Buy and hold vs. active portfolio management

[Value Hunter]

So_Cynical an analysis of my own buy, hold and sell decisions over the years comes to the same conclusion yours did, that I would be vastly wealthier had I never sold a single stock I owned. Yes sometimes selling turns out to be better in individual cases but on average buy and hold seems to win.

The problem I have with the analysis done by tech/a is that he has cherry picked individual examples using hindsight after the fact that fit his trading methodology perfectly and extrapolated that into the statement that his trading methodology is superior to buy and hold on average over the long run.

tech/a If you really want to prove your methodology is superior on average over the long run in real time (not just in cherry picked hindsight examples) start a new thread where in real time you go up against buy and hold fundamental/value guys for example Value Collector, Craft, Vesupria, Mclovin, ROE, (I know some of these guys stopped posting but I am just giving examples of the style of poster/investor I am referring to), etc. In 3 to 5 years time we can determine whose approach is more profitable.

p.s. I am not saying tech/a has a bad or useless methodology. It may indeed produce adequate returns for some.
I am just saying I doubt his approach beats a well implemented buy and hold approach.

 

[tech/a]

@Value Hunter
im happy to do 5hat
Ive currently sold all of my Super-holdings so timing is perfect.
I’ll post my buys again when they occur.
Supported with charts.
Will be a slow thread so will be easy to follow.I reckon I can last another 20 years

Mind you my Super ( Longterm) is traded differently to my short term discretionary trading
But you’ll all pick it up.

 

[sptrawler]

I thought I had explained it before, what you are basically saying is that after FMG dropped from $25 to $20 that should have triggered me to sell, but obviously I had no way of knowing that the price would continue to fall, it certainly wasn’t clear to me at the time.

In fact six months earlier FMG had dropped from $25 to $20 and then quickly bounced back, if I had sold then I would have just probably had to buy back in at a higher price, while triggering a capital gains tax event where I would have had to pay about $7 a share in capital gains tax, and also potentially missed out on the $1.47 dividend.

The end result is that in Jan had I sold I would have ended up with less shares because of buying back in higher, along with the CGT and trading costs deducted, so then would have had a smaller dividend from the final dividend too.

But let’s say I didnt sell out in Jan but did this time round at $25, again I would have had to hand over $7 in CGT leaving me with $18 after tax to buy the shares back, but I would have also missed the $2.11 dividend, so my break even point would be about $15.90, but again I had no information to guarantee it would drop that far, and probably would have bought back in earlier than that anyway, because I doubt I would have timed it perfectly.

basically what I am saying is that I think it’s risky either way, and the company is going in the direction I want it to go, I think it’s safer for me, and less stress and work, to just stay put.

A case in point, I bought VUK when they crashed to $1.10 in April 2020, when the U.K announced their second lockdown in Oct 2020 I sold at around $2.40 on the hope of an expected crash.
They never went down and now are at $3.76, so I'm still waiting and it looks like I've stuffed up yet again.
When I bought them I thought they are about a $4-$6 share, but as the Duck says, take the opportunities, so I did. ?
The problem is the share income, is my only income, I wish it was my second income then i could laugh it off.?
Mine isn't play money, it is the difference between being self funded, or on the pension.
The thing is one size doesn't fit all, I think from my 30 years experience, I can't tell anyone what they should or shouldn't be doing.
At different stages of your life, the priorities and options change, when i was working on a very high salary losses were a part of life.
Now when i've been retired for 10 years and living on my investment decisions, they have become much more relevant.

 

[againsthegrain]

A case in point, I bought VUK when they crashed to $1.10 in April 2020, when the U.K announced their second lockdown in Oct 2020 I sold at around $2.40 on the hope of an expected crash.
They never went down and now are at $3.76, so I'm still waiting and it looks like I've stuffed up yet again.
When I bought them I thought they are about a $4-$6 share, but as the Duck says, take the opportunities, so I did. ?
The problem is the share income, is my only income, I wish it was my second income then i could laugh it off.?
Mine isn't play money, it is the difference between being self funded, or on the pension.
The thing is one size doesn't fit all, I think from my 30 years experience, I can't tell anyone what they should or shouldn't be doing.
At different stages of your life, the priorities and options change, when i was working on a very high salary losses were a part of life.
Now when i've been retired for 10 years and living on my investment decisions, they have become much more relevant.

