Can We Beat The Professionals?

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20th Sep '18 by kevfle

77 comments 8528 reads

Like many subscribers to Stockopedia, I am a private investor researching and investing in equities - mainly in the small cap sector. I am semi retired and spend around 10-15 hours a week on research and general reading around this subject.

But am I wasting my time? Could I achieve similar results by simply investing in a spread of actively managed funds and leave the professionals to do the stock picking? After all, they have access to better research than me and have teams of analysts available to do all the work.

Would it be a better use of my time to spend a few hours each month checking a portfolio of actively managed funds and do something else with my spare time or can I really beat the professionals by continuing to devote more time to individual stock picking?

Are we all kidding ourselves in thinking that we can out perform the pros? I would interested to hear your views on this based on your own experience.

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Kevfle

Premium Member

77 comments

pka

24th Sep '18

"Siegel also calculated that in the period 1871 - 2003 97% of stock market returns came from reinvested divis versus 3 % for capital gains."

This is a commonly held fallacy.

If the average capital growth in stock markets is, say, 6% per year and the average dividend is, say, 3% per year, then reinvesting dividends would lead to a combined average growth rate of about 9% per year. Over many years, compounded growth at a rate of 9% per year will, of course, produce much higher returns than growth compounded at just 6% per year. But the reason for the compounded growth is that the reinvested dividends get the benefit of BOTH the capital growth on the reinvested dividends at 6% per year and dividends from those reinvested dividends at 3% per year. The capital growth at 6% actually produces two thirds of the total compounded growth and the reinvested dividends just one third.

Merlotman

25th Sep '18

pka
I think you are misinterpreting the Siegel quote. Note he is saying that "returns came from reinvested dividends" (my italics) not simply from dividends. He is illustrating the power of dividend reinvestment as opposed to the case for dividends alone. For my part I was probably wrong to use this quote at that point as it has less relevance to the capital gains versus dividend discussion.

Based on what research I have found it appears to me that the body of evidence based on market wide (average) data shows that high yield stocks beat low yield by a significant margin over the longer term. Ed Croft's (and team) own ebook "How to make money in dividend stock" covers this well and introduces other pieces of research backing up this theory.

Of course I accept that some (smart) investors can make a more money by picking stocks for their potential price appreciation (a few of them even in the longer term) but I'm not one of them unfortunately!

pka

25th Sep '18

I suppose the main point is that whether you take out a percentage of the capital value of a low dividend-yield portfolio each year or you spend dividends rather than reinvesting them from a high-dividend-yield portfolio, the total compounded return of your portfolio over the long term will be significantly reduced. But it's a question of whether you need some jam today at the cost of some jam tomorrow.

Rusty2

25th Sep '18

I don't think Lord Lee would agree with you, he likes his dividends, many of his shares pay high dividends, he is said to be the first ISA millionaire.

Silver Moon

25th Sep '18

Hi abtan, thanks for the illustration of your viewpoint! If only things were less fluid, what with all kinds of misfortunes suddenly shooting down my own theories. Events at the Bank of England and Mervyn King pushed me from cash to equities and provided me with an exciting if bumpy ride. Now if only I had re-mortgaged the house back in 2010 I would most likely be getting dividends in double-figure percentages by investing in high-dividend blue chip shares. Capital improvement and big divis too! But I wasn't an investor back then other than in the privatisation offers.The dividend payers in my portfolios have given an average 4% plus since my records began in 2014 and will continue. Being a bit of a risk-taker the remainder are companies I hope will hit the jackpot some day.

Andrew L

26th Sep '18

My main point is that to do well in stocks you have to have the interest, psychological discipline and time. Most people don't possess all three of those. So I would still stand by my comment.

Most people who I see walking down the street would not do well in stocks. There was a TV show about training potential traders. The bulk of them didn't have the mental discipline to do well. The usual issue of not selling losers etc.

Polar Capital Global Technology in reality isn't a technology fund it is just that a lot of the holdings are classed that way. Facebook and Google are in reality marketing/sales platforms and Facebook is in the main a media company.

My overall argument is that Joe Blogs on the street can do well by picking good funds and fund managers. But Joe Blogs on the street will not tend to do well by picking stocks.

