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Weekend reading: A history lesson for every kind of investor

Weekend reading

Good reads from around the Web.

There are many reasons to be a passive investor, but guaranteed returns is not one of them.

Is passive investing most people’s best chance of capturing the expected returns?


But you can’t bank on expected returns.

This was illustrated nicely by Motley Fool columnist Morgan Housel in an article this week on how long it takes to prove yourself as an active investor.

Morgan was discussing how some lauded active investors might just have been born at the start of a good run for their asset class – and wondering how long you’d have to invest for in order to know your returns weren’t simply down to luck.

But the graph that illustrates his piece might interest passive investors, too.

It shows how US stocks did over various 20-year periods, which Morgan suggests would reflect the key years in an investor’s life (35-55, he says):

various-returnsSource: Motley Fool

From eyeballing the graph we can see that, for instance, the 20 years following 1910 were an awful lot easier to find gains in than the 20 years from 1930.

Lies and statistics

Now before anyone in any particular camp starts having a go in the comments, this is just one way of looking at a particular slice of data and it’s designed to make a particular point.

So yes, plenty of caveats.

For a start we nearly all invest regularly over many years, not just in a one-off lump sum.

Also, sensible passive portfolios are diversified – rather than just being all-in US stocks or any other asset class.

Indeed, rather than being pessimistic or misleading, Housel’s graph of US stock market returns reminds us why geographical diversification is important.

The evidence is that a wide variety of very simple well-diversified and rebalanced passive portfolios will deliver solid positive returns over the long-term (though nothing is ever certain!)

Finally, active investing is always a zero sum game. So to extend on Morgan’s comments, this means that an active investor in a good market may find it easier to put up impressive sounding numbers, but on average they will still lag tracker funds that follow the same benchmark.

Careful what lessons you learn

I suspect we will all take what we want to find from such graphs.

Passive investing skeptics will ignore my points about geographic diversification and regularly investing over a lifetime – and Morgan’s point about lucky fund managers – and say this is why you can’t rely on trackers for your returns.

And before I scoff at them too loudly, I must admit I did think to myself that this data shouldn’t really scare me, because as an active investor – for my sins – I flit about territories and individual stocks like a butterfly on a buddleia bush.

But it would be wrong (and ironic) to take away the message that passive investing is a flawed strategy from an article that is trying to show how the perception of an active manager’s success could just be down to when their parents happened to get jiggy with it.

(Again, read my zero sum game article if you don’t understand why.)

The active fund industry will always use the fact that shares go up and down and markets sometimes disappoint to play on people’s feeling that passive investing feels wrong.

But those feelings are not a good guide to the reality.

Certainly we need to be alert to the potential pitfalls, such as not being diversified or falling prey to sequence of returns risk.

And I do still hear too many new-ish passive investors saying things like “I can expect to get 5% from shares over the next few years”.

No you can’t, not over five-years.

You can hope to – but remember that average returns are not normal.

You know what you’ve got to do

I know these warnings and caveats are all a bit relentless, particularly if you’re new to investing.

I’m tempted to write that investing is like an onion, and that every time you peel away a layer you find a new layer and another complication.

But really it’s more like a childhood cut that turns into a scab.

You know what is happening and what you need to do – which is leave it alone – but you can’t resist picking and poking at it.

And if you do it may just start to bleed again!

The principles of investing – regular savings, compound interest, diversification, rebalancing, time horizons – were all worked out long ago.

Investors will experience very different markets depending on when they were born, but the principles don’t change.

Make sure you understand them before deciding to break them.

(And remember they are there for a reason before deciding you know better.)

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: The era of record low mortgage rates may be ending, warns ThisIsMoney. While average mortgage rates are at all-time lows, the absolute lowest rates are disappearing. For instance a borrower with a 40% deposit could get 1.99% in May but now the cheapest equivalent is 2.29%.

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

  • Constant mayhem amid long prosperity – Motley Fool
  • Most hedge funds are – effectively – costly passive funds – ETF.com

Active investing

  • Lloyds 2010 issue the first UK retail bond to mature – Telegraph
  • Are hedge funds still for suckers? – Bloomberg
  • Defensive shares of yesteryear take a haircut [Search result]FT
  • A primer on investing in quality companies – ThisIsMoney
  • Volatility is becoming more volatile – Bloomberg

