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Weekend reading: Are you one of the dying breed of gentleman investors?

Weekend reading

Good reads from around the Web.

Here’s an interesting graph via Business Insider showing who owns the US stock market, and how that’s changed in the post-war period.

A few interesting things to notice – the still small impact of ETFs, the plateauing of hedge fund’s presence in the market, and the big retreat of pension funds.

But most revealing is the demise of ‘household’ ownership of equities:

(Click to enlarge)

It seems the individual investors who used to dominate ownership of the US market have largely thrown in the towel on buying shares themselves (although much of their allocation toward equities will now be in mutual funds).

When Warren Buffett was getting started in the 1960s, he was up against amateurs. Today any self-directed stock picker is playing against professionals.

For most people that’s a good reason to invest passively, but for one or two active diehards who think career risk dominates fund manager’s decision making, it might just be an opportunity. (The key word being ‘might’!)

DIY is RIP

Felix Salmon doesn’t see those private investors coming back. Writing for Reuters, the blogger notes that real money share trading volumes are still falling, as shown in this graph:

(Click to enlarge)

‘Real money’ is mainly what we think the stock market is about – someone making a decision to invest their money in a specific company – as opposed to passive flows from ETFs or the frantic shuffling of high-frequency traders.

And such volumes are way down.

Perhaps this is because everyone has become a long-term buy-and-hold investor, savvy about the perils of over-trading?

Hardly. Salmon is surely right when he ventures:

I think that what we’re seeing is the slow death of the stock-market investor — the kind of person who subscribes to Barron’s, idolizes Warren Buffett, and thinks of stock-market investing as a do-it-yourself enterprise.

During the dot-com bubble, lots of people thought they were really smart when it came to stock-market investing, and then after the dot-com bubble burst, the rise of discount brokerages helped encourage new people to step in to the market and try their luck.

But:

Nowadays the message is sinking in: it’s a rigged game, you can’t win, and you’re better off with a passive strategy.

I’d agree with that, except for his use of the word ‘rigged’.

And except for the fact that I do personally invest a lot of my money actively – even though I think passive investing is best for nearly everyone, very likely including me!

Some of us can’t stop day-dreaming about Warren Buffett.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Those once-in-a-lifetime fixed rate mortgages just got even cheaper, thanks to a 1.98% two year fix from HSBC. The Telegraph predicts a new rate war.

Mainstream media money

Note: Some links are to Google search results – these enable you to click through to read the piece without you being a paid subscriber.

Passive investing

  • Give me the simple life – Vanguard blog
  • Swedroe: Focus on investment strategy, not outcome – CBS
  • Top ETF launches of the year [mainly US, alas]Index Universe

Active investing

  • Projections show smaller future stock market returns – CBS
  • Peston: How big is the ‘material hole’ in UK banks? – BBC
  • Does momentum spell the end of growth investing? – Stockopedia
  • Hedgie: “I leave stock picking to the experts” [Google]FT
  • GMO has all but abandoned fixed income – FT

Other stuff worth reading

  • A great way to stretch your retirement savings – CBS
  • The autism advantage in the workplace – NY Times
  • Article on enfeebled modern consumers [fortnight old]The Guardian
  • The case for ongoing global growth – Advisor Perspectives
  • Montier: Capital preservation in the age of repression [PDF]GMO
  • Measuring performance post-RDR [PDF]Morningstar

Book of the week: Nassim ‘The Black Swan‘ Taleb’s new book Antifragile is out, and it’s getting masses of coverage. Here’s an interview.

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{ 13 comments… add one }
  • 1 ermine December 1, 2012, 1:01 pm

    Yeah, I’m one of the dying breed of gentleman investors – because I want to carry on with another old-skool theme. ‘Being of independent means’ ie away from wage slavery. Been there, done that, it’s no fun any more.

    For me that means using stocks for income, in the old way. I’ve even got a share certificate in a drawer though I don’t go that way generally. It also means diversifying into non-financial investments and owning the roof over my head.

    Using a HYP thus leads to a different composition, and all automated versions of income investing seem to be lethally susceptible to value traps. It was you who educated me that IUKD and its ilk are most definitely not a HYP equivalent.

    Something about that huge index flow gives me the willies, summarised far better by Jacob ERE. Whenever I see an awful lot of anything going on in a market it is usually a sign to run like hell the other way 😉 And I’ve even got index funds and may buy more, but I still hate it…

  • 2 Lewis December 1, 2012, 1:46 pm

    Thanks for the link, and good post.

    One thing I might venture, somewhat heretically given the theme of your post, is that I look at your graph of equity cash flows and start pondering about market efficiency. Both funds and ETFs either explicitly or implicitly benchmark their performance to a market index – but it’s individual stock picking that drives efficiency and makes any individual security ‘fairly-priced’. If the market is over-correlated and driven by synchronised, index-wide moves, I wonder if the opportunity for a shrewd investor to spot potentially mispriced (especially small) stocks in any given category is increased.

