Active investors are engaged investors

A German lift manufacturer was quoted in the Financial Times this week talking about future sources of demand for its products:

“As populations age – and that’s happening in Europe, it’s going to happen in China, everywhere else – there’s a need to put in elevators,” Uday Yadav, chief executive of German firm TK Elevator, told the FT.

“We see that becoming an increasing trend . . . it’s early days, but it’s starting to happen,” he said, pointing to Japan as an example of a country where the process of demographic change was already advanced.

This was an interesting little read to me for a few reasons.

Firstly, I lost a micro-bet with myself. When I clicked through from social media I thought the story would be about Kone, one of the largest lift manufacturers in the world. Kone is a company I’ve run into before when I was a shareholder of a tiny maker of lift buttons called Dewhurst, which de-listed last year. ¹

Never mind – just having this latticework of many hundreds of companies in my head is one of the more esoteric pleasures I get from being an active investor.

The story also added to my sense of the world getting older and more infirm.

This should help me pick stocks. Maybe I’ll pay a smidgeon more attention to a drugmaker talking about an arthritis remedy, or a homebuilder targeting the over-65s with bespoke retirement communities.

But I’d argue it also helps me appreciate where we’re headed as a society, and so informs me as a citizen.

Actively engaged

Clearly you don’t need to read the financial press or company reports to understand trends like aging.

Non-investing-obsessed people make do with news stories and programmes, what they hear from others, and perhaps the odd non-fiction book.

However I do think there’s a particular quality that comes from putting your money where your curiosity and engagement moves you.

Unlike so-called ‘armchair quarterbacking’, being an armchair investor always brings with it the risk of a financial loss.

But beyond that obvious pain – or gain – there’s a secondary scorekeeping element to it that pushes back hard against the self-delusion we’re all prone to.

Red pill investing

We believe at Monevator that most people should be passive investors.

That’s because beating the market through judicious stock picking or tactical allocation has been shown to be a fool’s errand for most underperforming fund managers, let alone us amateur investors.

Nevertheless some of us do invest actively, for our sins.

And to me, one of my rare points of difference with my co-blogger The Accumulator is how it feels like being too passive by contrast can drain the colour – and even some of the underlying truths – from investing.

I’m thinking here of long passive pieces that talk about how ‘equities’ delivered this or that return over some time period – and how they performed versus other assets – without even the merest nod as to what the label represents.

I’d argue that when, in contrast, you always think of equities as so many companies competing in a capitalist system, then you always know you’re betting on human innovation, personal ambition, and risk-taking even when you put money into, say, a S&P 500.

Similarly, once you’ve traded individual bonds of varied coupons and maturities, you will forever see them as explicit I.O.U.s with particular obligations and an expiration date. Not just as building blocks with a certain risk/return profile.

Which in turn means you needn’t consult the historical data to grasp they’ll be smashed by higher inflation, say.

Or at least not be shocked when that happens.

Unaware investors

I have met people over the years with high six-figure sums invested in funds who cannot tell me what equities – or even ‘shares’ – are, let alone bonds.

To a great extent: score one for modern civilisation. Such people can now save and get rich from equities without any whiff of cosplaying a bloke in tights betting on the East India Trading Company in a 1690s coffee shop.

All the same, you will struggle to convince me they are excited about investing – or engaged with the capitalist society they live in – simply on account of their owning a tracker fund.

Indeed the capitalism bit has been neatly packaged away.

A Guardian editorial bemoaning ‘the threat’ of capitalism to pensions would be one quintessential result.

Foreseeing a non-financial return

That’s enough mild inter-factional shade for now. (Come on, don’t be like that…you passive investors have the run of the place on Monevator, with us diehard stockpickers left to do our thing on Moguls. Be magnanimous in victory!)

Let’s return to how active investing can help you see where society is headed.

Here are a few things where I feel investing got me up to speed ahead of my friends.

The death of physical media

I encountered Netflix as a US stock around 2008 or 2009, well before its launch in the UK. A few years before that I’d sold my several hundred CDs (most gathered as freebies as a student music reviewer) for proper money, having watched the likes of EMI struggle with online piracy. Shortly afterwards most of those CDs were worthless.

Weight-loss drugs

Reading the excitement around GLP-1 trials from the likes of Novo Nordisk suggested these would be huge years before Joe Public heard of them. Even a few years ago I was still telling some oblivious UK healthcare professionals about them. Following these drugs also hints at a tougher future for junk food manufacturers and booze companies. That’s yet to play out for sure, though.

Software eating the world

Where to start? The heady growth of innumerable software firms and tech platforms over the past three decades showed the trend to investors long before most of us had advanced beyond Microsoft’s Word, Excel, and Internet Explorer. An interesting case is Amazon’s AWS service. When Amazon started offering on-demand cloud computing infrastructure a few years after the dotcom crash, I saw that big in-house office IT departments were in trouble.

Influencer economy

Nearly a decade ago I put money into two consumer startups whose pitches centred around social media. Not just keeping their corporate profiles updated, but designing and curating products and spaces to attract influencers and to encourage customers to take and share photos on Instagram. I suddenly realised why some of the hippest eateries in London had installed neon-lit witticisms or art installations that customers would then pose beside. Ten years later we all live in that world. (And happily my investments have multi-bagged!)

But perhaps you think these examples are all obvious? Alas such post-hoc normalisation is all too easy.

It’s like when I try to convince my girlfriend that The Beatles were influential. She just hears some catchy but dated pop tunes, and the weird intrusion of a sitar. All the influencing is there in all the later music we hear, but the world was changed and it’s the new normal.

