I started the diary).  I either liked a company (at a price) or I didn't.  If I didn't like it, I just sold the lot, irrespective of the tax consequences, often acting against my broker's advice to "top slice" (I think that was the expression he used).    I don't know whether the fact that I'm recording what I've done is causing me to be different.  Also, while it's easy to know in hindsight that Apple was grossly overvalued in October last, I wasn't certain at the time, hence the decision to hold on to part of my holding.  Despite my earlier comment, I'm not sure that CGT considerations played that big a role.


Itchy said:


> Is there a different approach taken when operating in each of your Pension/Taxable Account/Spread Bet account?


Yes, absolutely.  I think that's a more important driver than CGT.  I am much more likely to sell a share that I hold in the spread bet account and tend to treat shares held in the pension or "personal" account as more long-term investments, and I'm less likely to sell if I think I'll get good value over the next (say) five years from shares held in those accounts, irrespective of whether I think they're marginally overvalued at the moment.   There's definitely an emotional aspect to that.


joe sod said:


> With regard to CGT liability the big sell off recently would have allowed you to sell other stocks at a loss


I would find it very hard to sell a stock that I thought was undervalued (and I think that some of my holdings are grossly undervalued at the moment).  It may be possible to argue that it might be still worth while selling in order to crystallise the loss (in order to reduce the CGT bill) and then buy back at the lower price, but I would be loath to incur the costs involved in stamp duty, broker's commission and bid-offer spreads.  Also, at the end of the day, you'd have a share with a lower cost price and thus a higher CGT liability when you eventually sell.


----------



## Colm Fagan

*A Homemade Hedge Fund?*

*“Diary of a Private Investor”      Update #10        Colm Fagan        7 January 2019*


Hedge funds are sometimes represented as the Holy Grail for investors.  They offer the enticing prospect of positive returns, whether markets are rising or falling.  Their main technique for delivering positive returns in falling markets is by shorting, i.e. selling stocks they don’t own and buying them back later, hopefully at a lower price.  This wonderful feat of levitation doesn’t come cheap: the typical remuneration package for a hedge fund manager is known colloquially as “2 and 20”:  an annual charge of 2% of assets under management plus 20% of profits (of course there’s no 20% refund if the fund loses money!). 

Over the last difficult few months, shorts have been among the few winning investments in my portfolio.  I have two short positions – three if we count a sterling hedge– and all of them increased in value during December. 

I closed most of my short position in Tesla in October[1] at a nice profit but kept a small residual exposure.  Tesla’s share price fell 5% in December, presenting me with a gain of $17.50 a share.  It fell another 7% on January 2, after it was revealed that car sales for the fourth quarter had fallen short of analysts’ expectations.  This netted me a further $22.80 per share.  The price has now recovered from that fall, but I’m holding on to my remaining short position.  I believe that Tesla will run out of cash within the next few months and will have to come to the market in search of additional funds, from either shareholders or bondholders – or both.  If that happens, I reckon that the market won’t take kindly to the news. 

My short position in sterling also delivered a profit in December, but the purpose of the sterling short is to hedge currency risk on my domestically focused UK shareholdings, so I tend to ignore any gains (or losses) on the hedge. 

My most spectacular gain in December was from a short position in the Japanese company, SoftBank. 

SoftBank started life as a mobile phone company.  It acquired the Japanese arm of Vodafone in 2006 and owns the US mobile operator Sprint.  It also sees itself – with some justification - as a visionary investor in technology start-ups.  Its most profitable investment is Alibaba, China’s answer to Amazon.  It also has major stakes, either directly or indirectly, in the ride-hailing company Uber and in Yahoo and WeWork, the office-sharing company. 

It recently got into trouble through the company it keeps.  It has close ties with Chinese technology company Huawei, which is in trouble with the US authorities.  It also has a close relationship with crown prince Mohammed bin Salman of Saudi Arabia, whose associates are currently on trial for the brutal murder of Jamal Khashoggi in Turkey.  The Saudi connection and SoftBank’s stake in WeWork, which I think is grossly overvalued, were the main reasons why I decided to short the stock some months ago. 

For a host of reasons, SoftBank’s share price started dropping like a stone in December.  It fell more than 25% between the start of the month and when I finally closed my position on 28 December. 

I was lucky in my timing:  I got out almost exactly at the bottom of the market.  On its own, my short position in SoftBank contributed almost 0.7% to the portfolio’s performance in December. 

Unfortunately, the short positions in Tesla and SoftBank were among my few winners in December.  My top four long holdings all fell in value.  Apple, which is still one of my top exposures despite recent share sales, fell by a whopping 11.6%; Ryanair was down 7.7% and Phoenix Group Holdings fell 6.2%.  By comparison, Renishaw held up relatively well, falling “only” 1.3%. 

The contrast between the gains in my short positions and the losses in my long positions caused me to toy briefly with the idea of making a fundamental change to my investment strategy.  I considered adding more shorts to the portfolio in order to get some protection from market downturns, like the one we’re experiencing now, while recognising that it would mean surrendering some upside in the good times. I reckoned that a strategy on these lines could reduce the volatility of my portfolio. 

I was encouraged in this thinking by news that a hedge fund run by Crispin Odey delivered a 53% positive return for 2018.  Ironically, in the light of Mr Odey’s political leanings – he’s an ardent Brexiteer - one of the top contributors to his positive result in 2018 was a short position he took on sterling. 

I then discovered that Mr Odey’s fund returned minus 22% in 2017.  By coincidence or otherwise, his returns in 2017 and 2018 were an almost exact mirror image of my portfolio’s performance of plus 50% in 2017 followed by minus 28% in 2018, or an average of plus 5.3% a year.  (For the numerically minded, the average is money-weighted and allows for the fact that I splurged big-time when returns were good in 2017).  Mr Odey had an even worse 2016.  That year, his fund fell in value by almost 50%; in contrast, my portfolio delivered a positive return of more than 5% in 2016. 

I decided therefore to stick with my current strategy of being primarily long in my investments, while adding a small number of short positions in companies I think are grossly overvalued. 

There are very few in that category at present.  On the contrary, I think most of my holdings are seriously undervalued.  Although I’m now at the stage in life where I’m withdrawing more than I’m investing, I’ve managed to limit the number of shares sold at current depressed prices.  I’ve even succeeded in increasing my exposure to Phoenix Group Holdings, which I think is particularly undervalued at its current £5.71 a share.  As regular readers know only too well, though, my views on value don’t always coincide with those of Mr Market. 


[1] See post #414 in https://www.askaboutmoney.com/threa...re-diary-of-a-private-investor.195710/page-21


----------



## Colm Fagan

Colm Fagan said:


> The Saudi connection and SoftBank’s stake in WeWork, which I think is grossly overvalued, were the main reasons why I decided to short the stock some months ago.


SoftBank announced today that it is scaling back its planned investment in WeWork from $16 billion to $2 billion, in response to investor concerns at WeWork's prospects.  They must have read my update and agreed with my assessment!!!  The share price jumped 5.7% on the news.


----------



## Duke of Marmalade

Jayz, Colm, 5% a year over 3 years.  Okay, it's about 3 times as much as State savings.  But all the same if I was offered a daredevil ride to Belfast, bouncing off the hard shoulder, I think I would prefer the train even if it was a few minutes slower

Are you still confident of a 6% target return?

I don't think shorting stock is yet a respectable investment strategy in the actuarial syllabus.  Surely it is gambling.  Bitcoin was different, that was a cert


----------



## Colm Fagan

Duke of Marmalade said:


> Jayz, Colm, 5% a year over 3 years.



Yes, I thought it hilarious too when I did the sums:  all that bother for a small margin over a low-risk investment.



Duke of Marmalade said:


> But all the same if I was offered a daredevil ride to Belfast, bouncing off the hard shoulder, I think I would prefer the train even if it was a few minutes slower



Staying with your analogy, Duke, the experience of the last three years is like heading for Belfast from Bray, hitting a few bumps at Foxrock, and judging the quality of the ride on that basis.

Some financial advisers would shove an auld fella like me into a tractor going at 20 kilometres an hour and tell me that I’d reach my destination (a real hot-spot in my case) in no time.  I’m planning a longer journey.  Besides, even on the bad road between Bray and Foxrock, I still managed more than double the speed of a tractor.


Duke of Marmalade said:


> Are you still confident of a 6% target return?


Absolutely.  History – and logic – are on my side.   Risk-takers must earn more in the long-term.  Period.  Anyone with an investment horizon of 8 years or longer can afford that luxury.  (I would put it even shorter).  Most pensioners fall into that category.


Duke of Marmalade said:


> I don't think shorting stock is yet a respectable investment strategy in the actuarial syllabus.


To misquote the Bard of Avon: “There are more things in heaven and earth, Actuary, than are dreamt of in your philosophy”.   If I analyse a stock and conclude it’s undervalued, I buy it.  If I analyse a stock and conclude it’s overvalued, I sell it.  What’s not respectable about that?


----------



## Duke of Marmalade

Colm Fagan said:


> If I analyse a stock and conclude it’s overvalued, I sell it.  What’s not respectable about that?


Sell?  Maybe, but Short?
I'll accept the argument of the equity risk premium which says that the fear of short term risk makes them good value for long term investors- i.e. the price compensates for the risk.  Shorting stock is riskier still than buying them but the equivalent argument that the market would then put a high price on the stock to compensate shorters for the risks they are taking, can't also be true.  I know you are not making this argument, you are arguing that you can spot overpriced stocks in the way Brendan spotted overpriced crypto.

My point is a bit tongue in cheek of course but there are those who believe that the risk/reward trade off is almost a moral imperative.  You get rewarded for taking investment risks and ergo you should expect extra rewards for shorting because of the extra risks.


----------



## cremeegg

Duke of Marmalade said:


> I'll accept the argument of the equity risk premium which says that the fear of short term risk makes them good value for long term investors- i.e. the price compensates for the risk.



This assumes the risk is worth the price, but if the market was efficient that should not be the case.

You cannot have a risk premium and an efficient market.

A volatility premium perhaps, but that is not often what is understood by risk.


----------



## Duke of Marmalade

cremeegg said:


> This assumes the risk is worth the price, but if the market was efficient that should not be the case.
> 
> You cannot have a risk premium and an efficient market.


I do broadly believe in the EMH or at least that there is no way that I can outsmart the market.  But EMH does not rule out there being good value for some.  That is because both risk appetite and risk assessment are very dependent on investment horizon. Thus a 25 year old both assesses that over her horizon the risk will pan out and they also have an appetite for short term volatility.  A 75 year old will assess higher risk and also have a lesser appetite.  Hence one could posit a stable model where young folk are buyers and getting good value for the risks they are taken and old folk are winding down their holding as they see the risks becoming progressively higher than the price of that risk in the market.
I do tend to see the whole issue of the ERP as a pricing phenomenon driven by supply and demand dynamics.  I have a pet theory that in recent times with mass involvement in equity purchase through mutual funds etc. and driven by a financial advice industry which thrives on the mantra that "blessed is she who taketh the risks as she will reap the rewards" the ERP may have been priced out of the market.  It has been posted elsewhere in these parts that the first 20% of this century has been quite disappointing for the mutual fund sheep.  Add to this the current artificiality of QE induced demand (negative interest rates indeed), and I stick to my state savings


----------



## Colm Fagan

We’re getting into how-many-angels-can-dance-on-the-head-of-a-pin territory.  Count me out if that’s where we’re heading.

I’ll try to summarise where I’m coming from on the ERP, efficient markets, risk, volatility, etc.

Every enterprise faces risk.  This leads to uncertain outcomes.  Views on whether that uncertainty is good or bad for the business vary over time.  That in turn causes volatility in the price people are prepared to pay for a share of the business.

If I have a choice of putting my money where the outcome is reasonably certain or where it is uncertain, I will opt for the safer option every time -  unless I can expect (in the mathematical sense) an adequate reward for taking the risk.  Numerous studies have shown that the expected reward (again interpreted mathematically) is greater than what can be explained rationally.  (I don’t understand the mathematics of utility theory; I leave it to others to explain what that means).   In any event, I don’t care.  All I care about is the expectation of a more than adequate reward for taking the risk of investing (positively) in shares.  That’s the ERP.  And I disagree with @cremeegg: you still have an ERP in an efficient market; you still have to get rewarded for taking the risk. I do accept though that, in a completely efficient, rational market, the ERP would be less than what it is in reality (I've tried to follow the arguments, but they're too high-brow for me; you can read up about the equity risk premium puzzle on Wikipedia).

If markets were completely efficient, it would be absolute folly to short shares, as the expectation would be negative, being the reverse of investing in them.  I short (only very occasionally) because I think the market has got it wrong for specific shares, that it’s not efficient, at least not for those specific shares.

I don’t accept the Duke’s theory that the ERP is reducing over time.  (Duke, are you actually going even further and claiming that it’s being eroded completely?)  I don’t think the ERP is falling.  One could propose the opposite hypothesis, that regulatory pressures are causing institutions to take less risks.  For example, sponsors of DB pension schemes are being pressurised to reduce their exposure to equities and to match their fixed liabilities with bonds.  Regulators are pressurising insurance companies and banks to allow for extreme tail events when proving their solvency, which also causes them to reduce their equity exposure.  This reduces the supply of risk capital in the supply/demand equation, which, ceteris paribus (I love the occasional bit of Latin!), should cause the price of risk to rise.  I'm not sure I accept that hypothesis either.  I'm happy to believe that the ERP won't be much different in future to what it's been in the past.  That's good enough for me.


----------



## cremeegg

Colm Fagan said:


> Every enterprise faces risk.



Of course it does, we are seeing a beaut unfold at the moment. What happens when the CEO and 16% shareholder of the worlds largest company gets divorced. I have no idea, but it seems we are about to find out. 

Could management decisions be determined by marital dilemmas. (sorry, Mrs B is a novelist). I cannot imagine how this could be included in investment risk models.

HOWEVER, this has nothing to do with investment risk for diversified investors in efficient markets. Not even in the aggregate of all such companies.

[I would love to go on here and make a positive point, but at the moment it eludes me.]



Colm Fagan said:


> And I disagree with @cremeegg: you still have an ERP in an efficient market; you still have to get rewarded for taking the risk.



If the market was efficient, the price would reflect the risk without a premium.


----------



## Colm Fagan

cremeegg said:


> [I would love to go on here and make a positive point, but at the moment it eludes me.]


????   I don't know whether you're referring to me, my contribution, or Mr and Mrs Bezos.  I'll leave it go.


cremeegg said:


> If the market was efficient, the price would reflect the risk without a premium.


And how would the price to "reflect the risk" be calculated?  Presumably by discounting expected future receipts at the bond yield plus the equity risk premium, so you end up in the same spot.


----------



## Duke of Marmalade

cremeegg said:


> If the market was efficient, the price would reflect the risk without a premium.


Just want to make sure we are talking the same language.  Let's imagine we have a betting slip which pays €2 if a coin toss comes up Heads and zero otherwise.  A fair (efficient?) price for this slip "reflecting the risk" would be €1.  However, for investors anyway, they should want compensation i.e. a premium for the risk as well as a reflection of it.  They might only give you 80c. 

