Good reads from around the Web.
A common dilemma as a stock picker is the decision on whether to buy a big established firm or instead the hordes of new entrants looking to unseat it.
Typically a value investor will buy the biggie and pour scorn on the little guys and their bold ambitions.
However that isn’t always the right thing to do, as an interesting piece by Meb Faber pointed out this week.
Meb recalled that back in 2000, a question doing the rounds in his circle was whether it was better own US drugs giant Pfizer or instead buy all the equivalently valued biotech market, which was full of companies seeking to displace it.
A lot of time has passed since then, so he decided to find out the answer.
The next 15 years started with a stock market crash, which as you’d expect walloped the biotech index for six, with huge declines from its March 2000 peak.
Over the same period Pfizer was merely flat.
Yet the race was not yet won – and over the next 12 or so years of recovery, biotechs roared back.
In fact, the index is now up 1,300% from its lows.
In contrast, big old Pfizer has advanced a mere 50%.
Buying the biotechs would have been far better for your financial health.
Now, I am not sure if these graphs include dividends, which would make a difference for Pfizer.
Also I’d argue it’d be more consistent – if less dramatic – to plot both graphs from the year 2000, rather than off the lows.
Neither of those observations would probably change the thrust though, which is that the biotech index proved the winning investment.
For his part, Meb points out that some of this under-performance is just down to the sheer size of Pfizer – elephants don’t jump, and all that.
I’d add too that Pfizer wasn’t actually cheap in 2000. We easily forget that drugs companies were go-go stocks back then, with the likes of UK mega-drug corps GlaxoSmithKline and AstraZeneca also sporting racy valuations.
Pfizer was on a P/E of 60 some 15 years ago, versus just 24 today.
On a related note, I suspect biotech is now in a bubble.
Time will tell as always, but writing in The Telegraph, fund manager Terry Smith certainly doesn’t like the odds of picking winners in the sector.
Still, it’s an interesting turn of events to think about as an active investor – especially as Meb goes on to ask the same question of Facebook and the “unicorns” today. (I currently own some Facebook shares…)
Passively persuasion to bet small
Passive investors might treat all this academically.
Personally though, I’d see it as another reason to make sure I had a clearly defined dollop of small cap exposure in my diversified portfolio.
The UK market, for instance, is dominated by a handful of huge Pfizer-like incumbents.
Adding small cap shares to portfolios has previously boosted returns and I’d bet on that happening again over the long-term.
(Note though that Lars Kroijer, for one, disagrees it’s a sensible way to invest…)
From the blogs
Making good use of the things that we find…
Passive investing
- Correlations aren’t constant – The Reformed Broker
- Why I still hold bonds – Retirement Investing Today
- What if the index fund is more expensive? – Oblivious Investor
- Mother nature designed you to be a rotten investor – WWOWS
Active investing
- Buy what’s been going up – Meb Faber
- UK market slightly cheap by CAPE – UK Value Investor
- Ignore economic forecasts: They’re wrong – The Reformed Broker
- On Keynes’ great investing wisdom – An Investor’s Field Guide
- Who gives a #*&$ – Investing Caffeine
- In search of a stock market bubble – Brooklyn Investor
Other articles
- SIPP Drawdown: Year 3 review – DIY Investor (UK)
- My $100m tax-free account – FIRE v London
- Say yes to an emergency cash buffer – The Aleph blog
- Thoughts on cutbacks in financial journalism – Abnormal Returns
- Where to stash a new round of cash? – Keeper of the Cauldron
- Best ASDA receipts for Wombling [New to me!] – YouTube
Ruse of the week: Waitrose has launched a ‘pick your own offer’ scheme that enables you to get a 20% reduction on your (limited) choice of favourite groceries. The Guardian explains how to make it pay.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
Passive investing
- Crash dieting doesn’t work for savers, either – NerdWallet
- Be prepared for lower U.S. equity returns [Video] – Jack Bogle
Active investing
- Active managers must prove their worth [Search result] – FT
- US farmland: Another bubble that wasn’t – MarketWatch
- Analysts are now honestly wrong, at last – Bloomberg View
- What the ultimate stock pickers own – Morningstar
Other stuff worth reading
- Bond markets flip between panic and greed [Search result] – FT
- Are lifestyle funds ill-suited to new pension freedoms? – Telegraph
- Housel: What good is history – Motley Fool US
- Should BTL landlords lose their juicy tax break? – ThisIsMoney
- Ratcheting the 4% retirement withdrawal rule – MarketWatch
- How to give for the greatest good – The Atlantic
Book of the week: The man who inspired The Atlantic’s do-gooding author has written a book on being a more rational giver. Doing Good Better
Like these links? Subscribe to get them every week.
- Note some FT 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”. [↩]
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I’m sure I recall a guy on money box live recently moaning about how his biotech funds bought in the tech boom were still under what he paid.