Phil - Congrats on your performance. But people who perform very well often assume that it is easy. The Naked Trader wrote a book saying "anyone can do it etc." That is typically the title of investment books. I am sure it seems easy as you are obviously very good at it. But many people simply don't have the discipline suited to doing well in individual stocks. If you can find 10 random people from the street and get them to generate your returns then I will stand corrected. But people have tried to do that and generally only 1 in 20 or less have the ability to do well.

My main point is that a fund investor could of bought Terry Smith's fund eight years ago and would now be up 300%. That is also diversified by sector etc. Again I am not saying that some people can't do well picking individual stocks. I am just saying that it is a viable alternative to pick individual funds.

For some reason this debate always seems to generate a lot of heat. Views come forward such as "all fund managers are terrible" etc. I can't really agree that Keith Ashworth Lord, Terry Smith, Nick Train are not good fund managers or good alternatives for people.

If someone has built up a pension/saving over 30 years should they really bet the ranch on their ability to pick a portfolio of 30 stocks themselves? In my view, the media puts out a lot of misinformation in this area. The reality is that it is a lot easier to find good fund managers then individual stocks. Yes the upside is less than being a really great stock picker but the downside is also less too.

Lots of the members of the public thought they were genius stock pickers in the dot com boom but it turns out they weren't. My overall message is that we shouldn't say that it is easy to do well picking individual stocks. Sorry if that is controversial but that seems to reflect reality. Equity markets are fairy efficient. There are lots of fund managers with 30 stock portfolios that do terribly.

It is also very hard for an individual investor to know if they have correlated risks in say a 25 stock portfolio. If 10 of the stocks could go bust in that portfolio then they have a problem. My main point is that saying that stocking picking is easy is not really a reflection of reality. By all means people can have a go and preferably with a fantasy portfolio. But most people don't have the psychological traits needed to do well themselves.

Andrew L

26th Sep '18

Someone did an analysis on Lord Lees' returns and you would of done just as well by being in a small cap fund that tracked the index (read that in the FT). His performance is really about compounding through reinvestment of dividends.

Andrew L

26th Sep '18

This quote I used has been cited a couple of times: "The reality is that most people would do better picking good funds than stocks."

Sorry but I 100% stand by that. Not quite sure why this is construed as being negative on anyone here. Congratulations if you have done well in a fantasy fund or managing a real fund. But the bulk of people just aren't suited to doing well like this. They don't have the interest, the time, the discipline etc etc.

The academic evidence shows that private investors generally are pretty bad just on market timing in funds. They tend to sell at the bottom and buy at the top. If you are with an IFA it can add 3% extra in terms of returns as opposed to doing it yourself. This is research from Vanguard in the UK. Most people get scared out when the media headlines are scary.

With regard to funds I meant a tracker or an active fund. Good funds can be figured out. It isn't rocket science. Also good trackers. I can't really believe that people here appear to be suggesting that the majority of people in the UK should manage their pensions/savings themselves?

In my view that would end in disaster. The people commenting here are not a representative group. Try asking someone in a coffee shop if they have thought of looking at stocks and they might ask you what a stock is. People on Stockopedia are likely to be professional and well educated.

It seems to me to be ridiculous to imagine that the majority of the British population should be trading individual shares themselves. What about doctors with intense full time jobs? What about people in the army? Should lorry drivers be doing this?

The funds debate is somewhat complex but in a sense you can do active theme/market selection very easily. I.e. buy healthcare funds, technology, US equities. Then you can pick good fund managers as well. For the bulk of DIY investors this is what suits them.

This is in reality what the bulk of DIY investors on Hargreaves Lansdown etc do. They want to enjoy their life without the stress of picking individual stocks. If that is what they want to do what is wrong with that? It is there life to enjoy surely?

But going back to my main argument the overwhelming evidence is that individual investors generally are poor at things like market timing. They panic etc. So I don't think getting the majority of the UK population to trade individual shares as a way of funding retirement and their home purchases is a good idea. But again I am not saying that say 3% of the population can't do this activity successfully.

These debates are so crazy as I don't think I am actually saying anything controversial!!!!!! If you are doing well here great...

iwright7

26th Sep '18

There must be some data somewhere that shows the % of UK savers/investors that buy shares in individual companies and the % who stick with funds/trackers. I am guessing that the later group may be 90% or more of the market. Then you are likely to have an even lesser % of individual investors who outperform the average fund. Do any financial advisors out there have knowledge of these numbers either nationally, or from their own client base? Ian

pka

26th Sep '18

"My main point is that a fund investor could have bought Terry Smith's fund eight years ago and would now be up 300%."

