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FTSE 100 vs 250 tracker....???
Harry Trout
Posted: 15 April 2018 11:54:23(UTC)
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Mr Helpful;60638 wrote:
Harry,
All good stuff, and a variety of approaches always find interesting.
Hope we are all here to learn, rather than constantly dispute.
In an earlier post you advised :-
"Each month I calculate the compound annual growth rate on my investments and compare to VWRL. Over time those that consistently underperform don't get topped up and may ultimately be sold. Those that out-perform get added to. I monitor how much of my overall portfolio is beating VWRL."

Such measurement presumably includes share price performance?
How does the method accomodate fundamentals getting behind or ahead of pricing, as it seems to with the proviso on HL?
Thanks.

Thanks Mr Helpful

Yep, I've learned a lot from this thread, thank you.

In answer to your question, I think what I'm doing in a cup half full kind of way is trying to pick a small basket of quality stocks that will perform better than average and hang on to them for a long time.

For example, you could say that the Amazon share price is somewhat ahead of its fundamentals, on any kind of normal metric. And each time I buy I take a bit of a deep breath before doing so. Amazon still represents less than 1% of my portfolio so I am building, slowly. AMZN could easily drop 50% in a year but I would keep buying.

I think HL was overbought at its recent £19.50 price but may be more sensible at around £15 (if soon). However, it’s my largest individual stock and I own HL indirectly through Lindsell Train as well. Therefore, I am not building this position at the moment.

Lastly and importantly, I am in this thread more focused on describing how I number crunch and looking to forum responses to check for errors in my approach rather than setting out a “method” for making decisions. I can see though how you might have interpreted my words.

Performance relative to VWRL is not a trigger it’s a guide but an important one to me. If I can’t pick shares that outperform VWRL (and there is a good chance of that) then I probably chuck it all on VWRL and wrap it up!!!

Hope that answers your question?

Thanks

Harry
King Lodos
Posted: 15 April 2018 13:43:34(UTC)
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Harry Trout;60635 wrote:
King Lodos

Thank you for the clarifications over the weekend regarding CAGR. I think what I’ve drawn from this is that it can be an answer for measuring returns, it’s just not your cup of tea. And I have shown that you can make it work for you for outflows without creating an infinite answer; therefore not quite so mathematically dubious as forum readers might have been led to believe.

I also disagree with your view that it makes you focus on the fund industry, is only useful for the fund industry and is not of any use in assessing your investing behaviour (comments taken from 3 separate posts by you in this thread)

Take for example my investment in Hargreaves Lansdown, one of my forever high quality, high momentum investment stocks. I had an interesting learning experience with this share in 2011 when I bought a few and then bottled it and sold. I then starting gradually building a new position in 2012 and haven’t sold since. I have added regularly and have reinvested dividends but haven’t sold any since the rebuild from 2012.

The CAGR for my investment in Hargreaves Lansdown (taking account of additions and dividends) is 19.5% to the end of March 2018. That’s high, and it’s been higher looking at my monthly record. My last purchase was on 05/07/17 at 1,268p. As it’s now my largest single investment stock using X-ray on Hargreaves Lansdown (5%). I would need the price to be nearer to £15 before considering topping up again.

The CAGR calculation for individual investments is a doddle and copes perfectly well with disposals making sure to adopt a consistent method (first in first out being my preference).

Hargreaves Lansdown continues to wear its gold star and I shall pay attention to those last remaining parts of my portfolio that are showing CAGR less than 10%.

CAGR works for me.



Well I have to be honest .. The CAGR approach makes no sense at all.

Investing in a bull market is shooting fish in a barrel .. You can pick stocks that 'go up faster' – but it doesn't gel well with 'hold forever' (by any stretch), as momentum reversals are also real, and tend to be the same phenomena in reverse.

There are two price-dependent effects in investing:
Momentum (things that go up keep going up);
Mean reversal (what's gone up goes down, and what's been down goes up).

At *some* point your best performers become your worst performers .. At any one time, a stock is generally either being pushed up by momentum, or mean reverting towards its fundamentals.

With a buy-and-hold approach, those fundamentals ARE all that matters, because they're the long-term value .. Buying on momentum therefore is usually an awful strategy, because it means paying inflated/optimistic prices .. A perfect example of this was the Tech boom.

You can trade momentum, but it's a completely different approach (and trust me, people (and computers) have been doing it a long time, and know all the pitfalls) .. Mixing these approaches is just random .. Jesse Livermore (one of the great momentum traders) commented that it's shocking how people put more time and research into buying a secondhand car than they do their own investments .. An afternoon spent reading about momentum and mean reversal would put you in a much more informed position

Apostate
Posted: 15 April 2018 13:56:37(UTC)
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Achieving a 17%+ annualised growth from FTSE 100 shares in the last 10 years is quite an achievement. Certainly no fund/trust managers have been able to do this.
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King Lodos on 15/04/2018(UTC)
King Lodos
Posted: 15 April 2018 14:17:29(UTC)
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Apostate;60642 wrote:
Achieving a 17%+ annualised growth from FTSE 100 shares in the last 10 years is quite an achievement. Certainly no fund/trust managers have been able to do this.


