Free to read: Learnings from the wisdom of crowds

There’s so much private investors can learn from each other – here are a few lessons you’ve taught each other in a strange investing year

It is the New Year, which means Twitter offers up a bonanza of private investors unveiling their year end returns. The results are decent, which just goes to show that us humble PIs are more than capable of giving the professionals a run for their money, without spending $40m on research to find that investing edge (or not as the case may be). s

In the main, the numbers on display reflect a decent year for markets – the S&P 500 Index delivered an extraordinary total return of 28.7%. Some PIs generated lower returns but have been brave enough to admit it, proving there is still some honesty and humility to be found on social media – although some head-scratchingly good figures suggest it is not everywhere (especially not in the good old US of A).

Putting our own performance out there, the Invest-ability portfolios did ok, with the more US-heavy Atlantic Portfolio returning 24.6% and the UK Quality Shares Portfolio returning 20.6%. I’ve been crunching the portfolio data this week and will be writing these up shortly.

Far more important than the returns themselves are the lessons Tweeters believe they have learned, and I thought it might be useful to compile the many insightful observations in one place. I particularly enjoyed some of the longer summaries a few PIs put together – step forward, in no particular order: Miserly Investor, Invested Geordie, Jonthetourist, and Henry Viola to name but a few of the many entertaining and informative views I’ve read this week.

You do you

But before we look at the lessons within, I would say that one big lesson must be that paying attention to other people’s returns, and especially one-year returns, is a somewhat pointless exercise. As @Carcosa61 points out, high returns don’t necessarily equate to great investing, just as low returns don’t necessarily mean poor decision making. In short, the higher or lower the returns the more risk you have likely taken on, successfully or unsuccessfully.

That risk could come from the underlying investment itself, or the concentration of assets within a portfolio – holding just a few shares can work out very well if they perform, but very badly if they don’t. And different investors are in different positions to take on risk than others – someone in retirement and looking for income is far less likely to put themselves in a position where a punt gone wrong could wipe out their retirement fund.

And as the ever entertaining @miserlyinvestor sagely points out “single year returns in themselves mean very little other than being a link in the chain of your long-term performance, which is the thing that matters most”.

Lesson 1: investing is not a race against anyone else, so treat the performance stats as nothing more than a bit of fun because you have little idea who you are comparing yourself with. Don’t be disheartened by your own bad year just because others are doing well, and try not to feel too smug if you top the pile…investing is a long haul, and you might be the winner/loser next year and more importantly when you hit retirement day.

Lazy winners

The other thing to note is that rather than labouring away all year, eyes pinned to the RNS at 7am each day, you could have done virtually nothing and still had a very respectable year.

Doing nothing can come in different forms, but in the case of those running stock portfolios it usually means avoiding the temptation to tinker. So many investors have said that their performance would have been better if they’d avoided what @ranmoorruffian describes as “the meddling quotient.” Overtrading is expensive in its own right, but also increases the risks that behavioural biases will creep into our decision-making. Fastidious RNS gazing may not, it seems, always be all that that helpful.

All that said, as @investedgeordie writes “Doing nothing is often the correct approach in many situations, but a killer in others” – as demonstrated by @ranmoorruffian whose meddling quotient actually saved 9.2% of upside.  

Which brings us on to the passive approach to doing nothing – invest in a tracker, sit back, and let the market do its work while you go away and think about something else. Of course, keeping an eye on the index is always useful context for any investing enterprise. But, as @battlebus puts it nicely, where’s the fun in that?! And, for that matter, where will the really big wins come from if we track and compound for our entire investing lives – indices do not always deliver as they have this year, and digging out small – and large – growth companies and funds is where we can give our returns a real boost.

Lesson 2: Are you investing solely for the returns or because you enjoy the intellectual challenge of investing. It’s an important distinction to make, and it might be worth following @tcsinvestor’s lead and keeping the fun money separate from the pension pot, and not trying to beat the market with that.

Head for the exit

While lots of PIs reported decent year-end figures, many of those also admit that those figures weren’t quite as good as they could have been had they taken profits on some holdings earlier in the year. As @jonthetourist put it, “rising nicely for two-thirds of the year only to collapse like a souffle coming out of the oven.”

One lesson could be that we should not underestimate volatility, especially in more speculative assets. Or it could, as some suggest, mean that we should learn to sell more quickly. Maybe so, but hindsight is a wonderful thing when it comes to market timing. And selling quickly is contradictory in respect of the many mantras we often hear about investing – should we follow the “no one ever lost money taking a profit” rule of Bernard Baruch, or “run our winners” instead? Is a loss only a loss when it’s crystalised? Or is investing, as many suggest, about “time in the market rather than timing the market” – a view supported by plenty of studies.

