I’ve recently been judging my investing track record against hindsight – always a losing proposition – yet fun if you have a masochistic streak
Looking up the ten-year performance of my chosen index trackers, I can easily see what I coulda, shoulda, woulda done instead.
Here’s three decisions that haunt me like some ghost of investing past: clanking its chains and wailing “failure! failure!”
Fail 1: Risk factor investing
I was warned. It’s right there in the strategy’s name: RISK.
The theory of investing in risk factors is you can zhuzh up some extra return by putting money into funds tracking baskets of companies with special properties as defined by clever academics.
These boffins had apparently reverse-engineered the secret sauce of stock picking legends like Ben Graham and Warren Buffett. They then published their recipe for the hoi polloi like me to lap up.
Of course, such factor returns weren’t guaranteed. John Bogle described the concept as a “marketing gimmick” back in 2013. Our own Lars Kroijer warned against them, too.
I dutifully did my research, noted the danger of decades of under-performance, then placed my bets on lesser-correlated, ‘no-promises but it’s a sure thing [wink]’ winners like the Value, Quality, Momentum, and Small factors.
With names like that, how could I fail? (Okay, maybe Small should have set the alarm bells ringing.)
More than a decade later and I feel like I’ve backed the gastropod with a gammy foot in a snail race.
My oh-so-clever smart beta, strategic beta, fundamental indexing, risk premium, factor investing (Christ! How many times do we need to rebrand this thing before it comes good?) funds drag themselves around the track in the wake of my vanilla global tracker year in, year out.
And now I’m trapped:
- The angel on my shoulder says a decade of under-performance goes with the territory. I’ve just gotta hold on.
- The devil says the risk premiums are dead. They were diluted by dumb money like mine the moment they were launched as mass market, fruit-flavoured ETFs.
Forgive me ‘St’ Jack (Bogle). I should have listened to your wisdom:
“Fund performance comes and goes. Costs go on forever.”
Conclusion: Keep reading research that claims my favoured factors are not overvalued, just out of favour. Confirmatory bias for the win my friends!
Fail 2: Buying on the cheap
Buy low, sell high. This heuristic has everything. It’s so beguiling, so contrarian, and as diabolically simple as a poisoned chalice switcheroo.
To action the plan just follow these simple steps:
- Load up on assets after a market fire-sale.
- Wait for mean-reversion to turn the tables in your favour.
- Cash in.
Only loser squares buy high!
This school of thought naturally led me to valuation metrics. Touchstones like the Shiller PE Ratio reputedly reveal when a market is a screaming buy, or else a giant bubble set to burst across the face of humanity.
By that light, the US market has been an inflamed pimple of doom for years.
Meanwhile, the UK and Emerging Markets have been the only major regions that looked remotely cheap for much of my investing life.
“Pah!” thought I. “Success ‘tis as simple as tilting towards these cut-price stocks.”
I might as well have cut my throat. The bargains stayed in the basement.
The FTSE 100 was dominated by big banks.
Me as the Financial Crisis lets rip: “Cripes.”
The FTSE 100 was dominated by big oil.
Me as the world catches fire: “Eeek!”
The FTSE 100 is dominated by big pharma.
Me as the world catches Rona: “Swings and roundabouts.”
As for Brexit…
…let’s not go there.
Conclusion: The FTSE looks like a sin index full of tobacconists, arms companies, booze giants, and miners planning to despoil the world’s beauty spots. That’s gotta be good for profits, right? And the US can’t keep climbing forever while China won’t keep filing the horns off their tech unicorns, surely?
The whole world looks like a basket-case. I best stop trying to be clever.
Fail 3: Rigid adherence to evidence-based investing
If an asset class doesn’t have a 100-year track record then I don’t invest.
Equities, bonds, gold, cash, commodities – I understand what these are for and what they do.
But how do you respond when someone invents something fundamentally new (hello, crypto) that could be a game-changer or a ponzi scheme?
Well, if you’re my co-blogger The Investor you scoop it up like a schoolboy at a rock pool. This guy collects securities the way others collect stamps.
If you’re The Accumulator you sit on the sidelines like a hunter-gatherer who can’t believe this farming lark will ever catch on.
Meanwhile, you torture yourself with crypto-millionaire fables – because even a caveman has to have a hobby.
Perhaps I should have started that fun money portfolio after all. That would help me escape my ideological constraints and silence the second-guessing.
Conclusion: The small probability of a major pay-off is tempting but I haven’t got enough money to chase every pot o’ gold story. Ethereum, meme stocks, NFTs. The opportunities to invest in things I don’t understand are endless and the casualties under-reported – like victims of the Onecoin scam.
Grateful for the investing mistakes I didn’t make
Comparing yourself to humanity’s fat-tail winners is a curse of the modern age, but I have a better idea…
Think about what went right.
