Speculation vs Index tracking

The Central Bank
#1

Hi folks,

I’m trying to decide whether its worth my while investing my time, energy and money to save for my retirement fund (23 years + 3?) by investing directly myself using TA or if I’m better off finding a good value passive tracker global market (well diversified) fund and getting on with the business of making money with my existing skills/experience, and living of course.

This is my story:

Two months ago, I read Mark Shipman’s books and thought, Eureka, an hour a week to follow the buy and sell signals, to achieve returns superior to the markets. Well, that’s a no brainer. But then if its that easy why isn’t everybody else doing it? So I started reading and researching further and I learned a few things which raised more questions:

The random market nature of EMH (Efficient Market Hypothesis) and how on average passive index trackers appear to outperform actively managed funds.
EMH has its critics and there’s evidence for and against as there is with TA (Technical Analysis). My reading of this is that there is no black and white, that the market has components of both, and these are greater or lesser depending on your view or motivation and therefore your choice of parameters (data-snooping/subjectivity), and of course whether you are looking backwards or forwards.
Some people earn an income but over the long term I question how profitable it is. I see from the forums I’ve visited that serious players with lots of smarts make a serious committment and devote a lot of themselves but may never feel truly confident in their abilities.
The business selling the advice or facilitating the buying and selling are the ones who are making the money. Therefore any business involved in this enterprise has to be biased (newspapers, journals, brokers, forums, etc) to some extent.
I’m willing to believe that while I may not be able to beat professionals (individual and institutional) that I may beat the ordinary Joe Soap who dabbles in stock picking based on tips and feelings. I felt I have the discipline, the desire and the work ethic to learn how the professionals do it, to get beyond the complexity and learn a few golden rules or home truths that I could follow and with scraps from the masters table, come out with a return marginally better than the standard fund investment.
However, I notice there is a lot of confusion, opinion and disagreement in TA. I’m willing to bet that for me and possibly a lot of home traders and investors would be better generating their wealth from non-trading work, ie using talent, drive and time to develop their career or business and so increase their earning power. In other words, if you can’t beat the market then why not join it?
The bottom line for me is results. How many traders out of all traders make positive returns and to what extent, ie over 10 years what is the annual % return on total capital invested each year? Where is the evidence? Have there ever been surveys carried out?

Does this story have a happy ending?

All advice and opinions welcome, Bernard.

A young bull and his dad are on a hill grazing when the young bull sees some cows in the valley. “Dad, lets run down the hill and have one of them cows!” Dad says, “Son, lets stroll down the hill and have them all!” - Its easier to build wealth slowly than quickly!

#2

I think what you should take into account is that investing on your own should be only one part of your investment strategy and that strategy should include deposits for emergency money,managed funds, protected investments, pension for the tax and prsi relief, you should also consider SSAP for pension if its open to you as you gain many more options that through a standard life ass. company or bwank etc etc but to do it all yourself you would need to come from that background and theres no guarantee you could do it even then.
Rule of thumb, all eggs in one basket (well just think of our property market) and the old addage diversify and multiply but do your homework and get advice.

#3

Barnyard
a couple of points to bear in mind when deciding between index and self (or professionally) managed investing.

  • The evidence on technical analysis (or for that matter fundamental analysis) generating returns above market returns is is overwhelmingly negative. This doeesn’t necessarily mean there aren’t inefficiencies in market prices, there are but it means to exploit them profitably (which is what technical analysts seek to do) you need to beat the market return after transaction costs. The transaction costs (bid/offer spreads, broker fee, management fees if investing in a fund) make this pretty much impossible to do consistently. If it’s pretty much impossible for professional fund manager, who pay a tiny fraction of the transaction costs retail investors do and have access to sophisticated research and quantitative models, you can probably say that for all pracctical purposes it is impossible for a retail investor to beat market returns.
  • The point you make about picking up scraps of return from the market is a tempting falllacy - because of the leverage institutional investors have access to. You might think that you can identify trades that will generate a small return above the market return that large investment funds wouldn’t be bothered with but you’re forgettinng that they can leveraged they’re investments by a factor of 20/50/100 times to turn tiny margins into fat profits.
  • If you feel you can’t beat the pro’s but could beat the joe soaps that’s no use - the small retaail investor is not driving marrket prices - they’re driven by institutional investor sentiment and analysis. So you’re not competing for returns against joe bloggs down the road you need to spot assets that have been mispriced by Goldman Sacks/JP Morgan et. al.

If you want equity exposure I’d suggest researching passive funds, geographically and sectorally diversified, with the lowest transaction costs.

Wv

#4

Barnyard

I recommend you read “A Random walk down Wall St” - easily available. In short, most professional fund managers fail to justify their management fees by consistently outperforming the market.

The author is a legit academic and proper studies do exist showing that over time the long term low cost index trackers are better value. Of course some fund managers will outperform out of sheer luck it’s the nature of the game.

You should also read the " Fooled by Randomness" by Nicholas Naseem Taleb author of “The Black Swan” which is also worthwhile, if a bit up its own a$$.

Remember the talking heads on CNBC/ in newspapers are usually there to sell their services (and books).

I think you make a good point re specialisation:
If for example you are a skilled professional the time you devote to playing the market (or being played by it) might be more profitably spent doing what you do best, (or used as quality family/leisure time).

Ask yourself what percentage you think you might out perform the market by, factor in downside risk and fees and ask if its realistic.

Also, consider the tax/ pension benefits to investing in a low cost index based pension - as opposed to dabbling with your own private account. These are guaranteed unlike a hot shot fund manager.

