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Weekend reading: Relatively predictable

Weekend reading

Good reads from around the Web.

When engaged in the Fool’s Errand of active investing, one must always think relatively:

  • Yes, the Eurozone looks troubled but it’s doing so much better relative to a few years ago.
  • Yes, auto sales are very low in Italy, say, but more importantly they’re relatively low compared to the long-run average, so they should eventually mean revert.
  • Yes some share looks expensive, but it’s relatively cheaper than the market.

… and so on.

As for passive investing, its appeal is founded on a principle of relativity. By aiming to get just the market return – minus the lowest possible costs – you’ll very likely do relatively better than most active investors who aim to beat the market but who pay a high price for trying to.

Combining these two lines of thinking is an article over at Morningstar about John Bogle’s concept of ‘relative predictability’ .

The author John Rekenthaler argues it’s Jack ‘Father Of The Index Fund’ Bogle’s least appreciated insight:

Relative predictability – a phrase that Bogle mentioned in passing to me, in a conversation last week – is something altogether different.

The relatively predictable asset is the asset that behaves as expected, given the performance of the financial markets.

Relative predictability has nothing to do with the usual statistics that measure absolute levels of risk. It cannot be measured by standard deviation.

Relative predictability is unrelated to volatility.

In its realm, cash can be highly risky and stocks can be fully safe.

Read on to discover its applications. The concept is a wonderful piece of investing philosophy that had me screaming “Yes! Yes! Genius!” as it cleared up a few fuzzy notions that I’ve been obsessing over for years.

Although if you get out more and have a rich home life, your mileage may vary…

Enjoy the weekend!

From the blogs

Making good use of the things that we find…

Passive investing

  • Set it and forget it works – Rick Ferri
  • Extraordinary claims require extraordinary evidence – Vanguard

Active investing

Other articles

Product of the week: Degiro is a new-to-the-UK broker that offers share trading for less than £2, reports the Telegraph. Think that’s cheap? Pah, it enables you to trade US shares for €0.50! However it doesn’t yet offer ISAs and the firm operates under Dutch regulation.

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

  • Bernstein: Currency hedging is performance chasing in disguise – ETF
  • Roche: The world is not one homogeneous index – Marketwatch

Active investing

  • Fisher: This bull market could rage for years… [Search result]FT
  • …though these two investment trust managers are “alarmed” – Citywire
  • Terry Smith: Bet on companies that have already won – Telegraph
  • Some momentum investing candidates in the UK – Telegraph
  • 13 expensive British shares that might just be worth it – Interactive Investor

Other stuff worth reading

  • A home, or a tax-efficient financial asset? – Guardian 1 and Two
  • ThisIsMoney’s The Investor Show name checks MonevatorThisIsMoney
  • Property prices to rise 25% over the next five years, says RICS – ThisIsMoney
  • Why pension freedom is still a way off for some [Search result]FT
  • The “baffling” new £5,000 tax-free interest rule – ThisIsMoney

Book of the week: As a long-time Tesla shareholder, I’ve already drunk the Kool-Aid. But I’m still finding plenty to marvel at in Ashlee Vance’s biography of Elon Musk. I suspect it’s not exactly a Tell All, but there are enough unflattering anecdotes to keep credible the otherwise unbelievable tales of building space rockets, dreaming of trips to Mars – and reinventing the automobile industry as almost a side-project.

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  1. 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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{ 18 comments… add one }
  • 1 dearieme June 13, 2015, 11:28 am

    May I just point out that “Extraordinary claims require extraordinary evidence” is contradicted by much of scientific history.

  • 2 Mr and Mrs Geek June 13, 2015, 1:14 pm

    Quite interesting this post introduction. We start investing end of last year and in terms of stress levels we probably check our active investments twice a day where our passive ones (LS80) we “don’t care”, we look to them from time to time. In summary, active investing is getting us stressed and in extreme putting our marriage at risk 😛 😛 ahahaha

  • 3 dearieme June 13, 2015, 1:23 pm

    I liked the point about pension ratios. If governments in Developed Economies were treated in a comparable way – adding up the liabilities implied by their welfare state entitlements – they’d all be seen as utterly insolvent, wouldn’t they?

