Buy and hold vs. active portfolio management

[Value Collector]

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.?

I think what he means is that you might not be able to purchase more shares once you have deducted your Capital gains tax and trading costs.

Think back to that CBA example, the guy that bought in at $5.40 and held, had his capital compounding away at 15%, for 30 years and never had to divert any of his funds away from his portfolio to pay taxes.

where as the guy that traded in and out, would have regularly had to divert funds away from his portfolio to pay taxes, not only missing out on the 50% CGT discount, but also sometimes missing out of franking credits due to the 45 day rule and sometimes missing dividends completely.

of course it is possible to still beat the buy and hold guy by trading if you manage to time your buys and sells Well.

But what Peter is pointing out is that where the Buy and Hold guy earned 15% per year, the trader would have to be earning at least 20% (30% more) per year to break even after taxes and trading costs.

it’s a point often missed, by delaying the Capital gains tax by holding long term, can allow you to essentially have those “tax dollars” continue growing and earning you dividends for decades before you have to end up handing them over to the government.

 

[tech/a]

Yes I see what he is saying and getting at. But if you see the other part of the equation happening only a handful of times over a 20 years
then some if not all plus some will occur. The capital gains would be from buy to sell and often over a year.
My example was back of envelope which is now being drilled to death!
It seems that back of envelope is fine if it supports a view if not lets drill the B jeeezzus out of it.

 

[barney]

Good Thread

Buy and Hold vs. Trading??

Some are good at "evaluating" longer term value. (Investing?)

Some are good at "evaluating" shorter term value (Trading?)

Neither are better or worse in my view

Play to your strengths!

ps "Strength" is realized through experience

 

[Greynomad99]

This sounds like an argument I had with a mate who is a sit and hold tragic - not that there is a lot wrong with sit and hold if that is your trading plan. He had held BHP for several years and had great dividends off it but no capital growth while an active trade over the same period would have returned him a great profit (I didn't take the exercise to the point of seeing if the hold period covered the shares exdividend date).

For what it is worth I did a quick active trade on FMG using simple rules (see below) which reminded me that it is a bugger to trade because it breaks stop losses only to immediately recover. Anyway, 5 of the 6 trades were positive and the one that was a loss only fell by 1.5%. Overall profit was 573% with active trades open for 38 weeks out of 64.

	Open	Gain	Close		mths in trade
Apr 2016 - March 17	$3.00​	101%​	$6.03​		11​
Jan 2019 - Aug 2019	$6.03​	62%​	$9.77​		7​
Sept 2019 - March 2020	$9.77​	5.60%​	$10.32​		6​
April 2020-Sept 2020	$10.32​	44%​	$14.85​		5​
Oct 2020 - March 2021	$14.85​	17.40%​	$17.44​		5​
Apr 2021 - Aug 2021	$17.44​	-1.50%​	$17.18​		4​
	Growth over period	573%​		38​

Sell Rules:
15% stop loss on buy in price or higher weekly trough
Two consecutive weekly closes below 12 week uptrend lines
Buy rules
2 consecutive weekly closes above a 12 week downtrend plus confirmation of new 12 week uptrend
If break of uptrend does not form a valid weekly downtrend then buy on break to high side.

This was done quickly - so no guarantees as to accuracy.

 

[Value Collector]

Good Thread

Buy and Hold vs. Trading??

Some are good at "evaluating" longer term value. (Investing?)

Some are good at "evaluating" shorter term value (Trading?)

Neither are better or worse in my view

Play to your strengths!

ps "Strength" is realized through experience

Agreed, definitely play to your strengths, that’s what I do, it is interesting to break it down to understand the pros and cons of both options though, because a lot of the time the truth of situations is counter intuitive.

I for one feel that this conversation has helped me, it was actually super interesting for me to sit down and break down the numbers on CBA, (I literally went through the historical dividends and DRP reinvestment prices one by one, took about an 1hour for 30 years of data)

what was interesting to me is how good the buy and hold for 30 years really was, but also how many times through the period buying and holding would have seemed silly and caused a nervous belly a lot of stress, but still produced a fantastic 15% return.

I then looked over Woolworths and BHP because they were pushed heavily to “mums and dads” in the 90’s and they were similar.