If you’re looking for a hobby or interest just for interest’s sake then its a different story…

#5

new paradigm
no real wealth creating opportunities, just bubbles
we are now in the period of limited resources and more mouths to feed
if you have wealth to protect, do not abdicate responsibility for protecting it
if you are trying to build wealth, good luck, you’d better be good at timing bubbles
I dont believe there are many books in print that have cottned on to this new paradigm

BTW Shipman is good, but maybe out of date, now cycles are set to become shorter

#6

This is all good guys - thank you. I’ve been trying to get feedback from askaboutmoney.ie on these topics with specific “investments” forums with little joy. My brother (a property nut) then suggested this site (even though its a property specific forum) for the quality of the content - so far he’s right!

#7

Speaking of websites: if you want an example of what not to do check out Boards.ie. Investments and Markets

Most guys either only look at Irish shares, or else plump for obscure opportunities (Rare earth metals) or churn around with penny stocks or the latest fad (gold)

#8

I think this is an important point, although t’s not just to do with leverage. Even in terms of solid money they’re likely to have much more to work with than a private investor, and if the market is a democracy it’s one where each dollar/euro/yen has a vote, not each punter.

That said, that doesn’t mean there cannot be opportunities. I had a friend who was making a living trading on the basis of technical analysis. He had some obscure trade going on that was making him about 10% return per month (or doubling his money annually), over the course of a couple of years. It involved some obscure DAX futures. However, he was only ever able to put about EUR100k into the trade, as more than that and you started to essentially trade with yourself and the returns dropped. So it wasn’t a “double your money annually” strategy as it first appeared, but rather a “100k per year trade”. In such cases, there may be windows of opportunity where you find some slim picking that the bigger players just don’t bother with (more money doesn’t help, and their analysts’ time may be so expensive that it’s not even economical to look for). However, you’ll still have quite a large number of bright people around the world competing against you who’d be quite happy to pocket 100k even if it took them a couple of years to find it.

It’s a bit like the only successful “trade” I ever made: buying cheap new books in a pound shop (50p each) and selling them for 75p in a shop up the road that bought second hand books based on cover price (made a cool 1.25 on that before the window snapped shut :slight_smile:. Nobody but a 12 year old could be interested in the available returns, even though the percentages look juicy enough.

Anyway, even my friend’s 100k strategy went away… returns got smaller, and “down periods” got longer. Probably other people found it and crowded out his money, or something changed in other people’s behaviour that removed the opportunity. Not sure what he’s trading at the moment, but definitely there was a longish period where he had his money out of the market.

Also, last point (again from friend above): if anyone tells you they have a good trading strategy or approach, ask them how much money they have made/invested in this. Lots of people have strategies they think will work, until they go to the market and realise that other people are trying the same thing. You might have a signal that says “buy”. It indicates 10 shares to buy, and you find that always at least 6 of those rise for you and you get optimistic. So you try to trade it, but then discover that it’s really tough to get those 10 trades on before the price rises. At best, it means you get 5 trades and 3 go up. Not bad. At worst you get 5 (or even 4) trades on, and discover you’ve been left with the 4 lemons.

Otherwise, i think the rest of the advice seemed pretty on the ball. I’d only add (as a non-trader with interests in that direction) that if you’ve an interest in this, and if you’re not a gambler with addictive tendencies, then try out the trading as a hobby/sideline, just so you know what’s available/not.

#9

Would you not be better off value investing? It’s certainly got a much more proven track record than technical analysis and is ideal for the long-term, especially in a sideways market (like we could have).

#10

In this type of environment isn’t the best thing to do not a NN Taleb and bet that there are bubbles about and that they will therefore collapse?

#11

This is exactly my justification (to myself at any rate) for using selection of regional passive trackers. If I were really that good at picking stocks, sectors, or even fund managers, I’d be doing it for a living, or advising others for a living.

Obviously of course, that means that you shouldn’t take any notice of what I say, even my advice to ignore what I say.

Or even the advice to ignore my advice to ignore my advice…

I need a drink…
8DD

#12

Have to pull you up on that as a Mod there.

There are plenty of posters who know what they are talking about on the forum. People who trade for a living. There are people who work in Equity Sales, Prop trading, fixed income, pensions etc.

THere are of course plenty of posters who think only of investing in Irish banking shares for a quick buck, but I doubt they would offer much advice.

As for EMH; Malkiel himself has pulled back from some of his more extreme views. I’d favour market psychology over EMH. (Surely most posters on the pin would? irrational markets, bubbles etc.)

#13

Fair enough; I’ve only looked a few times and was dismayed, there always seemed to be a guy saying XYZ looks cheap as it’s fallen from $8 to $4 - a bit like valuing property on the basis of it’s peak value.

My point was that not that EMH always holds, but that when all things are considered someone trading once a week using TA is unlikely to beat the returns of an index tracker in the long run once all costs, fees are considered. If you feel markets are overvalued - I felt equities had got too far ahead - then trading the index future is the way to go; performing Technical Analysis on individual stocks isn’t.

Then there’s access speeds - many professional future scalpers who once made a good living out of exploiting market inefficiencies are now out of the game; the algos have taken over to a huge extent in the more liquid markets. If guys with T1 lines to the futures exchanges cannot do it then ordinary Joes need to be realistic about the returns and risks involved in trading from home.

#14

thats my strategy, although you need to be careful - governments can prop up bubbles longer than you can remain solvent. Fortunetely the wolves are never far

#15

Thank you folks for your feedback which has helped input to my decision not to trade. I’m going to start a low cost passive globally diversified index tracker pension instead.

I know there will always be exceptions to the rule (some of the time :wink: ). However, I believe that is the right decision based on my own research and all the experienced and independent advice I’ve gleaned so far.

Meanwhile, I’ll be busy hanging out with the kids while they still look up to me and looking for the next great business idea.

Good luck with your own endeavours,
Bernard.

BTW, has anybody got any suggestions for an Ireland approved low cost exection only index tracker pension?