  • 4 Owl June 13, 2015, 3:01 pm

    “Yes, auto sales are very low in Italy, say, but more importantly they’re relatively low compared to the long-run average, so they should eventually mean revert.”

    And believe me, Italians love their cars! (I’m married to an Italian. Neither of us even knows how to drive.)

  • 5 Martin June 13, 2015, 4:21 pm

    But Degiro operates in the UK, so there wouldn’t be issues with withholding taxes and similar?

  • 6 magneto June 13, 2015, 7:16 pm

    The Rick Ferri link has raised a few questions elsewhere :-

    “By 1999, we had all the money we needed to send our three teenage children to good four-year colleges, with a little extra money to spare. My philosophy on money is, when you have it and you need it, don’t lose it. So to ensure the available assets would see all of our kids through their college days, I reallocated the entire portfolio to short-term corporate bonds in late 1999.

    If you remember your market history, that’s about when the tech stock bubble burst and the stock market collapsed over the next two years. It was a marketing-timing miracle I never saw coming, but the results meant that we still had all the money we’d set aside for our critical family goal.

    Paraphrasing Baseball Hall of Fame pitcher Vernon “Lefty” Gomez, it’s better to be lucky than good. While in this instance, luck happened to play our way, the real lessons from this experience made me a die-hard believer in the importance of having an automated savings plan, a disciplined low-cost portfolio strategy, and a commitment to avoiding market risk once you have accumulated the money you’ll need for an important forthcoming event.”

    Do we believe Rick was so valuation insensitive, that his move out of stocks at the peak in 1999 was solely down to luck/liability matching? Had stocks been on a PE or CAPE of 8, yield 5%, would he have made the same move?
    How was Rick advising his clients in 1999? To maintain full weighting in stocks?
    Take this one with a heavy pinch of salt.

  • 7 magneto June 13, 2015, 7:21 pm

    Merryn in FT Money this weekend might be worth linking.
    The bete noire of LifeStyle Funds.

  • 8 Mathmo June 13, 2015, 10:40 pm

    Good reading as usual, TI, thanks.

    Interesting reading RITs portfolio and reflecting on it. Always very generous and fascinating to read another’s asset allocation and I hope he won’t mind me commenting on it here.

    At a first glance, it strikes me as amazingly complex — how does anyone strictly rebalance against all those individual sub-categories? Is it possible to keep it all in marching order? I’m sure RIT manages it of course.

    From an allocation point of view, I’m most interested in the bond / cash definitions, which seem different to how I think about it. The comments do highlight it, but P2P is a bond in my eyes (and should be valued — as with all assets — at net realisable value, not historic cost). NS&I is pretty much cash isn’t it? And corporate bonds are part equity exposure in my mind.

    In the little portions, property in an invested portfolio always scares me as I realise I have such an astounding exposure to it outside of the liquid portion that I can’t bring myself to opt into owning more of it. 5% gold: tremendous. Can’t work out why that isn’t held in Ozzie, though, given the delightfully frank admission. We all have one of those lurking in there, I’m sure.

    Tremendous read. Thank-you.

  • 9 dawn June 14, 2015, 2:12 pm

    ‘The Investor’ appears to be back to his happy self again!

  • 10 david June 14, 2015, 4:18 pm

    The “extraordinary claims” quote is simply about how if you have some new claims that go against prevailing wisdom you better have some good evidence that stands up to scrutiny, some evidence out of the ordinary compared to previous analysis. So it is basically in line with most of scientific history.

    Sagan”s quote appears to be from this interview from 1996 where he also said:

    “Many of the principle advocates of UFO abduction seem to want the validation of science without submitting to its rigorous standards of evidence.

