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, an S&P 500 tracker.
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 you’ll 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.
Score one for modern civilisation. Such people can now invest into and get rich from equities without a 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 as excited about investing – or as 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’ from 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 other folk had got passed Microsoft’s Word, Excel, and Internet Explorer. An especially interesting case is Amazon’s AWS service. When Amazon started offering on-demand cloud computing infrastructure a few years after the dotcom crash, I could see 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. The Beatles’ impact is there in 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 little clouds when they’re still far away on the horizon is exactly what I’m talking about.
Not ‘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 it.
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 an 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 that you get few of those engagement 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.
- Yes Kone is Finnish and the headline states the firm quoted is German. But this clue wasn’t available in the preview I saw![↩]
If single shares are like the movement of individual atoms, and the aggregate market is like temperature, what do you say to the argument that what matters to us societally is the market/temperature, and not the shares/atoms?
But Bessembinder (96%/4%)… Isn’t active in the too hard bucket (the unrewarded idiosyncratic risk) for the median investor, or does dispersion make it all worthwhile? And if you’re a macro investor, do you then have it better (rates/ liquidity/geopolitical analysis; rather than moats, TAM, P&L and balance sheets) or worse than a stock picker? The problem for both approaches is that many more things can happen than will.
Open ended fund mangers are a special case. They invest for AUM preservation not investor returns. Fees, overtrading, passive inflow effects and the need for them to hold cash for redemptions then practically guarantee that they (as a group) underperform broad index tracking.
Isn’t it all in the price (already)? Where’s the edge over the price signals of Mr Market? Not saying the EMH holds in all circumstances (it doesn’t), but you have to respect the price as a rebuttable starting point.
I really enjoy learning, and active investing gives me that opportunity. I have learned so much about different sectors over the years, and it stimulates my brain.
Of course the flipside is having to remember that nobody else cares about lift brands (a terrible affliction looking which they are…) and stuff like that!
But I absolutely agree – I feel more connected to society as I know so much more about how things work than I did before.
And, as per Peter Cundill, there’s always something to do…
> our tech-enabled society proved those investors were right-ish all along.
Nah – they were sort of right but the batting average was not on their side, so not right enough 😉 The echo is across canals, railways, electricity, the internet, and AI
The job of capitalism is to burn investors’ shirts on developing technologies in the early days where there’s no clear winner. And the results are in. Many are called, few are chosen. Tech leading-edge whatnots kill general investment money in the interest of finding out what works, often by eliminating what doesn’t. Creative destruction in a big way.
If you have a good crystal ball, sure, go for it. But leading edge tech is not something where you can buy the haystack to find the needle. The tech-leading-edge haystack is too dear and there are too many ratholes and dead-ends in the uncertainty. We’ve seen it play out that way in tech pretty much every time.
The world gets the win, in general. Most investors in the leading edge tech du jour, not so much. That’s just how capitalism does innovation, it’s not called the bleeding edge for nothing.
The right answer was found, it’s hardly like we don’t use railways, electricity, the Internet nowadays and I’m sure people will use AI in 30 years’ time. But if you’re balls deep in AI stocks because AI will happen, you’ll likely get pasted, because you’ve invested in the dead ends too.
Sure, for keeping your hand in and in interest in the world being active/engaged is one way to do that, fair enough.
It’s a tragedy that so often when people check in their work paraphernalia for the last time they also switch off the curiosity light. Don’t do that. You will never live long enough to make a significant dent in the number of things you know bugger all about, but that’s no good reason to at least try and learn something new every day 😉
Enjoyed that article. Thanks.
Great article as always
Must put a word in for the Passive Investors-it’s a hard investment plan to maintain
The human brain is far happier with constant change-it’s hard wired into Homo sapiens -for good evolutionary reasons
Passive investing is very counterintuitive ie sit there and do nothing and that’s a difficult position to maintain day in and day out-active investing is a much more comfortable way of working
I help subsume my natural instincts by concentrating on items under my direct control ie saving as much as I can,living frugally and watching costs
The carefully selected Asset Allocation is then left well alone to the stockmarket and its miraculous compounding effect
xxd09
Like most things in life, surely it is a spectrum. Passive -to- Active? Analysing my own investments on the equities side, I have 18% in individual equities, which I would class as active, but most I have never traded so does that make them passive? Perhaps.
The rest is in ETF’s but, of those, a good 45% of the portfolio is weighted bets to regions or sectors, not just a plain all world approach, so that slides the scale towards active perhaps? All are choices, all have been informed by reading and processing the arguments. Not all win. (Sound familiar for an active standpoint?)
Utterly agree that any thought and reading around investment is engagement with the world we inhabit. I fills my days and leads me to some interesting conversations with people from areas of life different to my own.
