What caught my eye this week.
A friend of mine used to nag me to teach him how to invest. Every time I’d (more or less) say just have an emergency fund, mildly overpay your mortgage, and put the rest into an all-in-one [1] passive fund.
But my friend wanted to know how to “really” invest.
In the end I agreed on one condition: they’d have to pay me every week for lessons that would go on for several months. These lessons would start from ground zero. And we wouldn’t even get to what he wanted – stock picking insights – until we’d gone through hours about cash, bonds, inflation, risk and rewards, indices, and so on.
Feeling sure the next message I’d receive would be a request for a suitable one-shot tracker, I put my feet up – only to be hear a ping moments later with a one-word reply.
“Deal.”
Now there’s a lot I could write about my subsequent experience of face-to-face teaching, but we’ll save most of that for another day. Suffice to say I didn’t charge – it was only a bluff – and I even got some Monevator materials [2] from it. My friend generously gave me a gift voucher at the end of it all.
And about halfway through, I started looking forward to these lessons.
It’s true that if you want to understand something, it’s a great idea to try to teach it to someone. (Sometimes called the Feynman Technique, I learned this week [3] from Monevator.) Maybe I also liked the sound of my own voice. I started wondering if I had a knack. Perhaps I could make a new side hustle out of it – should I de-cloak and provide Monevator-themed investing workshops in London?
Don’t worry, you didn’t miss the invite. About three-quarters into this experience something happened that put me right off teaching – and indeed made me wonder (again) if people can really be taught much at all.
Copa, Copa-bananas
I arrived for week 16 or 17 as usual only for my friend to bound up to me with a “hah!”
Long story short, they told me that they’d just received the latest report from their active Latin American fund, and it had returned (something like) 30%.
So there! See, I’d kept saying use passive funds, but here was an active fund they’d selected before they’d even had these lessons, and it was up 30%! So active funds could be amazing! Sure index funds were all very well, but why not find more winners like this?
A thousand sighs.
You see, we’d been through everything that shouldn’t have made this conversation possible.
I’d never said active funds couldn’t deliver good returns. I said they tended in aggregate to lag the market return.
I’d never said you couldn’t be lucky. On the contrary I said luck can happen to anyone, and that it can be very misleading when it does.
I’d stressed the need to think in terms of the whole portfolio, and over the long-term. How was his overall actively-tilted portfolio doing? Not how was one fund up some particular year.
But most of all, I’d noted again and again the need to compare any returns to a benchmark.
It was great to hear his fund was up, I said, but how did it compare to the benchmark?
My friend didn’t know. My friend hadn’t thought to check. My friend thought I was expressing sour grapes.
A thousand and one sighs.
And don’t let me teach your kids.
Benchmark pressing
US writer Sanjib Saha tackled this subject well in a post for Humble Dollar [4] this week:
It baffles me that people often favor stock-picking over index funds – and yet they fail to measure their portfolio’s performance against a proper benchmark.
I’m not talking about those who buy a few individual stocks for entertainment or education. For them, it’s a worthwhile pastime and the stakes are low.
But there are others who ignore the evidence and arguments against active management, and devote serious money to picking stocks and timing the market in hopes they’ll earn market-beating returns. This group includes a number of people I know—folks I otherwise admire for their intelligence, critical thinking and self-awareness.
These acquaintances are do-it-yourself investors who actively manage their investment accounts, and they do so with confidence. I’ve probed a little to find out what lies behind this confidence.
My conclusion: Improper benchmarking is a common cause. In other words, many think their strategy has played out well, but—in reality—their investments have lagged behind an appropriate market benchmark.
If you’re an active investor trying to beat the market, I think you should unitize [5] your portfolio. This will enable you to track and compare your returns exactly as professional funds do.
But will you? Who knows… 😉
Have a great weekend!