Other stuff worth reading

  • State pensions and the “healthy life expectancy” gap – Telegraph
  • [Tragicomic] mismatch of hope and UK property prices – Telegraph
  • 5 common inheritance tax myths – The Guardian
  • The banks’ secret cash withdrawal limits – The Guardian
  • Equity release for the kids’ deposits Vs inheritance tax – ThisIsMoney
  • House prices jump £5,000 in a month – ThisIsMoney
  • The argument about time diversification [Academic]Morningstar
  • Steve Jobs a hero? It’s complicated – New Yorker

Product of the week: I learned how to make coffee using a commercial espresso machine a few weeks ago. Most of the other pupils in my class were City bankers, pretending to be hipsters. There were many clues (not least their interest in the coffee trade business cycle) but the clincher was they all recommended the Sage by Heston Blumenthal coffee machine and grinder, which I’ve noticed displacing the Italian brands in the slicker homes of my acquaintance. Viewer caution advised: Not for frugalists who’ve swapped their daily latte for a teaspoon of instant.

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  1. Note some 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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{ 29 comments… add one }
  • 1 ermine September 12, 2015, 1:06 pm

    Crikey. London is a different country. £500 for a coffee machine, how much are the expensive ones? Is the coffee any good? And do you need to factor in having servants to decoke it afterwards – the combination of heat and milk is never kind to the cleaner-outer.

    I fear I am a barbarian with coffee – Americano/filter coffee is as intense as I can cope with. OTOH I don’t do instant of any form, gave that up as a shocking example of lifestyle inflation when I started work.

  • 2 Survivor September 12, 2015, 3:30 pm

    @ ermine

    Sir, you are losing out on nothing. Instant is ersatz – to any half decent coffee appreciator, [‘coffee-lover’ sounded too affected] & having an economical common or garden mocha machine which lasts a lifetime (I am using my father’s out of sentimentality as well as practicality, so it’s going on for the second half of a century now) is just fine.

    Fancy professional machines you get in good coffee shops give you a nice surprise when you go out occasionally, so it feels different from home.

    This is just my individual opinion & of course everyone is entitled to theirs, but it seems crazy to delay your precious freedom for something as stupid as what you make your coffee in.

    It’s also strange to think that 25 years ago, few people in this country even drank it, let alone being obsessed about what they made it in – maybe more folk need to read the book ‘Status anxiety’. 🙂

  • 3 ermine September 12, 2015, 4:02 pm

    @Survivor > It’s also strange to think that 25 years ago, few people in this country even drank it,

    hehe – my mother is German, so I started earlier than most Brits. Though she still thinks the strength I run at is weak – recently she said I don’t have to make it weak for her. I didn’t have the heart to tell her that I’ve been drinking that ‘strength’ for decades! Mrs Ermine has one of those mocha machines that goes on the stove, it scares me!

    I am glad that Monevator grinds his beans, however – not only does that give the option of buying in bulk from catering suppliers like Garrards in his neck of the woods which is half the price of Tesco, and there are even cheaper places, but grinding – using a burr-grinder- before making is also a taste improvement, particularly if you buy in bulk.

    Still flabbergasted by the concept of ‘learning’ how to use a coffee machine though – add beans, add filter, add water, spark it up and hit the go button is all I need to know!

  • 4 M from There's Value September 12, 2015, 4:47 pm

    i still trust in my faithful DeLonghi Magnifica (which incidentally used to retail at just under £500)… as well as three cafetieres, 2 on-hob espresso kettles, and a Turkish on-hob copper coffee pot… yes, you could say I like coffee in all its guises – even Camp coffee mixed with hot milk when you’re feeling crap is somehow amazing.

    But being taught how to make it? What, you need to actually be taught? You are not a true coffee believer in that case.

  • 5 The rhino September 12, 2015, 6:29 pm

    I cut an espresso grind with a little glass fibre and rub it into the gums. Works a treat.

  • 6 Matt September 12, 2015, 7:52 pm

    It’s just not a cup of tea though, is it?

  • 7 Edmund Blackadder September 12, 2015, 10:32 pm

    I haven’t had the best experience of coffee…

  • 8 Survivor September 13, 2015, 9:28 am

    @ermine – Good on Mrs Ermine for her mocha, I too balance mine on the stove, it puts the art in artisanal 🙂

    My father is Italian & as such, coffee is so high up culturally, it takes on religious overtones – 25 years ago, we had to ‘self import’ – bringing it back in holiday suitcases, until we could find incredibly scarce speciality shops stocking anything half-decent.

    Kudos to the Monevator for roasting his own beans & grinding them though, that does step the taste up a whole gear [I’m currently a bit lazy & buy already ground] ….. one of my fondest childhood memories is the house smelling of roasting beans – that meant it was also a real home.