All the evidence shows that over the last 100 years (for successful economies) equities have outperformed "risk free" assets considerably. But it is impossible to tell to what extent that was because there was a risk premium or to what extent it was because things came up Heads.  I used the qualification "successful economies" and indeed the Equity Risk Puzzle was based on the US and given the very propitious environment for economic development (technology etc.) over the last century, my own view is that there is no puzzle.  The 6% p.a. outperformance of equities could indeed be a 1% p.a. risk premium, which is what the authors claimed was justified, and 5% p.a. because Heads came up (10 times in a row at least for the US IMHO).


----------



## cremeegg

Colm Fagan said:


> ????   I don't know whether you're referring to me, my contribution, or Mr and Mrs Bezos.  I'll leave it go.



None of the above. 

I have explained ( to my own satisfaction if no one else’s) why the idea that “every business faces risk” has no connection with the risk faced by a diversified investor. 

I have failed ( to my own frustration if no one else’s ) to progress from there to formulate an explanation of the risk that diversified investors do face.


----------



## cremeegg

Colm Fagan said:


> And how would the price to "reflect the risk" be calculated?  Presumably by discounting expected future receipts at the bond yield plus the equity risk premium, so you end up in the same spot.



I like the way you have formulated the question. 

But if the market is efficient,  why should there be a premium over the discounted value of the expected future receipts.


----------



## cremeegg

Duke of Marmalade said:


> Just want to make sure we are talking the same language.  Let's imagine we have a betting slip which pays €2 if a coin toss comes up Heads and zero otherwise.  A fair (efficient?) price for this slip "reflecting the risk" would be €1.  However, for investors anyway, they should want compensation i.e. a premium for the risk as well as a reflection of it.  They might only give you 80c.



Excellent comparison. 

I will happily offer you 85 cent for that betting slip. 

And so on until any premium is eliminated, unless of course the market is inefficient. 

Indeed if we live in a world which has come up Trumps so often you would expect a reverse equity risk premium. By which I mean equities would become overvalued because investors would see that they continually out perform. 

Or to go back to your illustration. If your coin came up heads 10 times in a row as you suggest for the US markets,  and I agree. Then I suspect that betting slips would sell for €1.01 if not more.


----------



## Duke of Marmalade

cremeegg said:


> I like the way you have formulated the question.
> 
> But if the market is efficient,  why should there be a premium over the discounted value of the expected future receipts.


Ahh!  Now we are getting to the nub.  A major focus of the dismal science is to explain pricing in terms of human preferences.  A few of the basics are:  people prefer more rather than less, people prefer now rather than later, people prefer certainty rather than risk etc.  Of course these are generalisations, monks who have taken a vow of poverty prefer less rather than more, gamblers seek out risk even at the expense of an overall expected loss.  But stockmarket prices are assumed to be dominated by investors rather than gamblers or monks.  It is consistent with these assumptions that the price of a future uncertain cashflow would be less than its discounted expected value.


----------



## Duke of Marmalade

cremeegg said:


> Excellent comparison.
> 
> I will happily offer you 85 cent for that betting slip.
> 
> And so on until any premium is eliminated, unless of course the market is inefficient.
> 
> Indeed if we live in a world which has come up Trumps so often you would expect a reverse equity risk premium. By which I mean equities would become overvalued because investors would see that they continually out perform.
> 
> Or to go back to your illustration. If your coin came up heads 10 times in a row as you suggest for the US markets,  and I agree. Then I suspect that betting slips would sell for €1.01 if not more.


Our posts crossed.  We better heed Colm's warning not to engage in a medieval theological debate.  Financial theory does not see the EMH and the ERP as contradictions.  The fundamental premise of the EMH is that there are no risk free arbitrage profits to be made and this does not logically rule out an ERP.

But I agree a lot with the other thrusts of your post.  That there is a theoretical basis for an ERP together with ample evidence of its delivery in the past does not guarantee that current pricing has an embedded ERP.  And I am with you that if the one track mantra of financial advice is that you get rewarded for taking risk (end of) then that of itself could well price the ERP away, and indeed I think there is evidence that this is the case from more recent decades compared to the first part of the last century.


----------



## Colm Fagan

@cremeegg @Duke of Marmalade   I'm wary about re-entering this debate; you two seem to have it completely sussed.  But I'm still not sure I've got my point across.


cremeegg said:


> But if the market is efficient, why should there be a premium over the discounted value of the expected future receipts.


No, there shouldn't be a premium.  The key issue though is the rate at which future receipts are discounted.

If I were to buy a government bond (most unlikely in my case), I would be discounting future receipts at the bond yield, which is currently 0.84% per annum for an Irish 10-year bond, i.e. I set up a little spreadsheet, insert future coupons each half-year and the redemption amount at the end of ten years into the spreadsheet, discount them all at 0.84% per annum and I arrive at the current market price of the bond.

It's more difficult to do the same calculation for a share, because of the uncertainties surrounding future income, but I try.  Take Phoenix Group, which I mentioned at the end of my latest diary entry as offering very good value (IMO).  How did I come to that conclusion?

The current annualised dividend is 45.2p a share.  I'll assume that the dividend is safe, that it won't increase or reduce in future, and that I'll be able to get my money back in ten years' time.  These are all heroic assumptions, but I think they're as reasonable as any other assumptions: the actual result could be better or worse with approximately equal probability (in my opinion).  Because of the uncertainties, however, I'll discount expected future receipts, not at 0.84% a year (which is what I'd use for a government bond), but at 7.5% per annum.  The share price that will give me that return is 603p, which is almost precisely the current price.

Therefore, on my reckoning, at the current price, I'm expecting to get an equity risk premium of 6.66% a year (7.5% - 0.84%) for my investment in Phoenix Group.  There are uncertainties around that estimate, of course, but that's precisely why I'm getting a risk premium.

PS:  I'm not recommending Phoenix Group as an investment; I'm simply using it as an example to show how I do my own personal equity risk premium calculations.  I hope I've also answered the Duke's question as to why I expect to get 6% a year in future.  There's a good safety margin in the 6% estimate!


----------



## Duke of Marmalade

If we discount the PG cashflows at .83% we get a present value of 984 which says that it stands at an almost 40% discount to the equivalent risk free investment.  I am not saying that this is wrong.


----------



## Colm Fagan

Duke

I'm sure your arithmetic is right, but the information you've provided is of absolutely no use to me.  I've no interest in an asset that will only yield 0.84% over 10 years, so I'm equally uninterested in how the price of another asset compares with such a low-yielding investment.

I take a different approach, focused on achieving an adequate long-term return.  Here's how I might do it for the Phoenix Group (while recognising that it is only an example):
My main concern with the Phoenix Group is that, while it may be able to maintain the dividend for the next ten years, the long-term capital value might be at risk (because of the peculiar nature of the company's business; the top concern will be different for a company with a different operating model).

In order to quantify this concern, I've calculated what yield I would get if the dividends were safe for the ten years, but if I were to only get back 75% of my original investment at the end of the period (this is a possibility if Phoenix isn't successful in acquiring new closed books).  The answer, per my little spreadsheet, is that I'd still get a total return over the ten years of 6% per annum.  I would not be unhappy with that return.


----------



## cremeegg

@Colm Fagan

Thank you Colm for an excellent post. no. 487


----------



## Colm Fagan

I intended my “like” of cremeegg’s last post as a “Thank you”, not an endorsement of the sentiment expressed in the post!


----------



## Colm Fagan

*The Virtues of a Small Harem*

*“Diary of a Private Investor”      Update #11        Colm Fagan        9 February 2019*

Warren Buffett, arguably the world’s greatest stock-picker, has often extolled the virtues of a concentrated portfolio.  One of his funniest analogies, particularly in view of his advanced age, is comparing his portfolio to a harem.  If you have a harem of 40 women, he says, you never get to know any of them well.

Sadly, I don’t have Warren’s colourful turn of phrase.  Neither do I have a harem, but we’re in full agreement on the virtues of a concentrated portfolio.  Over 90% of my portfolio is in eight stocks; more than 50% in just two, Renishaw and Phoenix Group.  I know I’m breaking all the rules of investing by having so many eggs in so few baskets, but like Buffett’s harem, I’ve got to know most of them well over the years.  That knowledge has proved invaluable at times, including over the last few weeks.

At the end of 2018, my portfolio was on the ropes, down almost 30% in the year.  Yet despite the prevailing gloom, I was feeling good as we headed into 2019.  I believed that most of my stocks were worth considerably more than their market values, thereby breaking another golden rule of investing, that the market is always right.   I was confident that Mr Market would eventually see the error of his ways and agree with me – if I could only avoid having to sell at the depressed prices prevailing at year end.

Phoenix Group, I felt, was particularly undervalued.   I was already heavily exposed to the stock, but I decided to back my judgement and increased my exposure still further, buying in early January at £5.72 a share.  This caused Phoenix to overtake Renishaw as my single biggest holding:  I was putting even more eggs in this one basket.

My confidence wasn’t misplaced.  Phoenix’s share price rose more than 13% in January, to £6.35 by month end.  To add to the good news, sterling strengthened against the Euro, adding another 3% to the return.

My other top holdings also rose in value during January:  Renishaw by more than 10% (although it has since surrendered some of the gains), Apple by 5% and even bombed-out Ryanair, by 2%.

The icing on the cake was a 7.8% fall in the share price of Tesla, in which I have a short position, so the price fall was good news.  Tesla’s price fell despite results for 2018 better than I had expected.  I thought it could run out of cash this year, but that now seems less likely.  The jury is out however on whether the good cash outcome was a consequence of good underlying performance or resulted from cutting back on research and development, from eating the seed-corn as it were.  The Chief Financial Officer jumped ship immediately after the results announcement, hardly a good omen.  I’m holding on to my short position for now.

I dodged a bullet with SoftBank, the Japanese telecoms/ internet investment company, in which I also had a short position.  I cashed the SoftBank short in late December at ¥7,120 a share.  The current price is ¥10,015, up over 40%.  I dread to think what I would have lost if I had waited.

The overall result for January was a gain of 11.6% on the portfolio.  I’m still a long way from clawing back the losses in 2018, but it’s a good start.

It wasn’t all good news in January.  I sold a portion of my Renishaw holding near the start of the month at an average £39.77 a share, compared with the current £43.06.  I didn’t sell because I’d lost faith in the company.  Far from it.  Renishaw is still my second biggest holding.  I was concerned however by its exposure to China, which is going through a rough patch just now.  A desire to address the imbalance in my portfolio also played a part.  Renishaw’s results for the half-year to 31 December, announced at the end of January, came as a pleasant surprise.  The company’s performance in China wasn’t as bad as I’d feared.

Sterling strengthened against the Euro in the month, causing me to lose money on my sterling hedge, but the loss on the hedge was more than offset by currency gains on my sterling denominated stocks.

My most painful loss was caused by an 8% drop in the share price of AMP, an Australian financial services company that I bought first in May 2018, then topped up in July following a severe price fall, in the mistaken belief that it was now a bargain.  In the process, I discovered the dangers of trying to catch a falling knife.

AMP has been a disaster from the start.  I’m sorry I didn’t opt for a long courtship before committing serious money to the share.  The AMP experience has strengthened my resolve to start with a small stake in any potential addition to my core portfolio and give it time to see how the relationship develops before making a long-term commitment to love, honour and protect.  In other words, I’ll stick with a small harem.


----------



## Colm Fagan

After reading my latest diary update, a friend forwarded the following link, which shows Warren Buffett and Charlie Munger proclaiming the virtues of an even smaller harem than what I've admitted to
https://www.youtube.com/watch?v=ibSp1xzLfy8&feature=youtu.be
Warren Buffett and Charlie Munger


----------



## Sarenco

Warren Buffett has consistently argued the virtues of index funds –

_“Investors, on average and over time, will do better with a low-cost index fund…"_

But if you think you can compete with Buffett's stock picking skills, then, sure, a highly concentrated portfolio makes sense.


----------



## Colm Fagan

*A Guy in the Attic*

*“Diary of a Private Investor”      Update #12        Colm Fagan        9 March 2019*

An anonymous reader, writing on the website askaboutmoney.com under the pseudonym @Gordon Gekko [1], questioned my DIY approach to investing, asking: “How can a guy on his own, working from his attic, beat the professionals?”

“Gordon” went on to tell of his friend, “a stellar stock-picker with a global investment bank (as in $10m+ bonus a year)”, who had left his job and had assembled a team of specialists, aiming to beat the market.  According to Gordon, lots of people lampooned his friend’s efforts.  Gordon then posed the question: if someone with his friend’s ability and back-up team had doubters, how could I, “one man and his dog”, possibly hope to do well over the long-term?

To answer Gordon’s question, let’s do a thought experiment.  Imagine two sophisticated investors, Abigail and Beatrice.  Both employ experts to help them:  CFA’s (Chartered Financial Analysts), quants (Quantitative Analysts), accountants, maybe even a few actuaries.

After surveying the market, Abigail and her team decide they’d like to buy shares in company X.  They assemble lots of information on the company, its products and markets, the quality of its management team, etc. and eventually decide how much they’re prepared to pay for the share.

Beatrice already holds shares in X and would like to reduce her holding.  Maybe, like me, she’s getting on in years and needs the money.  She and her team get out their spreadsheets and eventually decide a price at which they’ll be prepared to sell.

Abigail and Beatrice start haggling – virtually of course, through the stock exchange - and eventually arrive at a price “P” that’s acceptable to both.

Meanwhile, the guy in the attic decides that he’d like to buy a few shares in X.  He toddles along to his stockbroker and puts in his order.  He ends up buying at “P”, which happens to be the going price as decided by Abigail and Beatrice and their respective teams of experts.  The guy in the attic knows nothing about Abigail’s and Beatrice’s haggling but by buying at P he has unwittingly tapped into their collective expertise –at no cost.

Twenty-three years ago, thoughts on these lines prompted me to decide to manage my own pension investments rather than entrust them to professionals to manage on my behalf.  I had no experience of investing, but I trusted the market to get prices right most of the time.  I reckoned that, by buying stocks at random, I wouldn’t match the professionals’ gross returns (i.e. I accepted that there was still some room for skill), but that the net returns from my random portfolio would be comparable to those earned by the professionals, after deducting their charges.

About eight years ago, fifteen years into my DIY investment voyage, I concluded that the market was far from efficient, that it had significant inefficiencies, but that the nature of pooled investment products (mutual funds, unit trusts, unit-linked funds) forced the managers of those funds into straitjackets that hindered their ability to exploit the inefficiencies.  DIY investors could escape the straitjackets and therefore could aim higher.

A lightbulb moment came while I was attending an investment conference hosted by a major financial institution.  In the course of a presentation on the institution’s European Equity Fund, the Fund’s manager said that 20% of the Fund’s investments were in companies that he and his team had classified as winners.  In the subsequent Q&A, I asked the obvious question:  why wasn’t the “winners” proportion 100% rather than 20%?

His – somewhat embarrassed - reply was that investors expected returns from the Fund broadly to match the relevant index (European equities in this case).  This prevented the manager from straying far from the index when deciding which stocks to hold and what weightings to give them, thereby limiting the manager’s ability to exploit any insights they might have on the relative merits of different stocks.  DIY investors are not subject to the same constraints.