True, but he is much more likely to have bought one of the thousands of other funds that were then available that have performed far worse than Smith's fund over the subsequent eight years. It's easy to pick a fund that's performed well in the past with hindsight. It's very difficult to pick a fund that will turn out to outperform it's relevant stock market index in the future - many funds that have excellent past performance records go on to perform poorly. That's why index-tracking funds have become so popular in recent years.

Carey Blunt

26th Sep '18

Hi Andrew,
I don't think anyone on here is arguing with you, I think we are all in violent agreement. The posts here all agree (I think) that the average man on the street could do well in funds and that its a better approach for them than picking individual stocks.
The original question posed on the thread was if Stockopedia subscribers are better picking funds rather than picking individual stocks. In this case I think many of us (and maybe you as well) are saying that we can show that using Stockopedia and other resources and by dedicating time it is possible for us select few on Stocko to beat the professionals (although we all acknowledge that we haven't been tested in difficult times).
I don't think anyone is saying beating the professionals (well the best ones at least) is easy and we acknowledge the arrogance of even suggesting it can be done but I think its important that people feel its at least possible and to see possible strategies to do it.
Cheers
Carey

gus 1065

26th Sep '18

In response to iwright7, answering a related but different question, I found this extract in an article from March 2018 on YourMoney.com about the relative take up and returns from Cash vs. Share ISAs.

In essence, over the past 20 years the proportion of savings into cash vs. shares/funds ISAs has gone up from 43% to 75%, suggesting an increasing majority of savers savvy enough to think about tax management are turning to cash rather than shares. For many savers, the issue is not so much about the merits of funds against individual shares but about equities (and a lesser extent fixed income) against cash.

Despite the prevailing negative real returns on cash for the last 10 years, there seems to be a very strong aversion for many savers to investing in shares. Whether this is based on perception of risk, lack of understanding of the merits of the assets, poor advice or some other reason is a matter for conjecture. Given the population using ISAs are presumably reasonably affluent (they have spare capital to save) and rational (they accept the benefit of a tax free wrapper), I suspect the shares/funds aversion is even stronger among the population as a whole. The “shares aware” Stocko community is arguably a pretty small bubble in the scheme of things.

Gus.

——————

“Research from Schroders shows that when ISAs were first launched in 1999, total cash ISA subscriptions were £12.3bn compared to £16.1bn for stocks and shares ISAs – in other words, just 43% of the money went into cash ISA savings accounts.

Since then, there has only been one other tax year – 2000/01 – where investors have put more money into stocks and shares ISAs. By the end of 2016/17, 75% of the money went into cash ISAs despite a global economic recovery helping stock markets to make decent gains.

At the same time, for much of the past decade, putting money into cash would have been a poor choice. Research from Chelsea Financial Services found that anyone who kept cash savings since rates were cut to 0.5% could have missed out on significant stock market gains.

It stated: “£1,000 in a cash account paying the base rate would be worth just £1,042.60 today. In contrast, anyone choosing to invest in the average UK equity fund or UK equity income fund would have seen their pot of money grow to £3,093.30 or £2,959.40 respectively.”

Schroders research shows a similar pattern. It points out that saving money into a cash ISA over the last 18 years would have returned four times less than a stocks and shares ISA, although cash has been more stable.”

abtan

26th Sep '18

A few thoughts come to mind on reading a few of the dividend vs capital growth posts above:

1) If dividends give such a better return than capital growth over time, is it not better to just invest all your money into the highest yielding junk bonds?

2) Is it really easier to pick a company which will guarantee and maintain a dividend than to pick a company that will increase in value over the long run? Personally I think the latter drives the former, hence why capital growth is my focus these days.

As a side thought I remember 10 years ago thinking that Tesco was unstoppable, and with a guaranteed dividend, and we all know where that ended up.

Armorduck

26th Sep '18

It is interesting to read this. I’ve clearly been doing the opposite to most people over the past twenty years.

My investing journey started with investing in funds about twenty years ago. But most pep/isa tax free investments was still largely cash in banks and building Societies. For the first several years the cash did better than the funds, partly because of the crash. In 2009, I bought my first shares. These were Lloyds Bank, because my Dad had been an employee and clearly enjoyed following their price in the paper every day. I still own Lloyds but they have not done very well!

