# Revised chapter on why you should invest in the stockmarket



## Brendan Burgess (5 Oct 2001)

I have incorporated a lot of the Cult of the Equity comments and Contrarian's CounterView in a revised chapter 4

I found the debate very interesting and useful for updating the book and very useful for my own investment strategy.

Thanks to everyone who contributed

If anyone wants to contribute a CounterView, you are welcome to do so anonymously

Brendan


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## Dynamo (5 Oct 2001)

*Don't Panic When One of Your Shares Does Badly*

I think this needs a caveat, Brendan. I would phrase it as "don't panic over the price performance of your shares per se, but do review the companies you invest in periodically to make sure that there has not been a fundamental change in their long-term attractiveness".

For example, within the relatively recent past (seven or eight years, I think, although I may be understating it), Smurfit was the largest Irish company, and Crean was in the top ten. Smurfit has provided effectively zero return since 1996, and is now only the ninth biggest company, while Crean has declined in value by approx 90%, and now has a total market value of just €8 million. Remarkably, Smurfit has managed this <!--EZCODE BOLD START-->*  without *<!--EZCODE BOLD END--> any really fundamental change in its market or its position within that market, so you might argue that that could not have been foreseen, but I think a periodic review would certainly have sent a sell signal for Crean.

In any event, I think a "buy and hold forever" message, in the context of a portfolio of only ten shares, does require a qualification along these lines.


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## Brendan Burgess (6 Oct 2001)

*Re: Don't Panic When One of Your Shares Does Badly*

Hi Dynamo

My fundamentalist view is that the ordinary punter cannot pick winners or losers. If you had reviewed your portfolio, you could just have easily have sold CRH and replaced it with Crean ( I nearly did !).

Reviewing your portfolio is an expensive procedure which leads to trading and no added value. Maybe I need to make this view much clearer.

Brendan


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## Dynamo (8 Oct 2001)

*Trading & Stockpicking*

Hi Brendan,

I do understand that one of the objectives of the book is to minimise trading and highlight that stockpicking is difficult (if not impossible), and I fully accept that premise in this context.

However, I still think that a "buy and lock away forever" strategy, in a portfolio of only ten stocks, is way too dangerous without at least some ongoing review. Compare the strategy to an index fund - in the latter while you still have exposure to any declining dogs, you also own the rising stars which will replace them.

My earlier comment was trying to minimise the judgement (ie stockpicking) criteria that the investor had to bring to the table. Maybe you could take that further and mechanise it, eg as follows: <!--EZCODE CENTER START-->Compare your portfolio with the market index (from the newspapers) at the end of every year. If one of your stocks drops out of the top <!--EZCODE BOLD START-->*  twenty *<!--EZCODE BOLD END--> in size, sell it and replace it with one of the stocks which has gone into the top ten. If one of your stocks drops out of the top <!--EZCODE BOLD START-->*  ten *<!--EZCODE BOLD END--> but not the top twenty do nothing for a year, but if it's not back in the top ten a year later, sell it and replace it as above.​<!--EZCODE CENTER END-->

I'm not entirely enthusiastic about this, because there's clearly an element of selling low and buying high about it, but I think it's very dangerous to buy just ten stocks (especially in a market like the Irish one, where the sample size is pretty small to begin with) and not make sure periodically that all ten will be around for the long-term.


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## rainyday (8 Oct 2001)

*Re: Trading & Stockpicking*

Hi All - I share Dynamo's concern in this area. While Brendan's stated strategy is the logical extension of his original principles, it does seem to be taking the 'fundamentalist' approach one step too far.

Let's say I have a 'buy & hold' strategy. I buy/sell once per annum. I have a diversified portfolio of 10 shares. I have come to the conclusion (from my research, business judgement etc) that one of the ten is a 'dog' and likely to sink further. I would certainly be very likely to sell the 'dog' and reinvest elsewhere. I cannot produce statistical evidence to show that this strategy has worked. But likewise, I reckon that Brendan cannot product statistal evidence to show that it will not work.

Note that I'm not talking about regular trading - I'm not talking about jumping ship every time one of the analysts gets nervy. However, if I have a sound business reason to sell, I'll go right ahead and do it.

Regards - RainyDay

[Sorry, I had name-checked Zag instead of Dynamo in my original post]


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## Brendan Burgess (11 Oct 2001)

*Re: Trading & Stockpicking*

Rainyday's point is easier to deal with, so I will start with that.

The whole point of active investment is that professional fund managers and other business people exercize their sound commercial judgement to identify good shares which they buy and bad shares which they sell. This sounds fine in theory, but in practice, it just doesn't work. 

Passively managed funds, i.e. index funds, beat the actively managed funds comprehensively. 

I know that this is  counter intuitive and I know that it is very difficult to accept. I do practice what I preach and from time to time I am strongly tempted to exercize sound commercial judgement on reviewing my portfolio. When Fyffes went to €4 during the dot.com boom, I said this can not be rational and was tempted to sell. But then I argued, that just in case there was anything at all in the dot.com boom, it was no harm in having a small stake in it. Pity I didn't take Rainyday's approach as Fyffes subsequently tumbed by 80% !