My recent experience with Phoenix Group Holdings illustrates the point.  At end 2018, Phoenix represented 25% of my long portfolio.  This was already a very high exposure to a single share.   I believed the company was significantly undervalued so, despite my already high exposure to the stock and the fact that I was making regular withdrawals from the portfolio to meet my income needs, I still managed to increase my exposure to Phoenix.  Now, just over two months later, Phoenix accounts for over 33% of my portfolio.  Its share price has risen more than 23% since the start of 2019 and sterling has strengthened against the Euro (although my currency gains were limited by a decision to hedge a portion of my sterling exposure).   The net result is that, in the last few months, Phoenix has made a significant positive contribution to the portfolio’s performance.

Many professional fund managers would also have concluded that Phoenix Group was significantly undervalued at the end of 2018, but they would not have been able to use that insight to make a meaningful difference to the performance of their portfolios.  Phoenix, with a market capitalisation of £5 billion, is a relative minnow in stock market terms, accounting for less than 0.2% of the UK market.  A fund manager would be sticking their neck out – possibly to the point of putting their job at risk - by allocating even 1% of their portfolio to Phoenix Group.  A weighting that low would do virtually nothing for a pooled fund’s performance.

This is just one of the ways in which the DIY investor can match or even beat the professionals.  There are many others, which I hope to explore in future updates.  Meanwhile, I plan to continue working from my attic.



[1]   Post #95 on  https://www.askaboutmoney.com/threa...ure-diary-of-a-private-investor.195710/page-5


----------



## Duke of Marmalade

Colm,

I remember that thinly veiled "tip" for Phoenix and am kicking myself for not grabbing it
But did you outsmart the market or just get lucky?  If there has been no significant new info on P then by definition you have been ahead of the market.  If there has been more info which you couldn't have anticipated then you have been lucky.  I take it that it is the former.

You imply that Abigail and Beatrice would have been equally if not more convinced than yourself that P was undervalued, except benchmark constraints held them back.  Perhaps that is just modesty on your part but somehow that doesn't stack up.  I agree with the earlier part of your update that the price is essentially set by highly researched professionals.  So if Abigail and Beatrice were filling their boots as much as they dare, Alf and Bob must have been dumping their holdings.  The price is the price set between knowing professionals.

_Note to Moderators:  I know this looks like a handball inside the penalty area in so much as it discusses an individual share.  However, I hope that if you consult the VAR you will conclude that since I am discussing Colm's assertion that the gal in the attic can beat the gals on the trading floor that the handball was accidental._


----------



## Colm Fagan

Duke

I assume you have the advantage of youth over me.  Most people have.  With youth comes innocence.  When I was young and innocent, I too believed in the Efficient Market Hypothesis, for much the same reasons as you’ve articulated.

My loss of faith in the EMH probably dates from my experience with an Irish Life corporate bond (i.e. one issued by Irish Life plc on the stock market, not the type that Irish Life Assurance offers to policyholders) around 2010/11.  This bond had a coupon of 5.25% and a 2049 redemption date.  At the height of the crisis, it traded at close to 50c in the Euro, providing a running yield of more than 10%, with the prospect of a massive pick-up at maturity.   The market wrongly linked its prospects to those of Irish Life & Permanent.  They were wrong of course.  Irish Life Assurance was always completely sound.  I filled my boots with the bond and was duly rewarded when Irish Life was taken over by Canada Life.  The bond's price increased to more than 100c in the Euro.  Belief in the EMH went out the window after that experience.

How could “the market” have been so stupid to ignore such phenomenal value?  My personal belief is that research is not one of the “sexy” areas of finance, therefore the quality is generally poor and that it's mainly done by youngsters who have no real understanding or experience of business.  There is also a lot of groupthink.

But I’ve never worked in an investment department, so I may be completely off the wall in my opinions.  One of our contributors who works in the industry may be able to enlighten us.  I’m not hopeful, to be honest, as the quality of contributions on investment topics on AAM has declined recently (with some notable exceptions – like yourself).


----------



## Colm Fagan

_This month's diary update tells a cautionary tale of placing too much faith in Cristiano Ronaldo to rescue the situation – not on the football pitch but on the stock market. 

I couldn't post the article normally:  I was told that it contained banned words!!!   Sorry to disappoint , but the banned words were the name of a leading luxury brand!  
In order to get round the ban, I've attached it as a pdf file.  
_


----------



## Brendan Burgess

Moderator's note: Some brand names are banned as they are so often an indicator of spam. I have shortened the name of a well known brand to LV.
*The Naughty Step                                                                                                          
Diary of a Private Investor             Colm Fagan             Update 13            9 April 2019*

When children misbehave, their parents put them on the naughty step.   I tried the same with a misbehaving investment, but to no avail.

I bought my first shares in Samsonite, the luggage company, in May 2017.  For a time, it was my blue-eyed boy.  It was quoted on the Hong Kong stock exchange, the touch of the orient adding to its allure.

The main attraction was the price.  I reckoned that Samsonite was cheap for a luxury brand.  Someone close to me, who knows far more about luxury brands than I do, scoffed at my suggestion that it qualified as a luxury brand.  It didn’t have any of the cachet of top names like Cartier, LV, Prada, Rolex, Hermès, I was told.

I conceded that it wasn’t in the same league as those top brands, but neither was the price, I argued.  The difference between Samsonite’s share price and those of the owners of top brands was more than the difference in quality, I said, adding that Cristiano Ronaldo was global ambassador for one of the Samsonite brands.  Surely that had to be a positive?

They say that the worst thing that can happen to a gambler is to win their early bets.  That was my experience with Samsonite.   The price increased from the HK$29.60 at which I made my first purchase in May 2017, to HK$30.83 in August, when I more than doubled my holding.  The price had increased again, to HK$33.98, by the time I bought my third tranche in November 2017.  At this point, Samsonite had risen to #5 in my list of top holdings.  I bought again in January 2018, at HK$34.70 a share, causing it to edge ahead of Apple as my fourth biggest holding.  At this point, Samsonite accounted for 8.5% of my total pension and other investments.  From this lofty vantage point, I could admire a substantial unrealised gain on my investment, “unrealised” being the operative word.

Then disaster struck, on the very day I was heading off to the US on holidays, planning to spend some of my still-unrealised gains.  That morning, a short-seller issued a report accusing the company of various shady dealings.  The report claimed that Samsonite was only worth half its current market value.  The shares were suspended on the stock market as the company struggled to draft a response.  When the dust finally settled, on the day I was returning to Ireland, the share price had fallen to HK$26.50.  My beautiful unrealised profit had turned into an ugly unrealised loss.

The main fallout from the affair, other than a substantially reduced share price, was the sudden departure of the Chief Executive who, it was alleged, had been falsely claimed to have a doctorate from a US university.  He wasn’t the first, and won’t be the last, senior executive to be accused of embellishing their CV.

I decided to put Samsonite on the naughty step and to leave it there until after the results for 2018 were announced, at which time I would decide its fate.

The results for 2018 were announced on 13 March last.  At first glance, they looked good: sales up 9%; profit margins up, operating profit up 10%.  But published profits were down over 25%.  The new Chief Executive, who had been promoted from CFO after the departure of his un-doctored predecessor, stressed that published profits included lots of negative once-off factors.  When these were excluded, adjusted net income was up 13% on 2017.

I’m always suspicious of the term “adjusted net income”.  Adjustments, like beauty, can be in the eye of the beholder.  To some extent, management can decide what to include and what to exclude from the calculation.   For Samsonite, my suspicions were heightened by the cash flow statement, which didn’t show the higher sales and profit margins translating into hard cash.  I decided to sell my entire holding, proving that some naughty children really are sold to the gypsies (grandchildren, please note).  The average sale price of HK$24.63 meant I was incurring a significant loss, not just in percentage terms, but also in hard cash, because of the high proportion of my overall wealth represented by Samsonite.  Sore.

The final humiliation was the discovery of an Instagram photo of an impeccably suited Ronaldo, Samsonite’s brand ambassador.   By his side was a beautiful, petite, and most importantly, expensive ……  suitcase from LV






Humiliation has its consolations.  My willingness to suffer the occasional humiliation is one of the reasons why I can expect to earn significantly more – on average – than could be earned from risk-free assets.  Yes, I could avoid humiliation by taking less risk, but at a cost.  I reckon that a “safe” investment strategy would reduce my expected investment return by 4% a year or more, on average.  For that, I’m prepared to look foolish every now and then.


----------



## Colm Fagan

Thanks Brendan.  Can you add the Ronaldo Instagram post?  I'm useless with technology and wasn't able to include it.


----------



## galway_blow_in

I'm up 18 % year to date on a portfolio of five companies, s+p is up slightly more

Last year however my performance was only 4.5% negative while the s+p was down considerably more

Cement , dairy products, airline, packaging and energy is where I'm concentrated now

All Irish companies bar energy


----------



## Colm Fagan

@galway_blow_in   Sounds great.  The trick is to get a good average return on your entire savings over a long period, not just on a small proportion of them over a relatively short period.  I've taken this to the extreme.  All my savings, including ARF, AMRF, non-exempt savings, are in "risky" investments. I don't have any back-up in the form of a DB entitlement and I don't have a cent in so-called "safe" assets (other than enough cash to cover outgo over the next month or so), not even a single prize bond or savings certificate.   I'm not sure that many financial advisers would agree with that investment strategy!


----------



## galway_blow_in

Colm Fagan said:


> @galway_blow_in   Sounds great.  The trick is to get a good average return on your entire savings over a long period, not just on a small proportion of them over a relatively short period.  I've taken this to the extreme.  All my savings, including ARF, AMRF, non-exempt savings, are in "risky" investments. I don't have any back-up in the form of a DB entitlement and I don't have a cent in so-called "safe" assets (other than enough cash to cover outgo over the next month or so), not even a single prize bond or savings certificate.   I'm not sure that many financial advisers would agree with that investment strategy!



I've only 50 k in the equity markets for the past year as we hope to move house inside two years so I'm sitting on nearly 100 k in cash, on paper it's silly but I can't risk putting more in with a two year horizon


----------



## Duke of Marmalade

Colm Fagan said:


> _This month's diary update tells a cautionary tale of placing too much faith in Cristiano Ronaldo to rescue the situation – not on the football pitch but on the stock market.
> 
> I couldn't post the article normally:  I was told that it contained banned words!!!   Sorry to disappoint , but the banned words were the name of a leading luxury brand!
> In order to get round the ban, I've attached it as a pdf file.  _


Colm, that’s a sad case


----------



## redartbmud

Colm, I have been caught on the naughty step a few times in the past, hence my title - please read it backwards
I agree with your philosophy. Having carried out due diligence, and seeing rising momentum in the share price, the trend is your friend - until the story changes.
We can only rely on the accuracy of published data and, if lucky, the chance to look at the whites of the eyes of the executive directors in open forums, such as AGM's, where you can assess their competence by raising questions and viewing performance in the flesh.
Having taken an initial position, it is not unreasonable to increase the size of holding, by degree, particularly when momentum is on your side.
Sadly the old card trick of 'adjusting the pack' has been played in this case.
It is now common the quote both adjusted and reported figure. Which to believe? The factual number, arrived at on the reporting date or the one dressed up to make the reader believe that all is right with the company and to just ignore the adjustments, because they will just go away.
Hmmm... You are absolutely correct to look at the cash position. That does not lie, it is either in the bank, or it isn't.
It has become all too easy to hide indiscretions and problems under the heading of adjustments, and to make believe that they are non-recurring. In most cases, they are there for good reason. The numbers quoted are subjective. The auditors will have looked at the arguments put forward, to justify the numbers. The final outcome will usually only be known, somewhere down the track, when the problem has been addressed, and the money spent. Again, it is easy to window dress spending to flatter the outcome, losing attributable costs within normal operating expenses.
It is then a value judgement to let go of the holding. If it subsequently bounces, you kick yourself for jumping too soon, but how many times do you see a share re-rated downwards, and then continue to fall even further.
Once the story changes, for the worse, caution is the by-word. Better to lose 6,7 or 8% than 60,70 or 80% plus!!
By preserving the remaining capital, you have a better start point for the next train that comes along.
Good hunting


----------



## Colm Fagan

redartbmud said:


> The numbers quoted are subjective. The auditors will have looked at the arguments put forward, to justify the numbers.


I'm not an accountant, so I don't know if the auditors have any input to what goes into (and more importantly, what's excluded from) "adjusted net income".   When the term is used, it's always qualified with "not an IFRS measure", which leads me to think the auditors don't have an input to the calculation. Do you or any of the other experts on the forum know the answer?


----------



## redartbmud

The report of the auditor, within the annual report and accounts requires them to comment that the report gives " a true and fair value of the state of affairs of the company" at the relevant date.
In so doing, they will have reviewed, in detail, any reported adjustments, and assessed their materiality in relation to the overall results.
The detail within their audit report should comment on such work undertaken and to give an assessment of the risk of material misstatement.
They should set out the parameters that have been applied when arriving at their conclusions.

A bit wordy, but I hope that I have answered the question.


----------



## Colm Fagan

Hi unpronounceable name.  I don't think it's that straightforward.  The auditors' certificate (for Samsonite, probably the same for other companies) confirms that they have audited the consolidated financial statements (which don't include the "adjusted net income:  it was mentioned in the CEO's report) and that they (i.e. the consolidated financial statements) "present fairly .... the consolidated financial position of the Group ...in accordance with IFRS"
As far as I can see, they're running a mile from making any comment on the truth and fairness of "adjusted net income", but I recognise that I'm in foreign (i.e. accounting) territory - probably the first actuary in history to realise that I can't tell accountants their business!


----------



## redartbmud

Hi Colm,
My personal experience goes back a very long way now but, in my day, we used to pay particular attention to extraordinary and exceptional items reported in accounts:
1. Justification.
2. Relevance.
3. Significance to the results.
4. Underlying assumptions. - basis on how the provision had been calculated.
5. Quantification of the figure. ie. make up of the number.
In the following year, the useage of the provision was audited, to ensure that any remaining provision should be carried forward, written back to profit, or increased, if the problem remained ongoing. (Not necessarily relevant to a write down of goodwill.)

Yesterday, I just happened to be looking at the Audit Report on the annual accounts of De LaRue, which stretches over 7 'dusty' pages.
Their Adjusted operating profit was £87.3m and the Reported operating profit £123.3m.
The auditors report against key sections of the accounts, stating their view on the risk of material error in the reported figures, and the steps taken to review and assess the compliance to statutory reporting requirements and the subsequent impact and probability of material misstatement of the numbers.
I would therefore contend that they have in fact audited the numbers for adjustments.

My bone of contention is that modern techniques rely far too heavily on statistical analysis of probability and risk. As long as something falls within an accepted tolerance, then it is perhaps 'too readily accepted'. Their whole statement is very meaty and difficult for the layman to digest.

That is my humble defence, which I lay before you.

redartbmud


----------



## RedOnion

redartbmud said:


> The report of the auditor, within the annual report and accounts requires them to comment that the report gives " a true and fair value of the state of affairs of the company" at the relevant date.
> In so doing, they will have reviewed, in detail, any reported adjustments, and assessed their materiality in relation to the overall results.
> The detail within their audit report should comment on such work undertaken and to give an assessment of the risk of material misstatement.
> They should set out the parameters that have been applied when arriving at their conclusions.
> 
> A bit wordy, but I hope that I have answered the question.


Not in Hong Kong where Samsonite are listed. The audit rules are very old there, and if you look at the Samsonite annual report, the audit report is only a single page.

Compare to something like Bayer, where adjusted numbers are specifically addressed.