This used to happen to me all the time, almost like the market was doing it to troll me, so after I while I decided to sell half when selling "high" if it goes higher you can sell the other half or half of that later or keep it long. If you did get the high right then you are still winning just 50% less but winning. Better to have 3rd party insurance then none

 

[sptrawler]

This used to happen to me all the time, almost like the market was doing it to troll me, so after I while I decided to sell half when selling "high" if it goes higher you can sell the other half or half of that later or keep it long. If you did get the high right then you are still winning just 50% less but winning. Better to have 3rd party insurance then none

Spot on ATG, I just need to reign in the greed.
Like I said a lot depends on circumstances, one size doesn't fit all, one persons life changing splurge is another persons ashtray money.

 

[sptrawler]

I should have added, these opportunities come around about every 7 years, this one seems to have gone with regard industrial/financial, but I think the opportunity is arising in Minerals.

 

[Value Collector]

@Value Hunter
im happy to do 5hat
Ive currently sold all of my Super-holdings so timing is perfect.
I’ll post my buys again when they occur.
Supported with charts.
Will be a slow thread so will be easy to follow.I reckon I can last another 20 years

Mind you my Super ( Longterm) is traded differently to my short term discretionary trading
But you’ll all pick it up.

Since we have been discussing FMG, It might be an interesting experiment to compare putting $10,000 into FMG with a buy and hold strategy with dividend reinvestment plan switched on, and $10,000 actively traded in FMG shares.

Of course each FMG trade will have to trading costs and 30% capital capital gains tax deducted before rentry, and if you are holding on ex-dividend date you can add the dividend in.

where as the capital gain on The buy and hold will just be deducted at the end.

——————
(I understand this might be a lot of work, so understand if you don’t want to do it though)

 

[tech/a]

@Value Collector

FMG isn’t something I’d trade as a trade type issue
I’d place it if it met criteria into a longer “ Trade/Investment”
Portfolio. I have/ did have/will have again a SMSF Portfolio.
Using different metrics to anything discussed.

For trading I prefer Index Futures and small caps.

 

[Value Collector]

@Value Collector

FMG isn’t something I’d trade as a trade type issue
I’d place it if it met criteria into a longer “ Trade/Investment”
Portfolio. I have/ did have/will have again a SMSF Portfolio.
Using different metrics to anything discussed.

For trading I prefer Index Futures and small caps.

What about if you did the same thing I suggest for FMG but used VAS instead?

 

[tech/a]

What about if you did the same thing I suggest for FMG but used VAS instead?

I think you mean VSA.

V/C Somehow this has morphed into Trading V Long term holding.
The point Im making is that when price falls 20% really quickly as it has over the 30 years Ive been trading (around 6 times.)
and there is no direct link to the company in question from a fundamental view---then there is amazing opportunity
which in MY view should be taken. Times when all Blue chips take a dive because things like the GST/Tech Crash/COVID/Iron Ore Diving for no apparent reason.

 

[tech/a]

A case in point, I bought VUK when they crashed to $1.10 in April 2020, when the U.K announced their second lockdown in Oct 2020 I sold at around $2.40 on the hope of an expected crash.
They never went down and now are at $3.76, so I'm still waiting and it looks like I've stuffed up yet again.
When I bought them I thought they are about a $4-$6 share, but as the Duck says, take the opportunities, so I did. ?
The problem is the share income, is my only income, I wish it was my second income then i could laugh it off.?
Mine isn't play money, it is the difference between being self funded, or on the pension.
The thing is one size doesn't fit all, I think from my 30 years experience, I can't tell anyone what they should or shouldn't be doing.
At different stages of your life, the priorities and options change, when i was working on a very high salary losses were a part of life.
Now when i've been retired for 10 years and living on my investment decisions, they have become much more relevant.