    As a student I worked quite a lot as a barista [they didn’t call it anything snazzy then though, at least they didn’t pretend that we weren’t just cheap labour :)] & in the coffee shop, they had a machine that was the real deal, imported from Italy. I tried everything it made – for quality control purposes of course 🙂 – the techniques are pretty simple (you can train up anyone in a couple of hours to be honest) …. & it was all really good. Now I can understand that machine for a business, but seriously, anything on that level for your home is over the top – lifestyle inflation on steroids.

    Call it killjoy, but if you have everything amazing at home already, what is there to look forward to when you go out? ….. I believe we’re healthier & happier when we have difference to the routine & something to keep a sense of appreciation alive.

  • 9 Neverland September 13, 2015, 11:31 am

    You can get a £6 stove top espresso maker in tk maxx that will make you coffee as good as any espresso machine

    Anyone who buys an automatic espresso machine is a mug

  • 10 PC September 13, 2015, 11:44 am

    Stove top espresso works well for me.

    It’s freshly roasted beans that make the most difference to me – good to hear I’m not the only one roasting green beans at home.

    I have to confess to signing up for an Ikawa roaster on Kickstarter in a mas moment – it’s not cheap – https://www.kickstarter.com/projects/andrewstordy/ikawa-home-coffee-roaster but it’s not essential – I’ve roasted plenty of coffee in a cast iron frying pan with a glass lid.

  • 11 Tim G September 13, 2015, 11:55 am

    In a spirit of masochism, I clicked on the link the Mr Money Mustache’s post (“…Dog ownership is optional!”). Then I took my dog for a walk on the beach and composed a pithy rebuttal in my head, explaining why Mr MM is wrong to try to put a financial value on everything and why his obsession with deferred gratification is delusional, and pointing out just a few of the many things that a dog gives you that you won’t get from holding some shares in a tracker fund.

    When I got back, I was just about to go online and post my comment when I heard an odd sound from underneath the table. It was my dog retching as she regurgitated her entire lunch (and some other stuff too) on the kitchen floor. As I pulled on the rubber gloves I wondered if perhaps Mr MM had a point. Anyone out there willing to swap me some shares for a second-hand labrador?

  • 12 The Investor September 13, 2015, 2:25 pm

    So I typically grind own beans and make the resultant coffee in a £20 cafetiere, which my Barista friend is perfectly happy with.

    Cafetieres are fine as long as you watch the contact time (usually four minutes) and the grind.

    She does not recommend the Turkish method, didn’t ask why. It’s never been my favourite coffee either, FWIW. They do seem to be getting popular again though.

    The Sage was the bankers’ suggested weapon of choice not hers — she suggests a Gaggia Classic (£300) as an entry level machine that she says with good care will last for a decade.

    She also suggests that picking up a second hand one (maybe £150?) can be a good cost-effective route, since so many people buy machines and then stop using them after a month — though obviously you have to know what to look out for in a second-hand purchase (which I don’t, but she does).

    All that said, my expert has something that costs north of £1K at home herself — but before you all start spitting and for context she in the trade, travels to source beans etc, and each 0.1% improvement is surely worth it for her taste buds and livelihood…

    As someone else said earlier, she stresses that good grade specialty beans that suit your particular palette are the first priority, however you make your coffee.

    That and a cafetiere are perfectly fine.

    What I was learning was how to use commercial coffee machines (i.e. the tamping, portafilter, etc), how to do taste tests (cupping), how to figure out the right grind and contact time for any particular batch of beans… and how to make pretty hearts and flowers in the milk! 😉

    Obviously a machine is an indulgence versus frugalism… I haven’t indulged yet but I might as I do like milky coffees, and also because I like the rhythm of using a manual espresso machine.

    It’s easier than learning to play a music instrument, and yet a quick route to feeling like you have a skill!

  • 13 Mathmo September 13, 2015, 2:55 pm

    Thanks for another weekly round-up, TI. What a delight to find a tree-full of comments about coffee-making and not property this week. FWIW, I’m a Nespresso fan: consistent above-average but not brilliant coffee. I drink one a day and Mrs Mathmo has one or two. £50 machine has lasted 10 years so far so most of cost is capsules — last year was £563 — or £14,075 for those who think in (4%) capital requirements. Starbucks would be nearer 40k; instant would be cheaper, but it gives me the heebie-jeebies. Speaking of which, I just did a mental calculation of my booze budget and that’s an order of magnitude higher: seems I know where to tighten up.