----------



## redartbmud

Colm,
Maybe it will be wise to avoid future investments that rely on a footballer, such as Christiano Ronaldo, to front an advertising campaign.
You know from his image that he is more a LV kinda guy, more so than Samsonite
(The full LV name appears to be a banned word)

Just sayin'

red


----------



## redartbmud

Colm,

Ah the dreaded International Boundaries and Universal Audit Standards.
That should be addressed. The domicile, for governance and reporting standards for International Companies should be exactly the same the world over, and not be left to chance, where possibly lower standards are applied in certain countries
That is Utopia, I know, and maybe it is for good reason that many of the European Nations have joined together to form The EC.
I do not wish to get drawn into the political debate over Brexit, but society is now global, like it or not, and there must be continuing moves to raise standards, across the globe, in all aspects of life.


----------



## Colm Fagan

It's great, at this age, to be still learning.  Thanks, guys/ gals.  Interesting.  The "Control F" function is very handy.  I used it to search for the word "true" in the Samsonite results.  Not once (unless you allow "true-up").  More interesting still, I looked at the latest accounts for a recent addition to my portfolio (which hasn't yet appeared in the diary).  It's a UK company, so everything should be shipshape (until Jeremy, John and their commie buddies take over, or alternatively Boris and his F*** business colleagues, but I digress).  I searched for the phrase "true and fair" in its accounts.  Not once.  My understanding (speaking again as a non-accountant) is that auditors have managed to weasel their way out of certifying that accounts give a true and fair view.  Apologies to my auditing friends.  No more invitations to breakfast briefings or even the occasional dinner at their expense.


----------



## RedOnion

Colm Fagan said:


> auditors have managed to weasel their way out of certifying that accounts give a true and fair view


No, the requirements are set out in company law in the UK. They may describe it as "free from material misstatement", but by providing an opinion they say they represent a true and fair view.
A simple language version of UK auditor responsibility:
www.frc.org.uk/auditorsresponsibilities

You'll find a lot of UK reports include a link to the above.

Edit: I'm an accountant, but not an auditor.


----------



## Colm Fagan

@RedOnion   Thanks!   I don't have time now (I'm under pressure to get back to sunning myself!!), but I'll look at it later.  One quick question though:  why don't the words "true and fair" appear in the UK company's accounts?


----------



## Sunny

Whether you look at adjusted net income is up to the investor. It can often include some useful information around fluctuations in reported income but as also mentioned, can be a useful place to be 'creative'. The issue as stated is that it is not an IFRS measure so it is not standardised. This makes comparison a bit more complicated if you are using adjusted figures as you can bet that two companies are probably doing different things (without breaking any rules I should add!). Cash Flow Statement is still king to me but that's probably because I come from a fixed income background.


----------



## RedOnion

Colm Fagan said:


> One quick question though: why don't the words "true and fair" appear in the UK company's accounts?


So, I was incorrect above. UK company law explicitly requires auditor to provide an opinion as to "true and fair". The material misstatement is used more in detail, but the opinion requires true and fair language.

Taking Diageo as an example;
"In our opinion:
• Diageo plc’s group financial statements and company financial 
statements (the ‘financial statements’) *give a true and fair view* 
of the state of the group’s and of the company’s affairs as at 
30 June 2018 and of the group’s profit and cash flows for the 
year then ended;"


----------



## redartbmud

I think that the "True and Fair" debate can now be safely put to bed

Mr Fagan, please ensure that you do not get too much of the sun.
It can create much confusion, in the area of the body where the "little grey cells" function. Hercule Poirot.

Red Onion. Thanks.

Cheers


----------



## Colm Fagan

redartbmud said:


> I think that the "True and Fair" debate can now be safely put to bed


Agreed, and thanks to all for your input (although I've still some homework to do, to read up the link suggested by @RedOnion 
I'm also reassured by @Sunny 's comment that:  


Sunny said:


> Cash Flow Statement is still king to me


Yes, I too ended up looking at the cash flow statement when I got confused by the adjustments made to arrive at "adjusted net income".  As an aside, it seems that analysts have now reached similar conclusions to those I arrived at last week.  The Samsonite share price is now HK$22.35, compared to an average €24.63 when I made my final disposal.


----------



## redartbmud

Off at a tangent:
UK audits focus on the Balance Sheet, more than the P&L A/c. and in the USA the bias is towards the P&L A/c, rather than the Balance Sheet.

I can remember, back in the day, I had an American client whose year end was 31 December. We used to audit the stock on 30 September, then roll the figure forward to the year end by sampling transactions over the 3 months. It was the only option- they almost wanted the audited results before the year end - very tight timetable


----------



## Colm Fagan

*

"Shareholders Have Feelings Too"*
is the title of my latest diary update (number 14).  The "speed-read" is as follows:
* 
"A Lord venting his frustration helped propel me to a 25% profit on an investment.  I then dumped the shares at the scent of possible trouble ahead"
*
The full update is as follows:

Company bosses should treat shareholders as their friends.  No, closer even than friends.   How many of your friends would be prepared to hand you money on the vague promise that you would see them right if things went well, but they could wave goodbye to their hard-earned cash if things went badly?  The Chairman’s and Chief Executive’s statements accompanying Annual Reports can inform shareholders, sometimes unintentionally, what companies _really_ think of them.  In April, I dumped shares that I had bought only six weeks previously, partly because I concluded after reading the Chairman’s and Chief Executive’s statements that the company didn’t value its shareholders and didn’t care much about their feelings.

Charles Taylor plc is a UK small cap company, meaning that it is listed on the main London stock exchange but is outside the top 350 quoted companies.  It provides support services to the insurance industry.

In March, I decided to invest in Charles Taylor at £1.94 a share, mainly because Lord John Lee, a successful investor and a former Conservative MP who writes an occasional personal finance column in the Financial Times, thought they were good value a year ago at £3 a share.  The company hadn’t told the stock exchange of any material adverse developments in the meantime, so I reckoned its shares must be even better value now, more than a third lower.   I was also reassured by the dividend of 11p a share, implying a dividend yield of close to 6%.  Companies generally set dividends at a level they think can be maintained in normal circumstances, so even if the price were to fall, I would still earn a good running yield.  I decided to invest only a small amount, in keeping with my recent resolution to start with a small stake in a company and to increase it only when I got comfortable with the company’s strategy, its financials and its people (see diary update 11: “_The Virtues of a Small Harem_”). 

Charles Taylor’s results for 2018 were published on 13 March, the morning after I bought the shares.  I put the results aside to study later, but I was happy with the proposed 5% dividend increase.  It signalled that the Board and management had confidence in the company’s prospects. 

The price hardly moved after the announcement, indicating that the results and prospects were broadly as the market expected.  I took this as another encouraging sign.  Then something strange happened.  After staying almost unchanged for three weeks, the share price suddenly jumped 8% on 3rd April, to £2.16, for no apparent reason.  It jumped again to £2.37 on Monday 8th April and kept rising over the next couple of weeks, hitting £2.52 by Friday 19th April.  It was now up 30% on when I bought just five weeks previously.  Naturally, I was happy with this turn of events but asked myself: why did the market wait three weeks before reacting so positively to the results? 

I discovered that the price jump on 3rd April came immediately after an article by columnist Lord John Lee appeared in the online edition of the Financial Times.   Referring to his holding in Charles Taylor, Lord Lee wrote: _“I had expected that the results would deliver a modest bounce in the share price, but hardly a movement.”_   He was right: the share price hardly moved before his article was published.  It soon made up for lost time.  The price jump of 3rd April was followed by a further boost when the article appeared in the following weekend’s print edition of the paper. 

It was time to do my homework on Charles Taylor, to decide whether to cash my gains or to make a serious long-term investment in the company.  As always, I started by reading the Chairman’s and Chief Executive’s statements in the Annual Report.  They painted a picture of a business going through a lot of change.  Three companies were acquired in 2018 and the business undertook a major reorganisation. 

Acquisitions can be good news for a company.  They can also cause problems, financially and culturally.  Charles Taylor’s largest acquisition in 2018 was of a Latin American insurance technology business (“InsureTech” is the buzz word) called Inworx.  It cost the equivalent of more than two years’ dividends.  Earn-outs for management could add significantly to the cost – possibly close to another two years’ dividends.  Charles Taylor asked shareholders to fund the acquisition.  The new shares were placed at £2.60 each. 

Anyone who subscribed to the share placing in May 2018 was nursing a loss of around £0.90 a share by March 2019, when the Chairman and Chief Executive were composing their statements.  Yet neither showed any concern for shareholders’ feelings.  On the contrary, they seemed pleased to have persuaded them to pay a high price for the new shares.   In the Chairman’s words, the oversubscribed share placing “_demonstrates our shareholders’ confidence in the Group’s long-term strategy_”.  The Chief Executive followed up with “_we have managed proactively our financial leverage through a significantly oversubscribed share placing.” _ In plain English, he was trying to say that it was better to have got the money from shareholders, who wouldn’t have to be repaid, than from the banks, who would demand their pound of flesh.  Yes, a new share issue was better for managers; shareholders might think differently. 

The Inworx acquisition could cause cultural problems.  Integrating an acquired business is difficult at the best of times; it is even harder in cases such as this.  Charles Taylor’s Board and top management are predominantly British; Inworx’s base of operations is in Latin America and presumably most of its management team are there too.  Only one of Charles Taylor’s eight-person board and just one of its eleven-strong Executive Committee have deep technology expertise.  Will the company’s Board and Executive Committee be able to rise to the challenge of integrating successfully a technology business that has its headquarters thousands of miles away in Latin America, in a different time zone, whose executive speak a different language day-to-day and who operate in a very different cultural milieu?  The high earn-out element in the purchase price exacerbates the integration challenges. 

Charles Taylor’s finances are also a source of concern.  The company lost £3.3 million in 2018, which was transformed into a profit of £22.3 million after adjusting for exceptional items.  I’m always wary of such adjustments, especially when they improve the result significantly on a consistent basis.  In each of the last four years, Charles Taylor’s adjusted profit was higher than its published profit.  Worryingly, the amount of the adjustment increased each year, rising from £1.4 million in 2015 to £4.0 million in 2016, to £7.9 million in 2017 and to a whopping £25.6 million in 2018. 

The financial, strategic and cultural risks were too high for my liking, so I bailed out on 23 April, at £2.49 a share.  By deciding to cut and run, I was admitting to another failed attempt to add to my harem, i.e. my portfolio of long-term holdings.  There was some consolation in the form of a tidy profit from the adventure, for which I thank Lord Lee.


----------



## redartbmud

Due diligence.
Charles Taylor is a small business in a niche sector that operates in 29 countries across the globe. The management must therefore have a reasonably good grasp of those markets and the key players involved.
My first alarm bell that rings, when I examine the acquisition of Inworks is Argentina, closely followed by technology.
We are all aware that Argentina has major structural and financial problems. Then there is the vexed question of technology that has been the death knell of many a good business.
You point out, very clearly, the obvious operating difficulties associated with a subsidiary based "thousands of miles away in Latin America, in a different time zone, whose executive speak a different language day-to-day".

Deeper inspection of the company accounts reveals some interesting statistics:
Revenue has increased from £122.76m in 2014 to £210.32m in 2017, but operating profit remained stubbornly flat - £10.98m (2014) and £10.27m (2017).
Over the period, EPS has been on a declining path and the dividend flat, as does the Operating margin and ROCE.
Turning to the Balance Sheet, Intangibles rose from £55.09m to £107.98m.
They are hardly stellar numbers for a growth business. The material rise in the intangibles denote significant investment, that shows little return by the way of profit.

Your further revelations on the treatment of exceptional items sets 'Big Ben' striking 12 bells, and that is without recourse to the forensic examination of free cash flow.

That having been said, the timing of purchase and quick sale, has generated a tidy profit. well done!!

My personal view is one of higher than the average risk for a small cap stock - Not for Widows and Orphans, and those following a quiet life of Retirement. 
It is very easy to buy into the glossy hype of a well oiled machine, that has a strategy of growth through acquisition, but controlled and quality must rank highly on the sheet of objectives, when filtering for suitable businesses.

redartbmud


----------



## Colm Fagan

Thanks @redartbmud   I defer to what I suspect is your greater knowledge of accounting.  Despite our claims at times to understand accounting (and everything else besides), we actuaries (or at least this particular one) can get confused by technical accounting issues, so I'm lost on some aspects of CT's accounts.

A few things stand out for me, however.  One is that, despite shareholders contributing £17.6 million in new money last year, borrowings still increased, from £66.2m at end 2017 to £80.9m at end 2018.  As an aside, I see that Bank of Ireland is one of their bank lenders.  I was also flummoxed by the sudden appearance in the balance sheet of a £13.5m liability for "trade and other payables", consisting primarily of what's called a "Deferred lease liability".  There was nothing under this heading last year.  I don't know the significance of this.  Maybe there's an equally obscure asset on the other side of the balance sheet.

Another interesting technical aspect of the accounts is a reference to IFRS 16, which is being implemented from January 2019.  They say that "we expect there to be a material change in the balance sheet on adoption".   How material?  They also state that "this new accounting standard will have a significant impact on the Group's consolidated financial statements, including but not limited to EBITDA and profit before taxation."  How significant will the impact be on the P&L and in what direction?  If you or anyone else with accounting expertise could translate all of this into plain English, I would be obliged.

All in all, I'm glad I sold my shares.  I wonder if Lord John Lee is sticking with them after writing in the FT about how low the price was - before his article appeared, that is!  I'm convinced that his intervention made the difference for me between it being a so-so investment and a very good one.  Having said that, while a 25% profit looks good, I only ventured a small stake in the company, for the reasons stated in my article, so the actual cash gain wasn't fantastic.

The experience has made me think how wonderful it would be to have the power to move share prices with my writings.  It could open up all sorts of new opportunities for profit      Give me time!


----------



## redartbmud

On a previous topic:
There has been a reaction to the recent Investor day at Renishaw, one of your favoured stocks.
Investec now rates them as a sell.
The company continues to be an innovator and market leader, but the stars do not appear to be aligned on their horizon for the present time.

red


----------



## Colm Fagan

redartbmud said:


> On a previous topic:
> There has been a reaction to the recent Investor day at Renishaw, one of your favoured stocks.
> Investec now rates them as a sell.
> The company continues to be an innovator and market leader, but the stars do not appear to be aligned on their horizon for the present time.
> 
> red


Hi Red
I agree. I too was at the Investor Day. I know nothing about Renishaw's business, so presentations on new products go over my head. In the past, I felt like saying "Wow" occasionally, the inventions were so exciting. The "wow" factor was missing this year. The inventions seemed mainly to be enhancements of existing products. OK, an invention that allows a 3D part to be made three times faster may be very valuable but it doesn't bowl me over. It could also be that there is something wonderful in the offing, so secret that nothing could be said about it at the Investor Day.
I'm no longer a buyer, but I'm not selling either.  It's a good company with good people and lots of money in the bank.  I'm confident that it's still a good long-term buy, better than bonds over the next five to ten years, but probably won't deliver my target return of bonds plus 4%.   A further consideration in my decision not to sell is that it would leave me with a massive CGT bill!