In reply to this tragedy.
(1) Wait for a shock move down for no apparent reason 20% is a suggestion dont sell on a whim.
(2) Have a plan "B' if things dont play out as planned. But Plan "B' if you expedite plan "A" properly wont likely be needed.

 

[rnr]

I think you mean VSA.

V/C Somehow this has morphed into Trading V Long term holding.
The point Im making is that when price falls 20% really quickly as it has over the 30 years Ive been trading (around 6 times.)
and there is no direct link to the company in question from a fundamental view---then there is amazing opportunity
which in MY view should be taken. Times when all Blue chips take a dive because things like the GST/Tech Crash/COVID/Iron Ore Diving for no apparent reason.

I would suggest that VC is referring to the ticker VAS.

 

[Value Collector]

I think you mean VSA.

V/C Somehow this has morphed into Trading V Long term holding.
The point Im making is that when price falls 20% really quickly as it has over the 30 years Ive been trading (around 6 times.)
and there is no direct link to the company in question from a fundamental view---then there is amazing opportunity
which in MY view should be taken. Times when all Blue chips take a dive because things like the GST/Tech Crash/COVID/Iron Ore Diving for no apparent reason.

No I meant VAS (vanguard asx 300 index etf)

 

[tech/a]

I would suggest that VC is referring to the ticker VAS.

No I meant VAS (vanguard asx 300 index etf)

To what end? Isn't the Long term Re entry and Management of my SMSF account going forward more in line with the discussion/Thread ?
Hopefully I'll be around with it for 20 years or so (68 next B/D).

 

[Sir Burr]

So_Cynical an analysis of my own buy, hold and sell decisions over the years comes to the same conclusion yours did, that I would be vastly wealthier had I never sold a single stock I owned.

I'm in the same camp these days.
Many years system testing every which way while paying data, software, tax man, accountant, subscriptions, logging trading data, receiving a crap load of ASX letters, storing it all and probably a bunch of things forgotten. Hey I'm still a good Excel coder at least

I'm getting closer to shredding the lot after the 5 years tax records required to hold (not including company stuff).

Overall I think over the handful of systems I traded, I'm square (compared to market) after costs but with extra work.

That includes a system of a well known author (mentioned in this thread) I ran for a few years which was modified during that time due to poor performance. I believe has been modified since plus I see now being modified again. A professional trader with a system that needs repeated optimising due to poor performance against the market.

Well done Tech for doing it constantly. I read qlffrog's thread and feel happy (sorry qldfrog but human nature or is it just me?) that I'm now passive investing.

 

[Value Collector]

To what end? Isn't the Long term Re entry and Management of my SMSF account going forward more in line with the discussion/Thread ?
Hopefully I'll be around with it for 20 years or so (68 next B/D).

I thought the best experiment to measure the performance difference between buy and hold vs active management would be to measure the difference between total shareholder return after CGT on by and hold over time vs Total return on the same asset the trader received after the additional trading costs and CGT along the way.

Because that’s the real point isn’t it, eg to find out whether some one jumping in and out of a stock actually ends up out performing some one that just stays put by enough to justify all the extra work they do.

After all if you think back to the CBA example, there is no doubt that a trader had a decent chance of making money on CBA over the last 30 years, because the share itself averaged a 15% compounded return, but the real test is whether the trader was able to beat that 15% compounded return,l.

Eg if after years of active management, trading costs and premature CGT the trader only also averaged 15% or less we could happily say he wasted his time and should have just held, if he was able to earn say 20% we could say that the active trading might have been worth the additional 5% return.

Basically what I am saying is that if we are going to conduct an experiment we need to compare apples with apples, eg buy and hold a stock or index vs trading that same stock or index.

 

[Value Collector]

For Those interested in such experiments.

Warren Buffet in 2007 made a $1 Million dollar bet that a group of 5 Hedge funds wouldn’t be able to provide their customers a return over a 10 year period that beat the S&P 500 index.

He allowed the other guy to pick any 5 Hedge funds he wanted, By 2017 it proved out that the Index beat the hedge funds and Warren won the $1 Million for his charity.

it’s hard to believe that 5 hedge funds full of super smart people, that are deeply incentivised to beat the market, and who’s full time jobs is to trade and invest still couldn’t beat the market average return, but as I explained before the headwinds of taxes and fees are significant.

the hedge funds did produce a decent return, it was just less than the market average.

