Which is more important in your world: knowledge or skills? This question is the fulcrum of an ideological battle being fought over our education system, and it’s a debate that also has ramifications for DIY investors.

• The champions of knowledge believe we need to command certain basic facts to operate effectively in society – the essentials of science, literature, history, and geography. Without these fundamentals, you’re like a driver who can’t read road signs or markings.

• The advocates of skill argue that a robotic recall of verb conjugations and the Kings of England should take a back seat. They favour building prowess in problem-solving, debating, hypothesising, and so on.

While the obvious answer to my opening question is “Can I have both, please?”, I believe that knowledge is far more important to a DIY investor than skill.

Licence to skill

I spent a long time at the beginning of my investment journey furrowing my brow over the fact that I didn’t know how to read company accounts, or work out the discount rate of future cash flows, or have the seemingly God-given ability of my peers to declare the market ‘fair value’.

Such skills seemed like concealed weapons. You’d only glimpse a flash, enough to let you know ‘they’ could slip through the investing maze like ninjas. But the application of these powers was as shadowy as their utterances of success.

Now I just don’t worry about it.

Even talking heads in the fund management industry are happy to go on record to say that skill is so abundant in their field that the winners and losers are mostly separated by luck.

And that suits me. Because whereas skill might let you play in the deep end of the pool, knowledge enables you to stay safe in the shallows.

It’s the difference between taking a couple of martial arts lessons and walking in to the wrong pub shouting “I’ll take you all on”, and knowing enough to avoid staring at the shaven-headed gentleman with a spider-web tattoo on his face.

The basic facts are much easier to acquire for an amateur than superior skills. Knowledge is an all-you-can-eat buffet in the digital age. You can stuff your face with it via blogs and books.

The only question is what you choose to swallow.

Knowledge Base Alpha

My research quickly taught me to stop asking the question that all my non-investing friends ask:

“What’s hot?”

It doesn’t matter. By the time an asset class is hot, it’s probably already too late to make big money.

I don’t worry about tips from commentators or newspapers. Even if they throw the dart in the right direction, the smart money has already moved on.

The market is the consensus of expectations on the future of a stock. Only unexpected events can shift the price. How can you predict the unexpected? The short answer is: you can’t.

I know that diversification is the only free lunch going. I load up on all the useful asset classes while resisting the siren call of ‘the next big thing’.

I understand how asset classes work. I know that equities are volatile and that nothing is truly safe. If the market crashes I won’t panic because I know it will probably recover. I won’t hunker down in cash, refusing to believe in inflation.

BRICs? Gold? Hedge funds? The Fear Index? Low vol ETFs? High yield funds? I know that keeping up with fashion and labels will cost me dear.

Behavioural finance tells me that I’m a pitiful collection of psychological defects, about as capable of self-discipline as a bonobo at a swinger’s party.

The more we learn, the less we know

In the face of all the evidence that I can’t market-time, pick winners or even trust myself, passive investing using index funds is the only strategy I feel confident enough to stake my financial future on.

Sure, I love reading yarns about the prospects for gold, timber, or Lego bricks, but I now know that’s no basis for a portfolio.

My best bet is to invest in a diversified portfolio of low-cost trackers and sit tight.

Doing very little sounds too easy. In some ways it is. Portfolio maintenance costs me less than an hour a month.

But it’s simultaneously the hardest part of passive investing.

Surely I should be doing something? Anything? Surely I’ve got enough skill by now to test my mettle in the market with more active investment strategies?

No. I’d be better off composing a passive investor’s prayer that wards off temptation.

Staying on the straight and narrow is hard, but knowledge and education are the best way to keep on track.

Take it steady,

The Accumulator

What caught my eye this week.

Rummaging around to select an old post from the Monevator ‘archive-ator’ each week can be bittersweet.

On the one hand, it seems I used to be smarter, wittier, and more productive.

But a compensation for these memento mori moments is coming across those little nuggets that have aged rather better than me.

Take these comments on tech stocks from December 2010, in a post about what I called the investor sentiment cycle:

For a contrasting unloved sector, consider technology companies.

It’s hard to remember a time when half the office owned shares in nonsense companies like Baltimore, Webvan, and NTX. Yet it was only a brief decade ago that the Dotcom stocks were doubling in a month on a good press release and a name change.

Today roughly nobody except institutional investors bothers with individual technology shares.

Yet the Nasdaq tech market in the US has been quietly beating the Dow and the S&P 500 for months.