As I said it’s counterintuitive, you would think high amounts of activity should guarantee better results, but the headwinds you face by being active can be pretty strong, I think it’s something you have to understand before attempting it.

 

[Greynomad99]

This sounds like an argument I had with a mate who is a sit and hold tragic - not that there is a lot wrong with sit and hold if that is your trading plan. He had held BHP for several years and had great dividends off it but no capital growth while an active trade over the same period would have returned him a great profit (I didn't take the exercise to the point of seeing if the hold period covered the shares exdividend date).

For what it is worth I did a quick active trade on FMG using simple rules (see below) which reminded me that it is a bugger to trade because it breaks stop losses only to immediately recover. Anyway, 5 of the 6 trades were positive and the one that was a loss only fell by 1.5%. Overall profit was 573% with active trades open for 38 weeks out of 64.

	Open	Gain	Close		mths in trade
Apr 2016 - March 17	$3.00​	101%​	$6.03​		11​
Jan 2019 - Aug 2019	$6.03​	62%​	$9.77​		7​
Sept 2019 - March 2020	$9.77​	5.60%​	$10.32​		6​
April 2020-Sept 2020	$10.32​	44%​	$14.85​		5​
Oct 2020 - March 2021	$14.85​	17.40%​	$17.44​		5​
Apr 2021 - Aug 2021	$17.44​	-1.50%​	$17.18​		4​
	Growth over period	573%​		38​

Sell Rules:
15% stop loss on buy in price or higher weekly trough
Two consecutive weekly closes below 12 week uptrend lines
Buy rules
2 consecutive weekly closes above a 12 week downtrend plus confirmation of new 12 week uptrend
If break of uptrend does not form a valid weekly downtrend then buy on break to high side.

This was done quickly - so no guarantees as to accuracy.

I meant to add this chart to my post re FMG back test trade.

 

[divs4ever]

No I meant VAS (vanguard asx 300 index etf)

that is an interesting twist ( although in theory index ETFs were designed for BIG players to trade the trends )

the big $$$ value would stop me from that style ( in VAS ) .. but 20% gain is a 20% gain whether on penny-dreadfuls or CBA ( or VAS )

the 'guaranteed liquidity ' ( aka market makers' ) gives you a safety net nearly all of the time


maybe i should test it in the comp ( with an index ETF ) in the comp. ( for November or January )

cheers

BTW IMO a proper active manager should have some reasonable trading skills ( say swing-trading , or trend-trading ) sadly my trading skills are very primitive , but i do own a trusty calculator to tell if a deal really is that good

 

[tech/a]

Buy and Hold vs. Trading??

Just by the way the thread title is Joe Blows
when he moved the discussion from the FMG thread

 

[barney]

Just b6 the way the thread title is Joe Blows
when he moved the discussion from the FMG thread

Yeah Cheers Tech. I'm late to the party here.

Appreciate the input particularly yours and V/Collector however, regardless of the Thread name etc

 

[Value Collector]

This sounds like an argument I had with a mate who is a sit and hold tragic - not that there is a lot wrong with sit and hold if that is your trading plan. He had held BHP for several years and had great dividends off it but no capital growth while an active trade over the same period would have returned him a great profit (I didn't take the exercise to the point of seeing if the hold period covered the shares exdividend date).

For what it is worth I did a quick active trade on FMG using simple rules (see below) which reminded me that it is a bugger to trade because it breaks stop losses only to immediately recover. Anyway, 5 of the 6 trades were positive and the one that was a loss only fell by 1.5%. Overall profit was 573% with active trades open for 38 weeks out of 64.

	Open	Gain	Close		mths in trade
Apr 2016 - March 17	$3.00​	101%​	$6.03​		11​
Jan 2019 - Aug 2019	$6.03​	62%​	$9.77​		7​
Sept 2019 - March 2020	$9.77​	5.60%​	$10.32​		6​
April 2020-Sept 2020	$10.32​	44%​	$14.85​		5​
Oct 2020 - March 2021	$14.85​	17.40%​	$17.44​		5​
Apr 2021 - Aug 2021	$17.44​	-1.50%​	$17.18​		4​
	Growth over period	573%​		38​

Sell Rules:
15% stop loss on buy in price or higher weekly trough
Two consecutive weekly closes below 12 week uptrend lines
Buy rules
2 consecutive weekly closes above a 12 week downtrend plus confirmation of new 12 week uptrend
If break of uptrend does not form a valid weekly downtrend then buy on break to high side.