----------



## Gordon Gekko

Colm Fagan said:


> I know nothing about Renishaw's business



Hi Colm,

Is that not a terrifying admission? You know far more about markets and investing than most people, but my fear is that, like most people, you too are like a lamb to the slaughter in that your portfolio is too concentrated and you don’t have the resources to research the companies. Would you not be better off playing golf and drinking red wine whilst your old pals in ILIM or elsewhere manage an equity mandate for you? It is a genuine question.


----------



## cremeegg

Gordon Gekko said:


> Would you not be better off playing golf and drinking red wine whilst your old pals in ILIM or elsewhere manage an equity mandate for you? It is a genuine question.



But where would be the fun in that. Apologies to Colm for interrupting.


----------



## Colm Fagan

@Gordon Gekko   Reasonable questions.  You're right:  I know nothing about Renishaw's core business, metrology (the science of measurement), but I am very familiar with how Renishaw does business and its values.  It believes in taking a long-term view, through thick and thin.  Every year, it invests 15% of revenue in R&D.  That has paid off over the long-term.  My original investment of 20 years ago is now worth around 10 times what I paid.  That equates to a capital return of 12.2% a year.  Add another 2.5%  or so a year for dividends.  I don't think they'll match that in future, but I still believe in their approach to doing business.  It's how I'd like to run a business.  

As for the dangers of a concentrated portfolio, I have been banging this drum for a long time.  See for example Diary Update 11 ("The Virtues of a Small Portfolio") of 9 February.  I attach a copy of the update.  The concentrated portfolio has delivered long-term returns well in excess of those produced by ILIM or any of the other major investment firms.  


Gordon Gekko said:


> Would you not be better off playing golf and drinking red wine


I don't play golf, but I do like the occasional glass of red wine.  There was lots of it on offer - for free - at the Renishaw Investor Day!  As for the time commitment, it doesn't take much effort to keep on top of a concentrated portfolio.  I only have to keep a weather eye on a small number of stocks.  I look at them in detail only once a year, sometimes less often.  That's not a significant overhead.  
@cremeegg is right:  I really do get lots of fun from investing - and writing about it.  Maybe I'm just sad.  Strangely enough, by managing my own portfolio I'm able to sleep much better at night than if I were relying on an institution to look after my money.  For example, at the end of 2018, the portfolio's value had fallen significantly, but as I wrote at the time I wasn't particularly worried as I knew that some of the shares were being ridiculously undervalued by the market and that they'd eventually come back, which they did.


----------



## redartbmud

I feel a little guilty, setting off the rabbit, to run across the fields, then disappear for a short break.
As a long term investor in Renishaw, I understand a bit more about the company, and the business, every time I attend an Investor Day or AGM.
I fully endorse Colm's present views on the status of the business, and his current position. I am holding, but not adding, for the short/medium term. The current state of the world economy will temper growth until such time that we see something new.

The advantage of holding a limited number of shares, in a portfolio, is the amount of time available to hold a watching brief over your investments. Advances in technology have made available considerable quantities of data to sift and digest. 
Unlike the 'good old days', when markets moved more slowly, it is vitally important to keep a daily watch for company announcements, broker comments, newspaper articles. Investment forums, where private investors can post their views, can be short term disruptors, should they create short term momentum, either up or down. Programmed trading, using algorithms, have the capacity to create irrational volatility.

The corollary is however, that a larger number of holdings creates a greater risk because the investment is spread more widely.  Assuming that you double the number of holdings from 10 to 20. Only 5% of your total investment is held in 1 share. The question is whether share No20 on the list, is as strong as share No10, and that it will generate similar returns. An interesting conundrum.

red


----------



## elacsaplau

Hi Retardmud,

Good of you to _revisit _us! I note that you have a very particular and singular attachment to this thread. And why not! - it's not every day that you'll cyber meet a fellow long-term investor in Reinshaw, who travels to attend its AGMs, has mirroring views on its current prospects and is a passionate advocate of the concentrated portfolio with both feet very firmly in the "diversification is a protection against ignorance camp"!!

In case that an overly comfortable consensus takes hold, just for balance, I'd like to record that there are alternate views which include:

1. Most professional fund managers do not beat the market in the long-term;

2. It is hard to understand why amateur investors generally would be more successful than professional fund managers and by extension even less likely to beat the market in the long-term;

3. Keeping a daily watch of market noise is generally a waste of time and one should be encouraged to find other areas of interest like philately or pilates or something; and

4. There is Noble Prize winning research that would disagree with the general point that "a larger number of holdings creates a greater risk".


Please don't take this to mean that it is not possible for individuals to beat the market. Hell, I've taken bets myself that have paid off handsomely. But it really is hard to tell to what extent such personal investment successes were primarily down to luck. For the majority of people the majority of the time, I am not at all convinced of the merits of the concentrated stock-picking strategy which is central to this thread.

For the avoidance of doubt, I do believe that Colm has beaten the market - I am just concerned with the central messaging and that some people will suffer as a result of it! There needs to be more of the Blue Peter messaging....


----------



## Sarenco

redartbmud said:


> The corollary is however, that a larger number of holdings creates a greater risk because the investment is spread more widely


With respect, that is complete nonsense.  

A concentrated portfolio of securities is always more risky than a more widely diversified portfolio.


----------



## redartbmud

Hi Sarenco/elacsaplau  


Firstly, an apology.
I meant to say that  " a larger number of holdings creates LESS risk....". The greater the spread, the lower the risk. In my simple case study a 20 share portfolio suggests a holding that, at cost, equates to 5% of the portfolio, compared to 10%  of a 10 share portfolio.

I agree with you on the professionals. Pressure of business once meant that I gave my portfolio to a Broker, to manage on my behalf. It did not end well!! The whole episode could be the subject of a Diary column.

Any long term investor, who says that they have never had a disaster, must be economical with the truth. Over my years of investing, I have had a number. My aim is to ensure that the percentage of losers, or underperformers, is vastly outweighed by the winners.
There are many publications that show charts that compare performance of the markets vs cash. It is important to understand the underlying assumptions behind the figures, and of course the start point and time span.  The fundamental fact remains that income plus capital growth will always outperform income alone, over a long enough economic cycle.

Every investor has their own set of criteria. Some have greater aptitude than others. Sadly, far too may gamble on spread bets, CFD's and other very risky investments, only to retire with a big hole in their pockets, down which their funds have disappeared.
My personal goal is not to beat the markets, but to generate sufficient long term growth and income from my assets, to maintain a standard of living that meets my needs. Unlike Colm, my personal portfolio is far too diverse, and I do not treat all of the content, with the attention that is required, all of the time.

Turning to the column, I find it an interesting, and informative, walk through the world of investing. Both good and bad are reviewed, for what they represent, and generate thought and ideas. It is important to stand back, from time to time, and take stock. The old "cannot see the wood for the trees" springs to mind.

It is a coincidence that Mr Fagan share a similar love affair with a remarkable business, such as Renishaw, but I do not share his devotion, for example, to Ryanair. I am however interested in his opinion.

I have been a reader of Diary of a Private Invstor for some time, but have only recently become a commentator/contributor.
Long may he continue to pen his musings, and create a debate, from which we may all take away a small amount of knowledge, and maybe the odd success story.

red


----------



## joe sod

redartbmud said:


> Unlike the 'good old days', when markets moved more slowly,





redartbmud said:


> Programmed trading, using algorithms, have the capacity to create irrational volatility.



Im surprised there is not more analysis of these crucial issues in markets today, how technology moves markets and increases volatility. Look at the huge sell off in december, largely explained by the above. Even when volatility is low in the overall market, it can be high in individual stocks, ryanair falling 10% on little specific news recently. I think the capacity for investors to be spooked out of markets today is much higher than in the pre internet days.


----------



## Sarenco

And yet the last decade has been the least volatile in stock market history.

Reality does not conform to your thesis.


----------



## Gordon Gekko

The more I see, the more I welcome private investors buying ETFs rather than active because it gives sensible investors an advantage.

The greatest value that an investment manager can add is the conviction to stay the course.

Cheap ETFs are all well and good, but most people who invested in them ran for the hills in December.


----------



## jpd

Gordon Gekko said:


> The more I see, the more I welcome private investors buying ETFs rather than active because it gives sensible investors an advantage.



apart from the 41% tax


----------



## joe sod

Sarenco said:


> And yet the last decade has been the least volatile in stock market history.
> 
> Reality does not conform to your thesis.



I think what we saw in december with the huge selling and then the very fast recovery in january is not what has been seen before, some of the selling in december was worse than 2008. Even on this site where there is not much discussion anymore there were  a lot of people that had sold their holdings because this was the big crash they had been reading about on investment blogs. I think technology and too much information is definitly a big factor moving markets


----------



## Andrew365

I remember January 2016 being pretty bad for the S&P before recovering to highs come mid year deja vu. 

Something that stuck with me from a podcast years ago and it is the value of your own time. In a Simple example let's say I invest passively and earn 5% or I can pick individual stocks via research in my free time and earn 8%. However is that 3% worth the time I have spent earning it or could i have done something else. Personally for me in my position it has so far I have picked the passive strategy due to work and hobby commitments.


----------



## joe sod

Andrew365 said:


> n a Simple example let's say I invest passively and earn 5% or I can pick individual stocks via research in my free time and earn 8%.



and unfortunately with investing that extra work could worsen your performance, your assumptions and calculations could be wrong. Even if you research a company to the nth degree you still can be just wrong.


----------



## redartbmud

Some interesting posts recently.
The Column is titled Diary of a Private investor, and that may give a clue as to the content.

Gordon/joe
Do you advocate that it is a waste of time to be a DIY investor, and that the best course is to invest indirectly through
products such as ETF's, UT's, IT's etc?
The number and spread of such vehicles is now so huge that you are spoiled for choice. How do you apply filters to select
the fund, in which to invest? The principle is the same as selecting a share., you are relying on the published data, both historic and
future forecast, consequently it is easy to make a mistake when making the choice.


----------



## Colm Fagan

A few responses to the various postings, which I hope will clear up some misunderstandings about my approach to investing.  It's worth stating at the outset that I'm speaking for myself.  I can't speak for other private investors.


elacsaplau said:


> Most professional fund managers do not beat the market in the long-term;


Yes, the statistics are firmly against active investment.  I read recently that there is only a c1% chance that an active fund will beat a passive fund over 10 years.   The great investor Warren Buffett advises "normal" investors to buy passive funds.  I recommend the same to anyone who asks my opinion.  I'll explain below why I prefer an active approach (or what I prefer to call a "passive active" approach) for my own investments.


elacsaplau said:


> Keeping a daily watch of market noise is generally a waste of time and one should be encouraged to find other areas of interest like philately or pilates or something


That's probably true too, but it doesn't apply to me.   I have a highly concentrated portfolio (five companies account for over 80% of my holdings) and I make only small changes over time.  Four of the five top holdings at end May 2019 were also in the top 5 in May 2016.  The proportions in different companies within the top five have changed over time as I've become more or less optimistic about their prospects.  Those small changes have generally made positive contributions to performance.  It's not time-consuming to keep tabs on a highly concentrated portfolio that changes little over time.


elacsaplau said:


> There is Noble (_sic_) Prize winning research that would disagree with the general point that "a larger number of holdings creates a greater risk".


It depends on the definition of risk. It's obvious that the more concentrated the portfolio, the less likely its performance will track the broader market.  It's not so obvious that the risk of loss is greater.  My most concentrated portfolio ever was when I owned 100% of my own business and had very little else.  I was confident the business would succeed.  I didn't believe I was running too much risk.  I felt much the same about four years ago when I had a sizeable portion of my investment portfolio in Renishaw and its share price was under £20.  (It topped £50 last year).   I'm sorry now that I didn't have even more in it at the time, even though it would have meant exposing myself to even greater "risk".   Over short periods, I have performed abysmally compared to the market.  I don't give a fig how my performance compares to the market.  All I want is to earn a good return (say inflation plus 5% a year) in the long-term.  I'm happy that I'll achieve that goal.


elacsaplau said:


> I do believe that Colm has beaten the market


If I have, I don't think it's because of any great skill on my part.  I've stuck to a few very simple rules.  One is to try to keep costs to a minimum.  That's one reason for having a concentrated portfolio and for making relatively few trades.  (I haven't checked, but I'd say that the turnover of my portfolio is much lower than average).  DIY also helps keep costs down.  I'm saved the costs of professional management, which I believe adds nothing to returns, on average.  (Some professionals beat the market over long periods, but it's almost impossible to know in advance who they'll be).   I'm also a firm believer in the adage that "it's time in the market, not timing the market, that counts".  I have practically 100% in equities.  I expect to get 3% to 5% a year more (on average) from them than from bonds.  Therefore, I can expect to earn 1.2% to 2.0% a year more (on average) than someone who is 60% in equities.  It's simple arithmetic and has nothing to do with being a good stock-picker.  Also, I believe that keeping a diary of why I'm buying or selling particular companies helps to reduce the incidence of complete turkeys.  It doesn't eliminate them entirely:  witness Ryanair, which was one of my top five holdings in May 2016 and is still up there, sadly.
Strangely enough, having a concentrated portfolio helps me to sleep at night.  As I noted in my "Diary" at the end of December, my portfolio was on the ropes.  I lost around 30% in 2018.  Yet I wasn't particularly worried at year end, as I was confident that some of my bigger holdings (Phoenix Group in particular) were at ridiculously low prices and would recover, if I could avoid having to sell while they were so grossly undervalued.  That belief gave me a lot of comfort.  I don't think I would have had the same equanimity if I had been invested in a faceless fund, where I wasn't familiar with the underlying investments.


----------



## joe sod

redartbmud said:


> Do you advocate that it is a waste of time to be a DIY investor, and that the best course is to invest indirectly through
> products such as ETF's, UT's, IT's etc?



No Im not suggesting that, clearly you (and Colm Fagan) know what you are doing. Its just that there seems to be an implied assumption that if any investor researches a company enough that he will make the correct investment decision, his research and assumptions could just be wrong. For what its worth its probably the case that most shares are not correctly valued and their values are dependant more on trends, fashions, emotions, trading algorithms than on their fundamental value. Look at what happened Neil woodfords funds, he knows more about investing and valuing stocks than any amateur investor.


----------



## redartbmud

joe

I am afraid that Mr Woodford has become the most recent professional fund manager who has got things wrong.
At one point in time, he became a star fund manager, and attracted a large following, of investors, who subscribed
vast sums of money into his funds.
I have tried to attach, it would appear very clumsily, a summary of the top 10 holdings in Mr Woodford's fund.
Two house builders, three financial services, two pharma and biotech companies, two non=quoted companies and one company
aligned to the property market is hardly a model portfolio that I would consider to be appropriate for an investor with little
knowledge and understanding of financial markets and investments.
Apologies for the messy attempt to cut and paste.













�

1Barratt Developments7.51%United KingdomHousehold Goods & Home Construction2[broken link removed]5.97%United KingdomFinancial Services3Taylor Wimpey5.33%United KingdomHousehold Goods & Home Construction4Provident Financial4.80%United KingdomFinancial Services5Theravance Biopharma4.77%United StatesPharmaceuticals & Biotechnology6BENEVOLENT AI LINK WEIF A4.48%Non-ClassifiedNon-Classified7IP Group3.30%United KingdomFinancial Services8Autolus Therapeutics ADS3.18%United KingdomPharmaceuticals & Biotechnology9Countryside Properties3.16%United KingdomHousehold Goods & Home Construction10OXFORD NANOPORE TECH ORD2.58%Non-ClassifiedNon-Classified


----------



## jpd

That's only 45% of the portfolio. so it's hard to state categorically it's over reliant on a few sectors.