Maybe the seeds are being planted for a new boom in technology share investing:

• The first shoots will be obscure magazine articles on the Nasdaq’s recovery.

• Then you’ll discover a friend or a bulletin board poster who has tripled his money betting on cloud computing micro-caps.

• Perhaps Facebook or Twitter will float for what will seem a crazy valuation, but will look positively modest a few years later.

…and so on.

It was very hard for most people to care much about tech stocks in 2010. That was why I used them as my illustration.

Yet by the end of 2019, the tech sector had proven the best place to have been invested for a decade.

And 2020 has only kept that up with knobs on!

I don’t bring this up (entirely) to blow my own trumpet. Digging through the archives also reveals plenty of howlers. (London residential property is massively over-priced in 2007, anyone? Oops.)

Rather, it’s fun to see that Monevator is now so old we’ve actually been around to see some of these cycles play out.

Tech’s unexpected recovery since 2009 proves the point I was making. Investing and the economy are cyclical, and investor sentiment can be downright faddish.

Never expect the status quo in the markets to hold forever.

It won’t.

Working from home poll

Exciting additional news: the results are in from last week’s poll. Over 2,000 of you voted to say you would prefer to work from home:

So two-thirds of Monevator readers would like to work from home most or all of the time. Interesting!

I guess the remaining 4% are brain surgeons worried about the carpets.

Have a great weekend.

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What caught my eye this week.

Fashion shop ASOS reported full-year results this week. Revenues were up a fifth and profits surged, as the online retailer found itself with a – cough – captive audience during lockdown.

In the mercurial way they are wont to do though, its shares actually slumped despite this good news.

Everyone knows business is booming for online retailers, and ASOS shares have been on a tear for months. So like a seasoned Tinder swiper, investors focused on the negatives.

ASOS’s management fears its 20-something customers are set to suffer more job losses. That’s even assuming they’ve got anywhere to get dressed up to go to, with much of the country lurching into increasingly ubiquitous ‘local’ lockdowns.

Also, customers have begun to return a lot of what they buy, just like they used to in the good old days.

For a few months earlier this year, a sort of Blitz spirit saw most shoppers buy only what they felt most likely to keep. But more than a few have now resumed their habit of ordering with abandon like Julia Robert’s Pretty Woman run wild in Rodeo Drive, only to return most of it to ASOS. That’s a big drag on margins.

I suppose it’s encouraging in a sense. A hint from the resilient younger generation that things will go back to normal someday, spendthriftery and all.

Office politics

I wondered about whether we’ve changed and what will go back to normal before. It still seems up in the air, at least from the perspective of UK citizens who find themselves restricted again. (I daresay the existential questions are less prevalent in virus-free South East Asia.)

One place where the narrative is especially all over the place is working from home.

I’ve read countless reports from property companies this year that talk a good game before admitting their offices are open, yes, but mostly empty.

And it wasn’t long ago that Boris Johnson was urging people to go back to work, eyeing city centers that remained more ring doughnut than jam-packed.

But even before the second wave, it wasn’t clear whether people actually wanted to go back to the office.

A study by UK academics found that 88% of employees who’d had a taste of working from home during lockdown wanted to continue to do so, at least in some capacity.

Nearly half said they wanted to mostly work from home in the future.

Set against that are regular soundings from those who are finding working from home a strain, if not depressing or distracting.

As one person quoted by Slate put it this week:

I didn’t think I would miss the office because I’m an introvert … until I was a few months deep into full-time WFH. I almost need the external accountability of going into the office.

Otherwise I tend to procrastinate and lose focus, and as a result I’ve really seen my work quality dip and my stress level go up as the months have gone on.

I recently got the opportunity to come back into the office on a part-time basis and I feel so much more productive and happy.

I have worked from home for most of the past two decades. I’ve long considered it one of the secret joys of modern life. (I did break the omertà and tell you so).

Everything is easier without a commute or crowds at the shops, and with most of your chores done during screen breaks.

Not to mention you’re more likely to be in for those online deliveries!

Well, that cat is out of the bag. We’ll see how many newfound freedom lovers can transition to at least partially working from home, and how many are made miserable when the option is snatched back from them.

What do you think? Let’s have a rare Monevator poll:

I don’t expect our readership to mirror the general population. But it’ll be interesting to see what you all think.

If homeworking is here to stay, then some companies face a reckoning. You can definitely run a business with many or even all your workers at home (I have) but it must be set-up that way for the long-term. Institutional memory and goodwill got firms through the first lockdown. But those are wasting assets.

Have a great weekend, as best you can where you are.

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