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Advice for 30yr old with high risk tolerance
Mr Helpful
Posted: 19 May 2018 10:35:13(UTC)
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Bvlp;62522 wrote:
1. However, with index trackers, am I missing something obvious? If market cap is determined by those making active decisions on where to allocate their capital, doesn’t the rise of index trackers make the market cap %’s increasingly ‘dumb’, i.e. money which has no opinion on the future of the individual business itself. Also, doesn’t new money into index trackers amplify this ‘dumbness’ by further increasing the price of those with the highest market cap? ......
2. will we all just be throwing money at the market based on a declining number of active decision makers and an increasing number of people who have no opinion? Won’t this eventually reach breaking point? I assume this view is flawed ....

This topic raises its' head from time to time.
1. The use of a tracker is justified inter-alia on grounds of not chasing the latest hot stocks/funds but settling instead for the quite generous market returns. When combined with rebalancing, the passive investor has a head start on the 'average investor', who tends to buy and sell at the wrong pricing, or we would see an efficient market with steady risng prices without significant fluctuations.
The 'average investor' sadly has quite a poor record.
So it depends very much on who the passive investor is being compared with. Does not mean that a more intelligent approach might not outperform passive. Therefore audience variable.
The point is valid about 'tracker dumbness', and tracker history has horrid examples such as Japan 1980s.

2. There can never be a breaking point. There will always be some one ready to move in to exploit inefficiencies and hence be rewarded.
Alan Selwood
Posted: 19 May 2018 10:58:28(UTC)
#23

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I did see an article suggesting that the more people use index trackers, the less money would be devoted to new growth areas and the more would go into companies on the basis of their existing market capitalisation rather than their merits as good, profitable companies with prospects. Personally, I never buy companies based on their market capitalisation, unless they also have solid profit margins and future prospects. In the megacap area, I prefer to use managers like Nick Train and Terry Smith, rather than pick my own.

Only time will tell.

If you have specialist knowledge in a particular area, there is some merit in devoting a small part of your investments to this sector. If your knowlege is better than the average fund manager in a niche area, who knows - you might outperform the professionals! You might even become a niche fund manager if you're really good and very interested in the topic.

But don't concentrate only on what you know, because time passes and key area of the market change, leaving some previous 'hot' sectors looking moribund.

If you want a manager who seeks out the 'new kid on the block' sectors, read up about Scottish Mortgage Trust and Monks Investment Trust, and Allianz Technology. Also The Biotech Growth Trust and the International Biotechnology Trust.
2 users thanked Alan Selwood for this post.
Sara G on 20/05/2018(UTC), Tim D on 20/05/2018(UTC)
King Lodos
Posted: 19 May 2018 14:09:00(UTC)
#22

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Bvlp;62522 wrote:
However, with index trackers, am I missing something obvious? If market cap is determined by those making active decisions on where to allocate their capital, doesn’t the rise of index trackers make the market cap %’s increasingly ‘dumb’, i.e. money which has no opinion on the future of the individual business itself. Also, doesn’t new money into index trackers amplify this ‘dumbness’ by further increasing the price of those with the highest market cap? As index tracking rises and highly paid fund managers start losing their jobs, will we all just be throwing money at the market based on a declining number of active decision makers and an increasing number of people who have no opinion? Won’t this eventually reach breaking point? I assume this view is flawed, grateful is somehow could explain how it's flawed?


You'd think so .. However

Here's a very in-depth piece that demonstrates you only need a small number of active traders – you could happily have 90% of the market indexed, because those indexes will still be an expression of what's going on in the active part, AND the active part will probably be smarter (50 years ago, half the market was amateurs .. these days, the vast majority of trades are made by increasingly smart algorithms):

http://www.philosophicaleconomics.com/2016/05/passive/


On the other hand, the effects of people buying and selling index funds, and trends in alternative trackers, would create different types of inefficiency .. Inefficiencies across broad categories of stock: geographies, value styles, momentum, etc. and asset classes .. Which does inform the investing strategy I developed (which has done quite outsized returns for a while).

So if you're going to play the active game, you have to know your competition – what they're doing, how they behave, what their weaknesses are .. I spent time on forums for passive investors, and trend followers, and traders – because it's the only way to immerse yourself properly .. And if you know them well enough, and know your own natural edge, then you can build a strategy that works .. But of course by the time someone else works it out, let alone writes about it, it's in trouble. (just like someone working out a new way to win at poker – how long would that work?)

Specialist knowledge can take you far, but you do have to see the business, and not just the technology .. Technology's been the worst sector to invest in since the 60s (bizarrely) because people tend to chase ideas and products, and miss the real basics of how to look at a business .. Which is what Warren Buffett is particularly good at, and why investors read his shareholder letters like a Bible.

What Work on Wall Street is a classic, but the more quantitive approaches to investing tend to degrade as more people learn about them .. You have to either keep ahead of the curve on those approaches (if you enjoy analytics and maybe programming), or avoid playing that game and go the Warren Buffett route and understand business

Law Man
Posted: 20 May 2018 08:39:02(UTC)
#24

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BVIC: in response to your last:

1. index trackers. The counter argument applies. As a good share grows, your contributions to it increase, so running a winner. When a bad share falls, your contributions to it become less so pruning the losers.

Allocation. When you say no more than 50% away from the FTSE all market, consider whether 50% or more should be in the World Index tracker.

2. Managed funds: Start by thinking what theme(s) you want. world Quality such as Fundsmith and LT Global seems a good idea. Now think if you want to add any other themes.

3. Individual stock picking. By all means try a narrow theme such as Cyber Security. Have a look at the ETF Cyber Security index tracker. If nothing else it spreads your bets, and gives you ideas for individual stocks.

I did not do well with the specialist knowledge idea. I worked for finance houses for 35 years, and knew Cattles as better than Provident Financial, so bought Catles. All went well until there was a 'fraud' and the company collapsed. Fortunately I had observed the principle of putting only a small amount in one share.

I am still, benevolently, concerned at your emotional view: child with open flame, disliking boredom. Boring cumulative gains at 7% p.a. are wonderful. Always show humility and caution.

Come back in 2019 and let us know how you get on.
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