Get a clue

It’s hard to grasp what wasn’t obvious in the past when it’s everywhere today.

But seeing such little clouds when they’re only on the horizon is exactly what I’m talking about.

I’m not really talking about ‘the market’ as a whole sniffing out a technological revolution or societal upheaval. Although it certainly can and does do that.

I’m thinking more granularly and earlier in the timeline.

I also don’t want to imply all active investors have a crystal ball – an infallible perspective that shows them tomorrow’s headlines, even if they struggle to profit from them.

On the contrary, it’s easy to recall when hapless active investors who paid heed to R&D spending, earnings transcripts, or grand corporate proclamations would have done better to buy a pack of Tarot cards.

From 3D printing to NFTs to fuel cells, active investors have been led up more garden paths than Alan Titchmarsh.

And let’s not even talk about the metaverse.

Faulty foresight

As a sidebar, the dotcom boom and bust makes for an interesting case study on insights versus outcomes.

Investors then extrapolated a few key technology developments – and a vast amount of spending – into bonkers valuations for still-profitless companies.

The result was a bubble that soared then self-destructed. Yet all the same, our tech-enabled society proved those investors were right-ish all along.

It’ll be interesting to see if today’s mega-splurge on AI proves a historical echo?

Or for a different example of stock market fallibility, think back to Covid.

I’d been tracking the virus ‘for fun’ with some nerdy friends since around Christmas 2019. And I vividly remember an Asia-focussed dinner date telling me about how “All the factories are closed in China” in early February.

I had my mum isolating soon afterwards. I sold a lot of my shares, too – though not enough, given the turmoil that was to come.

Watching the US stock market continue to climb even as Covid case numbers multiplied elsewhere was discombobulating, to say the least.

Yet just a few months – and crash and bounce later – the market went crazy over work-from-home darlings like Zoom, DocuSign, and Peloton. These were the firms of a digital future that Covid had apparently pulled forward a decade.

Only they weren’t. The vaccines came, and now they languish below their peaks.

The loser’s game

So again, I’m not saying there are easy financial wins to be had when it comes to turning insights into a market-beating advantage.

Quite the opposite!

I actually did okay with my investing decisions around the Covid tragedy – including when to buy in again.

But I can equally well recall my thinking the market looked cheap in mid-2007, before the GFC. I invested more into Lloyds for its chunky dividend… Oops!

Certainly just noticing a sector or theme in the news is probably going to lose you money versus the market, unless you’re some kind of wunderkind trader.

Consider the mega-trend ETF investigation The Accumulator conducted a few years ago. In many cases, TA found backing Big Obvious Developments actually saw you lose to the market.

At the very least, by the time a Big Obvious Development has been packaged into an easy-to-trade ETF wrapper, everyone can see it coming and the gains are probably already in the price – and more.

Mirror mirror on the trading wall

By now you might be wondering – since you’re apparently in the presence of an active investing soothsayer – what should we expect to see next?

Fair, and I’m immediately going to hedge and say AI hysteria is largely crowding everything else out. At least in terms of what my little brain can process.

But here’s a few examples that slouch to mind:

• Retailers have been increasingly complaining about (and taking action over) the cost of online returns. I suspect we’ll look back with amazement that you could buy three sizes of the same outfit, keep at most one, and then return the rest for free.
• A lot of companies are talking quantum computing. You can read about this on the BBC website, so the progress is no secret. But money talks louder than puff pieces.
• UK housebuilders are consistently citing a need to unlock the demand they see. I wouldn’t be surprised if the government relaunches a version of Help to Buy soon. Or if the housing market picks up anyway.
• Defence spending may go more towards software and cutting-edge technology (such as AI-driven drones) rather than tanks and guns, judging by what’s currently exciting investors. (Well, US investors. The Europeans like materiel maker Rheinmetall.)
• Choice fatigue. Consumer giants like Unilever and Diageo have stopped buying breakout brands. Instead they are rationalising. We could also be on the cusp of re-bundling, due to a weariness to pay-up for so many streaming services. (The ad-supported subscription plans of Netflix and Disney are another response to this.)

Yes you can also see such things coming if you’re a diehard passive Boglehead.

However it’s necessary (but not sufficient) to stay alert to the changing world as an active investor. Whereas ‘Vanguard and chill’ is a mantra for many passive investors.

Indeed that hands-off approach to investing is a benefit for most, not a bug.

Stakeholder citizens

Once more with feeling: I’m definitely not saying anyone needs to invest actively. Passive investing through index funds is best for most for sure.

I am however flagging up a lesser-noted pleasure of interacting with the world as an active investor.

In some ways it’s like the world’s biggest and best board game. Think Settlers of Catan meets Civilisation meets your financial future.

A while ago I was lucky enough to meet Lord Lee, the famed ‘ISA millionaire’ who loves to invest in dividend-paying UK small-caps companies.

Already in his 70s when I ran into him, Lord Lee’s investing seems to keep him more engaged with the changing world around him. That’s a model for me.

Absolutely it would be patronising to suggest that you must follow the fortunes of AIM-listed small caps in order to continue to care about UK PLC.

But I think it is fair to say you get none of those benefits if you’re a passive investor. You’ll have to seek your stimulation elsewhere!

Warren Buffett once said: “I am a better investor because I am a businessman and a better businessman because I am an investor.”

I’m sure that’s true. Similarly, I believe I’m a better citizen because I’m an active investor too.

Did active investing ever give you early insights into where the world was going? Let us know in the comments below.

1. Yes Kone is Finnish and the headline states the firm quoted is German. But this clue wasn’t available in the preview I saw![↩]