    A few passing property bits: I’m afraid Ermine loses me with his “it’s all gone to hell in a hand-basket and it’s the bankers and Thatcher’s fault” arguments — they are neither credible nor helpful: neither of those protagonists operates without a willing and supporting public, and it fails to get to a so-what. The supposition that credit makes markets fail isn’t obviously true. The advice buried deep in the rant, however, that if you have something you need, don’t risk it for something that you do not is wonderfully clear-eyed. I think exposure to London’s super-rich is quite a good learning in this regard: if there’s always a bigger fish you can stop trying to be the biggest and figure out how big you *need* to be. And the bloke in the Telegraph exemplifies at least one thing that I think is wrong with the yoof-can’t-buy-houses arguments: he wants a 4-bedroom detached house in commuter-land like his parents have. Strewth. I want a big bucket of gold, but I know I can’t have it. Start small, sunshine: how about a studio in Southampton? And speaking of buckets of gold, I found the gold-miners article interesting, but I tend to extend the general aphorism “a gold mine is a hole in the ground with a liar on top” to all articles about gold.

    In TI’s thought-starter and the rest of the articles this week, I am reminded of Jim Paul’s definitions in What I Learnt Losing a Million Dollars —
    – investor — long term ownership of the underlying asset; dividend collector
    – speculator — ownership of mispriced assets for price movements. Capital gains
    – trader — makes money in the spread
    – bettor — places money on his ego – wants to be “right”
    – gambler — spends money for entertainment. Wants to be thrilled.

    So you can look at Kitces writing on the ETF flash-crash and see the mechanics of how it happened as feel sorry for the chap who dumped his holding at 35% below NAV, but you are left paused asking who on earth puts in a stop-loss in the first place? That’s a speculator or trader’s play — but these seem to be people advised by wealth managers. Shouldn’t they be investing, not speculating?

    Equally Ferri’s piece on drip-feeding vs dumping it all in ignores the underlying assumption we have that investing is essentially a value-creating exercise and timing the market (for better or for worse) is hard. We know that the back-tested result says 9x% of the time you stick it all in and are better off, so it’s just a question of tolerance for remote possibilities. And that’s also where the Morningstar article falls down: anyone who argues about the Law of Large Numbers without then extending to the Central Limit Theorem is going to find themselves on a sticky probability wicket when there’s a mathematician in the comments thread. The fact that something is theoretically possible doesn’t make it a likelihood worth considering if the probability is vanishingly small. At least the author has the decency to drive his own truck through his own argument at the end of the article so best to ignore it from the start, I say.

    Both Merryn’s article this week and hers of last week (I’m sorry, but I’ve yet to see the point of any of Claer’s articles at all) make a lot of sense if you think of investing as trying to gain exposure to underlying RoE, reinforced by AWOCS article on the long-term.

    Finally, I just want to sit back and admire the style of two regularly quoted blogs. KoTC demonstrates how dastardly complex managers make their reporting to us — and I’m sure we’ve all understood the simple message of the FIRE blogs and then tripped over death-by-a-thousand-compliance-forms in actually trying to make it happen. I love the detail which she supplies in her blog: the absolute opposite of theoretical. Finally, TEA has me every time with his robust use of language and film-analogy but to compare asset managers to the screwdriver-wielding Shawshank Sisters made me giggle.

  • 14 weenie September 13, 2015, 9:37 pm

    I just drink tea.

    Anyone fancy a cuppa?

  • 15 Jim McG September 14, 2015, 9:40 am

    Nescafe. And Index Trackers. Get over yourselves. 🙂

  • 16 L September 14, 2015, 9:55 am

    Delonghi? filter coffee and 15 bar espresson machine here, both c. 4-5 years old with a combined cost of maybe £140? In retrospect, the filter coffee maker was dearer than it needed to be, but I was happy to spend an extra few hours of my life working for the luxury of timed caffeine in the morning 🙂

    If it wasn’t for the fact that it was in London, I would be surprised that anyone other than potential barristas attends classes to learn how to make coffee!

  • 17 Minikins September 14, 2015, 11:11 am

    Very funny post, I detect a carefree romantic spring in the step of The Monevator and I can bounce along with it as I have one in mine too ; )
    @M TV – I too love the de Longhi Magnifica – as apparently do Germans who have given it a special award. Much as I love it, I recently sold it for a good price to a Spanish couple who weren’t aware of my own Spanish roots (or I’d have had to give them an Iberian discount ;)) Grinding coffee is gorgeously fresh and aromatic but very acidic and was tearing my stomach apart so I now happily buy readily ground and simply put some in an unbleached filter and after opening the coffee with some cold water, I pour on hot and wait for a piece of heaven and a quickened heart. It’s not quite the same as falling and being in love but it’s a good distraction..