I would add that travel, especially to developing parts of the world has influenced my choices as well.
Do I claim advantage over pure passive (If that is even a possible thing for most) No. I have out performed some years, I have under performed some years but I could put that down to luck. It works for me and keeps me thinking.
I often think of the book The player of games by the late Ian M Banks when I invest, it is a story of the most complex and beautiful game, its players, and the understanding needed to be successful in it.
JimJim
Well I bought a bunch of dividend hero type ITs several years ago for the income stream in a very passive manner – but they are looking very active of late, on an absolute tear! I think realistically they are just proxies for the FTSE100, they certainly seem to behave as such..
Much to my chagrin I’ve only become an engaged investor late in life and it hasn’t taken long to flick the active switch – I’m enjoying the ride, and like @JimJim the line between the active and passive parts of my portfolio seems blurred.
The above is really to get my first post out of the way and an excuse for the following,
in the spirit of interested curiosity, this article piqued my interest – https://www.apolloacademy.com/after-60-40-modern-portfolio-allocation-across-private-and-public-markets/. I don’t believe Private Market investing has been covered yet – perhaps worth an article? Although probably not for mere Mavens.
@Pie — Thanks for commenting, welcome to the chat 😉
I’ve covered private investing quite a bit in our Moguls membership posts, most recently here:
https://monevator.com/how-to-value-and-account-for-private-companies-and-funds-angel-investments-and-crowdfunded-shares-members/
There’s the odd free post site such as these ones:
https://monevator.com/crowdfunded-valuations-and-investment-trust-navs-still-need-to-come-down/
https://monevator.com/venture-capital-investing/
Loved this article. I’m not an active investor and used to argue away with my recently deceased retired father in law who loved how it kept his brain active. Vs me who needs to conserve every bit of brainpower to keep up with the email onslaught at work so passive investing feels delightful.
This article gave me a great perspective on another way to think about the market, so thank you for that.
Of my portfolio that is invested in equities I have around 90% in an All-World ETF, and then 10% in individual stocks, sector specific ETFs etc which I find helps me scratch that itch to actively invest and keeps me engaged with markets. The active 10% is massively outperforming the All-World Fund but I doubt this will last long…
@KTB — Thanks for the nice words! This article has gone down surprisingly well, based on feedback here and elsewhere. Appreciate all the comments as ever.
“Such people can now invest into and get rich from equities without a whiff of cosplaying a bloke in tights betting on the East India Trading Company in a 1690s coffee shop.”
Men in London weren’t wearing tights in 1690. This is the time of Baroque dress, with men wearing breeches and stockings (please see https://en.wikipedia.org/wiki/1650%E2%80%931700_in_Western_fashion). The tights-like garment “hose” had passed from contemporary style a generation earlier, becoming obsolete and archaic in the 1660s or so.
Too right about ‘….interacting with the world as an active investor.’
My investing and understanding of Geopolitics have become inextricably linked (initially triggered by March 2020 for me of course – the reason I started acquiring Gold & Silver).
From a speculative Uranium & rare earths play in Greenland, to coal mining in Bangladesh.
From a recovery play in Ukraine to litigation plays against the governments of India, Congo, Burkina Faso, Mexico etc…
All endlessly fascinating stuff.
> “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.”
This is a great point, put most succinctly. Thanks.
> “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?”
Well, it seems to me that a good investor should be looking at what’s generally considered to have no future, not looking for next trends earlier than other investors.
Elsewhere in the article you talk about weight-loss drugs hitting the business of “booze” companies. However, companies like Diageo aren’t really alcohol enterprises: There are entertainment and lifestyle companies.
Even those on weight-loss drugs haven’t lost their taste for entertainment and a self-image-affirming lifestyle. “Booze” companies whose shares prices are depressed by trend-followers are well worth a look.
No doubt the downsell of “traditional” companies viewed as vulnerable to disruption by artificial intelligence is wildly overdone too, because mildly-engaged investors haven’t considered the possibility that those companies will evolve, adapt and pivot.
Economist John Kay wrote about having to argue with his stockbroker in order to buy shares in a doomed Scottish shipyard at 60p, when the average market participant had completely overlooked that the UK’s left-wing government was determined to nationalise the yard, paying 100p per share. A highly likely win, but only for those who looked beyond the prevailing wisdom that British shipbuilding was uncompetitive and destined to fail: It didn’t matter, because someone else, the UK government, strongly believed that it shouldn’t be allowed to fail, regardless of the business viability. Frontrunning that was the profitable trade.
One should buck the trend, not try to spot it. This is a far more reliable strategy, the risks are lower.
#15 “One should buck the trend, not try to spot it.”
Instead of “skating to where the puck is going to be”, *avoid* skating to where the puck is today but may not be tomorrow…