I made it to financial independence, early. I’ve got enough to live on for the rest of my days. I can’t compete with my neighbour’s lambo but on the global scale, I hit the jackpot.
I’m happier than I’ve been for… decades. Wow! That realisation just fell out of my fingers as I was typing. It kinda stings my eyes.
I’ve had my share of luck. So it’s okay that I didn’t predict a cat GIF would be worth more than my house.
One happy coincidence for me was stumbling upon passive investing all those years ago.
That simple, replicable, stick-with-it strategy was never going to let me take a bath full of money.
But it’s allowed me to enjoy life’s other riches on tap.
Investing mistakes? I’ve had a few
The mistake this article makes is to view the past through a cock-eyed monocle of failure. Hindsight is 20/20 but it’s blind to chance.
Everyone loses some battles. You just have to win the war.
Take it steady,
The Accumulator
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The BBC podcast (The Missing Cryptoqueen) about the Onecoin scam is well worth listening to. Definitely confirms the age old adage of “if it sounds too good to be true…” as well as a reminder not to invest in things you don’t understand. But then again, how many of the people who put money into BitCoin understand it?
Look on the bright side.
You could have invested in Bitcoin in 2009 and been this guy: https://www.bbc.co.uk/news/uk-wales-55658942
Glad I didn’t listen to the “rational” pundits who said not to buy crypto last autumn, and went in with a DIY index fund of top 30 coins weighted by market cap (the same pundits taught me something after all). I did sell my Dogecoin just before Elon Musk went on TV with it, for a 7000% gain. That’s probably more than a lifetime of Vanguard gains.
The fact that someone lost money on the Onecoin scam is just as irrelevant as the people who lost money in stocks of companies that went bust. Why would you put all your eggs in one basket? I wonder when people are going to wake up to the fact that crypto is just another market alongside the stock market and you can index it too. Oh well, I’ll probably be richer by then.
@Neverland, or the guy that bought 2 pizzas with 10k bitcoins back in 2010 (£313 million according to google exchange). Apparently overall he spent over 100.000 bitcoins in stuff like that over that year.
Very similar experience to my own with respect to factor, etc bets. Over the last 10 years I have held US listed ETFs for US small caps, US small value, US REITs and US minimum volatility (not quite 10 years). All have underperformed my cap weighted US total stock market ETF. The only bet that does seem to have paid off is FTSE All-World ex-US Small-Cap ETF, which has outperformed the FTSE All-World ex-US ETF (I don’t hold this but have equivalent investments) by just 0.4% per year.
All a bit disappointing, but I hold on in the hope of a return to historic outperformance.
Moral of the story – buy the market if you want to avoid disappointment.
As noted and on the positive side, there are lots of things I could have invested in that would have done far worse. Overweighting the UK market is one that immediately springs to mind.
@TA
Was this article prompted by The Investor linking at the weekend?…
I read that article and started looking into multi-factor ETFs. Good job I couldn’t find one on my platform! 🙂
I stick with the boring stuff because its so much work to have investment theories and to put them to the test. However you’ve always struck me as doing the homework it takes to succeed. I have to imagine your long term results will be much better than most of ours. You are doing amazing! You have reached financial independence, that’s so rare and to be applauded! I’ve been there awhile, largely because I’m an old guy, and you just feel lighter, and indeed happier. Congratulations.
Is there any love for the idea of investing in long-term ‘Themes’?
For example, I can’t imagine a future which doesn’t involve very profitable high-technology companies. If I look ahead for 10 years, I cannot imagine a situation where high-tech has fallen out of favour.
Of course, the individual winning companies will have changed – but that is the job of the fund manager to adjust her portfolio.
Anyway, here are my three picks:
– Technology
– Biotech & Healthcare
– Clean Energy
@ Christian – The Missing Cryptoqueen is a great listen and doesn’t end well i.e. the bad guys aren’t caught and similar scams sprang up liked weeds to claim new victims. First time, I came across Onecoin was a random recommendation from YouTube – when the scam was in full swing. It stank to high heaven as far as I was concerned. Still, I’m naturally cautious and that instinct has kept me out of Crypto more generally. (I’m not saying crypto is a scam btw. Onecoin had all the hallmarks.)
@ Neverland – absolute classic. There was a similar tale of a guy in the US with millions in crypto trapped on a hard drive he’d forgotten the password to. He had 10 attempts and was down to his last 3 or something. Sounds like a Twilight Zone / Black Mirror episode.
@ Serge – congrats on your good fortune. There are lots of markets out there you can ‘index’. I don’t index private equity, commodities, junk bonds, and many other markets. Because those haven’t delivered stellar returns recently, you don’t hear from many people about them.
