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Weekend reading: Active investors need to love what they do

Weekend reading

Good reads from around the Web.

When my co-blogger The Accumulator and I debated why I am an active investor despite believing most people can expect to be better off by investing passively, I explained it was partly because I love it.

The big benefit of enjoying what you do is that it can be its own reward. While I’ve been fortunate enough to do okay for as long as I’ve been measuring my portfolio’s returns, there will be years when I will lag the market. The shortfall will be the price of my hobby.

But there’s another reason why I said my enjoyment of active investing is important to why I do it – and that’s because I believe it could be a source of edge.

When I first met Monevator contributor Lars Kroijer, he was surprised at my passion for investing. Many very well-paid professionals, Lars explained, don’t enjoy it at all in his experience. They do it for the money.

In my all-too-human quest for reinforcement bias, I was interested to read Warren Buffet tell MBA students something similar in a Q&A the other month:

Question: What are some common traits of good investors?

Warren Buffett: A firmly held philosophy and not subject to emotional flow.

Good investors are data driven and enjoy the game. These are people doing what they love doing.

It really is a game, a game they love. They are driven more by being right than making money, the money is a consequence of being right.

Toughness is important. There is a lot of temptation to cave in or follow others but it is important to stick to your own convictions. I have seen so many smart people do dumb things because of what everyone else is doing.

Finally good investors are forward looking and don’t dwell on either past successes or failures.

Sure, like a lot of folksy Buffett wisdom it is only good so far as it goes.

Enjoying investing doesn’t guarantee good returns, no more than liking Buffett’s favourite food of hamburgers means you can expect to end up a billionaire.

Far from it! But it might be a necessary ingredient for long-term outperformance.

I’m probably preaching to the converted here, whether you’re of a passive or active mindset – you’re reading a blog about investing, after all, and one that is not known for short pithy posts and cat pictures.

Clearly many Monevator readers get more than pure financial returns from their endeavours.

Traders gotta trade

By coincidence, I also recognised myself in a post entitled 17 Reasons Why Traders Love to Trade this week.

Like all hobbies – trainspotting, Warhammer battling, patchwork quilting – the appeal of active investing is mystifying to those who don’t do it. So they assume it must be down to money.

But if you just want the best chance of the most money, stick to passive investing.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Nationwide has launched a monthly savings ISA that pays 2%, reports ThisIsMoney. However you’ll only be able to sock away £1,270 a month.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • A deep dive into Vanguard’s ‘robo-adviser’ plans – Institutional Investor
  • Burton Malkiel: Sure, passive indexers can own a few stocks – Kiplinger
  • Average returns are rarer than you think – Bloomberg
  • However you measure it, active funds lag index funds – NY Times
  • The alchemy of ETF liquidity is an illusory promise [Search result]FT

Active investing

  • 11 UK shares that can afford their dividends – Telegraph
  • Buy Europe as Draghi gets it all wrong [Search result]FT
  • How ETF trading is influencing the market – Barron’s
  • Why this bull market has no famous managers – Bloomberg

Other stuff worth reading

  • The left-wing history of Monopoly – Guardian
  • Leverage made buy-to-let the best asset class over 18 years – Telegraph
  • Why pension freedoms won’t trigger a  property boom [Search result]FT
  • Couple’s £1.5m share certificates get lost in the post – ThisIsMoney
  • UK housing turnover has collapsed [What about stamp duty?]Guardian
  • Sexy men encourage more risk taking – New Scientist

Book of the week: Want more Warren Buffett? Tap Dancing to Work collates his various writings over the years, or you can read The Snowball, a biography. He fell out with the author of the latter so it must be true.

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  1. Note some FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 19 comments… add one }
  • 1 Calum April 11, 2015, 1:16 pm

    “Many very well-paid professionals, Lars explained, don’t enjoy it at all in his experience. They do it for the money.”

    Great post. When I was just getting interested in investing I thought the above statement couldn’t possibly true…then I actually met some fund managers.

    In my experience, the average fund manager at the average UK institution views fund management as the necessary evil to get up to management. The worst thing, therefore, the average fund manager can do is actually take an opinion on anything. Perhaps the rise of passive investing is starting to change this though… Whatever your inclination (active or passive), investing with these people isn’t the answer.

  • 2 Peter April 11, 2015, 1:55 pm

    “Leverage made buy-to-let the best asset class over 18 years – Telegraph”

    Am I right in thinking that the quoted return for equities excludes dividend re-investment?