This was done quickly - so no guarantees as to accuracy.

I am just trying to understand your trades there, would you have actually out performed a buy and hold from $3 after the trading costs, CGT and the dividends missed?

 

[Greynomad99]

I am just trying to understand your trades there, would you have actually out performed a buy and hold from $3 after the trading costs, CGT and the dividends missed?

I wasn't trying to make a case for either method - although I expected the active trade to have done better than it did. If you bought in at $3 and today's price is $15 the sit and hold plan made a profit of 400%. I haven't looked at dividends but they wouldn't have made another 173%. You also need to consider the time cost of money. The sit and hold investor had his capital tied up for the full 5 years while the active trader's capital was only invested in the stock for a bit more than half as long.
Also the trading plan I used was the simplest I could think of - so it was easy to apply. FMG had two big falls which made a range of sell signals a more sophisticated trading plan might have avoided.

 

[sinic]

Plenty of talk about the evils of CGT, however, within an SMSF these considertaions are of less or no concern, since taxation may be 15% or 7.5% in accumulation mode and 0% in pension mode.

 

[Value Collector]

I wasn't trying to make a case for either method - although I expected the active trade to have done better than it did. If you bought in at $3 and today's price is $15 the sit and hold plan made a profit of 400%. I haven't looked at dividends but they wouldn't have made another 173%. You also need to consider the time cost of money. The sit and hold investor had his capital tied up for the full 5 years while the active trader's capital was only invested in the stock for a bit more than half as long.
Also the trading plan I used was the simplest I could think of - so it was easy to apply. FMG had two big falls which made a range of sell signals a more sophisticated trading plan might have avoided.

I don’t want to go into the full explanation again because it’s been explained above multiple times, but you have to also take into account the multiple times the trader paid Capital gains tax at full price, where as the buy and hold guy hasn’t paid any tax yet, and when he does eventually pay he will get a 50% discount.

basically there total growth wouldn’t have been 573% because after each trade a certain amount of the capital would have been diverted to the government, and not been available for the next trade, and non of the trades qualify for the 12 month capital gains tax discount.

 

[Value Collector]

Plenty of talk about the evils of CGT, however, within an SMSF these considertaions are of less or no concern, since taxation may be 15% or 7.5% in accumulation mode and 0% in pension mode.

I retired at 36, so my daily bread is funded by investments outside super.

but even so, the point of taxation is still very relevant even at the lower tax rates of super.

for example let’s say you have $100 capital base, and earn 100% return each year as a trader paying 15% tax

Year 1 $100 > $200 - $15 tax = $185
Year 2 $185 > $375 - $28 tax = $347
Year 3 $375 > $750 - $56 tax = $694

now the buy and hold guy, that doesn’t get tax along the way but still gets the 100% return.

Year 1 $100 > $200 = $200
Year 2 $200 > $400 = $400
Year 3 $400 > $800 = $800

See how even though they are both earning the same return, but the tax man taking his cut along the way is putting a headwind in front of the trader, so his capital is not compounding at the same rate, trading costs add to this also.

that’s why I am saying these examples that ignore tax are not accurate, and that the trader will have to be earning a much higher rate just to break even.

Yes the buy hold guy will have to pay tax eventually, but perhaps only after years or decades of the compounding game, and only at half the tax rate.

for me personally I am in the highest tax bracket, so a difference between 45% and 22.5% is huge, especially if the 45% was being charged each year along the way.

 

[tech/a]

@Value Collector
Why are you in the highest tax bracket if your retired.
where is your income coming from and why is it at the
high end? Does your wife work?