    To be taken seriously, you need physical evidence that can be examined at leisure by skeptical scientists”

  • 11 grey gym sock June 14, 2015, 10:59 pm

    thisismoney seem to be baffled by the £5000 tax-free interest band themselves. they shouldn’t have included dividends in the list of other kinds of income to add up. dividends are treated as the upper slice of income, with interest as the middle slice, and other income at the bottom; so the amount of dividends is irrelevant to the calculation of whether the £5000 band applies.

    degiro’s default account allows them to lend out stocks you hold with them, which introduces extra risks. alternatively, their “custody” account doesn’t allow stock lending, but has high charges for receiving dividends. which is enough to put me off.

  • 12 dearieme June 14, 2015, 11:16 pm

    “So it is basically in line with most of scientific history.” Nope. The most remarkable single advance in science was Newton’s Theory of Gravitation, which was supported by the perfectly ordinary evidence of Copernicus/Brahe/Kepler, ordinary in the sense of being publicly available to anybody. What was required was extraordinary insight. The other contender for greatest advance – the widespread adoption of the idea of evolution – was the consequence of Darwin’s writing his Origin of Species, which was a masterpiece of advocacy and the marshalling of evidence – but not of extraordinary evidence. Sagan’s statement was plain silly.

  • 13 The Investor June 15, 2015, 10:36 am

    @the geeks — Why not go fully passive then? 🙂 Are you adding value versus the market — even before you get into the potentially high cost of divorce! 😉

    @mathmo — Cheers! I’d have to leave RIT to explain his portfolio, but I think it’s fair to say it’s roots are somewhat old in passive terms. We forget that the very simple portfolios we discuss so often are I think a somewhat new innovation in the UK. Plus he clearly enjoys it! And he has a mechanical spreadsheet driven top-up thing going on, based around valuations as he perceives them, so he’s taking lots of active decisions driven by that.

    @owl — Hah! I’ve read quite a bit over the past few years about Italians having to forestall their luxury car purchases, too, due changes in, er, the robustness of tax enforcement. Hopefully all will mean revert before the self-driving cars arrive!

    @greg gym sock — Hmm, well I must admit it does seem needlessly complicated to me, too, like much of the tax system distorted by political fiddling over the years!

    @dawn — Don’t believe everything you read! 😉

    @magneto — Yes, I wondered about that too!

  • 14 Tyro June 15, 2015, 12:58 pm

    As ever over the years I’m enjoying the post and links, but today for the first time am repelled by one of the adverts – do we really have to see what looks like a female mannequin trussed up in bondage gear and in a parodically submissive position (bum/stilettos in air, face covered with hair and on the ground), and strapline “The Next Step in Evolution?”? Any more of that and you’ll be losing me …..

  • 15 The Investor June 15, 2015, 8:30 pm

    @Tyro — Where are you seeing the ad, on this site?

    Like almost all sites you see on the Internet most of the advertising here isn’t directly controlled by me, it comes in via Google’s advertising network, Adsense. I’ve never seen that ad, for instance.

  • 16 Mark June 15, 2015, 10:11 pm

    My favorite blog by far to read since I found it 2 years ago. Thanks a lot for the great information about passive investing and the rest. It’s been a year exactly since I started. I quit my job last summer, invested and went for a sabbatical and now I’m back catching up with everything, hence my question:
    – how can we find the the new funds (index and non/index ones) created since last year for instance?
    – is there a place we’re we could see that information?
    – also, is it possible to see changes in TER on funds since last year? I would be really good to know about this. Thanks, keep up the amazing work and all the best!

  • 17 The Accumulator June 16, 2015, 8:37 am

    Hi Mark,

    I don’t know of any site or tool that provides that info. The best you can do is take a snapshot of the current state-of-play.

    These are the tools I uses to do that:


  • 18 Tyro June 16, 2015, 12:46 pm

    @The Investor – yes, on this page. Ta for the clarification, though Adsense doesn’t have much, er, ad sense if it thinks that’s the kind of thing I want to click on.

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