The Perils of Shorting: A Real Life Example

are we not missing the factor that Colm isn't an average Joe. His whole career was centred around the stock market. So while i wouldnt back myself to pick winners and would take (and do take) gordons approach, i would give Colm a better chance than me.
 
I have the following philosophy. It takes 1 hour (max) to buy a broad-based market ETF. Picking individual stocks, if done correctly take hours of research. Yes theoretically you could have +/- % over the market but is the time spent trying to beat the market worth it?

This strategy, you will win with the market and lose with the market, for example my US Equity ETF is up 20% YTD and I have spent exactly 0 hours doing anything with it.

I have approaching 15 years in derivatives, I used to work on one the largest Equity trading floors on Wall Street, and not many people are setting around picking stocks.
 
Gosh, I go out for an evening, have a few scoops, sleep on in the morning, and wake up to a barrage of posts, most of which have absolutely nothing to do with me or my approach to investing!
The main thing that got me was @Gordon Gekko 's belief that I won't just do worst than the market in future, but that I'll GENUINELY do SPECTACULARLY worse than it. I really don't know where he (assuming Gordon isn't a woman in disguise!) got that idea from, and still don't, despite his efforts to explain himself, for example his VIEW that too many of my researched stocks will turn out to be duds and that there is ENORMOUS disruption, which I won't be able to identify but presumably which experts out there know everything about and will have their clients invested in those companies.
The core issue is that Gordon GENUINELY (he loves that word) believes that there are professional fund managers who know which stocks are going to do well in future and which will do badly. I thought about this issue in some detail in an earlier thread and I took one of his comments as a headline for a diary entry: "A guy in the attic" (Update 12, dated 9 March last). The conclusion from that article that the market is (normally) right explains the default assumption that my portfolio will deliver market performance - on average.
The Vanguard article that @Sarenco quotes is a load of self-serving rubbish - and the Duke had shown it to be rubbish a long time ago. I don't know why it keeps being resurrected. Its purpose was to persuade people to buy Vanguard funds.
I'm sorry now that I gave details of my past performance relative to the market. I honestly don't care whether the market stands on its head, so long as I earn the risk-free return plus 4%/5% in the long-term. I choose stocks that I think - based on DCF calculations - will deliver that return. Of course I get it wrong at times, but some deliver more than the target. I don't give a damn whether I'm missing out on the 2% (or whatever) of stocks that will deliver fantastic returns, so all the discussion on that topic was completely irrelevant as far as I'm concerned.
Finally, thank you @Blackrock1 for crediting me with wonderful knowledge of the market, but my entire professional life was spent on the other side of the balance sheet, trying to determine how much should be set aside for liabilities to insurance company policyholders, not deciding where that money should be invested. However, I believe that a lifetime in business, much of it spent interacting with Boards, CEO's, FD's, and senior managers in my role as a consultant, have helped me to identify companies that will succeed and those that will fail. Which brings me back to where I came in on this thread - Tesla and Elon Musk!!
 
Andrew365 said:
I have the following philosophy. It takes 1 hour (max) to buy a broad-based market ETF. Picking individual stocks, if done correctly take hours of research. Yes theoretically you could have +/- % over the market but is the time spent trying to beat the market worth it?

This strategy, you will win with the market and lose with the market, for example my US Equity ETF is up 20% YTD and I have spent exactly 0 hours doing anything with it.

I have approaching 15 years in derivatives, I used to work on one the largest Equity trading floors on Wall Street, and not many people are setting around picking stocks.
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I wouldn't expect any trading floor to be sitting around picking stocks. If you asked a trader about a company's fundamentals, I think they would snap their braces laughing....

But that doesn't mean Colm's approach is wrong. He is not trying to beat the market like a traditional fund manager who claims he can add huge alpha returns. He is trying generate returns that he has calculated he needs to live on. Big difference
 
Sunny said:
I wouldn't expect any trading floor to be sitting around picking stocks. If you asked a trader about a company's fundamentals, I think they would snap their braces laughing....

But that doesn't mean Colm's approach is wrong. He is not trying to beat the market like a traditional fund manager who claims he can add huge alpha returns. He is trying generate returns that he has calculated he needs to live on. Big difference
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Yes I don't disagree with Colm's approach. I just factor in the time element, if I had the time I would follow his approach.
 
Colm Fagan said:
Gosh, I go out for an evening, have a few scoops, sleep on in the morning, and wake up to a barrage of posts, most of which have absolutely nothing to do with me or my approach to investing!
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That's why Gordon is worried about you....You are just drinking away the returns...The stock market could have crashed this morning during your lie in......
 
Andrew365 said:
I have the following philosophy. It takes 1 hour (max) to buy a broad-based market ETF. Picking individual stocks, if done correctly take hours of research. Yes theoretically you could have +/- % over the market but is the time spent trying to beat the market worth it?
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HI Andrew. I have every sympathy with you, but I want to disabuse people of the notion that I spend half my life looking at company accounts, etc. I don't!
My three largest holdings, which together account for around two-thirds of my (long) portfolio at the moment, and have done for ages are: Phoenix Group Holdings (first bought in 2014), Renishaw (first bought in 1998), Apple (first bought in 2012). I spent some time researching each of these at the start and I take a look at their annual/half-yearly reports, but they take very little time. It's much the same with my other holdings, most of which I have held for many years and which take hardly any of my time. For example, update 16 of 14 August was about Town Centre Securities, which I've held since 2000.
Sunny said:
.The stock market could have crashed this morning during your lie in.
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It did (to an extent)! I'm not worried, though, as I'm happy with the fundamentals for my main holdings, so a price setback is not a cause for panic.
 