There’s a good interview here with Bill Bernstein on identifying bubbles:
https://shows.acast.com/the-new-bazaar/episodes/bad-bubble-behavior
@ Naeclue – it was a lot simpler than we realised, eh? Just buy the S&P 500. Leave it at that 😉
@ NewInvestor – haha. Lucky escape! One day my multi-factor punt will come off 🙂
The piece was prompted when I reviewed someone else’s portfolio. They made different mistakes. Mostly being influenced by the mainstream press and the ‘research’ being spewed out by large UK platforms.
@ steveark – that’s a lovely perspective. Cheers. The biggest lesson learned for me is keep it as simple as you can. And don’t worry about getting rich. Sure, I’d love to have made a fortune on crypto or cat gifs or whatever. But I doubt it would move my happiness needle. Better to count my lucky stars than my money.
@ Stephen – plenty of love for the idea but it’s a total crapshoot. It’s not about whether these sectors have a future, it’s about buying in at the right price. Check out these articles to see how theme investing has worked out using a longer term lens:
https://monevator.com/sectors-themes-megatrends/
https://monevator.com/10-year-retrospective-investing-in-the-future-with-specialist-funds/
The main trick is to not spend or lose all of your money.
Getting a -50% return is better than not having the money to invest because you spent it all.
My own financial missteps are too numerous to list but you learn, adapt and avoid – so it’s better to have invested and lost than to have never invested at all.
Accumulator,
Your links to past ‘Trend’ articles give me encouragement!
The medium-term performance of Tech and Healthcare sectors are at the top of the tree, and I will be surprised if that doesn’t continue.
Clean energy was easy to dismiss back in 2008. Plenty of politicians did so (and they are the people who spend Taxpayer’s hard-earned money).
Do you see any politicians dismissing ‘Clean Energy’ now? They are falling over each other to spend more – and that is worldwide trend.
I’m not convinced that ETFs are the best platform for these ‘Thematic’ funds. It seems that a team of active investors, looking for new disruptor stocks or ongoing leader stocks might be better (SMT, ATT, ARKK, WWH etc.)
Mistakes are but learning opportunities, I have a share or two that have gone to zero in my past. I learned from them. I have a fer that have trebled. For those I consider myself lucky. Mainly passive with a little naughty active is now my mantra. Basics covered and a little fun. I can afford to be a bit wrong for a lesson learned.
JimJim
A few active positions is a bit like playing the lottery. Nobody *really* expects to win the Lotto but it’s still fun to dream.
Most of my risky punts are in EIS startups… at least that way they can only go to ~40%, not to 0, and if they go to the moon the tax man gets nothing.
Just a shout all to all those ‘sophisticated investors’ ‘making a fortune’ on [insert shit name]coin
Isaac Newton lost a large fortune in the South Sea Bubble after previously making a small one out of it. Source: https://www.cnbctv18.com/economy/market-mania-the-south-sea-bubble-that-ensnared-even-sir-isaac-newton-8304691.htm
John Maynard Keynes was technically bankrupt in 1920s speculating on currencies. Source: https://www.theguardian.com/business/2016/jan/12/john-maynard-keynes-a-great-economist-but-poor-currency-trader#:~:text=The%20study%20found%20that%20Keynes,funds%20from%20his%20social%20circle.%E2%80%9D
So there are only two possible answers to this conundrum:
(a) You are smarter than Newton or Keynes
(b) Survivorship bias; you are just lucky
Hint: its (b) you are lucky, feel free to take up skydiving
@ Andrew – agreed. We humans love a lottery 😉
Speaking of which…
@ Stephen – you saw the results for China, right? Everyone predicted China would grow. China grew. The rewards have not accrued to investors.
Clean Energy not easy to dismiss in 2008. Climate crisis was already high on the agenda. Remember Obama’s efforts to bring the US into line – culminating in him cornering Xi Jinping in Paris. Meanwhile, Clean Energy developed apace. That’s why the cost of solar and wind has dropped to the point where politicians are falling over themselves.
None of this tells you whether you will be rewarded as an investor. It’s no secret that tech and healthcare are important. What matters is the price you buy in, and whether that industry’s profits subsequently exceed expectations. If it does then you can expect your future returns to exceed those implied by current valuations.
If the industry falls short then you’ll have overpaid – future returns will be weaker than you hoped.
Did you see the chart for the air industry over the long term? Investors have not been rewarded. The air industry grew from nothing into a major part of the world economy. But it persistently underdelivered against expectations. It didn’t deliver returns that matched or exceeded its aggregate valuation.
If big tech delivers poor returns in the future it won’t be because we’ve given up on the internet. It’ll happen if and when they can’t deliver profits that justify their share price.
Accumulator,
Interesting point of view.