    Thinking out loud as always, though. I’m not convinced of my own musing!

  • 3 Alex December 1, 2012, 2:57 pm

    “Some of us can’t stop day-dreaming about Warren Buffett.”

    May I suggest a penance? Drink Cherry Coke and lie down in a darkened room.

  • 4 Drew @ Objective Wealth December 1, 2012, 6:49 pm

    “Today any self-directed stock picker is playing against professionals.”

    Professionals who are likely being paid handsomely for poor performance. In what other industry would they last more than five minutes in their jobs!

    Thanks for the mention TI.

  • 5 Joe's Sustainable Portfolio December 1, 2012, 7:43 pm

    Yes, I am a gentlemen investor who hold share certificates in his boxes, mostly of new companies but at least I hold them directly and not through third party!

    An aspect of statistic I would be very interested is the percent of US Household that trades in shares. I wonder how that stack against the Share of US Corporate Equity Market.

  • 6 RetirementInvestingToday December 1, 2012, 8:04 pm

    Hi TI

    I’m heading towards being a gentleman investor for at least a portion of my portfolio. It helps with my continual hunt to minimise expenses. It will also hopefully help me develop a regular income stream as I begin the downhill run towards Early Retirement

    That portfolio portion is a HYP which is in its infancy at 2.5% of total portfolio value. It so far consists of SBRY, SSE and AZN.

    Cheers
    RIT

  • 7 Rob December 2, 2012, 12:51 pm

    “I’d agree with that, except for his use of the word ‘rigged’.”

    Personally, I think many people see it as a casino where the house always wins and I’m forced to disagree with such an opinion.

    The act of charging per transaction is like selling spades to gold diggers, but people have to just realise that it is a price exchange where you buy a percentage of a business. It is just a more liquid version of investing in a shop on your local high street with a bit of added choice (maybe this is a bad thing).

    If you invest to buy a stake in a business and to entitle yourself to that businesses operating profits then there is a logic to expecting to be able to earn a reasonable return in line with that underlying business. The problem is that people believe they can invest in price exchanges which is more akin to guessing the output of a random number machine.

  • 8 The Investor December 3, 2012, 9:44 am

    @ermine @Lewis — I do have some sympathy with that view, and I have tried to think around it myself. The maths is inescapable, however.

    The market is effectively the result of active trades. If you try to beat passives because you think the market is becoming less efficient because of the dominance of passives, then you can only do so — within that index — by taking a contrary position on a particular stock with another active investor in the same market. One of you will win, one lose. The tracker will follow the result, less costs.

    I can’t see a way around that, even though I get the jitters myself about any ‘no brainers’, which is what passives increasingly seem like.

    @Drew — I amuse myself at times by working out what my performance this year would be like if achieved at a hedge fund. Lots of zeros, but crucially following an absolute number. Considerably richer! And as you say the same would have been true in a terrible year like 2008!

    @Joe — That’s an interesting split — being an investor in new companies, and yet one wedded to the old ways of keeping ownership records. I sense a contrarian mind at work! 🙂

    @RIT — I think ultra-efficiency is overrated. There’s a romance to having at least some investments in the direct ownership way.

    @Rob — Nice metaphor. I usually start by explaining the stock market via a buy-to-let analogy, but they all amount to the same thing. 🙂

  • 9 The Investor December 3, 2012, 9:52 am

    @Alex — I’d be more a steak at Gorat’s kind of guy. 😉

  • 10 chris_moneyandi December 3, 2012, 11:47 am

    Too bad I missed this post during the weekend. Have to catch-up with reading tonight.

    Great line about buffett and professionals.
    Cheers

  • 11 Alex December 3, 2012, 9:46 pm

    @TI:
    Thanks, I don’t know much Buffettology, so Gorat’s was a new one to me. Have you seen the official website, goratsomaha.com? Wonderfully old-fashioned: very mid-90s. Horrible background colour (color?), clashing fonts and not much else…But I’m sure the food’s great, Mr B.

  • 12 The Investor December 4, 2012, 10:29 pm

    @Alex — Wow, I almost looked for the Under Construction sign. I suspect it’s the same inside, and indeed that its unchanging nature is exactly what a man of Warren’s mental character likes about the place… and as a shareholder in US outfit The Cheesecake Factory (think 1980’s Peewee Herman meets Will Wonka) I can’t argue. 😉

    My own tastes run much more obscure I’m afraid. Here’s where I ate on Sunday night.

  • 13 Alex December 5, 2012, 9:42 pm

    Now, that is a minimal website. 🙂

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