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a different explanation might be
land is an asset , it is tangible and clearly defined , gold is both an asset and a currency because it can be transported to a different owner relatively easily , gold can be used as a popular medium of settlement across jurisdictions
now a currency is only a medium of exchange ( both parties trust ) cash , diamonds , pearls , gold , some cryptos
now some believed US treasuries were a reserve asset thinking the US would never scorch somebody who lent them billions,trillions of dollars worth of goods , that thinking is starting to change
my father used to tell me , 'if you have to buy your friends , you probably don't have any ( friends )
I disagree. If somebody started investing in the Japanese market at its peak by dollar cost averaging every month and reinvesting the dividends overall from that point until today they still would have generated a positive return (due to buying many of the shares at lower prices on the way down) and the return would likely be higher than what they would have received in Japan by putting cash in the bank or into government or corporate bonds. The only way to lose would have been to put all of your money into the market at the peak and then not added more money after.Obviously someone doing the same thing on the Japanese market and starting at its peak ,into blue ships there Nissan, Fujitsu, Sony, Sanyo etc all very reliable strong companies..much more than our so called blue chips, would have been in the red for what 3 decades?...
Looking at the market (which one? ASX, NYSE, in the last 50y or so do not give us certitudes, just assumptions.
Just saying that black swans are actually very common.
If there is a lesson in my short life and let's say 30y, it is actually rare to not have major upheavals with financial effects in a decade
i avoid the Japanese market ( via indirect exposure ) as much as possible , since i only started investing in 2011I disagree. If somebody started investing in the Japanese market at its peak by dollar cost averaging every month and reinvesting the dividends overall from that point until today they still would have generated a positive return (due to buying many of the shares at lower prices on the way down) and the return would likely be higher than what they would have received in Japan by putting cash in the bank or into government or corporate bonds. The only way to lose would have been to put all of your money into the market at the peak and then not added more money after.
In terms of efficient market hypothesis in modern times some have chosen to divide it into "strong form Efficient Market Theory" which basically says that markets are perfectly efficient and "weak form efficient market theory" which posits that markets are mostly efficient most of the time meaning that in the long run the vast majority (over 95%) of active investors will under-perform a passive indexing strategy once higher costs (such as higher taxes and brokerage and fees, etc) are taken into account.
Strong form is ludicrous and has clearly long been discredited althugh I agree with the weak form theory in that basically only the top few percent of investors are skilled enough to outperform the market over the long-term. Skill does exist and it is possible to beat the market over the long-term because of the less than perfect efficiency of the market, but skill is much rarer than most people assume.
Furthermore the returns of fund managers, hedge funds etc is even worse than what it seems firstly due to survivorship bias and secondly due to the size impediment. If you look at managed fund, etc with a stellar track record the track record is based on returns without taking into account funds under management so during the 30 year track record the highest returns came when the fund was only managing $30 million dollars whereas now the fund is managing $30 billion dollars its getting much lower returns (with the exceptions of activist investing and market manipulation large size is generally the enemy of high returns). This means that the actual returns received by the investors on average is much lower than the funds return since inception.
Although I do not have solid evidence to back it up if I had to guess I feel that somebody must be in the top 3 or 4% of investors in terms of skill, etc over the long-term to outperform the market.
I think in general retail investors are at a information disadvantage (full time analysts generally will know more about a company than you will) as well as a control disadvantage (if an institutional investors owns enough shares in a company they can influence its decision making something a retail investor can never do). However retail investors can still outperform institutional investors if they play to their strengths which are:
-Size/liquidity: retail investors can enter or exit small and micro-cap stocks much more easily and quicker without affecting the price like large institutions would do. This means you can enter or exit small stocks faster than they can and you can buy stocks that they cannot even buy at all due to the small size.
-Flexibility: Many funds have rigid mandates which constrain their flexibility including maximum concentration limits per stock or sector, ethical considerations which prohibit investment in certain types of companies, time constraints as investments have to go through a slow committee style reporting and decision making process.
