The pain game [Members]
For MOGULS by The Investor
on March 28, 2025
Want to beat the market? Then you must do something different to the market. Both in terms of tactics and strategy, and in that your resultant portfolio will look different to the market and so deliver – for good or ill – differentiated returns.
Of course, most professionally-managed funds do not beat the market, nor the index trackers that simply try to match it.
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Another reason it should be possible for a ‘dedicated private investor to outperform than many a fund manager’ is because we can invest a higher %age of our portfolio into potentially explosive nano/micro caps that a fund manager wouldn’t be able to right? And that for a large fund manager would hardly move the needle anyway if even if they did explode..
@Algernond — Agreed, I did mention we run smaller amounts of money in the article. The flipside is that most people are not good stock pickers and hence when picking more illiquid stocks they will be liable to do even worse because there’s less ‘skilled information’ in the price.
Set against that, good small caps sometimes drift down for no reason just from a lack of buyers. So one strategy could just be to follow a few micro-cap stockpickers and try to pick-up what they like on cheap days for the shares. 🙂
Ticker typo – Isn’t it VWRL ? 2 locations.
Tracking portfolio returns over the years is really difficult, Even 80/100% returns on the money invested shown in portfolios does not reflect annual performances. Vanguard does a slightly decent job of tracking money inflows/outflows but rest of the portfolio is lacking this. Maybe all these new AI tools can help…..
@flyer123 — Good spot, thank you! Fixed now.
You’d think that after putting VWRL on a T-shirt I wouldn’t get ticker blindness, right?!
Have you seen our article on how to unitise your portfolio to track your returns? It’s the industry-standard way to compare like-for-like when it comes to active management:
https://monevator.com/how-to-unitize-your-portfolio/
I was searching for a new ticker, you know how sometimes you have just a letter difference for diff tickers 🙂
Thanks for the link, will have to re-read-refresh that article, read that long back when there wasn’t much of a portfolio, but now with so many ISAs/SIPPs, finding it difficult to keep everything aligned.
Picking the right ‘right’ stocks is very difficult, I do think a little market timing can have upsides when you are responding to markets becoming overly optimistic/ pessimistic, not all the time but on occasions….
A very personal piece @TI, and a nice compliment to your 2013 three part with @TA starting here:
https://monevator.com/passive-vs-active-investing-episode-1/
Coming late to the party in the comments, I only contributed to the chat on that (as @TLI) in 2023 (part 3, #38 et seq), but both at the time in 2013 and a decade later I was too circumspect to ask the question which (in aroundabout sort of way) I’m now going to ask you (prompted by this month’s @Moguls’ piece), namely:
* You’re obviously very committed to ‘active’ investment.
*We can argue about whether passive is a thing (IMHO ‘no’, because, as I’ve said elsewhere, it involves active choices left, right and centre – not least in what and how to track and in all the asset allocation choices).
*But, leaving all that aside, you clearly do go in for individual stock selection big time, and also for trading into and out of positions frequently.
*Dare I say it, but you’ve even done a fair bit of good old market timing (“Weekend reading: First they came for the growth stocks?” in December 2021 springs to mind).
* Accepted here that you’re (clearly) not so much (unlike me and, I suspect, also unlike @Algernond above) into other active-ish ‘things’ like factors (small minus large, high minus low, winners minus losers) or (like @Finumus) into leverage.
*You’ve also made it pretty clear that you don’t agree (or at least go with) @ZX’s (IMHO well founded) preference for elite global macro HFs (e.g. RenTech, BlueCrest, Citadel, Millennium) for an actively (risk managed) approach.
*However, notwithstanding a selective preference for certain aspects of ‘active’ investment ‘styles’ over others, your own approach in practice is a pretty full on refutation of the EMH (both for its weak and its strong variations).
* And this is not just a theoretical preference against the EMH. The Chicago School of Fama and French (and its empirical realisation in Jack Bogle and the work of Bessembinder) is the basis which index tracking cap-weight investing rests itself upon. Take away that and the edifice topples (hence the hostility elsewhere online, I think, towards Mike Green).
*Yet cap weight tracker funds is the Monevator house recommendation, and always has been.
*So, for me, it does feel more that a bit like “do as I say, and not do as I do”.
*I mean, although @TA is an ideologically commited ‘passivista’, you actually own the site. So it is a bit like having someone who is both the head chef and the restraunt owner who is a deeply commited vegan, but nonetheless will only serve meat dishes.
*It does seem to me, even after all these years (since 2008) reading the site, more than a bit disjunctive.
Did you want to say more on why and how you’ve approached it in this way?
Most blogs advocate for what they do in practice, as that is what they believe in (whatever belief means, here given the context).
Your approach, contrastingly, is unique to what I have seen elsewhere in this regard.
@Delta Hedge — Cheers for the extended comment but I’m afraid I don’t want to give an extended answer here because it’d be thousands of words and still not really explain it.
Really, this whole site and my 1400+ articles on it explain the answer to your question. 🙂
Absolutely when it comes to investing I think most people should do what I say not what I do. That’s a feature not a bug, and I’ve been explicit about it.