I thought the main problem was that it held a lot of non-quoted and illiquid stocks and so was finding it difficult to meet redemptions


----------



## redartbmud

jpd

Yes it is only the Top10, but that is all the fact sheets, issued by the Funds, provide as a matter of course.
Would you not concur that 45%, of the fund, in 10 shares is sufficiently significant to have a major influence.
No 6 Benevolent and No 10 Oxford Nano are unquoted and comprise 7.61% of the fund investments.
They are clearly very illiquid, and can only be sold to a willing buyer, on a matched basis. That doesn't
happen overnight. Placing several millions Euros worth of stock in a private company is tough, and
the buyers can quote fire sale prices, at which they are willing to pay.

Colm has been challenged, over the small spread in his portfolio, and here is a man, who was lauded
as the Rolls Royce, of investment manager, with 45 % of his total portfolio in just 4 sectors of the market.
His fund has a value in the hundreds of millions!!

Sorry, but your argument does not hold water with me.


----------



## jpd

I'm not a fan of asset managers, having been burned over 25 years ago and from which time I manage my own portfolio - which has around 20 shares and a few ETFs. My portfolio was setup when I lived in France, so the Exit Tax regime wasn't applicable and while I divested of some of them, the others I have held onto
I don't have a problem,  if asset managers hold a concentrated portfolio as long as that is signaled to prospective investors who can them decide to trust the manager or not. But I imagine a lot of people just invested in Woodward's fund because of his past successes - and as we know ....


----------



## Colm Fagan

There's an excellent article on Neil Woodford and his woes in today's Irish Times.  One aspect not touched on in the article is the difficulty of having unquoted and/or illiquid investments in an open-ended fund.  I think this particular problem is going to get a lot of publicity over the next while.  It's already causing shock waves in the UK and will surely spread to this country and to wider EU regulation in due course.  I plan to start a new thread on the topic.


----------



## cremeegg

Colm Fagan said:


> One aspect not touched on in the article is the difficulty of having unquoted and/or illiquid investments in an open-ended fund.


There is a valuable lesson here, with a reasonably actionable take away.

When I was a young trainee accountant I was told that you should always match the maturity of your financing with the life of your assets. So a vehicle with a 5 year expected life on HP similar over a 5 year period, and a building financed with a mortgage over 20 plus years. Well sort of!

While financing an illiquid asset with retail investment money is foolish, investing in short term assets with long term money can be very profitable.


----------



## redartbmud

creme

You are correct but:
Under normal operating conditions, there would be an assumption that withdrawals could be managed by the orderly realization of liquid assets. eg. Income from dividends and disposals is needed to fund dividends, in the normal course of events. There are always reasons why investors need the cash in their chips. New investors come along, encouraged by the prospect of good returns.
Illiquid assets would be realized, over time, as appropriate to provide returns to the fund, as their value is enhanced. Maybe the company will float, in the longer term and become a liquid asset within the fund.
There are many alternative ways of protecting the capital value, of a fund, by the use of, for example, a put ETF. If the value of investments increases,  the cost is covered, if values fall, the increased value of the ETF compensates.

(The building society model is based on the understanding the money for mortgages is lent on a long term basis, from deposits taken from investors, whose timeline is significantly shorter. A different vehicle, but similar principles.)

In this case, the under-performance of the assets has reached a point, where advisors have sold discretionary client holdings, and concerned direct investors have also sold up. Negative recommendations from analysts have only served to increase momentum, creating significant cash shortages. within the fund. The values of individual shares, in the portfolio, have fallen as the number of sales has far exceeded the number of purchases. That results in an overhang of shares and price reductions. Forced realizations, by the Woodford fund, may even be made at a capital loss.

Sadly Mr Woodford is one person in a long line of fund managers that have fallen from grace. He will not be the last.


----------



## EmmDee

The issue for the fund in question (or any fund holding illiquid shares) is not necessarily a liquidity issue. It is the requirement to be equitable to all shareholders.

If, for example, 50% of a fund portfolio is illiquid assets and 50% cash and a significant portion of shareholders wish to exit the fund, it is not equitable to fund those withdrawals from cash and leave the remaining shareholders with a portfolio which is now 100% illiquid. So the manager / fund is obliged to freeze withdrawals until they can rebalance the portfolio (or decide that it is actually better to wind down).

There isn't an issue with an illiquid fund if that is fully disclosed and understood by investors. I'm not sure if this particular fund altered it's investment strategy which would be an issue


----------



## cremeegg

It all looks like liquidity to me.



redartbmud said:


> Under normal operating conditions,


 
And when difficult circumstances arose he hadn't the liquidity to protect his position.

I tell anyone that will listen that borrowing to invest does not increase risk. But you must be sure that you are liquid, and not just under normal conditions.



EmmDee said:


> If, for example, 50% of a fund portfolio is illiquid assets and 50% cash and a significant portion of shareholders wish to exit the fund, it is not equitable to fund those withdrawals from cash and leave the remaining shareholders with a portfolio which is now 100% illiquid. So the manager / fund is obliged to freeze withdrawals until they can rebalance the portfolio (or decide that it is actually better to wind down).



Purely a liquidity issue. This is an example of a fund that hasn't the liquidity to meet its regulatory obligations, rather than the usual cause of illiquidity.

Neil Woodford's unquoted investments may turn out to be wonderful, and his asset allocation pure genius, but it doesn't matter to him, he ran out of liquidity.


----------



## EmmDee

cremeegg said:


> It all looks like liquidity to me.
> 
> 
> 
> And when difficult circumstances arose he hadn't the liquidity to protect his position.
> 
> I tell anyone that will listen that borrowing to invest does not increase risk. But you must be sure that you are liquid, and not just under normal conditions.
> 
> 
> 
> Purely a liquidity issue. This is an example of a fund that hasn't the liquidity to meet its regulatory obligations, rather than the usual cause of illiquidity.
> 
> Neil Woodford's unquoted investments may turn out to be wonderful, and his asset allocation pure genius, but it doesn't matter to him, he ran out of liquidity.



I'm not sure what you mean when you say liquidity. I assume you don't mean cash - very few funds maintain cash in any significant amount. It wouldn't make sense. However, funds need the ability to liquidate positions quickly enough to fund shareholder withdrawals. In this case, the fund had redemption requests for many months followed by a very significant single redemption request. If there is a constant flow of redemptions, at some point the fund has to decide whether continued selling of liquid positions will be unfair on the remaining shareholders as they would be left with a portfolio significantly made up of the illiquid holdings and/or whether forced "fire sales" of less liquid positions would also not be in shareholders' interests.

So was there a liquidity issue - no more so than any fund facing similar outflows. Even some Money Market Funds (which hold the most liquid asset types) were forced to "gate" (i.e. restrict redemptions) in the financial crisis. Which actually is a lot more crazy than an equity fund having to do that.

No fund maintains cash reserves to cover "difficult circumstances" on an on-going basis. Also - you stated the fund hadn't the liquidity to meet its regulatory obligations. Could you clarify? I don't believe there was any question of the fund breaching "regulatory liquidity requirements".


----------



## cremeegg

Liquidity is the ability to meet any cash call however it arises. 

The strategy employed to meet your liquidity requirement might be cautious I.e. hold lots of cash or some more risky approach. 

I have no doubt Neil Woodford thought his approach was a reasonable one. But he couldn’t meet the cash requirements that he faced. 

A fund that is exposed to redemption requests needs to manage that risk. Redemption requests are not going to arise frequently when the fund is doing well. 

I understand that the Woodford fund could even be shorted by its own investors who could then redeem their investments so driving the collapse they had bet on through the short. 

As for regulatory obligations, I was merely referring to the need to rebalance the portfolio you mentioned previously.


----------



## joe sod

cremeegg said:


> Neil Woodford's unquoted investments may turn out to be wonderful, and his asset allocation pure genius, but it doesn't matter to him, he ran out of liquidity.


I think it will be shown that those investments will perform if they were left alone and if the investors in his funds held their nerve. Afterall he did avoid completely the dot com crash and faced substantial criticism at that time for not believing in the "new economy" investments. He also came out of the financial crash unscathed, the worst crash since the 1930s, very few people avoided that.


----------



## Sarenco

joe sod said:


> I think it will be shown that those investments will perform if they were left alone and if the investors in his funds held their nerve.


Seriously.  How could you possibly know that?  Do you even know anything about these companies?


----------



## Sunny

cremeegg said:


> Liquidity is the ability to meet any cash call however it arises.
> 
> The strategy employed to meet your liquidity requirement might be cautious I.e. hold lots of cash or some more risky approach.
> 
> I have no doubt Neil Woodford thought his approach was a reasonable one. But he couldn’t meet the cash requirements that he faced.
> 
> A fund that is exposed to redemption requests needs to manage that risk. Redemption requests are not going to arise frequently when the fund is doing well.
> 
> I understand that the Woodford fund could even be shorted by its own investors who could then redeem their investments so driving the collapse they had bet on through the short.
> 
> As for regulatory obligations, I was merely referring to the need to rebalance the portfolio you mentioned previously.



There is no fund in the world that can meet massive redemption requests without having to take steps to protect other investors. That's not how funds work. As EmmDee says, there are money market funds that had to use gating during the financial crisis. Indeed money market reforms are now in place that allows liquidity fees to be charged and increased use of gating. Indeed some money market funds will now have floating NAV's which is unheard of not getting your money back. And these funds are supposedly as close to cash as you can get.

A lot of funds will have illiquid or at least less liquid assets in their funds. It is the nature of investing and can be hard to avoid. The percentage of these shares in a portfolio is usually regulated and limited to around 10% of the portfolio so shouldn't cause a issue. The issue with Woodford is there appears to be some questionable decisions including listing shares on the Guernsney Exchange and claiming that as liquid where there wasn't a market. That and his rubbish stock selection based on his 'Britain is great and Brexit will be fine' outlook.

Once again, this story will come back to bad practices by a fund manager who probably believed his own a PR and a regulator who despite everything that has happened, still seems intent on regulating based on reports submitted every month/quarter and ticking some boxes.


----------



## elacsaplau

Sunny don't go away. Apologies - liquid lunch - admittedly on vacation! Good post though.



Sunny said:


> .....a fund manager who probably believed his own a PR



Yep - investment guys _who know best_ worry me...…..of course, it happens but the odds ain't good




Sunny said:


> ….a regulator who despite everything that has happened, still seems intent on regulating based on reports submitted every month/quarter and ticking some boxes



Personally, not familiar with the UK Regulator but if it's like its Oirish cousin, mindless box-ticking sounds very apt.


----------



## cremeegg

Sunny said:


> There is no fund in the world that can meet massive redemption requests without having to take steps to protect other investors. That's not how funds work.



This is closed funds. My point is that there is a liquidity risk in such investments. 

Traded funds have no such issue.

My point is that there is a liquidity risk in such investments.


----------



## jpd

cremeegg said:


> Traded funds have no such issue.


Only if the hold traded shares - if they hold non-traded shares, they will have the same problem as closed funds


----------



## MangoJoe

Interesting thread - May I ask a question please?

Is it within the bounds of possibility that one could invest in shares and then discuss related companies in flattering terms in print and social media thus creating ones own good fortune to an extent?

….I presume that the more prominent 'A list' Investors could potentially manipulate this effect at will? Though perhaps not in a sustainable manner.


----------



## Gordon Gekko

Woodford’s Patient Investment Trust also has problems due to the sell off in relation to the assets also held by the open-ended fund. Illiquid stuff in an open-ended structure is just such a bad idea. The whole story really is a tale of woe.


----------



## cremeegg

jpd said:


> Only if the hold traded shares - if they hold non-traded shares, they will have the same problem as closed funds



If a fund is traded does the issue of redemptions arise ?


----------



## jpd

Yes, because the fund is obliged to issue and redeem shares in the market as required by acting a seller or buyer of last resort


----------



## Colm Fagan

I had started a post, but pushed the wrong button and posted it prematurely.  I'll start again!


----------



## Colm Fagan

MangoJoe said:


> Is it within the bounds of possibility that one could invest in shares and then discuss related companies in flattering terms in print and social media thus creating ones own good fortune to an extent?


Very interesting question. Of course it can and I'm sure it does happen. For example, going back to post #521 of 7 May in this thread (top of page 27), I told of buying shares in a company Charles Taylor plc, which Lord John Lee, a regular FT contributor, said was one of his long-term holdings and which he had often mentioned in his column.  When the 2018 results were announced in mid-March, the share price hardly moved for three weeks. They then jumped 8% when an article by Lord Lee, wondering why the share price hadn't reacted positively to the results, appeared in the online edition of the paper.  They jumped another 10% when his article appeared in the Weekend print edition of the paper.  Of course the timing of the price rises could simply be coincidence, but someone with a suspicious turn of mind could think that Lord Lee might have used his column to boost the share price.  I emphasise that I'm NOT making that allegation.


----------



## cremeegg

MangoJoe said:


> Interesting thread - May I ask a question please?
> 
> Is it within the bounds of possibility that one could invest in shares and then discuss related companies in flattering terms in print and social media thus creating ones own good fortune to an extent?
> 
> ….I presume that the more prominent 'A list' Investors could potentially manipulate this effect at will? Though perhaps not in a sustainable manner.


It’s common enough to have a name. It’s called pump and dump. 

The opposite, short selling a share then spreading rumours about the company is even more effective. Bad news is easier to sell. 

Illegality is hard to prove in either case.


----------



## EmmDee

MangoJoe said:


> Interesting thread - May I ask a question please?
> 
> Is it within the bounds of possibility that one could invest in shares and then discuss related companies in flattering terms in print and social media thus creating ones own good fortune to an extent?
> 
> ….I presume that the more prominent 'A list' Investors could potentially manipulate this effect at will? Though perhaps not in a sustainable manner.



Very illegal - under the Market Abuse Regulations this is known as "Market Manipulation" (or "pump and dump" as mentioned). It's even questionable whether you could get away with disclosures any more if you were writing glowing pieces (as used to be the case).

And if you had any non-public information and traded - again illegal.

On both, they pick up suspicious activity pretty quickly


----------



## EmmDee

jpd said:


> Yes, because the fund is obliged to issue and redeem shares in the market as required by acting a seller or buyer of last resort



For open ended funds, the fund isn't really acting as buyer of last resort - they are selling assets to cover net redemption requirements as the fund can't buy it's own shares. And also - they are the only (rather than last) method of liquidating a holding (some open ended funds allow transfers between parties but that is unofficial)

For a closed ended fund, there is no way of redeeming via the fund. The only way to sell out is to find a third party buyer - in many ways a closed ended fund share acts like a regular equity - you don't sell back to the company. Which means redemption liquidity is never an issue for a closed ended structure

It's variable capital vs fixed capital structures


----------



## joe sod

Colm Fagan said:


> They jumped another 10% when his article appeared in the Weekend print edition of the paper. Of course the timing of the price rises could simply be coincidence,



Colm what about Tesla and Elon Musk misleading the markets by saying that he was getting a large injection of capital (I think from saudi wealth fund). The share price of the troubled company got a big boost on the back of this, of course it turned out to be false. Everything seems to have gone quite with regard to the SEC investigation and the share price is back up again, seems a bit strange?