-Time horizon: Most fund managers, hedge funds etc have quarterly reporting on their performance and if they have one or two bad years clients will start withdrawing funds this results in them engaging in short-termism and making decisions which are suboptimal on a long-term timeframe. As a retail investor you are only accountable to yourself and can take a long-term view when investing without the pressure if worrying about quarterly and annual performance figures.
I believe that retail investors who disregard all of the above and decide to go the short-term trading route have much lower odds of success (you can still win but its exponentially harder) due to the fact that they are competing directly with algorithmic traders who can front run everyone, etc on top of the fact that costs tend to be higher (more brokerage and taxes, etc) under a short-term strategy.
So in my opinion the optimal strategy as a retail investor to outperform the market based on the above is:
-Invest with a long-term time horizon ideally holding stocks for 5 - 10 years or longer when appropriate.
-Have a concentrated portfolio to maximize the impact of good ideas (which are rare). This means at an absolute maximum 10 stocks and they should not be evenly weighted meaning concentration is higher still.
-Be heavily overweight in small and micro-cap stocks.
The difference between most retail investors and a fund manager such as Peter Lynch is that Peter Lynch managed a lurge fund and had a vast number of analysts working for him and therefore vast research fire power which retail investors do not have. Not to mention access to company management and also the time and funds to conduct more thorough research, for example when he bought stock in La Quinta Motor Inns he went and stayed at a number of their motels as a customer to experience the company from the customers perspective. How many retail investors could afford to do that for hundreds of companies?I have highlighted a few of your thoughts.
On the one hand, your position is that very few investors/traders can beat the market. To beat fund managers (who may/may not beat the market) play to strengths.
Your conclusion: buy a concentrated portfolio.
This seems at odds with your general position, particularly given your belief in semi strong efficient markets.
How then does your average investor, using the 'good ideas' approach (Peter Lynch?) outperform with 10 stocks. Mr Lynch had hundreds if not thousands of stocks.
Buffett is (probably) the most concentrated in terms of portfolio numbers, but he has a nuanced methodology.
A concentrated portfolio, in the hands of your average investor, is IMO, destined for underperformance if not outright disaster.
However if you can expand on the 'good ideas' methodology, I'm all ears.
jog on
duc
I believe that amateur investors should stick to companies that are (1) simple to understand and wherever possible invest where (2) they have an edge. Be (3) concentrated and buy and (4) hold for long periods of time.
1) Easy to understand both refers to financials and story. For example who could have understood the financials of Enron? If a company is making ten acquisitions per year and has a massive derivatives book and every year has "one-off/abnormal" expenses then you probably have little chance of understanding what is actually going on. In terms of story a company like Amcor is much simpler to understand than Macquarie group. Macquarie group has many business divisions some of which have hugely volatile earnings, it has lots of debt and a massive derivatives book. You are much more likely to understand what is happening at Amcor than Macqaurie group.1. As per your previous advice, small companies would probably be easier to 'understand'. What exactly do you seek to understand? Their financials? The 'story'? Or something else?
2. What would constitute an edge in this context? If you have some secret edge that you do not want to disclose, that's fine just respond 'secret edge'. Assuming however that you are willing to discuss an edge in this context, what would be some possibilities?
3. The issue with concentration is this: if you are wrong, it's really bad. If you are right, well yes, definitely the way to go. Just holding the massive winners to exclusion of all the trash sounds rather fanciful. Now of course Buffett is rather concentrated, but his advice to the 'average investor' is hold the market (SPY ETF). That certainly avoids credit risk and simply exposes you to market risk. I would say that your average investor does not correctly price credit risk. Essentially you are advocating a portfolio of concentrated credit risk.
4. Again, everyone's definition of 'long periods of time' is going to be different. What do you consider a 'long period of time'?
jog on
duc
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