Investing in China is geographical investing. I’m happy to invest in, say, technology stocks from anywhere in the world.
There might have been a time when the Air industry was a winning bet. It wasn’t in my investing lifetime. During those 45 years, it’s always been a race to the bottom. Cheapest has ruled.
Regarding Clean Energy, you rather make my point for me. Obama trying to convince the biggest polluter, and others, that climate change was real. Now, no politician would dare to challenge that idea. I remain less than totally convinced by the climate change industry, but it’s where the money is being spent in ever increasing billions.
The tech and drug industries will continue to introduce ‘new’ products and services that sell like hot cakes.
We’ve come a long way since we were all being told to hold 70% of our investments in a UK tracker fund.
The future will be interesting!
I should add, that I’ve been wrong, big time, on many occasions…
@ Stephen Almond – I think TA’s point is that this has already been priced in by the market and the share prices are fully valued and reflect your (probably correct) view already.
It’s unexpected returns that reward, not expected returns.
All you need to do is live well below one’s income. Then invest the remaining income into a world tracker. Never look at the pot. Never just check on the pot. Simply just invest,invest and invest. Read the newspaper but never act on it. Come back in say 10 years and you will be FI. Or, at at worse, you have an enormous pot of money that you a a normal person never believed was possible. Its actually incredibly easy.
Though, one should read Clausewitz about how war is incredibly simple but it is actually not because so many do not have the discipline.
Hak,
Great advice if your income is sufficient. Someone on minimum wage might just laugh?
For most investors, the advice is excellent. Just today I saw a chart indicating that the S&P 500 is up by an average of 7.5% over the last 20 years. The average US investor is up by just 2.9% over the same time period…
Then there are the people who treat investment as a serious ‘hobby’. Some don’t want it to be simple and average. Some want to be striving to beat the worldwide average.
By the way, I’ve also ‘known’ the right path to take on previous occassions. The last major one was dividend investing. It was successful in bringing in a reliable steady income. Unfortunately, the dividend paying stocks and funds badly lagged the stockmarket in total return – not acceptable to me.
It takes all sorts…
@ Stephen – The climate industry has sold a lot of solar panels and wind turbines in the intervening decade. For your thesis to stand up, you have to explain why that didn’t lead to great returns. It isn’t because the product didn’t sell, the industry hasn’t advanced, or hasn’t attracted investors.
China and airline industry – both had growth narratives which materialised but didn’t reward investors as expected.
Looking at other markets that didn’t succeed is key to seeing the missing part of the puzzle – explained by Brod more succinctly than I can manage.
Alternatively, look at the predictions which proved false – just don’t fall for hindsight bias.
Anyway, good luck to you. I love the idea of theme investing and I’m not trying to be critical of your personal approach.
I offer this up because it’s an interesting point of debate that many investors grapple with.
@Stephen (#21)
For most of my working life I was taking home less than someone working 40 hours per week on minimum wage, because I worked less hours (the early years I worked the 40 hours). I still saved/invested enough to retire early and comfortably, though considerably less than many on here are planning for.
So minimum wage may well be sufficient for FIRE, if expensive drains on ones resources are avoided.
Passive investing in the S&P 500 or an ETF like VWRL makes sense to me apart from one conundrum that I’m yet to find an answer for. What do you do in a bear market, or major market correction?
VWRL on 1st July 2021 was almost exactly the same price as it’s close on Friday so a passive strategy has netted zero returns over the last three months, yet has cost through opportunity costs, and even (abysmally) low interest rates.
A bear market looks a strong possibility so what’s the best passive strategy to adopt? Hang in there hoping time will restore the index growth? Pound cost average as the index falls? Find a negative correlation passive fund/ETF to hedge? Sell and get back in at a lower cost (the dreaded market timing approach)?
A bear market could last for years gradually grinding away passive fund profits that could take years to recovery.
Can anyone shed light on the best passive investing approach to adopt when Mr Market decides to be nasty? I’m genuinely puzzled by this as very few people mention this when discussing passive investing. Thanks.
EcoMiser,
You should be out there explaining to minimum wage earners how they can retire early. That is a gift you should not keep to yourself.
“if expensive drains on ones resources are avoided…”
Is that housing, heating, food, transport, clothing, children, tax etc.?
I’m spreading it here, and on MSE.
Children and tax are definitely to be avoided, clothing is necessary, but following fashion isn’t.
Transport – I did a lot of bike riding and walking, and used buses not taxis for longer distances.
Food – my local supermarket usually has nutritious, tasty food at bargain prices.
Heating – I only run the heating when I’m cold.
Housing – buying (Band A house) is cheaper than renting – or was for me.
But really I was meaning the booze and ‘baccy, take-away meals, premium channels and other costly habits so many poor people seem to find the money for, instead of saving up for something more permanent.