Re Biotech index versus Pfizer, comparing one stock to an index seems to be rather odd. S&P500 has done much better than Pfizer since 2000 for example, but it would be silly to decide between one stock or an index. Faber then goes on to ask the same question about buying a variety of midcap tech stocks versus Facebook. Most individual stocks get outperformed by a diverse index I imagine.
Faber has misguided attitudes towards investing from what I can tell. He obsesssively promotes investing in low-CAPE nations, resulting in a “Global Value” ETF (GVAL) that has been a terrible performer compared to the ACWI over the last year. Just get a global index and forget about it!
He also had a US market-timing ETF that did horrendously versus a total US market index, using moving averages to decide when to buy or sell. He’d back-traced his ideas and his back-trace showed it sorta matched the s&p500 with less volatility. Except his ETF went sideways for years while the total market index went up massively:
https://www.bogleheads.org/forum/viewtopic.php?t=60967#p1935708
Can’t he understand that a simple global mega-index is going to outperform most of his ideas? Josh Brown has promoted Faber a lot but without any critique of the results from what I’ve seen, while Brown keeps on sneering at index investors, calling them the “passive investing Taliban” – yes, Josh, we’re the Taliban who keep beating your friend’s high-fee ultra-active ETFs!
Faber also made fun of the S&P500 for being an “active fund in drag”:
https://www.bogleheads.org/forum/viewtopic.php?t=143250
An “active fund” index that has destroyed his own active high-fee ideas.
Is there any survivorship bias in the smallcap data, i.e it ignores the impact on your portfolio of all the companies that went bust or were otherwise booted out of the index?
@david — The reason he compares Pfizer to the biotech index is because that was the question being proposed around that time, a decade or so ago. He didn’t invent this comparison after the event. There’s a graph in his initial article from 2004, too, from a research report from that year making the comparison. He is returning to the idea to see how it went.
A stronger critique IMHO is whether his timeline and the variety of graphs he uses all mesh together to compare apples to apples. (I confess to that I may have slightly misread the period covered, for instance, in my initial precis of his piece, but I’d partly say “It was his fault m’lud!” on that score.)
I don’t think Josh Brown has anything against index investing really. He uses it professionally, and I’ve seen him salute it as much as anything else. He is however condemned like many of us who write about this stuff to making attempts to come up with various different takes on the same old themes every day, and to serving many different audiences.
The “passive investing Taliban” quip was, from memory, directed at militant passive investing or the highway advocates, whom I suspect you’d be in ‘sympathy’ with (to keep metaphor consistent! 🙂 ) from your comments here.
There’s no doubt that most people will do best just buying a global index fund, and we’ve said so many times here as you may know. But you’ll find Monevator is not really the place to continually bang the drum on any deviation from that theme, as we do cover a few different topics, partly due to my own nefarious interests. Bogleheads is the better place for that I think.
@Geo — Yes, I am not actually sure you could have bought the biotech index back then — not sure when the first biotech ETF was brought to market? So you would have had to use likely very expensive active biotech funds, which would have chewed up your returns, especially during the drawdown/crash phase.
Still, for the purposes of Meb’s thought experiment that doesn’t really matter.
A good selection of links this week, TI. Thanks.
@dearieme — Cheers!
passive investing taliban? i didn’t know there were tracker funds for frontier markets.
I’m fed up with the boring active-passive debate. If You don’t have an edge choose the passive way. If You have an edge take advantage of it. Of course the passive index is not the best solution as Christopher H. Browne once said “garbage in, garbage out” but FOR MOST OF US this is the least risky way see Lars Kroijer. And You can combine the two styles like The Investor. Not mentioning that pure passive investing doesn’t exist see Cullen Roche.
A comparison of the cash flow thrown off by Pfizer relative to the Biotech index might help to inform the debate.
Rob
Looking at the price history of Pfizer
http://performance.morningstar.com/stock/performance-return.action?p=price_history_page&t=PFE®ion=usa&culture=en-US
I am pretty sure the returns from Pfizer include all dividends the price of Pfizer was at times significantly higher in 2000 than it is now.
My only real exposure to small caps is a slice of Vanguard’s global small cap fund. Don’t think I’d be sleeping easily at night if I was betting on some niche like small cap bio tech. Not unless I worked in the industry.
My own tale.
In early 2005 I bought 10 shares – roughly £1,000 of each. These were the 10 shares recommended by the Independent newspaper as “shares to buy for 2005”.
One of those shares was GlaxoSmithKline and another was the, relatively unknown, Shire Pharmaceuticals.
I sold Shire a year ago, and GSK a couple of months ago. Thus I held both for about a decade.
I bought GSK for 1,258p and sold for 1,625p making about £272 nominal profit. I also received £485 in dividends over the decade. I did not reinvest the dividends.
I bought Shire for 593p and sold for 4,954p making a profit of £6,529. I also received £103 of dividends.
Thus for my c£1,000 stake in 2005 I made about £760 profit on GSK and £6,630 on Shire. That’s about 6% annual return on GSK and 23% on Shire.
For two companies in the same sector the big dependable GSK really did very little, while the upstart Shire blazed away.
Of course I had no idea that would happen. No-one did.