----------



## Colm Fagan

joe sod said:


> Colm what about Tesla and Elon Musk misleading the markets by saying that he was getting a large injection of capital


HI Joe
One could write a book about Elon Musk and the SEC.  Come to think of it, it's probably been written already!  If you google the two words "Musk" and "SEC", you'll get enough reading material to keep you going for a year. 
Elon Musk has been good to me.  I've made more than a few bob from shorting Tesla. 
You're right:  the share price increased recently following the release of good production numbers for the half-year.  I'm reminded of the saying: "Sales are vanity; profit is sanity".   We've yet to see how the sales figures (at discounted prices) convert into profits.  I'm holding on to my short position.


----------



## Colm Fagan

My latest diary update can be found on my website: 


			http://www.colmfagan.ie/documents/24_Document.pdf
		

I only started to populate the website within the last few weeks.  It's still very much a work in progress.


----------



## EmmDee

joe sod said:


> Colm what about Tesla and Elon Musk misleading the markets by saying that he was getting a large injection of capital (I think from saudi wealth fund). The share price of the troubled company got a big boost on the back of this, of course it turned out to be false. Everything seems to have gone quite with regard to the SEC investigation and the share price is back up again, seems a bit strange?



That cost him $20mm and he had to resign as Chairman. He was also supposed to have any tweets relating to the company vetted by in-house legal. Which he then ignored and ended up back in court in April on a contempt charge (not sure if that has been resolved yet)


----------



## WhiteCoat

Colm,

Pharmas are interesting investment plays and I'm back on my ethical hobby horse! They, en masse, do an awful lot of good but individually they invariably have skeletons - some more than others. I use the products they produce because they are good - albeit often produced by companies that display questionable ethics.

Take insulin. It is estimated that over the last 20 years, after adjusting for inflation, the price has increased by 700%. Profit motivation aside - are there any justifications to such an increase? Would it be a good thing generally if this price trajectory continued?  How is it that a vial of insulin costs about $280 (give or take a % or two) from each of the three main producers in the field?


----------



## Colm Fagan

Hi @WhiteCoat 
First of all, I'll defer to your superior knowledge on medical matters.  
As I said in the article, I don't have any other pharma or healthcare stocks.  There's a good reason:  I'm wary of the sector, for the reasons you've set out.  However, I felt that I was missing out on a major sector of the world economy by avoiding it completely.  I thought that Novo Nordisk was/is a  good company, with a long track record, and that they would not behave unethically.    
I have read horror stories of price gouging by pharma companies, but I thought it was mostly confined to companies with rapacious private equity owners.  Of course, a pharma company should be entitled to super profits for a while from developing a new drug or treatment.  Otherwise, why make the necessary investment?  In the case of the new pill I mentioned that Novo Nordisk is developing, it could take ten years to get it to market.  I'm sure there are all sorts of risks involved in the meantime, a possibility that the treatment will fail in tests, etc.   They're entitled to be rewarded for taking those risks.   I thought however that, once a drug goes off patent, normal commercial rules apply, and that the company with the lowest price has an advantage.    What you're saying indicates that that's not true, that there's some sort of oligopoly, even for drugs that have gone off patent.  That's news to me.


----------



## WhiteCoat

Hi Colm,



Colm Fagan said:


> Of course, a pharma company should be entitled to super profits for a while from developing a new drug or treatment.  Otherwise, why make the necessary investment?



Agreed.



Colm Fagan said:


> I thought however that, once a drug goes off patent, normal commercial rules apply, and that the company with the lowest price has an advantage.



Broadly correct. However, google "patent evergreening" or "insulin evergreening" to see what the Big 3 are doing to renew patents. [My comments yesterday were a little crude as, admittedly, there has been significant R&D spend in improving the general efficacy of insulin products]. Also, it's not so easy for generic manufacturers to get started in insulin production. This is, in part, due to regulations but also because insulin is a biologic which means it is more complicated and costly to produce generically compared with, say, duplicating chemical molecules, etc.



Colm Fagan said:


> What you're saying indicates that that's not true, that there's some sort of oligopoly, even for drugs that have gone off patent.  That's news to me.



Isn't this at the heart of the current class action against the Big 3 in the States? (That's a question - haven't studied closely). In any event, don't the Big 3 control something like 90% of the worldwide market?


----------



## Colm Fagan

@WhiteCoat    Very interesting.  Thanks for educating me.  No, I wasn't aware of the class action you mention.  I've just Googled the largest pharma companies and it says that the top three only have 15.7% between them (Pfizer 5.6%, Novartis 5.4%, Hoffmann-La Roche 4.7%).  Novo Nordisk doesn't appear in the top ten.  I realise of course that it's necessary to dice and splice the market differently to understand the REAL story on market shares, which I'm sure you're well on top of.  If nothing else, my decision to buy Novo Nordisk has opened up an entirely new field of learning for me.  That's one of the things I love about managing my own portfolio.


----------



## Colm Fagan

I've just realised that you're probably talking solely about the insulin market.  Go to the back of the class, Colm!

Ouch!  I'm just reading about it!  No wonder the yield is so attractive!   For other readers, @WhiteCoat is referring to a class action against Sanofi, Eli Lilley and Novo Nordisk.    It looks like this could be another disastrous attempt to broaden my portfolio!


----------



## WhiteCoat

Apologies - I didn't make it clear what I meant by the Big 3 - haste makes...…..confusion!

Also, for the avoidance of doubt, I've no idea if Novo is a good financial play or not...…..

And I don't know Novo well enough to meaningfully comment on their ethics either.

My original comment (on the Novo strand of this thread)  - and probably the only point I can really stand over - is that pharmas generally can be challenging from an ethical investment perspective. We need them - they do good - lots of good but sometimes their business practices can be questionable and sometimes very poor. For this reason, I would argue that investing in individual pharmas should require, as part of the selection criteria, a "comfortable with its ethics" box to be ticked!


----------



## Colm Fagan

WhiteCoat said:


> investing in individual pharmas should require, as part of the selection criteria, a "comfortable with its ethics" box to be ticked!


That's high on my list of boxes to be ticked for all my investments.  I thought Novo Nordisk ticked it.   I'll check again in the light of what you told me.  Thanks again, and I really mean it.


----------



## redartbmud

There has been a very lively debate, in the last several days. The Woodford and ethics investing debate has been very lively indeed.
Turning to the last diary has given me pause for thought.
I am constantly looking at my principles of investing, and the shares that I hold in my portfolio.
In the area of ethics, I do not hold tobacco/smoking related shares, as i cannot reconcile myself to profiting from the obvious harm that smoking does to my fellow human beings.
I do, however, invest in alcohol related stocks, and can reconcile my conscience on that issue.

More fundamentally, I have been looking at the thinking behind the approach to investing, surrounding management of existing shares in the portfolio and the addition of new shares as diversification.
It is very easy to get too comfortable with shares that form the existing portfolio. They have been thoroughly researched and they have a track record of performance.
What is not so clear is the recognition of change to the fundamental outlook for the company.
The fresh pair of eyes, of a new investor, looks at a share in a different way. They undoubtedly see the impact of key events far more clearly, because they are more detached.
On the one hand, we have the measure of performance, using whatever matrix is applied. They are rules that have stood us in good stead, over years of investing.
Do you, for example sell/reduce if the PE ratio hits a level well beyond the long term norm for the sector and the specific stock? Conversely, do you buy back/add when the PE falls below that norm, always given that the news-flow does not indicate any reason for the change in price.
Am I a long term holder forever, Warren Buffett style, or a butterfly. hopping around from share to share?
I am not clever enough to time the market such that I can buy anywhere near the peaks and troughs, or understand the impact, on the share price, of a new piece of news.
If I am going to 'trade' a share, how do I decide how many to buy/sell at the time? Do I blindly apply a standard formula of a set percentage, say 5% of the value of the holding?
Supposing I choose to sell an entire holding. I have to replace the income that stock provides.
My next consideration is comparison. having replaced A by B, can I discount the emotion of comparison of relative performance? Should share A significantly outperform share B, how do I react to that outcome? Does it impact on decision making in the very short term?

Just a few thoughts, of the many, that create inner conflict in my world of investing.
The thoughts and observations of fellow investors is certainly a therapy to to inner turmoil that comes from being an investor.


----------



## EmmDee

redartbmud said:


> I am not clever enough to time the market such that I can buy anywhere near the peaks and troughs, or understand the impact, on the share price, of a new piece of news.



As they used to say in one of my previous roles - "Bottom pickers get dirty fingers"


----------



## redartbmud

EmmDee

Should we ever meet, remind me not to shake hands


----------



## cremeegg

Lots of important questions there.

I would like to respond to one point.



redartbmud said:


> Do you, for example sell/reduce if the PE ratio hits a level well beyond the long term norm for the sector and the specific stock? Conversely, do you buy back/add when the PE falls below that norm, always given that the news-flow does not indicate any reason for the change in price.



As a stock picker, who has chosen to step away from the fundamental "buy the market' rule, you do not have a set rule for when to sell either.

You should know why you bought the share originally, because some positive attribute was not reflected in the price, if you still believe this to be true, hold, otherwise sell. Knowing why you bought should answer the when to sell question.


----------



## Colm Fagan

redartbmud said:


> Do you, for example sell/reduce if the PE ratio hits a level well beyond the long term norm for the sector and the specific stock?


To quote Harold Macmillan, "events, dear boy, events" are what cause me to sell/reduce my exposure to a specific stock (or possibly increase my exposure).  If something happens that changes the picture from what I thought, I will obviously review my decision.  Of course, by the time I learn of a new event, the price will already have moved, so the decision is whether the price change is a reasonable reflection of the changed circumstances.   I definitely do NOT set price limits - up or down - for selling.  
A specific example is an announcement yesterday morning by a company in which I hold some shares.  The announcement caused the price to fall 15%.  It was bad news OK, but I think the market over-reacted, so I'm now thinking of increasing my holding.


----------



## redartbmud

cremeegg

I do take your point, but I also hold the opinion that the market regularly mis-prices a share, over a short time frame.
If I am watching the price patterns in my individual investments, maybe I can recognize these events.
Whilst accepting that I prefer to buy and hold a share forever, or until the story changes fundamentally, should I take
advantage of a temporary dip in the share price, with a view to selling those shares when the price corrects?

Say I make a 3-5% 'profit' on the trade, and keep that difference in shares, I am achieving the following objectives:
1. Adding 'free' shares to my holding.
2. Reducing the average cost per share, using the running cost for valuation purposes.
3. Increasing my dividend yield.

It may only be marginal, on one trade, but say that I trade that share 20 times, over 3 years, the cumulative effect will begin
to become significant.

I am also making capital work. It is unlikely that I will ever be fully invested in the market.
By deploying a proportion of the available cash, on say a one month basis, to make 3%, I believe  that I 
have made a satisfactory return, by recycling my cash around the market.


----------



## joe sod

redartbmud said:


> There has been a very lively debate, in the last several days. The Woodford and ethics investing debate has been very lively indeed.



It has been very well discussed now the mistakes that Neil Woodford made, he has now become a "fallen angel". It is very easy now because of his big fall recently to retrospectively look back at everything he did and his successful strategies over many years and through 2 stock market crashes and completely discount them. Investing in tobacco stocks was a successful strategy , ethics should not come into it as tobacco is a legally traded commodity like alcohol like airline tickets like petroleum. It is not my responsability to chaperone grown adults into what they should or should not put into their bodies


----------



## cremeegg

joe sod said:


> as tobacco is a legally traded commodity like alcohol like airline tickets like petroleum. It is not my responsability to chaperone grown adults into what they should or should not put into their bodies



I agree, society has legislated that tobacco, alcohol, gambling etc are legal, why should put ourselves above that judgement.

Look at it the other way round, would we say that even though society has banned x activity, I see no harm in it and so I will do business with that, my opinion is better than the law. Most of us would stay from any activity that was illegal even if we did not disapprove.



joe sod said:


> ethics should not come into it



I would not go that far, there are certain legal activities that I personally would not like to deal in, (tobacco and arms) but an "ethical investment approach" is too goody two shoes for my liking.


----------



## cremeegg

redartbmud said:


> I also hold the opinion that the market regularly mis-prices a share, over a short time frame.



Undoubtedly it does.

However to profit from that you must recognise that in a timely manner, with sufficient profit to cover the transaction costs.

Thats difficult. And undoubtedly you will be wrong at least occasionally, and that may cost more than the profit on several correct calls.

I always think stock picking is like playing chess. Anyone can learn to how to play chess, anyone can understand everything Gary Kasparov did, can follow his games, can see his thinking. There is loads of commentary out there to explain it all. I can even recognise his mistakes on occasion.

Substitute the market for Gary Kasparov and stock picking for chess. None of that means I can beat Gary in a chess match.


----------



## EmmDee

cremeegg said:


> Lots of important questions there.
> 
> I would like to respond to one point.
> 
> 
> 
> As a stock picker, who has chosen to step away from the fundamental "buy the market' rule, you do not have a set rule for when to sell either.
> 
> You should know why you bought the share originally, because some positive attribute was not reflected in the price, if you still believe this to be true, hold, otherwise sell. Knowing why you bought should answer the when to sell question.



If I recall (Colm please correct me if I'm wrong), one of the criteria around the strategy is the expected return including dividends. So a view on the stability (or growth potential of them) is an important factor.

In that case, given a long term framework, the variances in price become less significant as your return is fixed when you buy. A stock gaining significantly in value doesn't change you % return. A price drop allows you increase your return if there is evidence that dividends will continue as before.

Judging whether the stock price is fully "priced in" is (as mentioned) a tough one to get right. I don't think that should be the primary criteria


----------



## Colm Fagan

EmmDee said:


> one of the criteria around the strategy is the expected return including dividends


Yes.  For me, it's all about the expected future return, including dividends, starting from the current price. 


EmmDee said:


> price become less significant as your return is fixed when you buy.


I don't think I agree.  The return is never fixed.  The future is always uncertain, so our expectations for what the future holds  are constantly changing.


EmmDee said:


> A stock gaining significantly in value doesn't change you % return. A price drop allows you increase your return if there is evidence that dividends will continue as before.


If a stock's price rises, but my expectations for future earnings and dividends are unchanged, it becomes less attractive, so I'm more inclined to sell.   Conversely, if the price falls and my expectations are unchanged, I'm more likely to increase my holding, so I agree with the second part, but not the first part.


----------



## cremeegg

Colm Fagan said:


> If a stock's price rises, but my expectations for future earnings and dividends are unchanged, it becomes less attractive, so I'm more inclined to sell.



Surely this depends on your original reason for buying. If you originally saw some advantage to the stock which the market had undervalued, is this still the case. The increase in price may fully reflect your original insight or may just mean that the marker is beginning to see things your way. Once the market begins to develop a new understanding, it usually acts on that for some time.



Colm Fagan said:


> Conversely, if the price falls and my expectations are unchanged, I'm more likely to increase my holding, so I agree with the second part, but not the first part.



If the price falls you have a greater dilemma. You have to ask yourself, do I still think my original understanding was correct even though the market has moved the other way. Only if you are still confident would you buy more. If sentiment is running against you, be careful. Remember Keynes.