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Duke of Marmalade said:
Ok so we have a market of 99 stocks which will lose everything and a single stock which will jump to 200. My expectation when holding the whole market is to double my money. a priori I have the exact same expectation if I just pick a stock at random.
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Sorry Duke but that makes absolutely no sense to me.

In the real world, nobody expects to capture whatever future return the broader stock market provides by simply buying one stock.
 
Sarenco said:
Sorry Duke but that makes absolutely no sense to me.

In the real world, nobody expects to capture whatever future return the broader stock market provides by simply buying one stock.
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Sarenco, we are going off topic. Do you want to post your Vanguard report as a separate thread?
 
Duke

This really has nothing to do with the Vanguard report.

You keep on insisting that if you pick a stock at random you have the exact same expectation as buying the whole market.

Sorry but that makes no sense to me.
 
Sarenco said:
Duke

This really has nothing to do with the Vanguard report.

You keep on insisting that if you pick a stock at random you have the exact same expectation as buying the whole market.

Sorry but that makes no sense to me.
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We are using two different definitions of expectation. You are using the colloquial meaning and of course one stock will definitely perform differently from the whole market.
The mathematical definition of expectation, which is what I was using, means on average what is the expected outcome. Thus following The Boss' example your expectation on the toss of a fair coin is zero, the same expectation as not tossing the coin at all. Can we put this rabbit to sleep :rolleyes:
 
Duke of Marmalade said:
The mathematical definition of expectation, which is what I was using, means on average what is the expected outcome
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I see. You will have to forgive us mere mortals that aren't familiar with the special meaning that actuaries apply to ordinary words.
 
sarenco, with all due respect, I don't think you should be reading things like the Vanguard report if you are not familiar with a term which would be explained in the first lesson on statistics of a lower level Leaving Cert student.
 
Sarenco said:
You will have to forgive us mere mortals that aren't familiar with the special meaning that actuaries apply to ordinary words.
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Hi Sarenco

I think that the terminology Expected Return is fairly standard in investment or gambling. It's not used exclusively by actuaries. I used it here:

Brendan Burgess said:
Consider a coin toss.

If I toss 100 fair coins and bet €1 on heads every time - my expected return will be zero. My actual return will probably be somewhere between -€10 & +€10 or between - 10 cents per toss and + 10 cents per toss.

If I toss only one coin, I will either win €1 or lose €1. But my expected return will still be zero.

Which comes back to your statement that you expect Colm to lose a lot of money.

His expected return will be the same as the market. But it could be significantly lower or significantly higher
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But I can understand the confusion.

The expected return is the same whether you buy one stock, 100 stocks, or the entire market.

But the outcomes will be different.

Brendan
 
Duke

I trust Vanguard to give words their ordinary and natural meaning in their presentations.

I'm sure it's true that the expected return of a single stock is identical to the return on the market as a whole in some theoretical, mathematical sense.

So what? What possible relevance is that in constructing an equity portfolio?
 
Sarenco said:
Duke

I trust Vanguard to give words their ordinary and natural meaning in their presentations.

I'm sure it's true that the expected return of a single stock is identical to the return on the market as a whole in some theoretical, mathematical sense.

So what? What possible relevance is that in constructing an equity portfolio?
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Trying to get slightly back on topic. GG said Colm was doomed to underperform the market in the long run. The fact is that Colm's expectation (sorry I can't think of any better term) is the same as the market's.
But I agree with you that, ignoring any skill factor for the sake of argument, the likelihood is that he will underperform the market. This is compensated for by a chance that he will greatly outperform the market and together they produce an equal average prospect (or expectation ;)) .
 
Brendan

The Investopedia article says that the expected return of a portfolio of securities is the weighted average of the expected return of its component parts. I think we can all agree that is self-evidently true.

However, Duke is saying that the expectation of somebody acquiring a single stock is the same as somebody acquiring the entire market.
 
Sarenco said:
the expected return of a portfolio of securities is the weighted average of the expected return of its component parts. I think we can all agree that is self-evidently true.
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It's not actually - it takes reasonably sophisticated maths knowledge to prove it's validity. And things we think are statistically "self evident" are often not

And "expected return" has a meaning - irrespective of what you think the lay version (or understanding) is. It's analogous with people dismissing evolution as a "theory" without understanding the word has a meaning and is the same meaning applied to the "Theory of Gravity".

If expected returns is a problematic concept, then it is better to get familiar with these terms
 
Sarenco said:
Brendan

The Investopedia article says that the expected return of a portfolio of securities is the weighted average of the expected return of its component parts. I think we can all agree that is self-evidently true.

However, Duke is saying that the expectation of somebody acquiring a single stock is the same as somebody acquiring the entire market.
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Please Sarenco let this one go, let me have the last word ;) . A holding of one stock is a portfolio so far as the mathematics are involved.
 
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