I’m not even certain that I shouldn’t. (See the existential section in the pain locker above…)
The site when it began was not purely passive (although I was well-versed in the theory and did suggest most people should invest using index funds). However as time went by and I encountered more investors on and here and elsewhere I became ever more convinced that most people were a danger to themselves when making active investing decisions, and I felt the (then still somewhat novel) passive investing agenda should be the focus of the site, to do the maximum good. So as the site owner I made the – ahem – executive decision to step back and make passive the mainstay of the site.
Me and TA many times discussed dropping active investing (and perhaps my articles with them) from Monevator. But he was always the most against it. Partly it’s because people like to read about active stuff even if they don’t do it. Partly because lots of people invest actively anyway, regardless of what they ‘should’ do.
But also very much because if a poacher tells you that in his experience you should be a gamekeeper, then arguably that carries a lot more weight then when the head gamekeeper badmouths the poachers and scoffs that anyone would ever take up such a pursuit. 😉
Re: ZX and elite hedge funds, I doubt I’ve ever disparaged the Renaissances of this world. If I could invest in the 5-10% or so that are are worth it (i.e. they are not gated and their minimums were not millions and knowing the principle from sharing a seat on the board of the New York Opera) then maybe I would, except I wouldn’t because I enjoy running my own money and I love the game.
Which is the main reason I do it. Yes I have evidence of some ability. Until 2022 a good bit of evidence, latterly more hit and miss. But I find it as enthralling today as I did more than 20 years ago (and several million words written and hundreds of million read later) when I first got started.
I know I’m not alone. There are others like me. So with Moguls, I have a venue to discuss this stuff again, with full caveats and warnings, to a small audience of hopefully likeminded or at least intellectually capable as well as curious peers.
The logo says ‘not for everyone’, I don’t think I could be accused of some kind of bait-and-switch here. 🙂
If someone doesn’t love active investing there’s no point in them doing it at all, not even on a professional basis.
That’s my view, distilled!
@TI – I’m super glad you decided not to drop the active investing from the site.
I think not all people are only passive or active, they can change from one to the other.
E.g., I knew nothing about investing when I discovered your wonderful site back in ~2014, and passive investing was what I needed to get a good foundational portfolio in my first ~ 6 years of taking it seriously. Since March 2020 I’ve become gradually more active, as I needed to do that to have a chance of fat-FIRE’ing soonish. Your active pieces have been a great resource, and also with all the great comments from people like @DH/TLI, @ZX, @SeekingFire , @Finumus ..etc..
When (hopefully not if) I do become fat-FIRE, I’ll go back to being more passive, and be tuning in with more of @TA’s stuff again.
Really thanks for all your great work.
Super appreciate both @TI #8 answer and @Algernond #9 comment above.
@Algernond: you might like this as a combo of small caps and momentum 😉
Each Apr/Oct take 3 highest past 6 months’ return UK small cap funds and hold for 6 months.
Rinse and repeat.
9.18% p.a. extra performance v UK small cap index since 1999 and outperforms (month end to month end) in 282 out of 303 five year periods from Jan 1995 to Mar 2025:
https://www.fundexpert.co.uk/fundresearch/dynamic-fund-ratings-the-evidence.htm
Thinking more broadly about the points raised in @TI’s piece yesterday:
I understand why people are attached to the active v passive labels. I’m not sure how helpful (in terms of descriptiveness) those labels are though. It’s not either/or, black & white, good v bad.
It’s a bit like “Dark Energy”. Sounds really catchy, but it really means nothing much (“smooth tension” would be a more accurate term there, apparently).
The danger of the idea of “passive”, I fear, is that it becomes a default setting for all investment thinking.
Problems need dynamical framing. If we get stuck on one paradigm and one narrative then there’s a danger that we might fail to see important stuff because – in part – we exclude the very terminology which would allow us to identify and parameterise it.
Put another way, the unasked question is the unanswered one.
Cap weight index tracking is fantastic. No doubt about it. Cheap. Captures skewness effectively. Highly scalable. Liquid. What’s not to like?
But you can still have to much of a good thing IRL whatever the theory says.
Chocolate is great when eaten in moderation, but not so much as a staple.
Similarly, going ‘all in’, all the time (even for a great idea like cap weight equity index trackers) might turn an otherwise good idea into not such a good idea – i.e. in extremis.
Fund flows do make a difference to marginal pricing. That’s the essence of supply/demand curves.
And flows can become reinforcing (momentum) and structural (auto contributions).
It is noticeable here that the rise of indexing and auto contribution since 1990 (US) corresponds with the average of the 10 year CAPE etc since 1871 heading northwards, which it wasn’t obviously trending towards before then.
Paradoxically, that itself is probably a reason to continue stay for the moment in cap weight index trackers for heavily passive flow dominated indices like US large caps.
But it could also ultimately give rise to problems if structural net passive flows should eventually reverse (i.e. if ever retirement drawdowns exceed new money in) and also in terms of impaired price discovery as the ratio (now about 1:1 on the S&P 500, accounting properly for all forms of passive) between truly active managers and passive (+ closet trackers) changes in favour of the latter.