But on the other hand, after reading Buffett some years ago, I had a look at my portfolio and actively considered swapping from CRH into Creans. In retrospect, that seems absolutely crazy and it would have been a far more expensive decision than my decision not to sell Fyffes. 

I did wonder at the height of the dot.com boom should the index trackers not have a small bit of flexibility which would have allowed them not to buy such "obviously" overvalued shares as Baltimore. 

If you manage 90% of your portfolio passively and exercize sound commercial judgement with the other 10%, I doubt if it would affect your overall returns very much, even if you did get a majority of your judgements correct. 

Brendan


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## Brendan Burgess (11 Oct 2001)

*Selling the dogs*

Hi Dynamo

What you are proposing is what happens in practice .  Say you start off with 10 shares - each with 10% of your portfolio. These shares will grow and decline at different rates. So after a while, your portfolio will have a distribution like the following; 20, 15,10,10, 10,9,8,8, 8,2

Now what do you do ? Personally, I would be inclined to leave it. However, if a stock represented more than 20% of my portfolio, I would sell it back down to 10%, so that my portfolio doesn't become too dependent on one big stock. 

Where would you invest fresh cash or the proceeds of selling off half your top share  ? Well the share which represents 2% of your portfolio no longer qualifies as a  top 10 share, so you won't be buying it.. So you buy the latest entry into the top 10. I like a neat little portfolio, so when I am buying new shares, I tend to get rid of the scraps which will no longer have a significant effect on my portfolio. So I would sell off the share which represents the 2% of my portfolio. But they have a habit of turning into stars just after you sell them. The last share I sold off was Glanbia which has turned into a very good recent performer. 

I don't sell a share because it has slipped out of the Top Ten or because I make a commercial judgement that it is no longer a good share.  I sell it when it is no longer a significant part of my portfolio and I am rebalancing my portfolio due to fresh cash.


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## rainyday (12 Oct 2001)

*Re: Brendan's Strategy*

Hi All

Two issues;

I wonder if it's valid to compare the results achieved by professional analysts for active fund managers with that of an individual excercising a conservative 'buy & hold' strategy. I would have thought that any active fund manager will have a whole lot of other influences (tax impacts, media positioning, potential future business for own firm from those companies whose shares are held, etc). Is it therefore valid to conclude that an individual could not consistently 'beat the index' using their own judgement? Note that I don't have any evidence to back this up - I just wonder if Brendan's evidence regarding active fund management is relevant to this scenario.

Also, the gap in Brendan's strategy is 'when do you sell?' - If it's a question of 'buy & hold for ever', then it's just going to mean passing on a substantial inheritance to the ungrateful children - which seems a bit pointless. I guess the simple answer is 'sell when you need the money', but I wonder if the 'book' should delve into this area a bit more.

Comments welcome.

Regards - RainyDay


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## Brendan Burgess (13 Oct 2001)

*Brendan's Strategy*

Hi All,

Brendan - your post makes it clear that you <!--EZCODE BOLD START-->*    are *<!--EZCODE BOLD END--> periodically reviewing your portfolio, and at least rebalancing it if not trying to exercise any judgement on company prospects. Even that is (I think) missing from the recommendation in the guide, and I think the inclusion of some comment to that effect would strengthen your argument. Buying ten stocks and locking them away for years without review leaves an investor very exposed to a long-term underperformer, which might perhaps have been identified.

On a separate but related point, surely investment of this type on a regular basis (ie committing new cash periodically) is better done through an index fund. The commissions on buying ten stocks (or even some of the ten) every time will kill you.

I had interpreted your original comment as referring to a once-off investment, hence my concern on the possibility of one of your ten becoming a dog.

This may have got a bit confusing, so in summary, my advice would be:
If you're investing a once-off capital sum for the long-term, by all means follow Brendan's "ten stock plan", but put in place some process for protecting yourself against a foreseeable long-term dog.
If you're making periodic regular investments forget the "ten stock plan" and use an index fund


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## Brendan Burgess (14 Oct 2001)

*Re: Brendan's Strategy*

Hi Dynamo

I will include a bit to cover changes to your portfolio. If you are saving small regular amounts, you are better off in an indexed fund until you have enough to buy shares directly.

I don't continuously readjust my portfolio to have 10 shares of equal weighting. If I am investing new money, I don't buy 10 shares , I just buy more of one share. The transaction costs are not too significant for a long term buy and holder.

The annual management costs of, even the cheapest, index tracker are worth avoiding if possible.

Brendan


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## Brendan Burgess (14 Oct 2001)

*Re: Brendan's Strategy*

Hi Rainyday

I think that the overwhelming objective of fund managers is to outperform their competitors and the index. The other issues might affect their performance, but I doubt it would be that significant. 

There are millions of private investors out there. Statistically, some at least, must be outperforming the buy and hold strategy.  If you read the sites which discuss shares, it appears that they are all outperforming the market. 

But you are right, it can't be proven. But I think it is reasonable to suggest that if the professionals can't beat the market, then 99.9999999999999999999 %  of private investors can't either. 

Brendan


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