 

[peter2]

@Value Collector makes a good point about the different tax regimes for active investors vs buy/hold investors. The benefit of the 50% reduction when positions are held longer than 12mths compounds over the years the investment is held. The active investor pays tax each year and starts the following year with less capital than the B&H investor.

An active trader must earn more than the market to offset this disadvantage. A quick calc shows that an active trader must earn 30% more every year to offset the extra taxes paid.



If an active trading system can't beat the market by 30% every year you're better off buying and holding.

However this only addresses the reward side of the equation. Markets have and will go down significantly in the future. The draw down in the GFC was -50% and the Covid selloff was -30%. It took the ASX market ten years to get back to the pre-GFC highs. Not a concern to younger investors but it was a serious concern for retirees and newer retirees who depend on dividends.

One of the significant advantages of active investing is reducing the size of significant draw downs. There is a cost for this benefit and it comes with a lower reward. An active investor may decide that lower DDs with occasional better years is preferable to the risk of trying to beat the market every year.

 

[Value Collector]

@Value Collector makes a good point about the different tax regimes for active investors vs buy/hold investors. The benefit of the 50% reduction when positions are held longer than 12mths compounds over the years the investment is held. The active investor pays tax each year and starts the following year with less capital than the B&H investor.

An active trader must earn more than the market to offset this disadvantage. A quick calc shows that an active trader must earn 30% more every year to offset the extra taxes paid.

View attachment 131395

If an active trading system can't beat the market by 30% every year you're better off buying and holding.

However this only addresses the reward side of the equation. Markets have and will go down significantly in the future. The draw down in the GFC was -50% and the Covid selloff was -30%. It took the ASX market ten years to get back to the pre-GFC highs. Not a concern to younger investors but it was a serious concern for retirees and newer retirees who depend on dividends.

One of the significant advantages of active investing is reducing the size of significant draw downs. There is a cost for this benefit and it comes with a lower reward. An active investor may decide that lower DDs with occasional better years is preferable to the risk of trying to beat the market every year.

It didn’t actually take the market 10 years to get back to the pre GFC levels if you include the compounded effect of dividends, looking only at price is missing the income return, which is where over half of your return comes from.

Not to mention that the absolute peak of the market is kind of irrelevant, because it represents such a short period of time, eg if you look at the asx200 chart, the lowest point of the GFC was the market All time high just a couple of years before, if you were carrying out the plan I mentioned earlier of just adding in funds every year, before and even throughout the GFC you would have done very well.

you would have only suffer an inconvenience if you went 100% in with you life savings right near the peak, which would have to be pretty unlucky, but even then dividends and time quickly healed your wounds, unless you panic and sold out and never rebought.

 

[tech/a]

@Value Collector makes a good point about the different tax regimes for active investors vs buy/hold investors. The benefit of the 50% reduction when positions are held longer than 12mths compounds over the years the investment is held. The active investor pays tax each year and starts the following year with less capital than the B&H investor.

An active trader must earn more than the market to offset this disadvantage. A quick calc shows that an active trader must earn 30% more every year to offset the extra taxes paid.

View attachment 131395

If an active trading system can't beat the market by 30% every year you're better off buying and holding.

However this only addresses the reward side of the equation. Markets have and will go down significantly in the future. The draw down in the GFC was -50% and the Covid selloff was -30%. It took the ASX market ten years to get back to the pre-GFC highs. Not a concern to younger investors but it was a serious concern for retirees and newer retirees who depend on dividends.

One of the significant advantages of active investing is reducing the size of significant draw downs. There is a cost for this benefit and it comes with a lower reward. An active investor may decide that lower DDs with occasional better years is preferable to the risk of trying to beat the market every year.

Back at the grind after a week of flu so pretty hectic.
Will answer when I can.

Peter what about the extra shares you would be able to purchase when re purchasing at the lower rate plus the extra dividends on the extra shares you would have.?