  • 18 theRhino September 14, 2015, 11:17 am

    or this?


    very reasonably priced and for sure something you can’t get in costa (yet); you would be ahead of the game to a certain extent..

  • 19 Tim G September 14, 2015, 11:25 am

    @the Rhino

    I couldn’t resist following your link to the home enema kit. I was particularly amused by Amazon’s usual combo reference: “Frequently bought together – home enema kit, organic coffee for detoxification, and a big bag of Epsom salts.” Sorted!

    A little confused by the fact that the spot below the enema kit is taken by a large advert for “Sex and Sensuality”. Could make for some interesting chat-up lines…

  • 20 M from There's Value September 14, 2015, 11:34 am

    @weenie – Oh go on then, just this once!

    @minikins – incidentally, it was a German who bought us the DeLonghi, and I really rate it for a great espresso. You do have to be careful which beans you use though, as Garraway’s standard blend was way too oily (?) for the machine and made the grounds out into the tray below, instead of them all being caught in the grounds container

  • 21 Tony @ Investing Track September 14, 2015, 1:57 pm

    Great roundup. I don’t drink coffee, although I do love the smell of it.

  • 22 The rhino September 14, 2015, 5:44 pm

    You may not like the smell of my £7 DIY coffee enema. An acquired aroma I would say

  • 23 Minikins September 14, 2015, 10:55 pm

    @tony don’t believe the hype from the Rhino-he’s public enema number 1, I hope you’ll try it and enjoy it one day (coffee, that is).
    I’m probably the only one here qualified to talk about both enemas and coffee anyway with my medical background, I’ve given more enemas than you’ve all had hot coffees..
    On that theme, has anyone ever heard of an Ethiopian coffee which is apparently harvested from cat poop? A Palestinian coffee loving colleague has mentioned this to me before. @TI may be an interesting convo for your barista friend? 🙂

  • 24 The Investor September 15, 2015, 7:04 am

    @Minikins — The Civet cat? 🙂 Yes, it’s the fourth method of refining coffee (others are natural, washed, and the honey process. You can see I’m a keen learner.)

    As it happens, the Barista in question has tried it, says she doesn’t particularly rate it except as a novelty. There are also some ethical/cruelty concerns…

  • 25 Grumpy Old Paul September 15, 2015, 11:06 am

    Never tried Kopi Luwak but heard of it years ago when it appealed to my somewhat lavatorial sense of humour. I believe it is hideously expensive.

    I’m a coffee fan but am also a member of an endangered species, a loose-leaf tea aficionado. Had some in a hotel of all places at the weekend when we were celebrating my mum’s 100th birthday!

  • 26 Minikins September 15, 2015, 10:56 pm

    @Grumpy Old Paul
    Congratulations to your mother! How wonderful! Has she received her royal telegram yet? My grandmother made it to 99. I think a good sherry and game of cards every night helped. She was a teacher and before the Spanish civil war would ride a horse side saddle to teach in remote countryside towns sleeping with a pistol under her pillow as this was before she was married.
    @TI How very interesting, thank you! What a wealth of knowledge this site is..

  • 27 Jeff September 15, 2015, 11:05 pm

    The following machine gets the same average review on Amazon and costs less than £100.


  • 28 Tim G September 15, 2015, 11:19 pm


    Not sure that I follow your logic there. Just because two items get the same review doesn’t make them equivalent.

    Presumably one of the factors reviewers take into account (when they are not giving 5 stars to eagerly awaited but not yet delivered items, or giving 1 star as a means of complaining about a delayed delivery!) is the relationship between price and quality.

    You can find a £250 laptop with a 4.5 star average and a £1000 one with the same average: it doesn’t mean the two machines will have the same specs, performance, reliability etc.

    Personally, I own an Aeropress (4.7 stars, <£30). I love it, but I wouldn't claim that it is just as good as a £500 machine with the same star rating.

  • 29 meglinson September 21, 2015, 1:26 pm

    I wouldn’t normally refer to myself as lucky except when it comes to coffee. 1.5 tea spoons of Nescafe (not even the gold blend but the standard one) is my favourite – that’s one of life’s ‘wealth destructors’ dealt with.
    I go to friends houses with these wealth destructing machines and I don’t have the heart to tell them that I would actually prefer instant.

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