How long before I'm a billionaire like Howard Marks?

5th Aug '17 by BankOfChina

13 comments 8125 reads

Or more specifically...in The Most Important Thing, Marks says an investor needs either superior information or superior analysis to consistently outperform.

My question is, what advantages does an amateur investor and Stockopedia user have over other market participants? And how to leverage those relative strengths into outperformance?

Thanks

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BankOfChina

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13 comments

Howard Marx

5th Aug '17

There's one source of outperformance that I believe you missed:

better information
better analysis
better behaviour

By 'better behaviour', I am of course referring to behaviour in the context of the one central thing that investing involves - dealing with the future. The reason investors get things wrong so often is that we accommodate change badly - we are naturally resistant to it, preferring past certainties to future uncertainty, and consequently react rather than anticipate. We compound the problem by closed mindedness due (for psychological reasons) to being overly protective of our beliefs & prior judgements. This leads to a failure to absorb & interpret new information with an open mind.

James Montier (GMO, previously DKW) published a handy taxonomy of biases that highlight the numerous behavioural ways that we delude & fool ourselves:

Nick Ray

5th Aug '17

If you accept the semi-strong form of the Efficient Market Hypothesis then neither superior information nor superior analysis are going to get you an advantage that allows you to consistently outperform the market.

A lot of people on here have portfolios which are currently doing very well - and compared with the FTSE100 they are. But if they look at the AIM100 index they will probably find they are tracking it quite well. If your portfolio peaked in early June, fell until early July, and has been roaring away since then, you are probably tracking AIM100 which is up about 23% YTD.

iwright7

6th Aug '17

The 1st thing to understand is that the stockmarket is not a "Get Rich Quick" machine. Try to realize that you are up against huge computing power and some very successful investors investing vast amounts of money.

I suggest that you need to look for an Edge over the market and if you have the time study all the information you can find on Market Anomalies, (such as under researched small caps, momentum, earnings surprises etc). Alternatively if time poor you could do a lot worse than screen/pick from the top Stockrank decile. Good luck. Ian

pka

6th Aug '17

I'm afraid that the easiest way to become a billionaire from the stock market is to become a hedge fund manager and each year charge management fees of 2% of the fund's assets plus 20% of any profits over an undemanding benchmark. In other words, use other people's money!

jonesj

6th Aug '17

One potential advantage is that amateur investors can take a long term view.

Fund managers are at risk of being fired if they underperform over a 3 year period, so they have an incentive to not stray too far from the index. If we can get our own psychology under control, we can just take a long term view.

Secondly, we have more freedom. I can buy everything from small caps, to FTSE stocks, gold, platinum, Vietnam ETFs, Asian Investment trusts etc. Whatever appears attractive at the time. A manager of a UK income fund is constrained to a specific sector.

Blissgull

6th Aug '17

Surely a paltry billion or two is just small change to someone called BankOf China ?

But for the rest of us.

In "What Works on Wall Street" the best long term strategy examined was called "Trending Value" which returned 21.08% pa between 1965 and 2009.

If you could achieve similar returns after costs then the maximum £20k invested in an ISA every year would become £1bn in just 48 short years. For those who are content to settle for mere millionaire status the same investments and returns would become over £1m in a mere 13 years.

If you were feeling generous and opened a junior ISA for your grandchild as soon as they were born, contributing the maximum £4,128 every year, and persuading them to carry on contributing throughout their life they could retire with a cool £2bn at age 60. They could celebrate being a millionaire on their 21st birthday.

But this raises a more practical question for most people. How much do you really need to give up work and live off your investments? The potential effects of pound cost ravaging mean that safe withdrawal rates are far less than your expected average return.

I once put the figures given in "What Works on Wall Street" for the Trending Value portfolio into a spreadsheet using fairly conservative inflation assumptions. I found that even at withdrawal rates of 8% of the starting balance the money would sometimes run out. Of course, if you started your retirement at just the right time then withdrawals of over 20% of starting balance were possible. From memory I think I found that 12% was possible if you were prepared to settle for a 90% success (i.e. you die before the money runs out) rate.

However those are theoretical returns with no allowance for costs and in the USA market which has outperformed the UK.

I realise there are many people who give up work to invest for a living and who have been able to take 20% or more from their investments every year, but they may be living with higher risks that I would find acceptable. If you are confident you could get back to regular work if your investing career failed, or you have a good pension you can clearly accept higher risks. But if you want to be 90% confident that your investments will provide then I suspect that even with market beating strategies such as those found on Stockopedia, the limit is probably around 8%.

aflash

6th Aug '17

.......what advantages does an amateur investor and Stockopedia user have over other market participants? And how to leverage those relative strengths into outperformance?

'amateur' could have various meanings here.

It becomes obvious from published comments on the site what stage the writers have reached. There are those that ask for recommendations after companies report.

The probabilities of them retaining any profits they make must be low.

There are those that offer a thesis, often well supported, that draws conflicting but also cogent replies.

These help make a decision, whatever the contribution to billionaire status.

There are those who have retired from investment or banking who offer interesting insights on the industry and have obviously honed their techniques.

They have probably reached their financial objectives and seen enough disasters not to want a billion.

I know one billionaire. He controls a billion dollar real estate porfolio so there is a lot of OPM (Other Peoples Money) in his net worth. Nevertheless spending time with him is useful. He quotes Jim Rohn saying 'You are the sum total of the five people you spend the most time with' and I agree. Rubbing shoulders with the better contributous to Stockopedia can only help your investment process.

That said, my question is why do you want to be a billionaire? Observing the process I assure you there are substantial losses and strains on the way and once you get there you become obsessed with how to give it back to society.

BankOfChina

6th Aug '17

Thank you very much. I can see that the James O'Shaughnessy Tiny Titans screen has the top 5yr annualised returns so there's definitely something worth investigating further. I've now got the book in my reading list.

Cheers, BOC.

jonesj

6th Aug '17

Considering 5 year annualized returns is much too short term for decision making.

ricky65

8th Aug '17

I don't think you need either superior information or superior analysis to consistently outperform.

For me, it's a winning strategy and the discipline to follow that strategy.

Rusty2

8th Aug '17

William O'Neil CAN-SLIM-esque is also very good, better than Tiny Titans over some periods and Europe has out performed the UK in most of the screens.

Chris Brown

9th Aug '17

I don't believe superior information really exists in markets nowadays, for large-caps anyway, and excluding the obvious cases of insider dealing, which is illegal. We've all seen suspicious price moves shortly before announcements.

I think execution is the biggest advantage for PI's. Large funds move really slowly - taking weeks to buy in and sell out of positions. I highly recommend Minervini's book How to Trade Like a Stock Market Wizard - a real blueprint for how to manage a portfolio.

It's all about asymmetric returns - cut your losses at 10%, run your winners, and be right around half the time!

GrahamF

9th Aug '17

If there was a sure fire answer (or even reasonably certain answer) to the the question of how to achieve out performance then we would all be doing it and so it would no longer be out performance.

While some strategies that have been mentioned have proved to be give better returns in the past, as the world is constantly changing they may not deliver out performance in the future.

But the answer may be..........be more knowledgeable than average, do better research than average, be more dispassionate than average, be more skilled than average, have a better insight to the future than average and........hope that you are luckier than average.

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BankOfChina

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