We are, of course, in behavioural finance territory here and there is no one-size-fits-all answer (which is, I believe, the very nature of investing full stop). Are we selling because an investment has gone bad, or to lock in profits? Are we selling because the positions are low-conviction, sub-scale and doing nothing for the overall portfolio? Should we hang on and claw back some losses, as @jonthetourist managed to do with his amusingly named “Dog’s Home” portfolio. The permutations in the context of individual shares in individual portfolios could be almost endless.

Perhaps the art of buying and selling is less about the timing of the act itself than the process by which we have made the decision to do so – which should be consistent with our individual approaches to identifying what we like or dislike about an asset, or via a rule based approach like Henry Viola– he’s looking for companies that return 10% per annum over a five-year period, and sells them if they don’t meet this criteria by the end of the second year and also fail to generate at least 4% in dividends. Other PIs have trimmed positions that have grown to represent an overly concentrated part of a portfolio – sensible, given mean reversion (although again in contrast to the ‘run your winners’ mantra).

Lesson 3: The best reason to sell is because something about the asset has changed in a way you don’t like, and the best way of avoiding the need to sell quickly and cut losses is not to buy quickly. And if you want to lock in gains but keep running winners top slicing is always an option – as long as you’re sure you have a better use for the cash. But the main lesson must be, don’t trade for the sake of trading – have a plan and stick to it as much as you can.

To buy or not to buy

One thing that we can clearly see from PIs annual reviews is that whilst the destination is the same for all of us there are many ways to get there – funds, trusts, large caps, small caps or anything else for that matter can all be useful ingredients for generating Alpha if chosen well and added in the right amounts (apologies for the hideous metaphor mixing in this paragraph). I’m sure @AndrewTalbot2 wasn’t the only one who had Terry Smith and “the Fundsmith juggernaut” to thank for a decent year. And as @reb40 noted, her performance suffered from being late to recognise the renewed strength in large caps, especially in the commodities space.

What is apparent is that some ingredients are the investing equivalent of the gold leaf in Salt Bae steak – looks nice, but never likely to be worth what you pay for it. In investing terms this is the equivalent of investing in so-called ‘story stocks,’ which are often driven higher by FOMO trading. It’s encouraging to hear that PIs are, in the main, becoming very wise to the risks of buying into such speculation and focusing their attention on productive (i.e., profit/dividend producing) assets.

That said, I’m not going to turn my nose up at anyone that wants to ride the momentum behind more speculative ventures – but if you do the selling strategy becomes more important than ever, as does paying attention to management quality. It’s one of the hardest things to judge, but when something doesn’t smell right it always pays to be doubly cautious.

Lesson 4: Be asset agnostic because Alpha can come from anywhere and we shouldn’t cut off potential sources of strong returns (although I draw the line at Crypto, which as Henry Viola points out has to be the ultimate story investment). But always be careful, do your homework, and have a clear idea in mind of what you hope the investment will deliver.

Diarising is as good as analysing

It’s very apparent from this exercise that more and more people are journaling their investment journey, which is a very good thing – I have scratched the surface of FinTwit to compile this, mainly because it’s so bloody hard to find it all on Twitter. Here at Investability we’re working on something to help resolve this – if you haven’t already you can sign up to our mailing list here to be the first to hear when we launch it soon.

It’s well known in educational psychology that the very act of writing something down cements it more firmly in our minds, so as we jot down our investment lessons – good and bad – they become more entrenched in our thought process. Just make sure you’re honest with yourself as you do so – sometimes we get lucky, and it’s important to recognise when that happens, just as sometimes markets can work against us and deliver a dollop of unavoidable bad luck every now and then.

One way of keeping honest is to focus on the hard numbers – as @miserlyinvestor reminds us “keep proper records, calculate their returns and judge them against some suitable benchmark. Like many endeavours in life, keeping score has a tendency to motivate one to do better, so at least try to keep score accurately.”  

Lesson 5: It’s often said that the biggest obstacle to successful investing is ourselves, so write stuff down, honestly, and refer back to it so that you get to know yourself and your mistake-inducing biases better. Better still, share it and let other members of the brilliant FinTwit community offer their incredibly helpful insights. Investing can be a lonely business and being able to bounce ideas around without judgement and learn from the wisdom of the crowd is one of the better aspects of social media. I’ve enjoyed reading you all this January, thanks, and good luck in the year ahead!

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