From Monevator
Asset allocation strategy rules of thumb – Monevator [6]
What do 6,500 clicks tell us about UK FIRE? – Monevator [3]
From the archive-ator: Seven surprising things you may not know about Warren Buffett – Monevator [7]
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1 [8]
Investors trapped in Woodford’s £3bn fund could lose 43% in wind-up, says leaked estimate – ThisIsMoney [9]
Number of new homes built in England hits a 28-year high – ThisIsMoney [10]
Question mark over Chilango, which recently raised £3.7m in 8%-paying ‘Burrito’ mini-bonds – City AM [11]
Events in Hong Kong reveal the thin veneer of civilisation [Search result] – FT [12]
[13]
Acting on the advice of doomsters [14] would have cost you dear [Paywall] – FT Alphaville [15]
Products and services
Vernon Building Society the latest to offer 100% mortgages to [parent-backed] student landlords – ThisIsMoney [16]
Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter [17]
25 years of the National Lottery… – ThisIsMoney [18]
…but buying shares instead of lottery tickets would have returned nearly 2.5x your money – ThisIsMoney [19]
Klarna: Beware the impact on your credit score. [Actually, just beware] – Simple Living in Somerset [20]
Family homes for first-time buyers – Guardian [21]
Comment and opinion
Factor farming and the value of perspective – Portfolio Charts [22]
Bernstein says stop when you win the game – White Coat Investor [23]
Common plots in economic history – Morgan Housel [24]
Vanguard won the loser’s game – Morningstar [25]
How to build a compounding machine – The Escape Artist [26]
Compared to what? – Seth Godin [27]
Meet the young entrepreneurs who used tech skills to make their side hustles a success – Evening Standard [28]
The case against REITs [Nerdy] – Factor Research [29]
Random colon special
Tim Harford: on why we fall for cons [Search result] – FT [30]
Ceteris paribus: on generational housing inequality – Indeedably [31]
Signal failure: on the transience of valuation metrics – Humble Dollar [32]
N=1: on the persistent problems of low sample size – Of Dollars and Data [33]
Naughty corner: Active antics
The price of excellence – Novel Investor [34]
Merryn Somerset-Webb: In search of an investment to last a lifetime [Search result] – FT [35]
Non-intuitive lessons from the man who solved the market [Also video at end] – A Wealth of Common Sense [36]
Value has never been this cheap versus momentum – The Big Picture [37]
Flexible friends: Investment trusts that have got your back – IT Investor [38]
Public investors signal it’s a buyer’s market for money-losing startups – Crunchbase [39]
Politics quarantine box
Tory majority ‘bad outcome for country’ due to Brexit implications, says [former Tory] David Gauke – BBC [40]
Martin Wolf: Irresponsible election promises will hit brutal economic reality [Search result] – FT [41]
Anger after The Sun photoshops out WW2 veteran from Remembrance Sunday service – Tom Pride [42]
[43]
General Election 2019: What are the six biggest challenges for the UK economy? – BBC [44]
Kindle book bargains
Radical Candor: How to Get What You Want by Saying What You Mean by Kim Scott – £0.99 on Kindle [45]
The Wealthy Retirement Plan by Vicki Wusche – £0.99 on Kindle [46]
RESET: How to Restart Your Life and Get F.U. Money by David Sawyer – £0.99 on Kindle [47]
The Complete Guide to Property Investment by Rob Dix – £0.99 on Kindle [48]
Off our beat
My night in a millennial hobbit home [Search result] – FT [49]
Iceland’s big Bitcoin heist – Vanity Fair [50]
Venice Council flooded moment after rejecting climate crisis plan – Guardian [51]
Homocide is declining around the world because the world is getting older [Research] – Quartz [52]
When ‘tears of joy’ emojis turn into frowning faces [Search result] – FT [53]
I thought I could never love my large nose – but then I had my portrait painted – Guardian [54]
If not now, when? – The Financial Bodyguard [55]
And finally…
“It is both easy and dangerous to categorize someone who behaves differently from you as ignorant, wrong, or even thick-headed. Today’s world requires a more sophisticated understanding where you value a person for his or her strengths or weaknesses.”
– Thomas Erikson, Surrounded by Idiots [56]
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- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩ [62]]