 

[Greynomad99]

I retired at 36, so my daily bread is funded by investments outside super.

but even so, the point of taxation is still very relevant even at the lower tax rates of super.

for example let’s say you have $100 capital base, and earn 100% return each year as a trader paying 15% tax

Year 1 $100 > $200 - $15 tax = $185
Year 2 $185 > $375 - $28 tax = $347
Year 3 $375 > $750 - $56 tax = $694

now the buy and hold guy, that doesn’t get tax along the way but still gets the 100% return.

Year 1 $100 > $200 = $200
Year 2 $200 > $400 = $400
Year 3 $400 > $800 = $800

See how even though they are both earning the same return, but the tax man taking his cut along the way is putting a headwind in front of the trader, so his capital is not compounding at the same rate, trading costs add to this also.

that’s why I am saying these examples that ignore tax are not accurate, and that the trader will have to be earning a much higher rate just to break even.

Yes the buy hold guy will have to pay tax eventually, but perhaps only after years or decades of the compounding game, and only at half the tax rate.

for me personally I am in the highest tax bracket, so a difference between 45% and 22.5% is huge, especially if the 45% was being charged each year along the way.

Ahh - the joys of mathematics. I guess I've always ignored tax because everyone's situation is different. I use a super fund with some carried forward losses from some long gone business dealings - and being a relatively small trader, for me the raw trading profit is all I'm looking at. I suspect for someone on a marginal rate of say 25% there probably isn't much real difference in the end result of a trader vs investor. However, one thing the analysis does overlook is how bloody good was an investment in FMG 5-6 years ago when you look at a 100% pa return and consider how many traders ever make a100% average return year in, year out.

 

[tech/a]

Ahh - the joys of mathematics. I guess I've always ignored tax because everyone's situation is different. I use a super fund with some carried forward losses from some long gone business dealings - and being a relatively small trader, for me the raw trading profit is all I'm looking at. I suspect for someone on a marginal rate of say 25% there probably isn't much real difference in the end result of a trader vs investor. However, one thing the analysis does overlook is how bloody good was an investment in FMG 5-6 years ago when you look at a 100% pa return and consider how many traders ever make a100% average return year in, year out.

A great deal has to do with the Capital your trading with.

Making 100% on $50K is easier than making 100% on $500k or More.
or 100% on any single trade for that matter.
Trading a SMSF to 100% in any year would be stellar.(Or very lucky more to the point)
In my opinion.

 

[Value Collector]

@Value Collector
Why are you in the highest tax bracket if your retired.
where is your income coming from and why is it at the
high end? Does your wife work?

The highest tax bracket kicks in at only $180,000. Last year the dividends from FMG by itself added over $750,000 to my tax return once the franking credit was included, add to that the dividends from all my other shares, some options profit, rental income from some real estate, interest from plenti and it was well over $1M last year from all sources.

My wife is retired too, she has her own Investments.

This year given that FMG just paid a $2.11 dividend ($3.00 including franking), and the next dividend is still likely to be about $1.40 at current Iron Ore price, it will probably be adding over $1 Million to my tax return.

So I am Sending huge amounts to the ATO every year, if I can delay CGT for a few years, and in the process pay 22.5% instead of 45%, then I will definitely prefer that.

 

[tech/a]

You have 350,000 FMG shares?

I find your situation nothing short of amazing.
You mentioned you retired at 36 so if you had a University
education you would have worked for approx. 14 years.

Did you develop an app or something.
To amass what you have in 14 years given the early start you have mentioned in
all your long term share holdings plus real estate which would require equity
to satisfy banks its one of the most remarkable 14 year or so stories I seen.

Think you'd have to admit its not normal.

 

[againsthegrain]

You have 350,000 FMG shares?

I find your situation nothing short of amazing.
You mentioned you retired at 36 so if you had a University
education you would have worked for approx. 14 years.

Did you develop an app or something.
To amass what you have in 14 years given the early start you have mentioned in
all your long term share holdings plus real estate which would require equity
to satisfy banks its one of the most remarkable 14 year or so stories I seen.

Think you'd have to admit its not normal.

He did say he bought his first shares at 14 so he had a head start, 22 years to build his empire.

Bought fmg at $3 prob bought first re in very late 90s which you could do with even MacDonalds job and/or parents help, then the snowball kept rolling

right time right place and took advantage of it to the fullest, def not normal but doable... back then