This could, in turn, eventually give rise to less marginal liquidity and more marginal volatility; and possibly to a greater risk of negative tail risk outcomes.
So, I think we must acknowledge that, for all its very clear and significant advantages, cap weight index trackers are merely a tool and a strategy, but not a necessary default or a one size fits all inevitable solution in (and for) all circumstances.
@DH.
Thanks, but I think I am being really slow!
I’ve gone to the link you gave, but I don’t see anything about the rules you state in your comment?
(it sounds interesting, and I may start doing something a bit more hand-offs like this again once my micro/nano caps come good!)
Hi @Algernond.
My apologies. FE don’t put the rules on the same webpage as the evidence. They’ve made their site free but it does need a sign up (pseudonymously in my case) to access all the content.
In any event, the rules for their self styled “UK Dynamic Small Cap” portfolio (which, like all their ‘dynamic’ portfolios, is just either a 6 month or a 3 month fund momentum portfolio with either 3 funds, or in 1 case just 1 fund) are (line spacing removed to save space):
“Sectors: (UT) UK Smaller Companies. Fund selection: Best three funds from the sector. Review period: 6-monthly. Our review cycle: April/October. To re-create this portfolio on a different review cycle simply go to Best Funds by Sector > Unit Trusts only and select (UT) UK Smaller Companies. You can then sort the results by 6-month performance and select the best performing funds from this sector”.
And the link (for which you might need to sign up) is at:
https://www.fundexpert.co.uk/fundresearch/portfolio-library/dynamic-uk-smaller-companies-portfolio.htm
Obviously DYOR. If you’re into momentum and UK small caps already it might be of interest though, if only for further research. It has slightly (49% to 57%) underperformed the UK small cap sector average over 5 years but personally I see that as a good sign as factor performance tends to mean revert and IIRC correctly when I first looked at this strategy with FE about 8-10 years ago it was showing (with less data then available obviously) something like 11.8% p.a. out performance overall, since when the rolling figure has fluctuated, as you might expect.
I do like the simplicity of it. Simple beats complex in my book.
Thanks @DH – Definitely when my nano/micro cap multi-bagger quest is over (for better or worse), I will look at doing something like above which shouldn’t involve too much overhead.
Not sure if you’ve read ‘What Works on Wall Street’ by James O´Shaughnessy ? It goes over various Systematic combinations of Value, Momentum, Quality factors, and looks to have a rather good record.
There’s an interesting guy, who has refined it further concentrating on Microcaps (@systvest on Twitter/X). His Substack is a good read (https://systvest.substack.com/p/understanding-systematic-valuemomentum).
Also he’s been on the The Security Analysis Podcast
What a fantastic Substaker – thank you @Algernond.
FWIW, I think one of the biggest practical barriers to doing something potentially profitable away from plain vanilla broad market index trackers is the institutional barriers of the FCA, the PRIIPs and the platforms.
AQR would be my go to but good luck trying to access their full range from the UK.
Likewise with US ETFs more generally including capital efficient ones like GDE ETF or TAA ones like HCMT ETF.
On the active manger front (as @TI’s piece has very eloquently explained), virtually no-one is actually going hell for leather on returns.
Now you should always look down before you look up in investing (a 90% loss needs a 900% gain to break even), that’s true.
But the most important thing is initial position size given the risk.
If you only put 1% in and it falls 90% you’ve lost 0.9% of the portfolio starting value. No sweat there. I honestly don’t understand why the Kelly criterion is not the first thing taught about investing.
But if you’re only going with low single digits (or just 0.5%-1%) it has to be able to move the dial over 20, 30, 40 years of cumulative outperformance (assuming no resizing or rebalancing of the initial position).
So whether its SCV combined with momentum or something a bit ‘nuts’ like the ‘max pain’ (the clue’s in the name when it comes to drawdown risk) constantly leveraged asset momentum rotation idea from Dual Momentum Systems (34% p.a. backtest performance from Dec 1979 to date – albeit I’d quibble with how the changes to the cost of leverage would impact pre-2000 returns); the basic idea is only put in what you’re completely chill to lose, AKA the shrug test.
I’d argue strongly that a portfolio which is 100% in risk assets (global equities via VWRL or such like) over a 40 year investment lifetime is much more anxiety inducing one than one which is 50% in risk off assets (bonds), 40-45% in VWRL and 5-10% in b*t s**t level risk ideas; and is moreover potentially more rewarding if those ideas have sufficient convexity.
Personally, I’m not going to lose sleep if a 1% 3x levered allocation gets nuked by volatility drag
But I do worry about the 50% allocation I still have to unlevered plain vanilla tracker exposure to the S&P 500 (given the valuation concerns there).
Passive investing is wonderful and I fully endorse it.
But it mustn’t become dogma to the exclusion of all other approaches including hybrid ones.
As Friedrich Nietzsche put it “Convictions are more dangerous enemies of truth than lies” – (Human, All Too Human, 1878).
The advantage of small/micro/nano – under covered, under rated, under owned. The only area without systematic price discovery:
https://open.substack.com/pub/dirtcheapstocks/p/case-study-2x-earnings-48-of-net