  • 3 Matt April 11, 2015, 3:11 pm

    Enjoyed the Warhammer reference! I’m still waiting for that combined gaming/finance blog – preferably called “Warhammer 401(k)”.

  • 4 Retirement Investing Today April 11, 2015, 3:47 pm

    I also love investing. As you know I’m mostly passive MPT with the exception of a HYP and a bit of valuation based asset allocation flexing. I’d love to increase that and become far more active but some time ago I proved to myself that I’m far more likely to be better off by staying predominantly passive. With both that temptation and that knowledge I therefore have to prevent myself from veering towards more activity. I do that with lots of personal finance reading, ‘portfolio analysis’ and the blog.

  • 5 underescored April 11, 2015, 5:42 pm

    The BTL returns compare non-levered returns to levered!

  • 6 UK Value Investor April 11, 2015, 6:42 pm

    I have to agree. If you don’t at least have an interest in active investing you shouldn’t be doing it. I’m not sure about love, but definitely an interest beyond just wanting to make money.

    I speak to enough investors to know that if the basic interest is lacking they’re almost always better off and happier with a passive and/or index-based approach.

  • 7 The Investor April 11, 2015, 8:15 pm

    @underscored — Yes, that’s why I wrote “leverage made buy-to-let the best asset class”. The reality is the financial structuring behind buy-to-let is a massive structural advantage of buy-to-let. Very hard to keep up with as an equity investor as you can’t get anything such terms, which makes borrowing to invest in shares far far riskier. Theoretically buy-to-let will blow up and wipe out over-levered players every so-many years/decades to even things out, but, well, we’re still wwaiting…

  • 8 weenie April 11, 2015, 8:37 pm

    @Matt – what sort of chapter names to expect in Warhammer (401)k?

    Guardians of the Dividends?
    Fund Angels of Retribution?
    Rampaging Knights of Equity?

    🙂

  • 9 Dividend Drive April 12, 2015, 1:03 am

    Couldn’t agree with you more. Loving what you do undoubtedly has the possibility of giving you an edge. It is the case in all things not just investing, of course!

    It is interesting to think of it as a hobby. I think you’re right. As such, its value goes beyond just financial return.

    Nice post. Thanks for it!

  • 10 dearieme April 12, 2015, 2:42 am

    “Should You Be Mostly Cash Like Mohamed El-Erian?” assumes that cash returns essentially zero at the moment. That’s no doubt true for institutional investors, but it’s not true for us. 6% 5%, 4% are all freely available in current accounts or regular savers, and with the advantage of deposit protection too. And we can hope they’ll be tax-free from next year. Old-style ILSCs are cash-like and are guaranteed to beat inflation. All-in-all, it’s bonds that look pretty bad at the moment. Equities and cash, with a soupçon of silver and gold, and a wee pinch of property, looks the best broth to me.

  • 11 Cerridwen April 12, 2015, 9:35 am

    For me learning about investing has been similar to learning how to play a game. Active investing is rather like chess – all those different pieces and all those rules that get written about, discussed and endlessly disputed. Passive investing is more like draughts. The strategy is less complex, and therefore less challenging. I suppose that’s where the attraction (over and above the money) comes from – the challenge of understanding the system/game and getting it to work for you now and then. (Or not :-))

    (btw – thanks for the mention)

  • 12 Mathmo April 12, 2015, 10:14 am

    The issue of leveraged investments (telegraph article) harks back to previous comments on what to include in the portfolio when assessing performance.

    One option is to net the mortgage off against the value of the property and net the interest off against the cost — which is what leads to the spectacular returns figures: persuade a bank to lend a high LTV and the denominator in the yield is tiny.

    Another option is to simply include the property and its return as another line in the portfolio and consider the whole portfolio leveraged by the mortgage. This is more honest when considering asset allocations (and usually reveals that anyone with investment property is spectacularly over-exposed to that asset). However it is extremely hard to rebalance a few grand of a central London flat so that makes the regular rebalancing task much more complicated than a brokerage account. Furthermore you can’t consider dumping the property without the mortgage company wanting their loan back: of all the ways to create leverage, property is by far the simplest. (SIPP-backed loan, anyone?)

    In all this, I’ve ignored dwellings – should one include those as an investment and put a matching income and rent line in the P&L to show what would happen if you were to cash out and move to a cheaper place?

    As always (and as highlighted in the previous unitisation article) the question of how you analyse and allocate should be driven by the decision you will take and the actions it will cause. If you are considering whether to buy a btl you analyse differently from if you are considering retirement income forecasting.