As Carl Sagan said: “Extraordinary claims require extraordinary evidence.”
Mr Helpful
Posted: 15 April 2018 14:40:12(UTC)
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Harry T,
If it works for you; that's copacetic. Keep at it.
Don't throw out the baby with the bath-water.

Here are some counterpoints taken from 'The Long and Short of It' by John Kay, which is a bit heavy going and unfocused IMHO, so far from a favourite investment book.

+ Why do I want to buy what they want to sell?
The returns the buyer will obtain are exactly the returns the seller could have obtained.

+ Basic principles of Stock-Picking are concerned with fundamental value, not momentum in the share price.

+ Markets are characterised by short-term serial price correlation, or momentum. In the long-run there is mean reversion to fundamental value.

+ Options (in a broad sense) and Diversification are the most effective responses to cope with a complex world.


The above, albeit conventional thoughts, occurred thinking around the CAGR measure, which has certainly set this investor ruminating.
Thanks for the info.

P.S. Thanks for clarification around momentum in next post.
Makes sense.
Equals (high) Long-Term Growth (Revenue, Profits, Earnings, Cash Flow and maybe Dividends, etc).
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Harry Trout on 15/04/2018(UTC)
Harry Trout
Posted: 15 April 2018 14:41:01(UTC)
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King Lodos

I'm probably using language too loosely. I use CAGR to measure long term performance, it informs decisions but does not direct them.

When I say I'm buying high momentum high quality shares for the long term I mean that I am buying shares that typically that have the characteristics of high momentum (shares that typically have consistently rising earnings). I'm not necessarily saying that I am buying thereafter on momentum. I understand the difference and I can see how my words may have mislead, apologies.

For example Diageo, a high quality share with good momentum characteristics that I added for the first time a year or so ago at £22.77. Topped up since at higher prices to build the holding. While it's characteristics remain high quality and high momentum I will continue to buy. It would be nice to pick up in dips but it has remained relatively resilient lately.

Ultimately though if long term Diageo doesn't make me 10% CAGR and I can find others that can it will be chopped out.

As I mentioned to Mr Helpful, I was mainly talking in this thread about the mechanics of CAGR for calculation and I'm saying I am still comfortable with it as an assessment tool. I know you use dollar weighted.

Hope this clarifies.
Stephen B.
Posted: 15 April 2018 15:04:56(UTC)
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I'd say the main issue here is not the good performance of the 250 but the poor performance of the FTSE 100. For at least 20 years I've been trying to convince people that the FTSE 100 is a terrible investment portfolio - with fairly little success I think, but let's have another go ... the basic point is that it's a size-weighted index so you aren't really investing in 100 stocks in any meaningful way, more like 30. Secondly, it isn't even a diversified 30 like the DJIA, it's concentrated in a few specific sectors - banks, oil, pharma, retail, utilities, mining. It happens to be the case that those sectors haven't done very well over the last 20 years, obviously especially the banks, but even without that it's a bad idea to have such an undiversified portfolio - would you really want to split your entire portfolio between just (say) BP, HSBC, GSK, M&S, BHP and United Utilities? It's also quite dominated by multinationals and you then have the question of why you would focus only on UK-listed multinationals - why Shell but not Exxon, why GSK but not Roche, why Unilever but not P&G, let alone areas like car manufacture and tech where there are few UK-listed companies at all. Conversely, if the idea is to be exposed to UK-oriented companies the FTSE 100 hardly does that at all.

A final point is that it's distorted the debate about active funds vs trackers, because many funds can claim to have outperformed the FTSE 100 or All Share simply by having a more diversified portfolio. If they compared against the 250 index there would be many fewer showing outperformance.
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Mr Helpful on 15/04/2018(UTC), Tim D on 15/04/2018(UTC), Sara G on 15/04/2018(UTC)
King Lodos
Posted: 15 April 2018 15:53:43(UTC)
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Harry Trout;60649 wrote:
King Lodos

I'm probably using language too loosely. I use CAGR to measure long term performance, it informs decisions but does not direct them.

When I say I'm buying high momentum high quality shares for the long term I mean that I am buying shares that typically that have the characteristics of high momentum (shares that typically have consistently rising earnings). I'm not necessarily saying that I am buying thereafter on momentum. I understand the difference and I can see how my words may have mislead, apologies.

For example Diageo, a high quality share with good momentum characteristics that I added for the first time a year or so ago at £22.77. Topped up since at higher prices to build the holding. While it's characteristics remain high quality and high momentum I will continue to buy. It would be nice to pick up in dips but it has remained relatively resilient lately.