After learning how to buy shares with Lloyds I started switching away from funds and buying individual shares and etfs (largely to reduce fund charges, and because the funds had been so disappointing for so long). Buying shares also allowed me to be invested in local companies or companies that did things I liked, like making beer. The past 9 years have been pretty kind and I am up on my individual investments (overall). But I also started investing in Fundsmith in 2012 (can’t remember why) and that has done well too. I am now about 50:50 Fundsmith/individual shares. Its hard to be precise but I don’t think I can match Fundsmith for return, and therefore on financial grounds I have been wasting my time. But I find it’s fun to own shares, more so than owning Fundsmith. Receiving dividends is nice, seeing prices go up and down on a daily or hourly basis is entertaining and reading company reports is interesting. I even attended my first AGM recently and might attend another one day.

I suppose I enjoy thoughtful gambling, such as playing cards for money, even if only for pennies. Each individual share as a gamble and I hope that armed with reasonable information (Stockopedia) I might win sometimes. In the future holds all my money might be in cash, trackers, funds or shares. Most likely it will be a bit of everything. For the moment, I enjoy wasting my time thinking about individual shares, as well as putting money in other places.

ricky65

26th Sep '18

It's a myth that you have to be a good stock picker to have success in the markets. For example, a stock picker who is right 30% of the time may be more profitable than a stock picker who is right 70% of the time.

The Phoenix

26th Sep '18

Interesting debate for me I think the two biggest issues are have a plan before you go into a trade where will you topslice some profit if your right what do you do if your wrong stop out or do you add more if still a believer.

My worst trades have been impulse buys and not having a stop in place this was more in the early days than now but agree if your not beating the top third of funds in the sectors you are investing in after five plus years maybe you should ask am i better putting my research time into something I;m more suited to,

PhilHofGrowYourDough

26th Sep '18

It's funny you mention The Naked Trader. It was a review of the Stockopedia Guru's Screens in 2013 that put me onto the smooth performance of the Naked Traderesque Guru Screen.

I based my initial screen on that strategy and over the years I've added to it based on Stocko articles, Paul Scott's balance sheet checks, etc. I've then purchased European and US Stocko options in order to not compromise the screen when the screen returned limited UK options.

Any mug with a Stocko subscription could fork the Naked Traderesque Screen or any of the Guru Screens that they like and buy the top 25 stocks, rebalancing on a quarterly basis as per the guru screens. After all the UK version of the NT Screen has returned an annualised return of 20% over nearly 8 years.

The investor in this screen doesn't even need to perform any qualitative checks on the companies instead they could just rely on the quantitative group properties.

In summary, for me there is no reason why Jo Public cant take control of their future in this way. My 11 year old daughter could do it.

#notrocketscience

iwright7

27th Sep '18

Phil,

I too am a fan of NT having read his book, listened to the Audible version, been on his beginner and advanced day courses (recommended), studied the inspiring Stocko historical NT performance chart and modified Robbies approach to become my own.

But I can also say that a lot of the people paying to attend the beginner NT day course were not temperamentally suited to adopting his investing style, despite it being handed to them on a plate. I strongly suspect this would also be true for the other successful Guru inspired strategies. This is a good job too because it gives those of us who want to a great opportunity to beat the market and the run of the mill fund managers!

PhilHofGrowYourDough

27th Sep '18

Hi iwright7,

I've never attended his seminars but I have read one of his books.

I think the difference between the Robbie's strategy and the NTesque guru strategy is that the former requires the investor to make qualitative judgements about the potential investment. The latter just says "this stock meets the quantitative criteria you've presented".

I'm arguing that an investor doesn't need to make those qualitative judgements to achieve a good return. Of course that would freak out many hear as they believe that their success is down to their ability to select 'good' investments. Hand on heart, I know little of the 25 or so companies that I have invested in over and above the Stockopedia summary.

Best of luck with your strategy!

Rusty2

27th Sep '18

The problem I have with the NTesque guru screen is the turnover, all 21 selections have been added this month, most on the 7th September. It also seems to select quite a few "foreign" companies such as german property companies. It also has not performed very well this year only up 2.5%. Yes it's different from Robbie Burns, I don't think I have ever seen a company on that that screen that Burns holds.

But yes it's a good idea to duplicate some guru screens and play around with the rules to suit you. Or you can make your own screens up.

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Can We Beat The Professionals?

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Kevfle

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