    As a passive long term investor, who believes in strict rebalancing rules for liquid investments, I hold my netted-off btl separately from my liquid investments so that I can see what to do on a regular basis. Sure it makes it a really high yield line, but since I’m not considering buying more of it, that has no effect on my decision-taking.

  • 13 KayD April 12, 2015, 8:44 pm

    I’ve been investing for 20 odd years, bought a third of my house on the proceeds of the millenium boom, and have only just learned to unitize my fund. I understand the theory of rebalancing but have come to think that the less trading I do the better for the value of my fund. I call it my money making hobby, but my husband told me he thought it was my job to do it! Unitizing going back 11 years my money has increased 236% which I don’t think is a bad result, even for a female!

  • 14 Ric April 12, 2015, 9:32 pm

    I’d take slight issue with comparing myself to the “17 Reasons Why Traders Love to Trade” article in that “traders” are playing a different game to “investors” which, if asked, is where I like to place myself. Therefore some of the reasons in the article are not what float my boat (for example, “Receiving instant feedback about your trade decision” does not apply to me. Sometimes it is months before I know if I made a right investment or not). I love the game of investing for the longer term strategy, staying the distance and getting rewarded for it. For me trading is a dirty word!
    Notwithstanding all that pedantic point, great article as ever, thanks.

  • 15 The Investor April 13, 2015, 10:54 am

    @all — Hmm, I seem to have uncovered an Orcs’ Nest of Warhammer veterans here. I’ve rolled some D20 in my time. Coincidence? 😉

    @Dearieme — As a long-time champion of cash I agree in principle that cash has more attractions for private investors, though I think “6/5/4%” being “easily available” slightly over-eggs it. I’m looking for some new homes for cash over the next few weeks though, so we’ll find out.

    @All — Cheers for the comments, hope you got some of the Spring sunshine where you were.

  • 16 dearieme April 13, 2015, 2:45 pm

    “I think 6/5/4% ” being “easily available” slightly over-eggs it.” Not if the cash is in the modest amounts that we are interested in. 6% p.a. regular savers that pay their interest next tax year give 6% tax-free (or did the last time I looked: First Direct and M&S). My wife can get 5% at TSB and Nationwide, with no tax to pay, and 4% at Lloyds. I can get 4% at Lloyds on their Club regular saver, with the interest being paid tax-free next year. By spreading about £20k between the right accounts at Halifax and Santander she can get the equivalent of 3.6%, by a combination of true interest and cashbacks: add in the incentive payments for transfers and that’s up at about 4% again. Thereafter I run out of puff, but that’s all very welcome on our emergency funds and a wee bit of “portfolio” cash. Assuming that I raise the energy to execute this fine plan, that is to say. Alas it runs counter to Herself’s (perfectly sensible) edict to reduce our number of accounts.

  • 17 dearieme April 13, 2015, 2:52 pm

    I suppose we could also try P2P lending as a use for portfolio cash: I take it that the income generated counts as “interest” for tax purposes. It seems that one might earn more than 6% p.a. with what some people hope may be modest risk. It might have the huge advantage for Certain People Around Here of satisfying their urge to be active in investing, so that they can use passive funds for their equities and bonds. Actually, I’d welcome a monevator post on this P2P lark.

  • 18 weenie April 14, 2015, 10:26 am

    @dearieme

    Income from P2P lending is classed as interest and can be included in the first £1000 tax free interest bracket from April 2016:

    http://www.telegraph.co.uk/finance/personalfinance/savings/11489834/First-1000-of-peer-to-peer-returns-will-be-tax-free.html

  • 19 The Investor April 14, 2015, 3:05 pm

    @dearieme — Thanks for the follow-up, and point taken (and previously understood! 🙂 ) that there are options for high-ish returns from cash.

    However my point is in asset allocation terms for any sort of mature-sized portfolios, 5%,6%, or even 4% is going to be a stretch. Those regular savings accounts, for instance, only allow relatively small amounts to be socked away.

    Somebody looking to use cash instead of bonds for say a standard 60/40 portfolio is going to struggle to get above 3-4% once above even £100,000 — and I’d argue it’s much harder than that since they’d want to use ISAs, and rates there are far lower. (The just launched ISA regular saver mentioned above pays 2%).

    Agree P2P can be part of the mix for risk takers. I’d even consider retail bonds, tiny holdings in mini bonds and so forth.

    None of this is to say cash isn’t a reasonable alternative to short-to-medium term government bonds for private investors, in my view. I am just against over-egging the pudding. 🙂

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