Ultimately though if long term Diageo doesn't make me 10% CAGR and I can find others that can it will be chopped out.

As I mentioned to Mr Helpful, I was mainly talking in this thread about the mechanics of CAGR for calculation and I'm saying I am still comfortable with it as an assessment tool. I know you use dollar weighted.

Hope this clarifies.


'Momentum' usually refers to share price moves within a 12 month window .. So Diageo's not got particularly high momentum, but it's got good long-term growth.

The clue as to why that isn't a good basis on which to invest is this:

https://sc.cnbcfm.com/applications/cnbc.com/resources/files/2015/03/02/ndx%20top%20weighted_0.png

In 2000, 7 of the top 10 stocks in the Nasdaq (i.e. those that had GROWN the most) had dropped out of the top 10 by 2015, and all of those that remained had a smaller market share .. And this is the pattern in almost every market.

So you don't make higher returns just investing in things that have grown the most in the past (in fact it's something fund managers avoid doing) .. If you did, firms wouldn't need to employ MIT graduates, and no one would need to read books or study great investors .. Even betting on something as relatively simple as boxing isn't that simple: i.e. if you always bet on the favourite, the only guaranteed is bankruptcy, because the market prices the obvious in long before you do


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Harry Trout on 15/04/2018(UTC)
Stephen B.
Posted: 15 April 2018 16:18:50(UTC)
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On the general point about performance measures: in my case net worth and CAGR aren't vastly different because I stay fully invested, I don't trade a lot and at least for quite a long time inflows and outflows have been fairly small compared with the total. I track both, but mainly to get a general idea of how things are going, not to set any particular target. I think it's very easy to get caught up in all the short term noise and lose sight of the bigger picture of how you're doing overall and where you'd like to be.

I just had a look at my long-term net worth graph (investments only, so not my house or final-salary pension). As it happens I started tracking systematically in April 1999. The big picture is that in the ten years from then I was up about 25%, and in the subsequent 9 years I'm up more or less exactly a factor 3 (so something like 13% CAGR). The reason for that difference is obvious - the first ten years contained two enormous market setbacks, the second period started at the bottom of the market and has been a largely uninterrupted bull market ever since. My guess is that most diversified investors will have something which looks broadly similar.

My basic conclusion is that the bulk of your long-term returns will be determined by the global investment environment and there's nothing you can do about that. What I can say is that I've avoided any real catastrophe along the way, that my overall returns seem to be decent given the circumstances, and that I have more than enough income to give me a comfortable lifestyle, and that's basically what I'm after. In ten years' time if I find I'm up another factor 3 that will be very nice, but far from essential, and I'm certainly not planning on taking any significant risks to try to achieve it.
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Harry Trout on 15/04/2018(UTC), Mr Helpful on 15/04/2018(UTC), Tim D on 15/04/2018(UTC)
Harry Trout
Posted: 15 April 2018 16:36:34(UTC)
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King Lodos;60651 wrote:
So you don't make higher returns just investing in things that have grown the most in the past

Yep, I think that before every investment I make and take a deep breath!

My 6 (in order of inception) are Hargreaves Lansdown, Berkshire Hathaway, Amazon, Diageo, Unilever and Microsoft.

The stars have been the first 3, the last 3 too early too tell. Happy to keep you posted and thanks for the post, I do get what you are saying !!!

Cheers

Harry
King Lodos
Posted: 15 April 2018 17:39:07(UTC)
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Harry Trout;60654 wrote:
King Lodos;60651 wrote:
So you don't make higher returns just investing in things that have grown the most in the past

Yep, I think that before every investment I make and take a deep breath!



Well there's no reason to think any of them are bad stocks .. They're top holdings of Lindsell Train, Fundsmith, SMT, and Buffett, and they're doing a lot of research on them to make sure they're good holdings.

But *that* is your strategy: hedge fund replication .. Holding the top stocks of hedge funds is perfectly valid (there's a book: Investing with the House, which covers it .. Your edge can be their research, and it can be concentration).

What you're doing with CAGR is basically astrology – and doing nonsensical things introduces chaos, into your portfolio and into your thinking .. And bull markets don't last forever .. Chaos is what makes people do stupid things, because in this case your belief systems are based on a positive feedback loop (being on the right side of the most obvious trades in this market) – and like Buffett says: Only when the tides go out do you get to see who's been swimming naked .. Right now this is the same conversation I was having 6 months ago with people in Bitcoin, and 6 years ago with people who thought they could always get away with drink driving
Harry Trout
Posted: 15 April 2018 18:30:03(UTC)
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Thanks King Lodos, good stuff.

Like magpies we probably all borrow from the greats either consciously or sub-consciously.

Someone once said "you owe it to yourself to be your own fund manager" for example. There is no point in paying management charges to a fund for holding shares you feel comfortable owning directly.

This forum is a fantastic melting pot of ideas

Cheers

Harry
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King Lodos on 15/04/2018(UTC)
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