----------



## redartbmud

cremeegg

You are quite correct about the possibility of a price fall, after I have purchased a 'trading' holding.
My purchases are made, after a fall in the share price, and there have not been any news flows eg, company announcements, broker updates etc.
The value of shares purchased is relatively small, compared to the value of the core holding.
If I do get my timing wrong, and the share price falls further, I am happy to hold those shares, until the price rises again, and I can sell at a profit.
It may well be that I pick up a dividend along the way.
Even with the increased number of shares, my average running cost should be well below the current market price, so I am relaxed.
My expectation is for the share price to return to a more normal level, and it is a share that forms a key holding in my portfolio.
Should the story fundamentally change, and I dispose of the entire holding, I would expect to sell, at an overall profit, but I would then take a loss on the last purchase within that number.


----------



## Colm Fagan

Hi @cremeegg 
We're not too far apart, but I think there's a fundamental difference in how we view the market, which is encapsulated in your final comment.  I presume you're referring to Keynes' observation that the market can stay irrational for longer than you can stay solvent.  Keynes was a great man for leverage in his stock market dealings, so prolonged market irrationality was a major concern to him.  I do have some leverage, but I think it's at manageable levels.  Otherwise, I don't give a hoot about market irrationality, provided the fundamentals are OK.  As I said in an earlier posting, my ideal holding period is forever.  In that context market irrationality - even for a prolonged period - isn't a concern.  I am decumulating (I'm not sure if that's an acceptable word, but everyone knows what it means) so irrationality should matter to the extent that I'm obliged to sell stocks to meet my income needs.  I have found, however, that dividends deliver the bulk of my decumulation requirements, thus reducing the need to sell.


----------



## EmmDee

Colm Fagan said:


> I don't think I agree.  The return is never fixed.  The future is always uncertain, so our expectations for what the future holds  are constantly changing.



I should have been more clear - assuming dividend levels remain the same, your annual % return remains fixed irrespective of stock movements.




Colm Fagan said:


> If a stock's price rises, but my expectations for future earnings and dividends are unchanged, it becomes less attractive, so I'm more inclined to sell.   Conversely, if the price falls and my expectations are unchanged, I'm more likely to increase my holding, so I agree with the second part, but not the first part.



If you're expectations for future income streams remain the same as when you purchased, and if you had invested as a long term play, why would a price increase make it less attractive. You would continue with the same income stream on your original purchase cost.

If you have a "price target" or a capital gain target I can understand. I guess it comes back to the question of defining the objective when making the initial investment and acting when that objective is met


----------



## Colm Fagan

Hi @EmmDee 


EmmDee said:


> If you're expectations for future income streams remain the same as when you purchased, and if you had invested as a long term play, why would a price increase make it less attractive. You would continue with the same income stream on your original purchase cost.



You seem to think current market value is irrelevant.  It fundamentally changes the equation.  Suppose I bought at 80, for a dividend of 4 a year.  My running yield was 5%.   If the price has now risen to 100, and the dividend is unchanged, my running yield has fallen to 4%.  If I can find something that now yields a safe 5%, I'll sell the one that's NOW giving me only 4% and buy the other one.


----------



## joe sod

Colm Fagan said:


> Otherwise, I don't give a hoot about market irrationality, provided the fundamentals are OK. As I said in an earlier posting, my ideal holding period is forever. In that context market irrationality - even for a prolonged period - isn't a concern.



the problem is how do you know you are correct in your assessment that the market is irrational, the market could be correct and you (im not referring to you personally but any investor) could be wrong. For examply Neil woodford assessed that the market was overly negative on ftse stocks so he bought more (maybe he was correct and was not given enough time or he was just wrong). If Neil woodford can be wrong on market irrationality what hope is there for joe bloggs in assessing whether the market is irrational.


----------



## Colm Fagan

joe sod said:


> the market could be correct and you (im not referring to you personally but any investor) could be wrong.


Then I'm just plain wrong.  Irrationality doesn't come into it.  I've often been wrong in my assessments of stocks.  I've admitted it many times in my column.  Having the humility to accept your mistakes is essential for long-term survival.  Neil Woodford was hubristic and couldn't believe he could get things wrong.  That led to his downfall.


----------



## EmmDee

Colm Fagan said:


> Hi @EmmDee
> 
> 
> You seem to think current market value is irrelevant.  It fundamentally changes the equation.  Suppose I bought at 80, for a dividend of 4 a year.  My running yield was 5%.   If the price has now risen to 100, and the dividend is unchanged, my running yield has fallen to 4%.  If I can find something that now yields a safe 5%, I'll sell the one that's NOW giving me only 4% and buy the other one.



Hi.

I don't think it is irrelevant but it doesn't change your yield run rate - that is baked in at the start (assuming no change in dividend). To use your example, if you buy at 80 for a yield of 4 (5%). If the price goes to 100, you are still getting 5% because it is still €4 on your original capital outlay of €80. Any new investment will get 4% as you say - so it might affect whether you increase your investment or it might alter the equation for somebody else looking to copy your approach

So if you were considering switching investment - you would need to find something that beats 5% not 4%.


----------



## cremeegg

EmmDee said:


> Hi.
> 
> I don't think it is irrelevant but it doesn't change your yield run rate - that is baked in at the start (assuming no change in dividend). To use your example, if you buy at 80 for a yield of 4 (5%). If the price goes to 100, you are still getting 5% because it is still €4 on your original capital outlay of €80. Any new investment will get 4% as you say - so it might affect whether you increase your investment or it might alter the equation for somebody else looking to copy your approach
> 
> So if you were considering switching investment - *you would need to find something that beats 5% not 4%.*



That seems wrong to me. Just arithmetically.

If you bought Stock A at 80 for a 5% yield and now the price had moved to 100 (so now yielding 4% on the market price), you could sell Stock A and buy any Stock B with a yield of say 4.5% (or any number greater than 4%) and be better off that you were.


----------



## Colm Fagan

Hi @EmmDee 
@cremeegg is obviously right.  History is bunk.  At this stage the price I paid originally is irrelevant.


----------



## EmmDee

cremeegg said:


> That seems wrong to me. Just arithmetically.
> 
> If you bought Stock A at 80 for a 5% yield and now the price had moved to 100 (so now yielding 4% on the market price), you could sell Stock A and buy any Stock B with a yield of say 4.5% (or any number greater than 4%) and be better off that you were.



The yield change is only relevant for those who buy at the revised price. If you buy something for €80 which pays €4 per annum you are receiving 5% yield. If that asset changes price to €100, you are still receiving €4 on your initial €80 - you are still receiving 5% yield. If I buy the asset at €100, I only get 4% but that doesn't change your return until you change your holding.

If you then look around for a better % return, you need to beat 5%. In absolute terms you are thinking you need to beat €4 but in fact that's because you are converting capital gain (the 80 to 100) - you sell the asset and have a larger capital base. But to get the same % yield you need to beat €5 not €4. Which may be a valid choice if looking at absolute € income rather than % yield.


----------



## EmmDee

Colm Fagan said:


> Hi @EmmDee
> @cremeegg is obviously right.  History is bunk.  At this stage the price I paid originally is irrelevant.



Hi - just saw this. 

I obviously don't think it is irrelevant. But there may be other factors to be taken into consideration


----------



## Colm Fagan

I've posted an update on my short position in Tesla, and how I now view the stock, on my website.  Anyone who's interested can access it at 





						Colm Fagan- News
					






					www.colmfagan.ie


----------



## Colm Fagan

I've published my latest diary update, "Psst, looking for a bargain?"   It tells of an opportunity to buy into property at close to half-price, but buyer beware:  I'm trying to sell the same property!


			http://www.colmfagan.ie/documents/32_Document.pdf?d=August%2014%202019%2013:12:18
		

.


----------



## Colm Fagan

My latest diary update is called "Too good to be true".  It tells of a weird product, concocted to satisfy savers' hunger for security and return.  That's an impossible combination in today's low-interest environment.  

http://www.colmfagan.ie/documents/34_Document.pdf?d=September 10 2019 14:24:54.

If you feel as strongly about the topic as I do, please share with your contacts.

I've decided not to post any more diary updates on AAM.  Anyone interested can follow me on Twitter or LinkedIn.


----------



## cremeegg

Colm Fagan said:


> I've decided not to post any more diary updates on AAM.



Sorry to hear that Colm, I hope you will continue to contribute generally here at AAM.

Meanwhile, how do you switch on the twitter machine.


----------



## Colm Fagan

Hi @cremeegg 
Nothing against AAM.  It's just that there has been very little/ no feedback on recent updates.
As to Twitter, I'm not sure.  I'm only starting on it now.  I'll have to get lessons on how to switch it on.  I'm CFaganActuary .  Let me know if you find me there!
Of course, anyone who's not on Twitter or LinkedIn can simply go to my website www.colmfagan.ie


----------



## Sunny

Colm Fagan said:


> My latest diary update is called "Too good to be true".  It tells of a weird product, concocted to satisfy savers' hunger for security and return.  That's an impossible combination in today's low-interest environment.
> 
> http://www.colmfagan.ie/documents/34_Document.pdf?d=September 10 2019 14:24:54.
> 
> If you feel as strongly about the topic as I do, please share with your contacts.
> 
> I've decided not to post any more diary updates on AAM.  Anyone interested can follow me on Twitter or LinkedIn.



That is shocking Colm. In this day and age that we still have this rubbish going on and BNP should be ashamed. I have a couple of contacts in the CB I will send the link and try and embarrass  but Brendan is probably the best person. Think he has a hotline into them after the last few years!!

I am a regular reader of your website and will continue to read it. Not sure you will enjoy the delights of Twitter but sure I will follow you anyway!


----------



## Steven Barrett

Colm Fagan said:


> Hi @cremeegg
> Nothing against AAM.  It's just that there has been very little/ no feedback on recent updates.
> As to Twitter, I'm not sure.  I'm only starting on it now.  I'll have to get lessons on how to switch it on.  I'm CFaganActuary .  Let me know if you find me there!
> Of course, anyone who's not on Twitter or LinkedIn can simply go to my website www.colmfagan.ie



That doesn't mean you're shouting into an empty room Colm. I've been enjoying your columns but don't necessarily feel the need to comment on each one of them. I can still read them on LinkedIn anyway.


----------



## Colm Fagan

Thanks Steven.  I used to appreciate the feedback on AAM; some really insightful comments, which helped my understanding of issues (some stupid ones too, of course!).  Maybe the reason for the fall-off is because all the questions have been asked and answered at this stage, but if you or any other readers feel like commenting on a future article, feel free to use this forum.   I'll be more than happy to respond.


----------



## declan11

Colm, I would think I am like many other readers of this forum , I rarely post on AAM but am a regular reader of topics here. In fact I had to reregister today to post this as I have forgotten what email address I had used initially. I have an interest in investing in shares and have found your contributions and those of more knowledgeable responders very enlightening. Your contributions have spurred me to investigate some of the companies you have commented on and I have dipped my toe into one following my own research! I have also checked out your website but am not a twitter or facebook fan. 

So thank you for your contributions on this thread. I would add my support to the other posters that are encouraging you to continue. While I'm in such good humour may I thank those other frequent posters here that have contributed to my education in this field. Declan


----------



## owenmcg

Colm,  Thank You for the past posts which I found very informative., OMcG


----------



## joe sod

Thanks colm for your input, you clearly put a lot of thought into it.
With regards to being let down a bit by the lack of feedback to your posting on askaboutmoney, I think it's a general thing now and not restricted to your posts. 
There is plenty of feedback on other forums especially in relation to property investment and pensions and obviously brexit.
I think there is a lack of interest now by Irish people in investing in shares in general for a number of reasons,
The onerous tax levied on Irish shareholders now.
The collapse of the many people's investments a decade ago in relation to the banking collapse.
The on going poor performance of the Irish and British stock markets obviously hard hit by brexit concerns.
Therefore most people as judged by the postings are now only interested in very low risk ultra safe investments.
Your recent diary contribution has alluded to this with regard to a "too good to be true investment product"


----------



## Boyd

I think @Colm Fagan above nailed it - it's all been done, most questions are asked and answered already. The answers are almost always the same. Investing in ETFs in Ireland is rubbish. Investing in shares is too much hassle and likelihood of picking dogs too high. Most lay people (myself included) have not got the time, knowledge or inclination to bother researching individual companies to put a fair value on their share price. Investing in shares with only 3k is pointless due to fees Vs with 1 million. Pay off any high interest loans first. Start a spending diary. Overpay non-tracker mortgage then. Max out your pension. Buy state saving after that. After that advice it's niche questions really.

There's nothing new anymore IMO in Ireland finance area. Best craic recently was the 3 mortgage switches in 6 months. Other than that so many people want high return with no risk or other such silliness. People don't want to read ideas about investment articles, they want to read "Buy this share now" articles. It's just all a bit "meh" really IMO. Again not a reflection on AAM it's just there's only so many questions to be asked really...


----------



## SPC100

It might be related to content structure.

Since you started with external PDF articles I think interaction stopped. They are harder to read and quote and comment on.

I hypothesise if you do one new thread per article and include the article text you would get more interaction.


----------



## Colm Fagan

SPC100 said:


> It might be related to content structure.
> 
> Since you started with external PDF articles I think interaction stopped. They are harder to read and quote and comment on.
> 
> I hypothesise if you do one new thread per article and include the article text you would get more interaction.


Fair point. 
I'll try it.  Watch for the new thread!


----------



## seamless

I'd like to add my support and thanks for your contributions. I read your postings carefully and find them very educational. I think you do a great public service in explaining the risks and rewards of investing and I would encourage you to continue on AAM.


----------



## SPC100

Colm Fagan said:


> Fair point.
> I'll try it.  Watch for the new thread!


Great! Thanks.

I will watch the experiment with interest. But it is biased now as folks will be interacting to encourage you to post in the future. 

I too have enjoyed your articles and would be happy to continue to read them here.

It's great to have people with good maths skill, experience and financial knowledge sharing their wisdom.


----------



## Colm Fagan

In the spirit of transparency, openness, humility, etc., I must tell readers of a "news" item I published on my website a couple of days ago.
It relates to a"coup" I thought I had pulled off earlier this year, buying and selling shares in Charles Taylor plc.  The original article is #521 above.
Here's my admission, reported in http://www.colmfagan.ie/news.php:
_"I got it badly wrong with Charles Taylor. There are no two ways about it. In diary update 14 of 7 May, I reported how chuffed I was after selling my shares in the company at 249p each. No wonder I was happy: I had bought them only a month previously, at 194p each. I was even more pleased later in the summer when I saw the price fall to under 220p a share. Then, two days ago, the Directors announced that they were recommending a takeover bid at 315p a share. How wrong I was in my assessment!!"_


----------



## LDFerguson

Colm Fagan said:


> _"I got it badly wrong with Charles Taylor. There are no two ways about it._



Are you being too hard on yourself?  You made a profit of over 28% in a month.  I would consider that a big success.  So you could have made a larger profit if you had known that the price would subsequently rise to 315p.  How could you have known that, unless you were aware of the potential bidder, which presumably was a well-kept secret in April/May?


----------



## Colm Fagan

@LDFerguson   I appreciate your support, but I completely misread the profit & loss account and the balance sheet.  I thought they were losing money and increasing borrowings, with nothing to show for it.  In reality, assuming of course that the buyers have done their homework, they were investing in improving the customer offering and in creating real (though intangible) value in the business.   That investment paid off and good luck to them.   In fairness, I would need to have been closer to the business/industry to have understood this reality.


----------

